If There Was Any Doubt…

14-Sep (USAGOLD) — The yield on Greek 1-year money is trading in excess of 140% today; up dramatically from just a week ago when the 1-year yield was still below 100%. Clearly this is unsustainable and Greece is unquestionably on the verge of default, save for some massive infusion of funds that will negate Greece’s need to access global credit markets.

Nonetheless, EU leaders continue efforts to reassure the market. Today, French President Sarkozy echoed German chancellor Merkel in saying that France — like Germany — is prepared to do “everything possible to save Greece.” Yet the German constitutional court seems to have severely hamstrung at least Germany from participating in anything beyond what has already been approved. Without Germany, there will be no rescue for Greece and if Greece does indeed fail, the markets are rightfully concerned that haircuts on Greek debt will start toppling the dominoes.

Even US Treasury Secretary Geithner — who obviously has troubles of his own right here at home — took the time today to assure the world that there is “no chance” of European countries letting a major financial institution fall the way Lehman Brothers did three years ago this week. He went on to urge European leaders to act more forcefully to solve the continent’s escalating debt crisis. Glass houses Mr. Geithner…glass houses.

Today the Austrian parliament’s finance committee rejected a motion to fast-track a budget proposal to fund the country’s contribution to the expanded EFSF. Lawmakers in Austria apparently want more time to consider the implications. Time is not a luxury the EU can really afford; certainly not with respect to Greece.

China too seems to be retreating from recent pledges of support. President Wen Jiabao said today at the World Economic Forum in Dalian that “Countries should fulfill their responsibilities and put their own houses in order” before turning to China for further bailouts. The Greek house is about as “out of order” as a house can get, but they are most definitely not alone.

Not surprisingly, the latest news has intensified the pressure on European banking shares. Moody’s downgraded two of France’s largest banks, Societe Generale and Credit Agricole. The intensification of the liquidity crisis is evidenced by both the rise in Libor and the news that at least two banks tapped the ECB’s emergency dollar lending facility.

Despite the latest events, the euro remains underpinned, off its recent 7-month lows and gold remains consolidative within its recent range. The recent rise in the dollar, relative particularly to the euro, may be having a suppressive impact on the yellow metal; as perhaps has some deleveraging resulting from recent stock market losses. However, when push comes to shove, gold remains one of the last viable safe-haven assets remaining; and the trend remains unquestionably bullish.

14-Sep (Forbes) — Treasury Secretary Timothy Geithner called for U.S. politicians to support America’s softening economic growth Wednesday, while also maintaining that the escalating debt crisis in Europe will not lead to a repeat of the 2008 meltdown.

There is “no chance” of European countries letting a major financial institution fall the way Lehman Brothers did three years ago this week, Geithner said at the CNBC Institutional Investor Delivering Alpha Conference in Manhattan Monday.

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PG View: This is the same guy that assured us there was “no risk” of US credit downgrade back in April, just four months before the US was indeed downgraded by S&P.

By Martin Wolf
13-Sep (Financial Times) — “Perhaps future historians will consider Maastricht a decisive step towards the emergence of a stable, European-wide power. Yet there is another, darker possibility … The effort to bind states together may lead, instead, to a huge increase in frictions among them. If so, the event would meet the classical definition of tragedy: hubris (arrogance), ate (folly); nemesis (destruction).”

I wrote the above in the Financial Times almost 20 years ago. My fears are coming true. This crisis has done more than demonstrate that the initial design of the eurozone was defective, as most intelligent analysts then knew; it has also revealed – and, in the process, exacerbated – a fundamental lack of trust, let alone sense of shared identity, among the peoples locked together in what has become a marriage of inconvenience.

…This is what I heard from an Italian policymaker: “We gave up the old safety valves of inflation and devaluation in return for lower interest rates, but now we do not even have the low interest rates.”

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14-Sep (RealClearPolitics) — Jim Cramer, CNBC host: “Now let’s talk about the fact that you said the economy is weak. You put out a jobs plan. The New York Times today basically gives its obituary. ‘Tax plan for jobs bill.’ Familiar ring. Meaning the GOP will not back this. Is this dead on arrival?”

Tim Geithner, U.S. Secretary of Treasury: “Absolutely not. I think that there’s no reason now for the Congress of the United States not to act to help strengthen growth in the near term. It’s the conservative, prudent, responsible thing to do. You can think of it as protection against Europe.”

Cramer: “Okay.”

