June 28 (CNBC) – France’s new plan to rescue Greece and forestall the looming global financial crisis has one important thing in common with all the previous efforts: It won’t work.

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June 28 (CNNMoney) – QE2 is just about done. But the Federal Reserve will still be buying massive amounts of long-term Treasuries.

In fact, the Fed’s purchases over the next year will likely be at least $300 billion. That’s half the size of QE2 — even if QE3 never takes place.

Think of it as QE2.5.

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PG View: Don’t think for a second that the Fed’s asset purchases are coming to an end in two-days.

June 28 (Washington Post) – The International Monetary Fund on Tuesday chose French finance minister Christine Lagarde to be its next managing director, maintaining Europe’s long-standing hold on the agency’s top job and appointing the first woman to take over the global financial powerhouse.

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June 27 (Der Spiegel) – In a SPIEGEL interview, leading German economist Stefan Homburg argues that euro-zone members should not bail out Greece, discusses who is making a profit from the crisis and explains why he himself is buying Greek bonds. “I believe in the boundless stupidity of the German government,” he says.

A couple choice excerpts from the interview:

SPIEGEL: The European Union and the International Monetary Fund are planning a new bailout package for Greece involving the voluntary participation of banks. What’s your take on this?

Homburg: Banks cannot participate voluntarily. An executive board is committed to its company’s welfare, and not the public interest. If it waives outstanding debts at the expense of its own company, this is a breach of trust and punishable by law.
–
SPIEGEL: So the voluntary participation of private creditors, which German Chancellor Angela Merkel and French President Nicolas Sarkozy have agreed on, will achieve little or nothing?

Homburg: It was all just a big show which was mainly intended to calm the German public. Merkel wanted mandatory participation, Sarkozy wanted none at all. In effect, Sarkozy has prevailed.
–
Homburg: The alleged risk of contagion is a myth that doesn’t stand up to closer scrutiny. If you share my conviction that all this talk of Greece being too big to fail is simply nonsense, then there is no reason for bailouts …

SPIEGEL: … yes, but only if you’re right.

Homburg: No, it also holds true in the reverse situation. If the bankruptcy of little Greece were actually to trigger a global financial crisis, new bailout programs couldn’t solve the problem: They would actually exacerbate it. If no more states or banks are allowed to go bankrupt because this might precipitate a financial crisis, then we’re finished. Then the problem continuously escalates and leads to a much greater crisis.
–
SPIEGEL: Europe wants to use the bailouts to buy time. The idea is that during this period the banks can recover and countries like Portugal, Ireland and Spain can get back on an even keel, so the risk of contagion is not so great when the inevitable restructuring takes place in the distant future. That is the strategy.

Homburg: I wouldn’t call it a strategy. First, states bailed out their banks, now states themselves are being bailed out. But there is no next level to fall back on beyond this bailout. The bailout packages have merely exacerbated the crisis. Last year, if we had adhered to the Lisbon Treaty, which prohibits assistance payments, Greece would have restructured its debt, just as Uruguay, Argentina, Russia and other countries have done over the past 15 years …
—
Homburg: After the Greek bonds have been paid back at full value, the gamblers will turn to the next candidate, such as Portugal. If creditors suffered losses in Greece, however, they would renounce this business model. In this sense, the rescue measures are exacerbating the problem.

SPIEGEL: If there were such a business model, a lot of people would be buying Greek government bonds now.

Homburg: In recent days, I myself have invested a considerable sum in Greek bonds. They will mature in one year’s time and, if all goes well, produce a 25 percent return on investment. I sleep very soundly at night because I believe in the boundless stupidity of the German government. They will pay up.

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PG View: Homburg is spot-on regarding the moral hazards of bailouts. I would quibble with one point though, I think there is at least one additional level of bailout for Europe and thy name is The Federal Reserve. Click here for another possibility. It would seem that “boundless stupidity”…well, abounds.

June 27 (zerohedge) - It has been a long time since we had seen a 5 Year auction as ugly as today’s: printing at a 1.615% high yield, the 5 Year had a 3.5 bps tail off the bat to the 1.58% WI where it was trading before. The internals were just as ugly, with the Bid To Cover coming at 2.59 a plunge from May’s 3.20, and the lowest since June 2010. Not surprisingly, Indirect interest evaporated once again, tumbling from 47.1% to just 37.6%, with Primary Dealers having to take up more than half, or 52.1%, once again, the remainder going to Direct Bidders. Too bad they will have no more opportunities to flip these back to the Fed. Which as expected starts to confirm Bill Gross’ thesis that in the absence of the Fed monetizing, rates are about to go higher.

