Greek PM Vows to Stay Amid Calls for More Austerity

As yields in Greece and the reset of the EU periphery continue to climb, it would seem that the eurozone debt crisis is coming to a head. The FT heralded yesterday that Disunity deepens Greek debt crisis. That disunity is not just within the Greek government, but among the various stake-holders who can’t seem to agree on a path to solvency for Greece.

source: Business Insider

Yet another “new deal” was proffered by the EU and IMF today, but not surprisingly it comes with new austerity measures to be absorbed by the Greek people. The politically weakened PM George Papandreou is going to have a hard time selling even more austerity to the Greek people, who have already reacted violently to the already severe cuts they’ve had to endure. Rumors that Papandreou would step-down proved unfounded as the embattled PM vowed to fight on today, delaying a promised cabinet shake-up as well. That certainly is not going to do much to quell the civil unrest.

The euro fell to a new 3-week low today as hopes of a palatable resolution to the Greek crisis waned, driving investors into the perceived safety of dollars, yen and Swiss francs. Certainly gold is benefiting from safe-haven flows as well, but they have primarily had an underpinning effect rather than a truly bullish effect, as the dollar and gold tend to be inversely correlated.

Further evidence that the US economic recovery is faltering, along with rising concerns that China may be slowing as well, have tempered inflation expectations somewhat. This week’s sharp drop in oil prices is a good illustration of this, but in the face of diminished price risks and given that we’re in the midst of the summer doldrums, gold remains remarkably buoyant.

Americans should be paying attention to the events in Europe as they unfold, as our situation is not all that far removed from Greece’s. However, the big difference is that we in the US maintain or “exorbitant privilege” — a phrase coined by former French Finance Minster Valéry Giscard d’Estaing in the 1960s — of being the worlds reserve currency. We essentially have the ability to create as many dollars as is necessary to meet any obligation.

In joining the EMU, Greece gave up its ability to print and thereby devalue its currency. While this puts Greece in an untenable position now, the US should be aware that our “privilege” has some very real costs attached to it. Costs that should be every bit as troubling as the massive debt we have accumulated.

June 16 (Associated Press) – ATHENS, Greece — Prime Minister George Papandreou has vowed to stay on and fight to pull his country out of a crippling debt crisis, facing down a revolt in his Socialist party over new but widely unpopular austerity measures.

Papandreou told lawmakers Thursday at an emergency party meeting that he would keep seeking a consensus with opposition parties over the financial reforms that creditors have demanded as part of an international bailout.

Papandreou admitted his government had displayed “mistakes and weaknesses,” but promised a new, stronger Cabinet in a reshuffling.

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PG View: It would seem that recent rumors that Papandreou would step down were unfounded. That, along with a delay in the promised cabinet reshuffle, probably isn’t going to do much to quell the rising civil unrest in Greece.

June 15 (CNBC) –

Yesterday’s big negative miss on the Empire State index set the stage for this disappointment.

Gold is modestly higher within the recent range as debt turmoil in Europe and the US continues to support safe-haven trades. The euro has tumbled to a new record low against the Swiss franc amid rising concerns of a Greek default, raising the risk of SNB intervention to check the franc’s rise. Euro losses have also benefited the dollar, even though the US has its own massive debt problem, made worse by the government’s inability to continue borrowing because of a political impasse on raising the debt ceiling.

Stocks remain under pressure on rising worries about the health of the recovery, although some mildly more encouraging US data helped temper pre-open losses.

• US current account deficit widened to -$119.3 bln in Q1, on expectations of -$128.0 bln, vs $112.2 bln in Q4-10.
• US initial jobless claims -16k to 414k in the week ended 11-Jun, below market expectations, vs upward revised 430k in previous week.
• US housing starts +3.5% in May to 560k, above market expectations. Permits +8.7%.
• Eurozone HICP inflation confirmed at 2.7% in May, down slightly from 2.8% in April
• UK retail sales -1.4% m/m in May, well below market expectations, vs +1.1% in Apr; Just +0.2% y/y from negative revised +2.4%.
• SNB holds Libor target rate steady at 0.25%. Inflation forecast pared for 2012-13.

June 16 (GoldCore) – Central banks have already bought 129 metric tons in 2011 through April, exceeding last year’s total of 90 tons. This represents a sizeable 43% increase in demand when compared with the first four months of 2010.

The World Gold Council’s Managing Director Marcus Grubb told a conference in London today that central banks will be net buyers of gold this year and probably next year.

…Indeed, it is a very important development that Eurozone central banks have become net buyers of gold in 2011. This is the first time that this has happened since the inception of the euro in 1999.

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June 15 (The Globe and Mail) – It is the unwritten rule in the global corporate jungle that three beasts rarely get harmed: oil companies, defence contractors and banks.

Countries are invaded to make the market safe for Big Oil. Defence cutbacks, at least in the United States, are so rare as to be laughable. And banks? Just look at Europe, where the operating principle is to protect the banks and their bondholders at all costs, then bleed the taxpayer white to pay for the effort. No wonder Greece, Ireland and Portugal – the euro zone trio “rescued” by bailout loans – are still sinking.