Geithner: “You can think of it as insurance against weaker growth going forward. And you got to think about the alternatives. If Congress or Washington is incapable of acting, then policy will be damaging to growth because what you’ll have is a deeper, steeper contraction in fiscal support than is prudent for an economy at this early stage of the crisis given the shocks we face. You know, life is about choices. Life is about alternatives.”

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PG View: While this may be a significant admission on the part of the Treasury Secretary; in reality this may be the early stage of a crisis within the broader well-established crisis.

13-Sep (Bloomberg) — Newmont Mining Corp. (NEM), the largest U.S. gold producer, said the price of bullion may jump 36 percent to $2,500 an ounce by 2013.

“I don’t see the facts to cause the gold market to change in at least five years,” Chief Executive Officer Richard O’Brien said in Dalian, China today. Gold may gain to more than $2,000 in 2012 and stay high for the next five years, he said.

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14-Sep (Financial Times) — Wen Jiabao, Chinese premier, has outlined conditions that Europe must meet before China will increase support for debt-laden Europe, in a sign of Beijing’s reluctance to be cast as a saviour for the global economy.

His top condition was the long-standing demand that Europe recognise China as a full “market economy”, a technical definition that would benefit Chinese companies involved in trade disputes.

…“Countries should fulfil their responsibilities and put their own houses in order,” Mr Wen said.

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14-Sep (Bloomberg) — European banks are losing deposits as savers and money funds spooked by the region’s debt crisis search for havens, a trend that could worsen economic and financial conditions.

Retail and institutional deposits at Greek banks fell 19 percent in the past year and almost 40 percent at Irish lenders in 18 months. Meanwhile, European Union financial firms are lending less to one another and U.S. money-market funds have reduced their investments in German, French and Spanish banks.

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14-Sep (Financial Times) — Moody’s has downgraded its credit ratings on Crédit Agricole and Société Générale and kept France’s biggest bank BNP Paribas on review for a downgrade.

The decision on Wednesday follows days of uncertainty surrounding French banks’ exposure to Greek sovereign debt, which has led to violent swings in their share prices.

French officials have resisted pressure to shore up their besieged banking sector as senior eurozone officials instead increased efforts to avert a Greek default.

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14-Sep (FT Blogs) — The Greek financial tragedy seemed set to enter the end game last week, when the troika representing big official lenders (the EU, ECB and IMF) was close to abandoning the next tranche of official loans to the country. Without these official loans, a disorderly default would have been inevitable within a month, and the departure of Greece from the euro, if not from the EU itself, would have been on the agenda.

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September 13 (Bloomberg) — Italian borrowing costs jumped at a 6.5 billion-euro ($8.8 billion) bond auction as contagion from Europe’s debt crisis leaves investors shunning the region’s most-indebted nations.

The Rome-based Treasury sold 3.9 billion euros of a new benchmark five-year bond to yield 5.6 percent, up from 4.93 percent when similar-maturity securities were sold on July 14. Demand was 1.28 times the amount offered, down from 1.93 times at the last sale.

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Uncertainty Prevails

September 13 (USAGOLD) — Gold staged another test below $1800 in earlier trading and those losses once again attracted buying interest. Given the still strong demand for a narrowed field of safe-haven assets, dips are likely to continue to be limited and short-lived.

Continued uncertainty about the fate of Greece and Europe as a whole will negatively impact risk appetite. That spells trouble for global stock markets, and in particular banking shares. German Chancellor Angela Merkel once again attempted to reassure investors that Germany and the EU are doing everything in their power to prevent a Greek default. However, given the news late last week that Germany was preparing a plan to shield its banks from a Greek default, it seems Ms. Merkel isn’t as confident as she once was. At best I think Europe is now merely doing everything in their power to prevent a disorderly Greek default. A default of some sort seems inevitable.

Similarly, here in the United States, risks to growth abound. The President’s $447 bln jobs bill was presented to Congress yesterday, but probably has very little chance of passing as it was written. The Republican majority in the House may attempt to pass just the tax cut provisions in the President’s plan, but the Democrat controlled Senate is unlikely to play ball. The reality is that there is unlikely to be any progress at all until the Super Committee comes out with their recommendations ahead of Thanksgiving. And even then, there are serious doubts as to whether those on the Super Committee can find common ground to the tune of $1.2 trillion in such a short period, given the contentiousness of the recent debt ceiling debate. The country indeed may just have to muddle along, mired in uncertainty, throughout the next 14-months of the election cycle.

