Currencies and Gold React to Greece’s Next Round of Bailouts

Currencies and Gold React to Greece’s Next Round of Bailouts

By Chuck Butler, EverBankChuck Butler Everbank

The euro (EUR) was removed from the boiling water this weekend, as the next phase of the bailout for Greece was approved… The reaction of the euro has been somewhat muted though, as most of the markets, being Pfennig readers, already saw the baby steps of stabilization going on, and priced in an approval… The euro has moved higher than 1.32 this morning, but, like I said, the move has been somewhat muted…

You see… Details, details… The details always get in the way, eh? Apparently, the final draft of the agreement — which, I must say, I was relieved to see the negotiations not break down — includes a 53% haircut on Greek bonds, which are terms that are much harsher for the private-sector than originally thought… But shouldn’t have really been that much of a surprise, given the funding gap that everyone knew about…

The total bailout was $170 billion and will bring Greece’s debt down to 120.5% of GDP in the year 2020… Of course that is if all austerity measures are still being implemented!

Well… As I’ve been saying for most of this year, now… These are baby steps to stabilization for the Eurozone, but they don’t remove the problem… So, everything is temporary, as the rally this morning in the euro will be, for the Eurozone is not out of the woods… And while Eurozone leaders have chosen aid over default, we still have to see the implementation of the funds, and the austerity cuts in Greece, and those have proven to be some major stumbling blocks…

You see, almost immediately, there were calls that the size of the Greek bailout wasn’t large enough, and we’ll have to go through all this again soon… That may or may not be true, but at this point, this is the kind of talk that keeps a lid on euro rallies.

OK… Enough of that! The other Big News from this weekend was an announcement by the People’s Bank of China (PBOC) that they would make another reduction of reserve requirements… This came as a HUGE surprise to me, given that the last inflation report in China showed that inflation was not defeated. These are the kinds of moves that really get a market going, because the PBOC threw a cat among the pigeons…

And get the markets moving it did! The Risk On traders came out to play, and a HUGE Risk Rally was on! The proxy for global growth and Risk On trading, the Aussie dollar (AUD), was solidifying its position as the leader of the pack, and it was all good for the Aussie dollar and the risk assets, until…

The minutes of the last Reserve Bank of Australia (RBA) printed yesterday… And in it the RBA minutes included a line about rates… “There is scope for easing should demand weaken materially.” OK… So the RBA put it all there that their easing bias remains… And yes, this was different than what RBA Governor, Stevens last said… But, that’s economists for you, talking out of both sides of their mouths, or that old saying about a two-handed economist that would say, “On one hand this will happen, but, on the other hand this could happen”…

Anyway… The Aussie dollar got taken to the woodshed over the RBA minutes, where it remains this morning. And the currencies that follow the Aussie dollar, like kiwi (NZD), are also getting sold… This is basically a sign of the times, folks… No one really knows what’s going to be around the next corner, and when it surprises them so much, they react by selling and buying Treasuries… When this all changes I have no idea. But stick around, because in a couple of hours, this could all be changing once again!

About six months ago, I really can’t remember when this happened, the Aussie dollar got sold like funnel cakes at a State Fair, when the RBA changed their bias off of tightening… But then calmer heads came back and realized that it was just talk, and I suspect we’ll see the same thing happen this time. But, like I said, no one really knows what’s going to be around the next corner, so that leaves us to making educated guesses…

Gold is up $4 this morning… I read a great piece on gold yesterday by Jeff Clark of Big Gold who writes for Casey Research. Jeff did a great job in the article, and so I stole a snippet of it… Here, Jeff talks about how “the downfall of every fiat currency (the dollar) are the two D’s. Debts and Deficits:

  • Morgan Stanley reported that there is “no historical precedent” for an economy that exceeds a 250% debt-to-GDP ratio without experiencing some sort of financial crisis or high inflation. US total debt currently exceeds GDP by roughly 400%.
  • Detailed studies of government debt levels over the past 100 years show that debts have never been repaid (in original currency units) when they exceed 80% of GDP. US government debt will exceed 100% of GDP this year.
  • Investment legend Marc Faber reports that once a country’s payments on debt exceed 30% of tax revenue, the currency is “done for.” By some estimates, the US will hit that ratio this year.
  • Peter Bernholz, a leading expert on hyperinflation, states unequivocally that “hyperinflation is caused by government budget deficits.” Next year’s US budget deficit is projected to be $1.3 trillion.

