09-Mar (Reuters) — Greece triggered the payment on default insurance contracts by using legislation that forces losses on all private creditors, the International Swaps and Derivatives Association said on Friday.

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Gold Recoups This Week’s Losses

09-Mar (USAGOLD) — Gold has traded in a choppy manner, falling in early New York trading after a modestly better than expected nonfarm payrolls report lifted the dollar and stocks. The purported success of the Greek PMI deal may have also diminished the safe-haven appeal of the yellow metal somewhat.

However, these intraday losses were short-lived as news that Fitch downgraded Greece to “selective default” and reports of an Israeli airstrike in Gaza sparked a rebound that saw gold set new highs for the day and threaten the high for the week at 1716.48. A close above the 100-day moving average (1695.66), and more so a higher close on the week (above 1710.50), would offer encouragement to longs for the week ahead. Such action into the close would also likely discourage shorts.

Despite reports of 95% participation in the Greek bond swaps, the euro tumbled back to its low for the week, just below 1.3100 versus the dollar. The Greek cabinet approved activation of the collective action clauses and Fitch downgraded Greece to selective default status. Meanwhile, in the grey market for the new bonds, it appears that the actual haircut for the private bondholders will be closer to 78%. Yields have surged from the get-go with new 2% bonds maturing in Feb 2023 being bid at 19.7% on repayment worries. Basically, the new bonds aren’t even out yet and already there’s ample skepticism about Greece’s ability to pay on them.

Such skepticism is well founded with news that the Greek economy contracted more than expected at the end of last year. The Hellenic Statistical Authority reported today that Q4 GDP fell by 7.5%, rather than the 7% that was initially estimated.

Here in America we’ve started seeing some downward revisions to GDP for this year that are primarily being driven by a surging trade deficit. The January trade deficit jumped to a three year high of $52.6 bln on rising costs for imported energy and food products. At the same time, European demand for our exports fell as their economy teeters on the brink of a new recession. The weaker economic prospects for the US may have prompted the Fed to spur renewed speculation this week about additional quantitative measures.

If the Fed does indeed launch a QE3 down the road, the gold market is likely to react in the same way it did to QE1, QE2 and Operation Twist, by pushing relentlessly higher. When you consider the absolute explosion in the balance sheets of the Fed’s peers — the ECB, BoE, BoJ, among others — it’s reasonable to view gold as being on sale at these prices.

09-Mar (SmartMoney) — The stock market has recovered its losses since hitting bottom three years ago today. But despite gains in employment during that same stretch, America is still down six million jobs, data shows.

The economy added 227,000 jobs in February, more than the 204,000 economists expected, the Labor Department reported this morning. The unemployment rate remained unchanged at 8.3% from last month. But while the economy has added more than 200,000 jobs for three straight months, the damage to employment done by the Great Recession is still far from repaired.

Between December 2007, when the recession officially started, and February 2010, when the Labor Department’s reports show employment hit bottom, the economy lost more than eight million jobs.

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PG View: While limited progress is certainly better than no progress — or worse yet, higher joblessness — there’s still a huge gap to fill.

A great interview with Jim Grant of Grant’s Interest Rate Observer, where he discusses how past, present and future quantitative measures are nothing short of market manipulation.

Grant also advocates for a “sound currency by which i mean a currency that is based on a standard and not at the whim and the discretion of a bunch of mandarins sitting around Washington D.C.”

Yes, Jim believes gold needs to be part of that conversation…

09-Mar (Bloomberg) — Greece pushed through the biggest sovereign restructuring in history after cajoling private investors to forgive more than 100 billion euros ($132 billion) of debt, opening the way for a second bailout.

Euro-region finance ministers agreed on a conference call that the swap meant Greece had met the terms to proceed with a 130 billion-euro rescue package designed to prevent a collapse of the Greek economy. Ministers freed up 35.5 billion euros in public sweeteners and interest now, with a decision on the balance to be made at a March 12 meeting in Brussels.

“It would be a big mistake to think we are out of the woods,” German Finance Minister Wolfgang Schaeuble told reporters in Berlin after the call today. “We have a chance of making it. And we have to seize that opportunity.”

…Investors with 95.7 percent of Greece’s privately held bonds will participate in the swap after so-called collective action clauses are triggered, the Finance Ministry said.

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09-Mar (Reuters) — Grey market trading on the new Greek bonds suggest long-suffering bond holders will receive an approximate net present value loss of 78%, as opposed to the approximate 75% NPV loss Athens negotiated with private sector creditors.