That very uncertainty, a byproduct of bitter partisan politics, is exactly what prompted the S&P downgrade of US sovereign debt. There may be further downgrades in our future, and therefore further demand for safe-haven assets such as gold, unless our political leader can come together and chart an agreeable course through these stormy seas. But don’t think for a minute that if political compromise is achieved the clouds will lift and calm will be restored immediately. Even in that unlikely event, we are probably in for years — if not decades — of slow growth, high unemployment and persistent systemic risks.

September 12 (Bloomberg) — Gold’s “perfect storm” is expected to continue on renewed investor demand for haven assets, potentially driving the metal to its 1980 inflation- adjusted record, according to Morgan Stanley.

The firm retains a positive view on gold for its role as portfolio insurance against a “formidable cocktail” of macro challenges including financial systemic risk, concern of a double dip recession and sustained low interest rates, its analysts including Peter Richardson wrote in a report.

The outlook for gold is now in favor of the firm’s “bull case” target of $1,625 an ounce this year and $1,819 an ounce in 2012, they said. Bullion now has an estimated 85 percent probability of trading between $1,819 an ounce and $2,085 an ounce next year, according to Morgan Stanley’s calculations.

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September 13 (Reuters) — German Chancellor Angela Merkel sought on Tuesday to quash talk of an imminent Greek default as the United States voiced fresh concern at the euro zone’s inability to master its debt crisis.

Merkel said in radio interview that Europe was doing everything in its power to avoid a Greek default and urged politicians in her own coalition to weigh their words carefully to avoid creating turmoil on financial markets.

…Obama was quoted as saying euro zone leaders need to show markets they are taking responsibility for the debt crisis and work out how to tally monetary union with budget policy.

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Bloomberg (September 12) — Greece’s chance of default in the next five years has soared to 98 percent as Prime Minister George Papandreou fails to reassure international investors that his country can survive the euro-region crisis.

The risk of contagion beyond Greece pushed sovereign credit-default swap prices to record highs across the euro region. European bank debt risk also rose to the highest ever amid speculation French lenders will be downgraded because of their holdings of Greek bonds.

“The contagion impact of a default will be severe, because next in the firing line will be Italy, Spain and it will take in the whole of the European banking sector too,” Suki Mann, a strategist at Societe Generale SA in London, wrote in a note. “This trio are already under intense pressure, but it will get much worse.”

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Kick the Can, or Kick-out Greece

Last week UBS released a report that attempted to estimate the costs associated with succession from the European Union. As there is really no mechanism to boot a country out of the EU, heavily indebted nations facing draconian austerity measures would presumably have to leave of their own volition. However, without bailouts from core-Europe and/or ECB buying of periphery debt in the secondary market, countries such as Greece would be forced to seek access to global credit markets on their own. They would be unable to do so at an interest rate they could reasonably afford to pay back, so it would be tantamount to an ejection from the union. They would be forced to secede and then massively devalue their currency.

There would likely be a collapse of the domestic banking system, and numerous corporate defaults on top of the sovereign default. According to UBS, the cost of a peripheral secession would be about €9,500 to €11,500 per person the first year, then €3,000 to €4,000 annually for some period afterward. With unemployment in Greece currently at 16%, and given the dire condition of the Greek economy, this is also a burden that Greece will be unable to bear. There are quite simply no good options here, but UBS seems to suggest that muddling along with the current reactionary patchwork of measures to save Greece is the lesser of two very large evils. This pretty much assures that Greece will be mired in slow growth and high unemployment for years, if not decades to come.

What makes the current situation different than previous iterations of the Greek crisis is last week’s ruling by the German constitutional court. While the court upheld the legality of the EFSF rescue measures — to the great relief of the markets — but, as the FT’s Wolfgang Munchau pointed out, the ruling “categorically rules out any policy option beyond what has been agreed so far.” The court effectively has rendered impossible the two measures that most likely could save Greece and other periphery nations; a permanent bailout facility and/or eurobonds. Even if European policymakers were to embark on the long and painful path to change the treaties governing the EU, there is little hope that Greece can be saved, and perhaps that’s true of all the PIIGS.

Suddenly Germany, which has been the source of all manner of reassurances over the past 16-months, is putting together a contingency plan to protect their banking system if — or perhaps now it’s ‘when’ — Greece defaults. Lars Feld, an economic adviser to German Chancellor Merkel, acknowledged today that an orderly restructuring of Greek debt is indeed being discussed. Feld however warned that “they must also be prepared for an unorderly restructuring that could take place as well.”

