15-Sep (USAGOLD) — Gold has dipped back below the $1800 level on fresh reassurances from France and Germany that Greece will get the next tranche of bailout funds. For good measure, the ECB announced coordinated central bank dollar liquidity measures in an effort to quell the mounting liquidity crisis that has sprung from the European sovereign debt crisis.

The euro has rebounded to regain the 1.39 handle and European banking shares have gotten some relief on the news that the ECB, Fed, SNB, BoE and BoJ will all be pumping dollars into the system in three separate operations on 12-Oct, 09-Nov, and 07-Dec. The anticipated flood of dollars has heightened risk appetite once again, and while weighing on gold initially, the relentless expansion of ‘paper’ liquidity is a primary long-term driver of gold price appreciation relative to that paper.

• US Philly Fed index rose to -17.5 in Sep, below market expectations of -15.0, vs -30.7 in Aug.
• US industrial production +0.2% in Aug, in-line with expectations; cap use 77.4%.
• ECB will offer 3-mth dollar liquidity operations in conjunction with Fed, SNB, BoE, BoJ.
• US CPI +0.4% in Aug, above market expectations of +0.2%, vs +0.5% in Jul. Core +0.2%, in-line with expectations.
• US current account gap narrowed to -$118.0 bln in Q2, on top of market expectations, vs -$119.5 bln in Q1.
• US NY Empire State Index sank to -8.82 in Sep, well below market expectations of -2.3, vs -7.7 in Aug.
• US initial jobless claims surged 11k to 428k in week ended 10-Sep, well above market expectations of 412k. Prev week revised higher to 417k.
• SNB reaffirms it will buy unlimited amounts of currency to defend EUR-CHF peg, citing deflation risks; sees inflation at just 0.4% this year.
• SNB holds steady on monetary policy. 3-month Libor target rate 0.00%.
• UK retail sales -0.2% in Aug, above expectations, vs +0.2% in Jul; unch y/y.
• Eurozone CPI +0.2% in Aug, in-line with expectations, vs -0.6% in Jul; +2.5% y/y. Core 1.2% y/y.
• Singapore retail sales (nominal) 10.7% y/y in Jul, vs 10.9% in Jun.
• RBNZ holds steady on official cash rate at 2.50%, in-line with expectations.

15-Sep (The Wall Street Journal) — Five major central banks moved in concert Thursday to pump dollars into the European banking system by arranging three new funding operations, an action aimed at stemming a new liquidity crisis.

The ECB said that it will be joined by U.S. Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank to conduct three U.S. dollar liquidity-providing operations.

The action addresses an acute shortage of dollar availability as U.S. lenders withheld funds out of concern that the European banking system is over-exposed to the region’s government debt crisis.

[source]

14-Sep (The Wall Street Journal) — As the expected end of Moody’s review to possibly downgrade Italy’s sovereign debt rating closes in, market participants are bracing for another hit to that country’s bond market.

Moody’s Investors Service says ratings decisions are historically made within 90 days of putting a country on review for possible downgrade. Italy’s 90-day period closes at the end of this week, as Moody’s warned it might downgrade the country June 17. Moody’s declined to comment on the status of the review.

A potential downgrade comes at a difficult time for Italy and potentially the entire euro zone. Italy, the euro zone’s third-largest economy, is already reeling from a disappointing debt auction earlier this week. And the overall region’s health continues to hinge on whether Italy and Spain will need bailouts similar to those of Greece, Portugal and Ireland.

[source]

14-Sep (Financial Times) — European banks are rushing to use their gold to access much-needed dollar funding, in the latest sign of the growing liquidity crunch for the continent’s financial institutions.

Gold dealers and analysts said that there had been a strong move to lend gold in the market in exchange for dollars in the past week, accelerating in recent days.

[source]

PG View: Maybe this morning’s announcement of a new coordinated central bank dollar liquidity scheme will end the European banks’ need to pledge their gold to get dollars.

15-Sep (Reuters) — World Bank President Robert Zoellick said on Wednesday the world had entered a new economic danger zone and Europe, Japan and the United States all needed to make hard decisions to avoid dragging down the global economy.

“Unless Europe, Japan, and the United states can also face up to responsibilities they will drag down not only themselves, but the global economy,” Zoellick said in speech at George Washington University.

[source]

15-Sep (Bloomberg) — Germany and France signaled they’re ready to keep supporting Greece as finance ministers prepare for a new round of crisis talks and Spain sold almost 4 billion euros ($5.5 billion) in bonds.

Global stocks rebounded after Chancellor Angela Merkel and President Nicolas Sarkozy said late yesterday that they’re “convinced” Greece will stay in the euro area. With global policy makers urging Europe to step up its crisis fight, officials meet in Wroclaw, Poland, tomorrow to discuss how they will implement the expansion of the euro region’s new bailout fund.

[source]

PG View: Just the latest in an endless stream of reassurances that all is going to be just fine with regard to Greece. Euro is higher along with stocks on revived risk appetite.

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.

[source]

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.”

[source]

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.”

[source]

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.

[source]

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.

[source]

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.

[source]

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.

[source]

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.

[source]

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.

[source]

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.

[source]

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.

[source]

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.”

[Source]

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.”