18-May (The Wall Street Journal) — Jittery U.K. customers of one of Spain’s biggest lenders pulled out funds on Friday, and bad debts held by Spanish banks rose to a 17-year high, underscoring the continuing challenges facing the country’s financial sector.

Lenders have been struggling with the country’s five-year property slump, and the rapid deterioration of the loan books was one of four reasons cited by Moody’s Investors Service for its downgrade of the credit ratings of Banco Santander SA, Banco Bilbao Vizcaya Argentaria SA and 14 other banks in the country late Thursday.

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18-May (ShareCast) — Just in case anyone thought that the Eurozone sovereign debt crisis was coming to an end, German finance minister Wolfgang Schäuble predicted that market turmoil will last up to another two years. In an interview with French radio Europe 1, he said that “with respect to the crisis of confidence in the euro, in 12 to 24 months we’ll see the financial markets calm down.”

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18-May (USAGOLD) — Gold continues to rebound from this week’s earlier test of the low-end of the range at 1522.40. The yellow metal has already pressured 1600.00 intraday. A move above this level would ease short term pressure on the downside and leave the three lows at 1534.06/1522.40/1527.45 as a key support zone.

Risk appetite improved somewhat today after EU Trade Commissioner De Gucht told the Flemish daily De Standaard that both the ECB and the EC “are working on emergency scenarios in case Greece doesn’t make it.” The market seemed to take some comfort in the suggestion that there may at least be a plan. However, De Gucht went on to say that “the endgame has begun, and how it will finish I do not know.” Such uncertainty is probably little comfort in reality, and the European Commission refuted the notion that they had a contingency plan for a Greek exit from the EMU and the ECB categorized such talk as “unhelpful”. Nonetheless, I think the market was desperate for something to grasp on to as a rather tumultuous week winds down.

Risk appetite also likely got a boost from today’s Facebook IPO. However, while pre-market gains in the equity indexes have already evaporated, gold has thus far been able to hold on to most of its gains.

Canada provided the latest uptick in inflation worries with hotter than expected inflation in April. The rise in core CPI from 1.9% y/y in March to 2.1% y/y (on expectations of 1.8%) was particularly troubling. The Canadian dollar and Canadian yields rose amid rising expectations of a BoC rate hike.

• Canada CPI +2.0% y/y in Apr, above expectations of +1.9%, core +2.1% y/y, on expectations +1.8%.
• Germany PPI +0.2% m/m in Apr, vs +0.6% in Mar; +2.4% y/y.
• Italy industrial orders (sa) +3.5% m/m in Mar, vs negative revised -2.6% in Mar; -14.3% y/y.

17-May (Reuters) — China’s gold demand hit a record high in the first quarter on investor worries over inflation and property market curbs, the World Gold Council said on Thursday, bucking a lower trend in global consumption driven by higher gold prices.

Global gold demand fell 5 percent on the year to 1,097.6 tonnes in the first three months of 2012, as jewellery and technology sectors bought less gold with average prices up 22 percent from a year earlier, but investment demand and central bank buying helped cushion the fall, the industry group said.

China remained the world’s top gold consumer for the second quarter in a row, with its gold consumer demand up 10 percent to 255.2 tonnes, beating India’s 207.6 tonnes, which was a 29 percent decline on the year.

“Further growth is expected (in China): investors remain wary of high inflation rates; and property market restrictions continue to drive demand for gold among investors seeking access to real assets,” said the WGC in its quarterly Gold Demand Trends report.

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17-May (Business Standard) — Central banks across the world have started picking up gold as reserves, observed World Gold council in its first quarter gold demand review report released today.

Although down from buying in the first quarter of 2011, central banks continued to purchase gold as a reserve. In Q1 2012, central banks gold reserve demand was at 80.8 tonne.

…The rapid growth of foreign exchange reserves in a number of expanding economies has required many central banks to increase gold holdings in order to maintain the ratio of gold to their foreign exchange reserves, WGC said.

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By Martin Wolf
17-May (Financial Times) — The irritation of the eurozone with Greece is at extreme levels. After all, 80 per cent of Greeks say they are in favour of staying in the euro, but then they fail to elect politicians prepared to implement the agreed programme. This drives creditors crazy. Increasingly, the latter are inclined to accept Greek exit, even welcome it. But they should be careful what they wish for.