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PG View: Today’s auction harkens back to the question posed last week by our own Michael J. Kosares: Who will finance the U.S. government post quantitative easing?

Gold Consolidates Around $1500

Gold remains defensive, straddling the $1500 level. The yellow metal was lifted off of yesterday’s low by renewed weakness in the dollar as the euro remains buoyed by hopes that a resolution (or at least a short-term band-aid) for the Greek crisis will be forthcoming. The Greek Parliament is debating further austerity measures that are likely to be voted on tomorrow and Thursday. Such measures must pass in order for Greece to receive additional EU/IMF bailout funds and avoid default.

However, there are some doubts that embattled Prime Minister George Papandreou has the necessary votes to heap additional austerity on the Greek people. Those people continue to make it quite evident how they feel about further austerity: A two-day general strike commenced today and the accompanying protests have already turned violent.

Even if the new austerity measures pass, it remains unclear if the debt rollover plan being advanced would result in a technical default anyway. Fitch Rating reiterated today that it would likely view such a rollover as a “credit event.”

“Fitch would very likely view such a ‘scenario’ as a sovereign default event and place the Greek sovereign rating into ‘Restricted Default’ (RD),” wrote David Riley, Fitch’s head of sovereign ratings, in a letter to the Financial Times.

Market activity by a large US name and a Swiss account generally associated with sovereign activity has resulted in market chatter that European sovereigns are liquidating gold for euros to raise funds for the second Greek bailout. If true, I’ll give you a couple guesses as to who might be on the other side of such a trade. China has been ingratiating itself with Europe throughout the past couple months of uncertainty. If Europe needs a ready buyer for whatever gold it might be interested in selling, it probably need look no further than their Chinese friends. Further transfer of gold from West to East.

BoE dove Alan Posen said yesterday’s BIS call for higher global rates was “nonsense.” He went on, saying that, “In the UK and the west more broadly, there is little or no credit growth, little wage growth beyond productivity, little evidence of rising inflation expectations, and oil prices are not — yet — a one way bet.” Surely Posen must get the connection between persistent easy monetary policy and the asset bubbles that sparked the global financial crisis, but policymakers all too often can’t see beyond the immediate crisis; hence the temptation to keep rates low and re-inflate. Posen favors keeping rates near the record low 0.5% and implementing additional quantitative easing measures.

Posen’s comments are tantamount to the Fed’s “exceptionally/extended” mantra, suggesting that despite the BIS warning that low interest rates pose a threat to world financial stability, yields at least in the US and UK are unlikely to rise meaningfully anytime soon. Meanwhile, final UK Q1 GDP was revised lower to 1.6% y/y from 1.8% even as inflation continues to run well above target. Similarly, the US has experienced a cavalcade of negative growth revisions, the most recent coming from the Fed itself. The Fed also acknowledged last week that inflation has increased recently due to higher commodities and import prices, as well as supply-chain disruptions.

While Posen believes stagflation in the UK and perhaps “more broadly the west” is unlikely, the realities of weaker growth and rising prices are hard to ignore. Yet so too is the seemingly rising impotence of monetary policy. Therefore, I think it is reasonable to expect additional one-off government actions like the IEA oil dump as more traditional fiscal and monetary tools become increasingly limited. This is likely to result in heightened market uncertainty and instability.

• US consumer confidence slipped to 58.5 in Jun, below marked expectations, vs upward revised 61.7 in May.
• US S&P/Case Shiller home prices +0.7% (NSA) in Apr for 20-cities index.
• UK final Q1 GDP unchanged at 0.5% q/q. Y/y outlook lowered to 1.6% from 1.8%.
• German Gfk consumer confidence unexpectedly improved to 5.7 in Jul, above market expectations, vs 5.6 in Jun.
• German import price inflation eased to 8.1% y/y in May, vs 9.4% y/y in Apr. Jun HICP rose to 2.4% y/y.

June 28 (AP) – Riot police fired tear gas at youths hurling rocks near the Greek finance ministry Tuesday, trying to quell the anger unleashed by a general strike as parliament debated new cost-cutting measures.

The latest austerity measures must pass in two parliamentary votes Wednesday and Thursday if Greece is to receive bailout funds from the EU and the IMF to stave off a possible default in July. If the votes don’t pass, Greece could become the first eurozone nation to default on its debts, sending shock waves through the global economy.