The euro has fallen to 7-month lows against the dollar. European stocks have tumbled to levels not seen since the summer of 2009.

Anyone who believes that the turmoil will be contained to Greece — or even that side of the pond — does so at their own financial peril. Germany, who is arguably as well connected to the situation as a country could be, is putting their contingency plan together. So should you.

Finally, the UBS piece ominously reminds us that “almost no modern fiat currency monetary unions have broken up without some form of authoritarian or military government, or civil war.”

September 12 (Bloomberg) — The cost of insuring European sovereign and bank debt rose to records on speculation Germany is preparing for a default by Greece while French lenders may be downgraded because of their holdings of the country’s bonds.

The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments soared 15 basis points to 351 at 3:30 p.m. in London. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers increased 17 basis points to 317 and the subordinated index jumped 25 to 560, according to JPMorgan Chase & Co.

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September 12 (USAGOLD) — Gold is under pressure against the dollar, but set a new all-time high against the euro in earlier trading at €1374.93. The EUR-USD rate fell to a new 7-month low, ticking briefly below 1.3500 amid heightened worries that Greece is on the verge of default.

Late last week, it became apparent that Germany was putting together a plan to support its banking sector in the event of a Greek default. Today, a German government adviser acknowledged that an orderly restructuring (i.e. default) of Greek debt was indeed being discussed, in the hope that the problem might be contained.

Expectations for a 50% haircut on Greek debt have sent global banking shares reeling, dragging broader indexes lower.

• Explosion at French Marcoule Nuclear site, north of Marseille. Report of one casualty. ASN says no radioactive leak. CAC40 plunges.
• Italy sold €11.5 bln worth of bills at an average yield of 4.153%, vs 2.959% at previous auction. Bid cover was weak at 1.53.
• Italy industrial production (sa) -0.7% m/m in Jul, vs negative revised -0.8% m/m in Jun, 3rd consecutive monthly contraction; -4.6% y/y (nsa).
• India industrial production 3.3% y/y in Jul, vs 8.8% in Jun.
• Japan Tertiary Industry Index (sa) -0.1% m/m in Jul, vs negative revised +1.8% in Jun.
• Japan domestic CGPI 2.6% y/y in Aug, vs 2.9% in Jul.
• South Korea M2 +3.2% y/y in Jul.
• China M2 +13.5% y/y in Aug.
• China trade balance (USD) $17.8 bln in Aug, vs $31.5 bln in Jul. Exports +24.5%. Imports +30.2%.

September 12 (CNBC) — The European Commission says Greece’s budget deficit for 2011 will stand at 9.5 percent of gross domestic product, far higher than the country’s original forecast for 7.6 percent.

Greece has argued that the deficit targets will have to be revised as the recession is far worse this year than originally predicted.

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PG View: Wake me when Greece DOES hit one of its deficit targets…

A German government adviser has reportedly suggested that an orderly restructuring (i.e. default) of Greece is indeed being discussed, in hopes of containing the problem.

September 12 (BBC) — One person has been killed and four have been hurt in an explosion at the southern French nuclear plant of Marcoule.

There were no radioactive leaks after the blast, caused by a fire near a furnace in a radioactive waste storage site, a French nuclear official said.

A security perimeter has been set up because of the risk of leakage.

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PG View: French CAC40 stock index plunges.

September 08 (WSJ Blogs) — The U.S. Senate, in an unusual procedure, cleared the way Thursday for the U.S. to lift its borrowing authority by $500 billion to $15.19 trillion, enough to keep the support federal government borrowing through late January or early February.

The action came under an unusual legislative procedure spelled out under the August agreement to raise the U.S. debt ceiling and avoid a U.S. credit default. In a 52-45 vote, the Senate blocked an attempt by Republicans to slow down the process that will result in the $500 billion debt-ceiling increase.

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PG View: Shhhhh. Don’t tell anyone, but we blew through that initial $400 bln debt ceiling hike in about a month.

By Barry Eichengreen
September 09 (Project Syndicate) — Europe is again on the precipice. The most recent Greek rescue, put in place barely six weeks ago, is on the brink of collapse. The crisis of confidence has infected the eurozone’s big countries. The euro’s survival and, indeed, that of the European Union hang in the balance.