In each of the three, but mostly in Greece and Ireland, there is no sense of shared sacrifice. Everyone – politicians, tax evaders, teachers, executives, bankers – is responsible for their countries’ financial and economic calamities. Yet it is the European Union banks and their senior creditors who are suffering the least. Their gain comes from everyone else’s pain.

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PG View: While the title of this op-ed was clearly chosen to evoke indignation among taxpayers, the general gist of the piece is spot-on: Raising the moral hazard issue once again of privatized gains and socialized losses.

By Madalene Pearson

June 15 (Bloomberg) Gold prices, rallying for an eleventh year, will extend gains as investors add bullion seeking a haven against currency debasement and inflation, according to India’s Quantum Asset Management Co.

“There will be more people moving towards the safety of gold which will take gold prices much higher,” Chirag Mehta, a commodity fund manager at Quantum, which manages about $1.5 billion in assets, said in an interview in Mumbai. “The gradual increase in gold price will continue.”

“The diversification to gold will continue, gold is still under-owned,” Mehta said yesterday. “Even if a small fraction of financial assets move to gold, I think the price will go much higher than what it is currently.”

“There’s a tidal wave of gold demand coming,” Jason Toussaint, the World Gold Council’s managing director of U.S. and Investment, said yesterday at the Bloomberg Link Money Managers Conference in Boston. “A key is the long-term fundamental change in emerging markets. The biggest markets of growth are China and India.”

“The market will increase, it’s nowhere near the potential,” Mehta said.

[Source]

By JONATHAN CHENG
June 15 (WSJ) – U.S. stocks tumbled as fears of contagion around a Greek default picked up, adding more pessimism to a foreboding mix of U.S. economic data.

The Dow Jones Industrial Average sank 177 points, or 1.5%, to 11900 in early afternoon trading, wiping out the week’s gains. The Standard & Poor’s 500-stock index fell 21 points, or 1.6%, to 1267 and the Nasdaq Composite shed 41 points, or 1.5%, to 2638.

Greek fears intensified after euro-zone officials failed to make progress on discussions about Greek aid and protests against austerity measures turned violent in Athens. Greek bonds were pummeled, sending yields to their highest levels since the inception of the euro.

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By Nicholas Hastings
June 15 (WSJ blogs) – Euro-zone politicians have struggled in the past to come up with a solution to stop Greece from defaulting. But this time the risks are even higher and chances are that even a last-minute reprieve will not be well received.

The current standoff is well known.

Germany is pushing for a bailout that involves the private sector, while the European Central Bank insists that any agreement must be voluntary to avoid a Greek default and a run on the country’s creditor banks.

As the July deadline for new funds gets closer, the battle between the two sides is becoming even more entrenched and the likely bailout figure even higher.

What started out as a need for €80 billion is now being talked about in terms closer to €120 billion.

…Evidence is rising that the strength of the euro zone’s core economies will be sapped in the second half of this year, especially if major export destinations such as China slow down.

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June 15 (USAGOLD) – Gold gave back much of the intraday rebound as the dollar extended to new highs for the month on euro weakness. However, the yellow metal seems to have caught another bid well shy of support 1514.05/1511.03.

June 15 (Reuters) – Greek Prime Minister George Papandreou told the head of the conservative opposition on Wednesday he would be willing to step down and make way for a national unity government, senior government sources said.

Papandreou would only do so if a specific framework and targets for the new government were agreed, the sources said.

[source]

PG View: Apparently Papandreou would need an assurance that any new government would support another EU/IMF bailout for Greece.

June 15 (USAGOLD) – Gold surged back from overseas losses to set new highs for the week after a series of US data misses tanked stocks, which were already on the ropes because of heightened worries about Greek contagion.

The US Empire State index plunged to -7.8 in June, well below market expectations of 13.5, vs 11.9 in May. US industrial production for May rose just 0.1%, also below market expectations. The bigger than expected rise in headline and core CPI, at +0.2% and +0.3% respectively has prompted further talk of stagflation.

It would seem the safe-haven and inflation hedge appeal of gold is trumping any deleveraging pressures.

By MATTHEW SALTMARSH
June 15 (New York Times) – PARIS — French banks were punished Wednesday for their exposure to Greek debt after Moody’s Investors Service placed three of the largest on review for a possible downgrade.

Moody’s cited “concerns” about the exposure of BNP Paribas, Société Générale and Crédit Agricole to the Greek economy, either through holdings of government bonds or loans to the private sector there, directly or through subsidiaries operating in Greece.

It said the reviews would also examine “the potential for inconsistency between the impact of a possible Greek default or restructuring and current rating levels.”

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PG View: Moody’s also warned that it could take “similar actions on other banks with direct exposure to Greece in the coming weeks.”

By HERNAN MUNOZ
June 15 (Associated Press) – BARCELONA, Spain — Politicians in Spain’s northeastern Catalonia region used police helicopters to get to the regional parliament to avoid some 2,000 demonstrators protesters who tried to blockade the building Wednesday to protest planned budget cuts in education and health.