A departure would create severe dangers. The danger of contagion is obvious. The long-run danger is more subtle. But the eurozone either is an irrevocable currency union or it is not. If countries in difficulty leave, it is not. It is then an exceptionally rigid fixed-currency system. That would have two dire results: people would not trust in its survival and the economic benefits of the single currency would largely disappear.

These perils are not of concern to the eurozone alone. Taken as a whole, this is the world’s second-largest economy, with the largest banking system. The risk that a bigger eurozone upheaval would cause a global crisis is real. As frightening is the likelihood that eurozone crises would become permanent features of the world economy.

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17-May (Financial Times) — Spain has been moved to deny reports of deposit withdrawals from Bankia, the part nationalised savings banks, after its shares tumbled as much as 29 per cent on Thursday.

Following reports in the Spanish media that €1bn had been taken out by clients of Bankia, Spain’s second-largest lender by domestic depositors, in the week since it was nationalised, Fernando Jiménez Latorre, secretary of state for the economy, denied the bank was losing client money.

“It is not true that there has been an exit of deposits at this time from Bankia,” Mr Jiménez Latorre told a press conference on Thursday. “There is no concern about a possible flight of deposits, as there is no reason for it.”

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PG View: You may recall that there were all sorts of denials that Lehman Bros and Bear Stearns were in jeopardy several years ago as well…

17-May (USAGOLD) — Gold is back on the rise, more than $35 higher on the day, after tests of the downside earlier in the week were successfully contained by the range low at 1522.40. Today’s bid in the market is a combination of technical factors — the failed test of support and an oversold condition — along with heightened expectations of further central bank measures to prevent the global economy from going off the rails again.

Minutes from the April FOMC meeting were released yesterday, revealing a more dovish tone. With today’s data misses on April leading indicators and the May Philly Fed index, the market is suddenly thinking that QE3 may be back on the table. At the same time, the IMF is ramping up pressure on the ECB to cut rates and continue its sovereign bond buying program. An IMF spokesman also said “further unconventional policy measures may also be needed.”

While Europe just barely avoided slipping back into recession, thanks to better than expected Q1 growth in Germany, the anchor that is the periphery may still lead to a double-dip in the eurozone. Ongoing fiscal stresses and a possible recession in Europe will pose risks to growth here in the US, and as we’ve seen time and time again, risks to growth are met by easier monetary policy from the Fed.

• US leading indicators -0.1% in Apr, below market expectations of +0.1%, vs +0.3% in Mar.
• US Philly Fed fell to -5.8 in May, well below market expectations of 10.3, vs 8.5 in Apr.
• US initial jobless claims 370k for the week ended 12-May, above expectations of 365k, vs upward revised 370k in the previous week.
• Canada wholesale trade +0.4% in Mar, above expectations of +0.3%, vs +1.5% in Feb.
• Spain Q1 GDP (sa) – Final confirmed at – 0.3% q/q, in-line with expectations; -0.4% y/y.
• Japan Q1 GDP SAAR – 1st prelim +4.1% q/q, vs positive revised 0.1% y/y in Q4-11.
• Japan industrial production (sa) – revised +1.3% in Mar.
• Hong Kong unemployment rate (sa) +3.3% in Apr, vs 3.4% in Mar.

17-May (Dow Jones) — The International Monetary Fund on Thursday again hinted that the European Central Bank should lower policy rates and continue its sovereign bond-buying program to help save the euro zone.

“The ECB has room for further monetary easing, given the expected weakening of underlying pressures,” said spokesman David Hawley during a regular press briefing.

“The policy rate remains at an historic lower bound of 1% but this could be reduced further as inflation is expected to drop well below 2%,” he said.

Asked if the ECB should continue its purchases of buying bonds, Hawley also said that “further unconventional policy measures may also be needed.” Hawley, who didn’t elaborate, could also have been referring to the central bank’s cheap loan program that helped to avoid another credit crunch in the region that would have wilted growth prospects further.