There is a wide price range being quoted in the grey market, but the new Greek 2042 bond is averaging a mid-market around EUR18.75 (yielding around 17%).

The new bonds are not starting from a nominal par value as is typically the case on new issues. Instead, as Greece’ Ministry of Finance has previously specified, they are being issued with a “face amount equal to 31.5% of the face amount of the debt exchanged”. In other words, the grey market trading around EUR18.75 should be viewed as a discount not from par but from 31.5, meaning they are already trading at a discount of 59.5%.

Totalling it up, we find that instead of an approximate 75% Net Present Value loss, holders of Greek bonds will instead receive an approximate NPV loss of 78%.

…The difference of course is only a mark-to-market loss; investors could hold onto the new paper, but clearly the market is already starting to price in further discounts/haircuts at a later date.

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08-Mar (Gallop) — U.S. unemployment, as measured by Gallup without seasonal adjustment, increased to 9.1% in February from 8.6% in January and 8.5% in December.

The 0.5-percentage-point increase in February compared with January is the largest such month-to-month change Gallup has recorded in its not-seasonally adjusted measure since December 2010, when the rate rose 0.8 points to 9.6% from 8.8% in November. A year ago, Gallup recorded a February increase of 0.4 percentage points, to 10.3% from 9.9% in January 2011.

…Gallup’s U.S. underemployment measure, which combines the percentage of workers who are unemployed and the percentage working part time but wanting full-time work, increased to 19.1% in February from 18.7% in January. This is an improvement from the 19.9% of February 2011.

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07-Mar (Forbes) — A report that the Fed is considering “sterilized” QE sparked a risk rally that shouldn’t really make sense. On the one hand, the breakdown of the how the Fed would actually execute the operation provided nothing new, on the other, “sterilized” QE would amount to a capital injection that puts enough restrictions on that capital to make it unusable, making the injection neutral at the end of the day, at least in terms of speculative capital.

What’s really happening? The Fed, via WSJ’s Jon Hilsenrath (dubbed “mouthpiece” by ZeroHedge and “Fedwire” by FT Alphaville), is testing the waters. Bernanke & Co. are telling markets QE is definitely on the table while acknowledging they recognize the inflationary threat carried by another round of quantitative easing.

…Will it work? It seems to me the more appropriate question is “does it matter?” The Fed’s two programs of quantitative easing have definitely fueled risk-asset rallies. During QE2, equities surged, but so did equities markets across emerging markets (which didn’t really help the U.S. economy). QE also fueled non-productive asset rallies as capital massively went into gold and other commodities (effectively helping crude oil prices surge).

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08-Mar (USAGOLD) — Gold traded back above the $1700 level in overseas trading on rising optimism that the Greek PSI deal is going to get done today. Heightened risk appetite lifted global shares as well, with an additional boost offered by affirmation of ongoing easy monetary policy by the BoE, ECB and BoC. The US initial jobless claims number for the week ended 03-Mar disappointed.

Bloomberg is reporting that expectations for participation in the Greek PSI have risen to 60%, from a mere 39% yesterday. While 60% is certainly better than 39%, it is believed that buy-in of 75% or more is needed to make this deal work. With just hours remaining until the 18:00GMT deadline, it seems the private bondholders are going to take this down to the wire.

Let’s be clear though, even if the debt swap is successful and the ISDA and rating agencies can say with a wink and a nod that no default occurred, it would be nothing more than another kick of the can down the road. It does nothing to solve the underlying fiscal issues that put Greece in this mess in the first place. With the economy collapsing, Greece is going to have a very hard time making good on the new bonds and are likely to find themselves right back in the same position at some point along that increasingly short road.

While ECB President Mario Draghi avoided specific comments on the Greek debt swap in his presser today, he did confirm a less than optimistic assessment of the eurozone economy as a whole. The ECB now expects the economy to contract in 2012 by 0.1%. They also negatively revised their growth outlook for 2013 from +1.3% to +1.1%. Meanwhile Draghi said that he expects inflation “to remain above 2% in 2012, with upside risks prevailing.” Above target inflation in a contracting economy? Sounds like stagflation to me.