Chuck again… Yes, debts and deficits… I’ve ranted over these for years, and people (non-Pfennig readers!) are finally beginning to realize that deficits really do matter! And as long as we, as a country, continue to go down this road of debts and deficits, I would look for gold to remain the anti-dollar…

OK… Another reason for gold to continue to be underpinned is the geopolitical stuff going on in Iran… This past weekend, Iran cut off oil exports to France and the UK. Now, this may cause an initial shock in those countries, but Europe has contingency plans here, and will shift suppliers immediately… So, while this will not be a huge mover of the oil price, it does keep it underpinned.

The European Central Bank (ECB) has once again cut off its bond-purchase program. You may recall the ECB going through this exercise once before, only to have to come back to the markets with their tails between their legs… Well, the ECB had decided that the bond market has calmed down, which is true, as we’ve seen yields come down in the peripheral countries, and they could remove the program… I’m glad to see them halt the bond buying… But I won’t be jumping up and down, hootin’ and hollerin’ because, the ECB could very well be right back here, down the road.

I read this past weekend that Uridashi bonds are making a comeback… For those of you who are new to class (or maybe have forgotten about it), the Uridashi bonds are debt issued in the euro market in any other currency but yen, and sold to mainly Japanese individual investors… This was all the rage before the financial meltdown, but as the events of 2008 began to unfold, this market dried up, and went away.

Seems these issues are beginning to make a comeback… Remember the stories of Japanese housewives and their “carry trades”? With yields in Japan stuck in the mud for over a decade now, Japanese investors look around the world for yield… They don’t really have to look too far, as one of the best yields resides in Australia… And just a week or so ago, A$22.2 million of an issue was sold by Morgan Stanley… So… They are back! The Japanese housewives!

This is good for the higher yielding currencies to see the interest from Japanese retail investors returning.

I read a report this past weekend that talked about how with interest rates this low here in the US, and Treasury yields going lower all the time, this year’s $1.333 trillion budget deficit will be the cheapest to finance than in all but 6 of the last 24 years! The report really ticked me off because the writer kept inferring that because the financing was so cheap, that a $1.333 trillion budget deficit was OK… WHAT? ARE YOU KIDDING ME?

My poor beautiful bride had to sit there and listen to me complain about this… And then the one that really got me going was this:

Then there was this… From The Financial Times

US taxpayers are expected to subsidize the $40 billion settlement owed by five leading banks over allegations that they systematically abused borrowers in pursuit of improper home seizures. A clause in the provisional agreement — which has not been made public — allows the banks to count future loan modifications made under a 2009 foreclosure-prevention initiative towards their restructuring obligations for the new settlement, according to people familiar with the matter. The existing $30bn initiative, the home affordable modification program, or Hamp, provides taxpayer funds as an incentive to banks, third party investors and troubled borrowers to arrange loan modifications.

Neil Barofsky, a Democrat and the former special inspector-general of the troubled asset relief program, described this clause as “scandalous”. “It turns the notion that this is about justice and accountability on its head,” Mr Barofsky said.”

To recap… Approval for Greece’s next bailout funds went through this past weekend, but the overall effect on the euro was muted, as most of the details were already known. China also had some news this past weekend, as they reduced their reserve requirements thus unleashing a risk assets rally, that was stopped by the RBA meeting minutes where they discussed having “scope to cut rates should the economy weaken”…

Greece Gets Next Round of Bailouts originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

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