In recent weeks, the IMF has criticized the ECB, saying governors are overly concerned about fueling inflation.

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17-May (CNBC) — A Greek exit from the euro zone could expose the European Central Bank and the currency bloc it seeks to protect to hundreds of billions of euros in losses, landing Germany and its partners with a crippling bill.

A Greek departure would take Europe into uncharted legal waters. The size of the burden other euro zone states could bear gives them a powerful incentive to keep Greece in the currency club.

With most of Greek’s private creditors having taken heavy writedowns as part of the country’s second, 130 billion euros bailout, it is estimated that the ECB, International Monetary Fund and euro zone nations hold approaching 200 billion of its debt.

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—Returning to a national currency after more than a decade of using the euro and having its money managed by the European Central Bank would catapult Greece into a financial, legal and political no man’s land.

Countries have defaulted, devalued, or even withdrawn from a broader monetary union in the past. But none has done it all at once—and certainly not an economy so deeply integrated into global financial markets.

Greece would have to remake its monetary system and rebuild its economy after a likely sharp devaluation that would have delivered a severe confidence shock to the population, undermined its banks and triggered likely defaults on debts to foreigners.

…Greece would need to keep its decision to exit a secret as long as possible to avoid even more money fleeing the country. Ordering new drachma notes could take months and could leak, encouraging Greeks to increase euro withdrawals from banks, accelerating the exit timetable.

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by Ezra Klein
16-May (Washington Post) — There’s some chance that House Speaker John Boehner’s threat to provoke another debt-ceiling crisis doesn’t much matter. If it does matter, it’s only because fiscal policy has already gone very, very wrong.

…So we’re not likely to have a “debt-ceiling crisis.” We’re either likely to solve our fiscal problems early in the year in way that defuses Boehner’s debt-ceiling threat or we’re likely to spend 2013 in a state of permanent crisis in which Congress lights the economy on fire by failing on the Bush tax cuts, the automatic spending cuts, the debt ceiling, and the appropriation bills needed to keep the federal government open.

That’s not a scenario that looks like August 2011, when the debt ceiling was the only thing on the docket. It’s an economic crisis that looks more like September 2008, when Lehman was collapsing. And in that world, it’s so hard to predict the resulting financial chaos, public outrage, interest group pressure, and political terror that it’s almost impossible to say anything about how the crisis would be resolved, or who might benefit.

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Several members indicated that additional monetary policy accommodation could be necessary if the economic recovery lost momentum or the downside risks to the forecast became great enough.

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PG View: General tenor of the FOMC seems a tad more dovish this time around.

16-May (USAGOLD) — The range low in gold at 1522.40 successfully contained the downside in overseas trading as ongoing concerns about Greece and the eurozone as a whole persist, contributing to risk aversion. The euro has tested below 1.2700 for the first time since January, keeping the dollar underpinned. US stocks rebounded on some encouraging data, providing gold with a little nudge higher.

New Greek elections have been scheduled for June 16 after it was acknowledged yesterday that efforts to form a coalition government have failed. A senior Greek judge will head a caretaker-government in the interim. The market is likely to remain on edge ahead of the new election, amid expectations that the anti-austerity Syriza party is going to garner even greater support the next time around.

In the meantime, there may be a good old-fashion bank run brewing in Greece, with more than €1 bln withdrawn already this week. At this rate, Greek banks will have to be recapitalized at some point and there are already rumblings of an LTRO3.

However, as BoE governor Mervyn King adroitly pointed out, what Greece and the broader periphery faces is not a liquidity crisis at all, but rather a solvency crisis. Certainly, spooling up the printing presses could provide Greek banks with the liquidity they need to cover withdrawals, but that does nothing to resolve the core fiscal issues that led to the crisis in the first place. If you fail to address solvency in a meaningful way, you may as well prepare to print to infinity and beyond.