Perhaps it is similar concerns that have prompted the Fed to consider additional quantitative measures in the form of “sterilized” bond purchases. It was just days ago that The Wall Street Journal’s Fed watcher Jon Hilsenrath wrote that the Fed would be taking a “breather”, now suddenly it’s QE3 on!. Hilsenrath says in his latest piece that, “the Fed would print new money to buy long-term mortgage or Treasury bonds but effectively tie up that money by borrowing it back for short periods at low rates.” Amazing how quickly a mere 1.57% drop in the Dow on Tuesday changed the dialogue…

I think it’s suggestive of how vulnerable the Fed perceives the stock market to be. And of course the “sterilization” aspect is an acknowledgement by the Fed of the inflation risks associated with quantitative measures.

February nonfarm payrolls come out tomorrow. The median forecast is holding steady around +210k, with the jobless rate expected to hold steady at 8.3%.

• BoC leaves policy rate unchanged at 1.00%, in-line with expectations.
• US initial jobless claims +8k to 362k for the week ended 03-Mar, above expectations of 355k, vs upward revised 354k in previous week.
• ECB leaves refi rate steady at 1.00%, in-line with expectations, lowers growth forecast, raises inflation outlook.
• BoE leaves repo rate unchanged at 0.50% asset purchase target unchanged as well. No statement.
• Switzerland CPI +0.3% m/m in Feb, above expectations of +0.2%, vs -0.4% in Jan; -0.9% y/y, vs -0.8% y/y in Jan.
• Germany industrial production +1.6% m/m in Jan, above expectations of +1.1%, vs positive revised -2.6% in Dec; +1.8% y/y, vs +1.3% y/y in Dec.
• Japan Q4 GDP SAAR – 2nd prelim -0.7%, vs -2.3% 1st release.
• Japan current account (nsa) falls to -¥437 bln in Jan, vs ¥304 bln in Dec. First deficit since Jan 2009.
• BoK holds repo rate steady at 3.25%, in-line with expectations.
• Bank of Indonesia holds rates steady at 5.75%, in-line with expectations.
• RBNZ holds steady on Official Cash Rate at 2.50%, in-line with expectations.

08-Mar (The Wall Street Journal) — The European Central Bank Thursday admitted that the euro-zone’s economy is likely to contract this year, and that inflation will outstrip the bank’s medium target.

Opening his monthly press conference, Mario Draghi said that higher-than-expected energy prices, along with increases in various state-administered prices, meant that “inflation is expected to remain above 2% in 2012, with upside risks prevailing.”

The central inflation forecast for 2012 is now 2.4%, up from 2% three months ago, Mr. Draghi said.

At the same time, the central assumption of the Eurosystem’s forecasters is now that the economy will shrink by 0.1% this year, that being the mid-point in a range between -0.5% and 0.3%. For 2013, the ECB now expects growth of 1.1%, compared with a prior forecast of 1.3%.

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PG View: What the ECB seems to be predicting here is stagflation.

08-Mar (Bloomberg) — Greece moved closer to sealing the biggest sovereign restructuring in history as investors indicated they’ll participate in the nation’s debt swap.

Holders of about 60 percent of the Greek bonds eligible for the deal, including Greece’s largest banks, most of the country’s pension funds and more than 30 European banks and insurers including BNP Paribas (BNP) SA and Commerzbank AG (CBK), have agreed to the offer so far. That brings the total to about 124 billion euros ($163 billion), based on data compiled by Bloomberg from company reports and government statements.
Enlarge image Investors With 58% of Greek Bonds Agree to Swap

The euro and stocks gained on speculation Greece will reach its participation target by the deadline of 10 p.m. in Athens today. The goal of the exchange is to reduce the 206 billion euros of privately held Greek debt by 53.5 percent and turn the tide against the debt crisis that has roiled Europe for more than two years.

…While Greece would prefer a voluntary deal, the government has said it will use collective action clauses to force holders of Greek-law bonds into the swap if the so-called private sector involvement falls short and it gets sufficient approval from investors to change the bonds’ terms.

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07-Mar (HousingWire) — Home prices in January declined for the sixth consecutive month in a row, according to the latest data from CoreLogic ($14.89).

The Santa Ana, Calif.-based analytics firm says home prices, including those on distressed sales, fell 3.1% in January from a year earlier and dipped 1% from December. When excluding distressed home sales, prices fell 0.9% in January compared to a year earlier.

“Although home price declines are slowly improving and not far from the bottom, home prices are down to nearly the same levels as 10 years ago,” said Mark Fleming, chief economist for CoreLogic.

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PG View: The negative wealth effect associated with a decade of lost appreciation in home values does not bode well for consumption and the broader economy.