European leaders have responded with a cacophony of proposals for restoring confidence. Jean-Claude Trichet, the president of the European Central Bank, has called for stricter budgetary rules. Mario Draghi, head of the Bank of Italy and Trichet’s anointed successor at the ECB, has called for binding limits not on just budgets but also on a host of other national economic policies. Guy Verhofstadt, leader of the Alliance of Liberals and Democrats for Europe in the European Parliament, is only one in a growing chorus of voices calling for the creation of Eurobonds. Germany’s finance minister, Wolfgang Schäuble, has suggested that Europe needs to move to full fiscal union.

If these proposals have one thing in common, it is that they all fail to address the eurozone’s immediate problems. Some, like stronger fiscal rules and closer surveillance of policies affecting competitiveness, might help to head off some future crisis, but they will do nothing to resolve this one.

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September 09 (Bloomberg) — Treasuries rallied, pushing 10-year note yields to a record low, as concern Greece may default this weekend stoked demand for a refuge from Europe’s deepening sovereign-debt crisis.

Benchmark 10-year government securities headed for a second weekly gain as German Chancellor Angela Merkel’s government prepared plans to shore up the nation’s banks in the event that Greece fails to meet the terms of its aid package and misses a payment on its debt.

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PG View: Everybody out of Europe and into the dollar and Treasuries! However, given the sub-2% yield on 10-year notes, America’s own massive debt problems and rather substantial currency risk, its hard to believe these new allocations to the US will prove ‘sticky.’ Where to next? Undoubtedly some of these safe-haven flows will ultimately find their way to the gold market.

JK Comment: In this video, Faber makes a prediction that gold could achieve highs of $6000-$10000/oz. While extremely bullish, I liked this video for the macro-economic context Faber offers on the gold market. Well worth the watch…

September 09 (Bloomberg) — Chancellor Angela Merkel’s government is preparing plans to shore up German banks in the event that Greece fails to meet the terms of its aid package and defaults, three coalition officials said.

The emergency plan involves measures to help banks and insurers that face a possible 50 percent loss on their Greek bonds if the next tranche of Greece’s bailout is withheld, said the people, who spoke on condition of anonymity because the deliberations are being held in private. The successor to the German government’s bank-rescue fund introduced in 2008 might be enrolled to help recapitalize the banks, one of the people said.

The existence of a “Plan B” underscores German concerns that Greece’s failure to stick to budget-cutting targets threatens European efforts to tame the debt crisis rattling the euro.

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September 09 (Financial Times) — The European Central Bank has been dealt a serious blow by the unexpected resignation of its German board member in a conflict over the bank’s controversial bond-buying programme.

Jürgen Stark said he would quit the ECB’s six-man executive board for “personal reasons”, without giving further details. His departure reveals the extent of the conflict within the ECB over its purchases of government debt, which last month were ramped up to include Italian and Spanish bonds.

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September 09 (USAGOLD) — Gold has been quite choppy thus far today. As the yellow metal neared $1900 once again in Europe, rumors of yet another CME margin hike surfaced, sparking a precipitous $60 sell-off. There has also been more widespread acknowledgement of possible “official” gold selling this week, although if there were any indication of an official offer earlier in Europe, I haven’t heard it yet.

While the CMEGroup did announce a margin increase on the very thinly traded London gold forwards yesterday, they have already denied the rumor that another margin hike on gold futures is in the offing. Gold is on the mend, and has already retraced more than half of today’s intraday losses.

The dollar has firmed as the euro tumbled to new 6-month lows. Ongoing concerns about the impending default of Greece, mounting growth risks and the resignation of the ECB’s chief economist Jürgen Stark over periphery bond purchases, have all weighed on the single currency.

• US wholesale sales unch in Jul, below market expectations of +0.8%, vs +0.6% in Jun; inventories +0.8%.
• ECB chief economist Jürgen Stark may resign from ECB over bond purchases conflict.
• France industrial production +1.5% m/m in Jul, well above market expectations of +0.4%, vs upward revised -1.5% in Jun; 3.7% y/y.
• France manufacturing production +1.4% m/m in Jul, vs upward revised -1.8% in Jun; 4.2% y/y.
• Italy Q2 GDP – Final (sa & wda) as expected at 0.3% q/q; 0.8% y/y.
• German Aug CPI – Final unexpectedly revised up to 2.4% y/y, vs 2.3% previously; HICP revised higher as well to 2.5% y/y, vs 2.4% previously.
• Malaysia industrial production falls to -0.6% y/y in Jul, vs +1.3% y/y in Jun.
• Japan consumer confidence index (sa) steady in Aug at 37.0.