• US industrial production +1.1% in Apr, well above market expectations of +0.5%, vs negative revised -0.6% in Mar; cap use rises to 79.2%.
• US housing starts +2.6% to 717k in Apr, above expectations of 679k, vs upward revised 699k in Mar.
• Canada manufacturing shipments +1.9% in Mar, well above market expectations of +0.2%, vs -0.3% in Feb.
• UK ILO unemployment rate 8.2% in Mar, vs 8.3% in Feb.
• Eurozone CPI +0.5% m/m in Apr, in-line with expectations, vs 1.3% m/m in Mar; +2.6% y/y. Core +1.6% y/y.
• Eurozone trade balance (sa) €4.3 bln in Mar, vs upward revised €4.0 bln in Feb.
• Portugal unemployment rate rose to 14.9% in Q1, vs 14.0% in Q4-11.

16-May (WSJ Blogs) — Whatever happens to Greece, whether it continues to use the euro or decides to give it up, the fundamental problem of imbalances within the euro zone still needs to be addressed.

Bank of England Governor Mervyn King reiterated the point at Wednesday’s quarterly Inflation Report press conference. Europe, he said, faces a crisis of solvency, not liquidity.

This distinction is of crucial importance.

There is widespread hope that somehow the European Central Bank will step in and save the day, perhaps through yet further rounds of its LTRO program of liquidity injections into the banking sector. But, as King pointed out, all this does is to increase the banking sector’s dependence on the central bank. It doesn’t actually solve anything, but rather merely gives a short-term palliative to an ongoing crisis.

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16-May (CNN) — Greece will hold new elections on June 17, state media reported Wednesday, after Greeks pulled hundreds of millions of euros out the banking system amid fears that the country will not be able to stay in the European Union’s single currency.

Setting the date for a new vote comes 10 days after a national election where voters punished the major parties for harsh budget cuts, leaving no party able to form a government.

A caretaker administration led by a senior judge will run the country until the new vote.

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15-May (Der Spiegel) — A large portion of Germany’s massive gold reserves are stored abroad, mainly in the Federal Reserve in New York. But are the bars really where they are supposed to be? A dispute has broken out over whether the central bank needs to check on its gold, or if Germany can trust its international partners.

Germany has gold reserves of just under 3,400 tons, the second-largest reserves in the world after the United States. Much of that is in the safekeeping of central banks outside Germany, especially in the US Federal Reserve in New York. One would think that with such a valuable stash, worth around €133 billion ($170 billion), the German government would want to keep a close eye on its whereabouts. But now a bizarre dispute has broken out between different German institutions over how closely the reserves should be checked.

Germany’s federal audit office, the Bundesrechnungshof, which monitors the German government’s financial management, is unhappy with how Germany’s central bank, the Bundesbank, keeps tabs on its gold. According to media reports, the auditors are dissatisfied with the fact that gold reserves in Frankfurt are more closely monitored than those held abroad.

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15-May (The Hill) — Treasury Secretary Tim Geithner on Tuesday warned Speaker John Boehner (R-Ohio) against playing with the U.S. debt ceiling.

Boehner, who’s giving a speech on the economy later in the day, will say that the debt ceiling, set to be breached early next year, should not be raised unless greater spending cuts and reforms are enacted, according to prepared remarks released by the Speaker’s office.

…“This commitment to meet the obligations of the nation, this commitment to protect the creditworthiness of the country, is a fundamental commitment that you can never call into question or violate,” Geithner said Tuesday in reaction to the leaked Boehner remarks.

“You can’t put that into question, you can’t put that into doubt, you can’t threaten to put that into service … of the partisan political agenda of any side of the American political spectrum. It is not responsible to do that,” he said in his address to the Peterson Foundation.

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PG View: You had to know that the debt ceiling debate was going to come back around before the November elections…right?

15-May (Financial Times) — Andrea Stautberg, 27, and her husband James wanted to buy a house after finishing graduate school in 2009. But in the face of a tough economic climate, uncertain job prospects and $115,000 in student loan payments, the couple instead decided to save money by living with James’s parents in Texas.

They stayed for more than a year – longer than the three months they had planned – before deciding to rent a flat.

“We are looking to buy a house, but have yet to get preapproved,” said Ms Stautberg. “We lived with his parents for as long as we did to pay back our student loans and still save for a down payment.”

The Stautbergs’s story illustrates how difficult it has become for young Americans to buy their first homes, despite low interest rates and years of declining house prices.

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