A police spokeswoman said the situation was tense as the deputies arrived at Ciutadella park in central Barcelona. Regional President Artur Mas was among at least 10 politicians who arrived by helicopter.

Scuffles broke out as police pushed protesters back so the deputies who arrived on foot could get in.

The politicians were heckled and at least two were sprayed with paint…

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June 15 (Bloomberg) — Greek police used tear gas to disperse demonstrators encircling the Parliament House as 20,000 people rallied against Prime Minister George Papandreou’s additional wage cuts and tax increases.

Protesters rushed police guarding the parliament in central Athens as union supporters joined up with demonstrators who have been camped out in front of the building for almost three weeks. Ports, banks, hospitals and state-run companies ground to a halt today as the two biggest unions went on strike.

[source]

June 15 (Bloomberg) — Greek economic prospects darkened as European bickering risked delaying the next rescue payment and defections weakened Prime Minister George Papandreou’s majority.

An emergency session of euro finance chiefs in Brussels yesterday failed to break a deadlock on how to enroll investors in a second bailout without triggering a default, casting doubt on funds due from the International Monetary Fund next month.

In Athens, Greek police used tear gas to disperse demonstrators around the Parliament as 20,000 people rallied against additional wage cuts and tax increases as lawmakers debated the budget cuts and asset sales that are conditions of the aid. Ports, banks, hospitals and state-run companies were paralyzed by strikes, while a Papandreou ally said he won’t support the austerity measures and another bolted his Socialist Party.

[source]

June 15 (USAGOLD) – As anti-austerity protesters clashed with police in Athens, S&P downgraded four of the major Greek banks to CCC from B, citing their direct and significant exposure to Greece’s deteriorating creditworthiness. S&P summed it up as follows:

In our view, outflows of domestic deposits could conceivably continue to intensify depending on the public’s view of the impact that Greece’s deteriorating creditworthiness may have on the banking system. The downgrade also reflects the significant risks to the Greek banks’ capital bases that we believe may arise should the government restructure some, or all, of its debt.

Meanwhile, Moody’s placed three large French banks, BNP Paribas, Societe Generale and Credit Agricole, on review for possible downgrade because of their exposure to Greece. The IMF warned France itself today that their AAA credit rating may be in jeopardy.

Even as the contagion risk is escalating, hopes of a deal for Greece seem to be diminishing. Eurogroup chief Jean-Claude Juncker said Tuesday that a deal on a second bailout for Greece may have to be delayed until July. The ECB’s Nowotny acknowledged that it will be difficult to find a solution without triggering a credit event. The euro, bond spreads and global stocks are all reacting accordingly. Deleveraging and dollar gains are weighing on gold.

• US CPI +0.2% in May, above market expectations of +0.1%. Core +0.3% (consensus +0.2%).
• US Empire State index plunged to -7.8 in Jun, well below market expectations of 13.5, vs 11.9 in May.
• Eurozone industrial production +0.2% m/m in Apr, above market expectations, vs upward revised 0.0% in Mar.
• UK initial claims unexpectedly surged to 19.6k in May, more than triple market expectations of +6k. Big upward revision to Apr as well.

Inflation Accelerates in China

June 14 (USAGOLD) – Continued robust economic activity in China gave global stocks a boost today and the improvement in risk appetite eroded the safe-haven appeal for gold somewhat. However, inflation pressures remain persistent, prompting the PBoC to raise bank reserve requirements once again. Accelerating price risks — primarily food price risks — are likely to keep demand for gold in China elevated.

A report released today by Standard Chartered Bank cited rising demand in India and China as a major contributing factor to their bullish outlook for gold. They pointed out that China only has 1.8% of its FX reserves in gold, compared to the global average of 11%. If China were to bring their holdings up to the average — and there is plenty of evidence to suggest that is exactly what they are striving toward — they would have to buy an additional 6,000 tonnes of gold.

SCB notes that is the equivalent of 2-years of global gold production. Obviously, with other competition on the demand side and anemic mining output projected, there is little hope that China will reach its goal any time soon. That however bodes well for the long-term uptrend in gold, with China likely to provide a consistent source of demand for years to come.

Debt troubles in Europe and the US continue to provide a safe-haven underpinning to the gold market in the near term. Events in Europe revolving around the second rescue of Greece seem to be coming to a head. While the euro seems to like the traction being gained by the Vienna-style “voluntary” rollover of Greek debt, the market seems to remain troubled by the implications of the rating agencies viewing this as a credit event. The discomfort was evident today in eurozone bond markets as Greek, Portuguese and Irish 10-year yields all hit new euro-era highs.

As the clock continues to tick on the US debt ceiling, President Obama warned that if Congress fails to reach a deal, the result a new global financial crisis could ensue. Even as negotiations led by Vice President Joe Biden resume today, market odds that a compromise on offsetting spending cuts will be reached seem to have eroded substantially in recent days. “[S]ome on Wall Street predict that there is just a 33 percent chance a deal will be cut in time to avoid default,” according to a US News and World Report article, but others have suggested its a 50-50 bet at best.