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By Tom Jennemann
June 27 (Fast Markets) – Gold on the Comex division of the New York Mercantile closed under $1,500 per ounce Monday as investors continue to liquidate commodity positions and lower inflation expectations.

Gold futures for August delivery settled down $4.50, or 0.3 percent, at $1,496.40 an ounce, which marks a five-week low. Trade ranged from $1,490.80 to $1506.10.

The market nervously awaits Wednesday’s vote on a 28 billion-euro ($40 billion) package of Greek tax increases and spending cuts in a parliamentary ballot.

“When gold was up around $1,550 it was clear that the market had priced in at least a technical default of Greece’s debt obligations as well as some degree of contagion, likely to Ireland and Portugal,” a US-based metal trader said.

“While I’m still of the belief that a default is inevitable, this little dog-and-pony show with the austerity vote and aid package has pushed that date down the road a bit. If the measures do pass parliament, gold could move somewhat lower but that’ll be short-lived as Europe’s structural debt problems remain unsolved,” he added.

Additionally, some market participants have lowered their global inflation expectations as several major economies have shown signs of hitting a slow patch. Gold generally benefits from higher inflation rates as the metal is often bought as a currency and inflation hedge.

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June 27 (The Globe and Mail) – Europe’s debt crisis has brought the region to the brink of an “economic collapse,” George Soros warns, and it’s likely the monetary union will at some point agree to a plan by which some of its members can leave.

“We are on the verge of an economic collapse which starts, let’s say, in Greece, but it could easily spread,” the renowned investor said at a panel discussion in Vienna yesterday, according to Bloomberg News. “The financial system remains extremely vulnerable.”

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PG View: When the story broke in May that Soros had sold most of his sizable positions in the gold ETFs in Q1, it was definitely a contributing factor in the yellow metal’s sharp drop from 1574.60 to 1492.25. While Soros was simultaneously buying mining shares, there was speculation at the time that he wasn’t so much exiting gold, as exiting paper representations of gold. His comments in Vienna over the weekend will likely add fuel to that speculation. Why would a savvy investor leave the gold market on such a scale if he truly believes we’re on the “verge of an economic collapse?”

The US dollar will lose its status as the global reserve currency over the next 25 years, according to a survey of central bank reserve managers who collectively control more than $8,000bn.

More than half the managers, who were polled by UBS, predicted that the dollar would be replaced by a portfolio of currencies within the next 25 years.

That marks a departure from previous years, when the central bank reserve managers have said the dollar would retain its status as the sole reserve currency.

…Robert Zoellick, president of the World Bank, last year proposed a new monetary system involving a number of major global currencies, including the dollar, euro, yen, pound and renminbi.

The system should also make use of gold, Mr Zoellick added. The results of the UBS poll also point to a growing role for bullion, with 6 per cent of reserve managers surveyed saying the biggest change in their reserves over the next decade would be the addition of more gold. In contrast to previous years, none of the managers surveyed was intending to make significant sales of gold in the next decade.

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PG View: The writing seems to be increasingly on the wall. As the dollar’s reserve status continues to erode over time, it will have an increasingly negative impact on the greenback. That should in turn continue to have a positive influence on the price of gold relative to those dollars, particularly if gold plays a significant role in any basket of currencies.

By Jennifer Thompson in Paris and Guy Dinmore in Rome
June 27 (FT) – French banks have agreed on a plan to a Greek debt rollover, which would see them reinvest in Greek sovereign bonds with longer maturities, Nicolas Sarkozy, French president, confirmed on Monday.

…The deal agreed with the French banks proposes that banks reinvest 70 per cent of the proceeds from bonds that fall due between 2011 and 2013. Fifty per cent would be rolled over into 30 year bonds. The remaining 20 per cent would be reinvested in triple-A rated investments and put into a special purpose vehicle, to act as a built-in guarantee for the repayment of the 30 year Greek bonds.

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PG View: Understandably the French banks are seeking to protect themselves from a haircut if Greek defaults. However, this plan still smells like a distressed debt swap. If the rating agencies see it as such, it is likely to be deemed a credit event and worthy of further downgrades.

