It’s a Currency War Either Way

28-Nov (USAGOLD) — Gold is comfortably back above the $1700 level today, and the euro and stocks are rallying, underpinned by renewed hopes that yet another solution for the eurozone debt/liquidity crisis is nigh. A number of rumors circulated today: A €600 bln IMF bailout for Italy and word that the six still AAA rated eurozone countries may jointly issue “elite bonds” to name just two. The first was repudiated by the IMF and the second was shot down by the German Finance Ministry. Nonetheless, markets continue to hold-out hope.

Meanwhile talk of eventual ECB bond buying, eurobonds, the possibility of the Fed buying European sovereign debt and a breakup of the eurozone continue to make the rounds. Each would likely have pretty grim consequences, but might at least buy some more time. Has anyone else noticed that the gap between crises is getting shorter and shorter?

The breakup of the eurozone, something that was absolutely unmentionable several weeks ago, is suddenly being very openly discussed. But let’s be clear about the implications: The Germans remain adamantly opposed to the ECB printing the single currency and using those devalued euros to buy sovereign European debt. However, you can be reasonably assured that one of the first orders of business of any country that leaves the Union will be to print and devalue their currency. Print and devalue as a whole or print and devalue the individual components. The end result is the same: A continuation of the currency wars.

Countries that leave the EU could conceivably launch their own QE campaigns, but once your take the steps to go it alone, there may be little incentive to make-good on on existing euro denominated debt. There’s going to be turmoil if a country returns to their legacy currency. Investors will be reluctant to lend anyway, given the likelihood of substantial currency devaluations, so why wouldn’t you default as part of that process?

If, as some have suggested, the Fed starts printing and buying European sovereign debt under the guise of protecting the US banking system, the weaker dollar that results would likely incite other nations to competitively devalue. Ben Bernanke, in his now famous 2002 deflation speech, acknowledged that “the Fed has the authority to buy foreign government debt.” Yet, a significant drop in the dollar will dis-incent the world’s largest group of consumers from buying foreign made goods and services. Foreign exporters would almost assuredly respond with devaluations of their own.

As evidenced in this past weekend’s comprehensive Bloomberg article on the $7.77 trillion in secret Fed lending during the height of the global financial crisis, the Fed has considerably — perhaps even unlimited — means at its disposal. And it’s not afraid to use them.

In an environment of perpetual beggar thy neighbor currency devaluations, hard assets such as gold would resume their long-term uptrends as savers seek shelter from continued erosion of wealth. The time to buy gold is in the relative calm of the recent range, before any of these scenarios become reality.

28-Nov (Bloomberg) — Italy’s credit rating was cut to BB from BB+ by Egan-Jones Ratings Co. as the euro-region’s third- largest economy struggles to manage its debt amid record borrowing costs and a slowing economy.

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28-Nov (Reuters) — Germany and France stepped up a drive on Monday for coercive powers to reject national budgets in the euro zone that breach EU rules, as a market rout of European debt eased temporarily on hopes of outside help for Italy and Spain.

The OECD rich nations’ economic think-tank said the European Central Bank should cut interest rates and step up purchases of government bonds to restore confidence in the euro area, which now posed the main risk to the world economy.

In Brussels, finance ministers of the 17-nation currency area meeting on Tuesday are due to approve detailed arrangements for scaling up the European Financial Stability Facility rescue fund to help prevent contagion in bond markets, and release a vital aid lifeline for Greece.

Berlin and Paris aim to outline proposals for a fiscal union before a European Union summit on Dec. 9 increasingly seen by investors as possibly the last chance to avert a breakdown of the single currency area.

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By Ambrose Evans-Pritchard
The dam is breaking in Europe. Interbank lending has seized up. Much of the financial system is paralysed, setting off a credit crunch just as Euroland slides back into slump.

The Euribor/OIS spread or`fear gauge’ is flashing red warning signals. Dollar funding costs in Europe have spiked to Lehman-crisis levels, leaving lenders struggling frantically to cover their $2 trillion (£1.3 trillion) funding gap.

America’s money markets are no longer willing to lend to over-leveraged Euroland banks, or only on drastically short maturities below seven days. Exposure to French banks has been slashed by 69pc since May.

Italy faces a “sudden stop” in funding, forced to pay 6.5pc on Friday for six-month money, despite the technocrat take-over in Rome.

German Bund yields have risen to 59 basis points above Swedish bonds since Wednesday’s failed auction. German debt has been relegated suddenly against Swiss, Nordic, Japanese, and US debt. As the Telegraph reported two weeks ago, Asian central banks and sovereign wealth funds are spurning all EMU bonds because they have lost confidence in a monetary system with no lender of last resort, coherent form of government, or respect for the rule of law.