06-Mar (Washington Post) — In the wake of the 2008 financial crisis, the Obama administration helped negotiate a plan to give emerging economic powers increased say at the International Monetary Fund, while also having them contribute more to an enlarged pot of money for the fund.

But a brewing election year fight with congressional Republicans has put that plan in doubt and could restrict the IMF’s finances at a time when agency officials say they need a substantial boost to protect the world economy.

The dispute centers on Republican opposition to increasing the United States’ financial contributions to the agency, reflecting anger over IMF rescue programs in Europe that some GOP lawmakers argue have become too expensive and have put U.S. taxpayers at risk.

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07-Mar (The Wall Street Journal) — Federal Reserve officials are considering a new type of bond-buying program designed to subdue worries about future inflation if they decide to take new steps to boost the economy in the months ahead.

Under the new approach, the Fed would print new money to buy long-term mortgage or Treasury bonds but effectively tie up that money by borrowing it back for short periods at low rates. The aim of such an approach would be to relieve anxieties that money printing could fuel inflation later, a fear widely expressed by critics of the Fed’s previous efforts to aid the recovery.

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PG View: Such an operation will be a goldmine for prime dealers like Goldman Sachs, Morgan Stanley, JPM, Citi et al and their shares are now outpacing the broader market.

07-Mar (Reuters) — Cash deposits to cover the declining value of guarantees posted against European Central Bank loans rose to their highest level ever last week, balance sheet data showed, a development which analysts pegged to the ECB’s move to exclude Greek government bonds from collateral use.

Deposits related to margin calls – money that banks place at the ECB after the market value of their collateral value declines – jumped to 17.1 billion euros at the end of last week from 2.9 billion the week before.

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Gold Finds Some Support as Greek PSI Deadline Looms

07-Mar (USAGOLD) — Gold is trading higher after falling in recent sessions. The yellow metal held up well as the EUR-USD rate probed below 1.3100 amid continued concerns that Greece is not going to be able to pull-off the PMI deal ahead of tomorrow’s looming deadline. When we see gold and the dollar rising in unison, we like to think that the safe-haven aspects of gold are starting to re-exert themselves. Time will tell.

The euro was also weighed on by a big slump in German manufacturing orders in January. Orders unexpectedly fell 2.7% m/m, well below market expectations of +0.5%, vs a negative revised +1.6% in December. The year-on-year pace tumbled to -4.9%, versus 0.0% y/y in December.

Bloomberg reported this morning that only about 39% of private bondholders had “volunteered” to swap their Greek debt for new bonds with a lower face value and much lower yields. This is not sufficient, and unless the buy-in improves dramatically before tomorrow’s 20:00GMT deadline, they will likely have to use collective action clauses (CACs) to force the swap on private bondholders. At that point, any pretense that the swaps are voluntary is shattered and the ISDA will have to (or will they?) declare a “credit event” that will trigger credit default swaps (CDSs).

The IIF warned that “it is hard to see how [the risks of a disorderly Greek default] would not exceed 1 trillion euros.” They worried about contagion risks to Spain and Italy, but nobody quite knows the true magnitude — nor the whereabouts — of the liabilities on the CDSs. Therefore, the ISDA may be obliged to find some new pretense for a Greek default not to be a Greek default. Certainly there’s going to be a lot more arm twisting going on over the next 26-hours or so…

Meanwhile the yield on Greek 1-year money surged decisively over 1,000%. The GGGB1YR has traded as high as 1,114.49300% intraday. Clearly the bond market — such as it currently exists — thinks that a Greek default is imminent, or has in fact already occurred.

The next day or so could be very interesting as policymakers across Europe scurry about trying to maintain at least the illusion that all is well and orderly. If they fail, the possibility of a financial crisis that would make the events of several years ago look like child’s-play is very real.

07-Mar (MarketWatch) — Gold futures edged higher Wednesday, finding support after tallying a decline of nearly 3% over the past three sessions, as U.S. stocks cheered upbeat data on private-sector jobs for February.

Gold for April delivery tacked on $5.20, or 0.3%, to $1,677.30 an ounce on the Comex division of the New York Mercantile Exchange.

The metal looked poised to end a three-session losing streak, during which it had dropped $50.10 an ounce, or 2.9% — including a drop of nearly $32 on Tuesday to gold’s lowest settlement in six weeks.

…For the long term, it’s “all about and always about the fundamentals” for gold, he said.

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