Greek Turmoil Persists

Gold extended more convincingly below $1500 in overseas trading, weighed by a firmer dollar. The dollar was originally being underpinned by a weaker euro, but the single currency has since rebounded on rumors that new Greek bonds could carry a AAA rating if they are guaranteed by the EIB or EFSF. I’m assuming that such guarantees would be the enticement to get private bond holders to “voluntarily” rollover. I’m not sure by what authority the EIB or ESFS can guarantee sovereign debt, but if there is any substance to this rumor, I’ll leave it to the rating agencies to determine if such a swap would be a credit event or not.

Keep this in mind though: A guarantee is only as good as the issuing party. AIG for example guaranteed more than $500 bln in credit default swaps that it ultimately couldn’t pay on. The Fed had to step in and bail-out AIG.

The BIS warned in its annual report that interest rates need to rise globally or the distortions that resulted in the ongoing financial crisis will continue to threaten worldwide financial stability. Therefore it would seem that any measures taken by the EU/IMF/ECB troika that distort Greek yields, to the point that they don’t accurately reflect the risks, are doing a disservice to Greece, global investors and eurozone tax payers that must ultimately foot the bill for loan guarantees.

At any rate, all of this may be moot if the Greek Parliament fails to pass the additional austerity measures being demanded by the troika. There has been talk of defections in recent days from Papandreou’s ruling party, suggesting that the looming vote is anything but a sure-thing. That vote is currently expected on Wednesday.

Meanwhile the Greek’s themselves are taking defensive action. Moody’s says that Greek banks have lost about 8% of their private-sector customer deposits so far this year. Moody’s went on to warn that those banks could face a severe liquidity crisis if such outflows persist. The Greeks are moving those deposits out of the country and they continue to rush into gold.

June 26 (BBC News) – The Bank for International Settlements (BIS) has warned that low interest rates across the globe are a threat to world financial stability.

The BIS warned low cost of borrowing had resulted in a credit and property price boom that was fuelling inflation, especially in emerging economies.

Central banks across the globe have cut interest rates in an attempt to boost growth after the 2008 financial crisis.

However, BIS warned that the policy may prove to be counterproductive.

“The prolonged period of very low interest rates entails the risk of creating serious financial distortions, misallocations of resources and delay in the necessary deleveraging in those advanced countries most affected by the crisis,” the bank said in its annual report.

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PG View: While what the BIS says in its annual report makes sense, some of the individual member central banks seem disinclined to heed their own advice. To wit, Fed chairman Bernanke reiterated the “exceptionally low/extended period” language just last week. How can the Fed view exceptionally low rates as a means to mitigate the financial crisis, while the BIS views them as the source and a threat to world financial stability? Well, if the Fed were operating in a vacuum and we were the only country on the planet with exceptionally low yields and a desire for a devalued currency, the Fed’s über-easy policy might actually be effective. However, we aren’t the only country and so it has truly become a circus of beggar thy neighbor, despite what the BIS says.

By Michael MacKenzie
June 26 (Financial Times) – Investors in the US government bond market could face losses of up to $100bn if the largest economy loses its triple A rating, according to a research arm of McGraw-Hill, the parent of Standard & Poor’s.

A ratings downgrade that results in higher bond yields and lower prices could also mean the US Treasury paying $2.3bn-$3.75bn a year more in interest on financing a $1,000bn annual budget deficit.

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June 27 (Reuters) – The euro fell against the dollar on Monday after Moody’s said Greek banks have lost about 8 percent of their private-sector customer deposits so far this year, warning that those institutions would face severe cash shortage if outflows mount to 35 percent of their deposits.

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June 24 (Dow Jones) – Gold futures settled a breath above $1,500 as fresh concerns about Europe triggered steep declines in equities and commodities and forced some traders to sell the safe-haven asset to meet margin calls.

Gold is considered a refuge from financial risk, but prices can tumble amid a market-wide sell-off as traders sell profitable holdings like gold to raise cash and cover losses elsewhere.

…However, gold’s declines are unlikely to breach far below $1,500 as it becomes too attractive for bargain hunters to stay on the sidelines.

“It would be a short-lived trade through $1,500, it would present buying opportunities and (investors) will come in,” said Haberkorn.

Moody’s warning about Italy comes as fellow euro-zone member Greece struggles to avoid defaulting on its government debt. In the latest steps to qualify for a second bailout, Greece agreed on a five-year austerity plan with the International Monetary Fund and European Union. The widely-expected accord must still pass a Greek parliament vote, however, and many market watchers question whether the plan will prevent a Greek default.

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PG View: So who thinks “cash” is where they’re going to stay? We’ve seen these deleveraging breaks in gold before and the market always seems to come right back. I’m inclined to echo the sentiments of those that believe losses below $1500 will be short-lived. If you need further incentive to pick-up the phone and talk to your broker, go back and reread our Summer Doldrums piece.