Even if EU leaders could agree on fiscal union and joint debt issuance – which they can’t – such long-range changes cannot solve the immediate crisis at hand. The push for treaty changes has become a vast distraction.

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PG View: Ben Bernanke said in his now famous 2002 speech on deflation, “The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt. Potentially, this class of assets offers huge scope for Fed operations.”

27-Nov (Bloomberg) — The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. Now, the rest of the world can see what it was missing.

The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue.

Saved by the bailout, bankers lobbied against government regulations, a job made easier by the Fed, which never disclosed the details of the rescue to lawmakers even as Congress doled out more money and debated new rules aimed at preventing the next collapse.

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PG View: Details of massive central bank bailouts were withheld from Congress as they debated banking industry reforms. The secret $13 bln in income allowed the banks to ramp-up their lobbying against said reforms, with enough leftover to juice the bonus pool…

by Gavyn Davies
27-Nov (Financial Times) — It has suddenly become respectable to ask the question: what would happen if the euro broke up? Last week’s rise in German bond yields signals that a euro break-up is being taken more seriously by investors. I am told that London law firms are allocating large amounts of time to examining the validity, following a break-up, of cross-border contracts written in euros. And, to judge from my own inbox, asset managers are beginning to ask about the economics of how it could occur.

When the euro was created, the process took many years of careful planning. The ECU, a basket of fixed amounts of national currencies, traded for several years in the foreign exchange markets, before its name was changed to the euro on 1 January 1999. There were no sudden revaluations and devaluations to disrupt economic relationships within the currency zone.

This movie cannot now be run backwards. It is hard to imagine the 17 members of the eurozone going through an orderly, decade-long process in which national currencies would first be reintroduced, then gradually allowed to deviate against each other within narrow bands, then ultimately allowed to float freely. I am not aware of any currency system which has broken up in such an orderly manner. Much more probable is a severe crisis, followed by the reintroduction of some national currencies, after which the “euro” might be retained by a remaining group of its current members, or it might simply cease to exist altogether.

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28-Nov (Reuters) — Italy’s prime minister faces a testing week as he seeks to shore up the country’s strained public finances, with an IMF mission expected in Rome and market pressure building to a point where outside help may be needed to stem a full-scale debt emergency.

However, an IMF spokesperson poured cold water on a report in the Italian daily La Stampa that said up to 600 billion euros could be made available at a rate of between 4-5 percent to give Italy breathing space for 18 months.

“There are no discussions with the Italian authorities on a program for IMF financing,” an IMF spokesperson said.

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28-Nov (AP) — Germany insisted Monday that it has no plans to float bonds together with the eurozone’s five other triple A rated nations and use the proceeds to provide assistance to some of the single currency bloc’s indebted members, such as Italy and Spain.

The Finance Ministry’s denial came as the International Monetary Fund also dismissed reports it was planning a euro600 billion bailout fund for Italy, and credit rating agency Moody’s warned that the “rapid escalation” of Europe’s financial crisis is threatening the credit worthiness of all eurozone governments, even the most highly rated. Only six of the eurozone’s 17 countries have the top rating — Germany, France, Austria, the Netherlands, Luxembourg and Finland.

Despite the denials, the markets appear to be in a forgiving mood Monday. With the future of the euro hanging in the balance, according to many in the markets, there are hopes that the recent signs of deterioration in the debt crisis will finally get Europe’s leaders to agree on a package of measures that can ease market concerns over whether the euro currency itself can survive. The Stoxx 50 of leading European shares was up 2.6 percent, while the euro was 0.6 percent higher at $1.3362.

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28-Nov (Bloomberg) — Moody’s Investors Service said the “rapid escalation” of Europe’s debt and banking crisis is threatening all of the region’s sovereign ratings.

Credit risks will continue to rise without measures to stabilize markets in the short term, the ratings company said in a statement today. European Union policy makers also face constraints to act quickly to restore confidence, it said.

“In the absence of major policy initiatives in the near future which stabilize credit market conditions, or those conditions stabilizing for any other reason, the point is likely to be reached where the overall architecture of Moody’s ratings within the euro area, and possibly elsewhere within the EU, will need to be revisited,” the statement said. “Moody’s expects to complete such a repositioning during first quarter of 2012.”

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25-Nov (IBTimes) — A panel of economic experts at the Institute of Economic Affairs (IEA) have said that the euro “will be scrapped within months.”

The panellists, which included the economics editor of Sky News, Ed Conway, Conservative MPs Bill Cash and Dominic Raab, as well as the former MEP John Stevens, offered a stark warning over the future of the EU saying that it is now paying back years of mismanagement from the top down.

Although many had varying opinions of the EU and why it has been brought to the point of the breakup, the panel unanimously agreed that the euro would be scrapped, with Mr Conway saying that it “could potentially be gone within months.” Although members of the audience challenged the panel, claiming that the single currency had remained strong, the experts said that it was “inevitable”.

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PG View: Market likely got a whiff of this and probably was more a factor in the intraday retreat in euro, gold and stocks than the SNB failing to confirm euro buying.

25-Nov (RTTNews) — The Swiss franc edged sharply lower against its major rivals on Friday morning in New York amid rumors that the Swiss National Bank might have intervened in the foreign exchange market.

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25-Nov (Reuters) — Spain’s new centre-right government, due to be officially sworn in mid-December, is considering applying for international aid as one of its options to shore up its finances, sources close to the party say.

The People’s Party (PP) inherits an economy on the verge of recession, a tough 2012 public deficit target, rising financing costs on nervous debt markets and a battered bank sector with billions of euros of troubled assets on its books.

“I don’t believe the decision (to seek aid) has been made .. but it is one of the options on the table, because I’ve been asked about it. But we need more time and more information on the current state of things,” one source told Reuters.

If extra funding is needed, either from the European Financial Stability Facility (EFSF) or a credit line from the International Monetary Fund, it would be politically preferable to make the decision independently and quickly, rather than being compelled by market forces at a later date.

“If we have to do it, we have to do it now,” the source said.

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25-Nov (USAGOLD) — Gold rebounded in thin holiday trading as rumors of SNB intervention lifted the single currency from new 7-week lows, tempering the latest bid in the dollar. The FT also reported today that the BoJ has been querying commercial banks about how they might assist the central bank in intervening to weaken the yen. The currency wars continue to ramp.

The situation in euroland continues to deteriorate as officials concede that market activity over the past month has pretty significantly eroded the expected boost in firepower of a leveraged EFSF bailout fund. Speculation is that the firepower could be as little as half what was originally expected.

It would seem that dithering on this front has frittered away any potential advantage of gearing-up the bailout fund. This further narrows the field of viable options to direct ECB bond purchases and issuance of eurobonds, both of which are still adamantly opposed by the Germans.

Yields have risen across the eurozone and Reuters is reporting that Spain’s new government is already contemplating seeking international aid. With the EFSF emasculated, Spain may seek to access the new IMF credit lines that were announced on Tuesday.

25-Nov (Financial Times) — A plan to boost the firepower of the eurozone’s €440bn rescue fund could deliver as little as half what the bloc’s leaders had hoped for because of a sharp deterioration in market conditions over the past month, according to several senior eurozone government officials.

European leaders hailed a scheme to offer insurance on losses for investors buying troubled eurozone bonds as a means of leveraging the €250bn spare capacity of the rescue fund four or five fold, to more than €1,000bn.

But the dramatic spike in borrowing costs for Italy since the summit is likely to force the European Financial Stability Facility to sweeten the deal offered to investors, which will limit the number of bonds the insurance would cover.

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PG View: Whether you believe expansion of the bailout facility is an appropriate response to the eurozone crisis or not, continued dithering is narrowing the options that just might prevent a complete collapse of the EU.

25-Nov (AP) — Hungary has slammed Moody’s decision to downgrade its credit rating to junk status, describing it Friday as another unjustified financial attack against the country.

Hungary, which last week asked the International Monetary Fund and the European Union for possible financial help, is feeling the fallout from the debt crisis in the 17-country eurozone, even though it does not use the euro. Its economy has not grown as much as hoped and its debt burden remains relatively high.

Late Thursday, Moody’s, one of the three major international credit rating agencies, cut its view on Hungary’s government bonds by one notch, from Baa3 to Ba1 and maintained its negative outlook. The move to junk status could mean that Hungary will find it increasingly difficult to borrow in money markets as well as having to pay a higher premium.

The country’s finance ministry was furious at the decision.

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25-Nov (Bloomberg) — Russia, Kazakhstan, Colombia, Belarus and Mexico added a combined 25.7 metric tons of gold valued at $1.38 billion to reserves in October, a month after prices rose to a record.

Russia’s bullion reserves rose 19.5 tons to 871.1 tons last month, according to data on the International Monetary Fund’s website. Kazakhstan’s assets increased 3.2 tons to 73.6 tons, Colombia’s gained 1.2 tons to 10.4 tons, Belarus expanded assets by 1 ton to 31.9 tons and Mexico added 0.9 ton to take holdings to 106.3 tons, the data show. Germany cut reserves by 4.7 tons to mint commemorative coins and Tajikistan cut 0.4 ton of gold.

Central banks are expanding reserves for the first time in a generation as prices head for an 11th straight annual gain and assets in exchange-traded products rose to an all-time high. Purchases may reach 450 tons this year, according to Marcus Grubb, managing director of investment research at the London- based World Gold Council. Central banks and government institutions bought 142 tons last year, IMF data show.