June 24 (China Daily) – Gold’s luster is continuing to attract rising domestic demand and China will continue to “outperform” other countries in private consumption of the precious metal, with sales growth remaining above 20 percent over the next two years, an industry expert said.

The amount individual buyers purchase as an investment is expected to surge two-fold annually, Zhang Bingnan, secretary-general of the China Gold Association, said.

And the government’s gold reserves are “far from enough”, and should be increased to fend off global financial risks, he said.

…”Demand for gold, mostly driven by investment, will grow at least 20 percent this year,” he said.

…”China’s reserves are small. They need to be increased appropriately,” Zhang said.

…China had more than $2.84 trillion in foreign exchange reserves by 2010, but only 1.7 percent were invested in gold.

…”The government needs to expand its share of gold in the foreign exchange reserves to reduce vulnerability to dollar depreciation. The reserve should be at least 5,000 tons,” Zhong said.

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PG View: We fully expect China to remain a reliable and substantial source of gold demand for years to come.

June 24 (Reuters) – European banks and finance officials are discussing a proposal to replace existing Greek debt with a different type of bond to get around ratings agencies’ reservations about a planned rollover, two senior European banking sources said on Friday.

The proposal foresees a voluntary rollover of debt into securities of a different and not comparable credit composition to avoid agencies moving Greece to default status, the sources told Reuters on Friday.

“Only by a completely different composition of the bonds would the rating agencies see the restructuring as voluntary and not declare Greece insolvent,” said one senior banker.

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PG View: The fact that Greece and the troika are going through such contortions to arrive at some “solution” that wont be viewed as a default by the rating agencies should have everyone worried…very worried. Especially when you consider that such a rollover is at best just another kick of the can down the road. You don’t claw your way out of a debt crisis with more debt; be that in the form of GGBs or some new miracle security contrived by the troika to skirt rating agencies interpretations of a credit event.

June 24 (MSNBC) – The breakdown of talks between the White House and congressional Republicans has intensified worries about the financial bomb known as the national debt. Without serious budget reforms, that bomb will almost certainly explode — with widespread collateral damage to the U.S. economy and the global financial system.

But no one can say for certain just when the bomb will go off. The fuse may be longer than many people assume.

Debt-reduction talks came grinding to a halt Thursday when Republicans pulled out, blaming Democrats for demanding tax increases rather than accepting cuts in federal services.

The clock is ticking. The Congressional Budget Office said this week that the national debt is on pace to equal the gross domestic product within a decade, and warned of a European-style crisis unless Congress moves to realign the budget.

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June 23 (Bloomberg) – Oil producers tumbled the most in more than a year after the U.S. government announced plans to pour as much as 1 million barrels of stockpiled crude a day into an already-glutted market.

The U.S. and 27 other nations pledged today to tap government-controlled oil inventories after civil war in Libya disrupted crude shipments and Saudi Arabia failed to persuade fellow members of the Organization of Petroleum Exporting Countries to plug the gap with increased output. Crude futures plunged more than $5 a barrel in New York trading.

The U.S. plans to make 30 million barrels available from the Strategic Petroleum Reserve over the next 30 days as part of a coordinated effort by International Energy Agency member states, according to the Energy Department in Washington. The other 27 IEA countries will collectively release an equal amount of crude during the same period.

The supply addition comes at a time when refiners in the world’s biggest economy have more crude on hand and are importing less as demand for fuels such as gasoline and diesel is slipping, according to Energy Department figures.

…“This is kind of a head-scratcher because we’re just not in a situation in the U.S. where we physically need more barrels to meet demand,” Blake Fernandez, an energy analyst at Howard Weil in New Orleans, said in a telephone interview. “This looks more like a perception move by the U.S. government and the Europeans to alleviate high crude prices.”

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June 24 (BBC) – EU leaders have urged all Greek politicians to support new spending cuts and tax hikes, saying there is no alternative if debt-laden Athens is to qualify for a second massive bail-out.

The second rescue is being negotiated in Brussels. It is expected to be about 120bn euros (£107bn; $171bn).

“There will be a new programme for Greece, on which the Greek parliament will have to vote next week,” said Germany’s Chancellor Angela Merkel.

The UK says it will not contribute.

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PG View: The UK has plenty of their own problems to contend with…but then again, so does much of Europe.