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25-Nov (The Wall Street Journal) — The Bank of Japan has sent a questionnaire to major banks asking whether they can help it intervene in currency markets overseas—a move seen as a “new front” in the central bank’s campaign against the strong yen.

The central bank has been polling financial institutions in Tokyo for about the past two weeks, both in writing and verbally, according to people familiar with the matter.

The brief survey asks several questions about how the bank can help the BOJ with its intervention, which is carried out under the control of the Ministry of Finance.

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PG View: One has to wonder what might be in this for the banks, but also what fiduciary conflicts might arise regarding the banks’ FX desk customers.

23-Nov (The Wall Street Journal) — Germany maintained its opposition to common euro-zone bonds Wednesday as the European Union’s executive arm announced a reform package that includes the issuance of euro bonds along with new powers to intervene in national budgets.

The European Commission’s proposal to introduce common bonds in the euro zone comes at an inappropriate time, German Chancellor Angela Merkel said just before the announcement was made. She insisted that first the treaty governing the EU should be amended to make it possible to bring fiscal offenders into line.

Germany has long argued that collective euro bonds are not a cure to the currency bloc’s current debt crisis, and could only work at the end of a lengthy process of narrowing the gaps in economic competitiveness among the 17 euro members.

…”Of course, the situation on financial markets would calm down for a couple of months,” Schaeuble said, but added that after that a loss in confidence in the euro zone would actually accelerate.

“Therefore, we won’t go down that path,” Schaeuble said.

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PG View: The first highlighted quote from Schaeuble was circulated earlier as an indication that Germany might be warming to the idea of eurobonds. Of course nothing could be further from the truth; and the second highlighted quote, which slams the door on the notion, somehow got separated from the first…

23-Nov (Reuters) — Belgium is leaning on France to pay more into emergency support for failed lender Dexia, newspapers reported, spooking investors who thought a 90 billion euro ($120 billion) rescue deal only needed rubber stamping.

The countries are wrangling about short-term funding guarantees meant to wean Dexia’s “bad bank” off emergency liquidity and allow it to re-enter financial markets, two Belgian newspapers reported.

“Belgium wanted Paris to guarantee more than had been agreed so far, because France can fund itself at a cheaper rate than our country,” Belgian daily De Tijd said, following a similar report in De Standaard.

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PG View: The take away here is that the only way either country can fund the bailout of Dexia is through additional borrowing. And as is becoming clearly evident, going deeper and and deeper into debt to finance bailouts solves none of the underlying problems. It buys time, but leaves you with bigger problems down the road.

23-Nov (The Economist) ONE can almost hear the gates clanging: one after the other the sources of funding for Europe’s banks are being shut. It is a result of the highly visible run on Europe’s government bond markets, which today reached the heart of the euro zone: an auction of new German bonds failed to generate enough demand for the full amount, causing a drop in bond prices (and prompting the Bundesbank to buy 39% of the bonds offered, according to Reuters).

Now another run—more hidden, but potentially more dangerous—is taking place: on the continents’ banks. People are not yet queuing up in front of bank branches (except in Latvia’s capital Riga where savers today were trying to withdraw money from Krajbanka, a mid-sized bank, pictured). But billions of euros are flooding out of Europe’s banking system through bond and money markets.

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PG View: Evidence of a developing bank run is generally a harbinger of even worse things to come. Truth be told though, there’s still plenty of risk whether your euros are in the bank or under your mattress. The same can be said even if you convert your euros to dollars. Gold is likely to garner increasing interest as the asset of choice for wealth preservation amid the worsening turmoil in the eurozone.

23-Nov (Der Spiegel) — Germany has been considered a safe haven of financial stability amid the ongoing euro crisis — but that may be changing. Growing mistrust from investors seems apparent after what has been described as a “disastrous” government bond auction on Wednesday. Just two-thirds of the German bonds sold, leaving analysts concerned but not panicked.

Investors seem to have lost their taste for Germany’s once much sought-after government bonds. At an auction on Wednesday of the country’s 10-year bonds, one-third went unsold according to the German Finance Agency, which manages the nation’s debts. The federal government had initially intended to sell bond issues worth some €6 billion (around $8 billion), but managed to garner just €3.89 billion.

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23-Nov (The Wall Street Journal) — he Dow’s steep losses this week put it on track for its worst Thanksgiving week since 1973, according to the WSJ Market Data Group.

Back in 1973, the Dow fell 4.2% during Thanksgiving week. The index was recently off by just about that amount for this week, with the index down by about 180 today at 11313.

In fact, Thanksgiving has been a turkey in recent years — the Dow fell during the holiday week in 2009 and 2010.

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