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October 10, 2012

Eurozone Ticking Bomb: Fuse Is Getting Shorter

Eurozone nations like Greece & Spain face doom either which way they choose to go. The choice could only be between now or later. Simply put, they sit on a ticking bomb.All one hears of these day’s is, “Spain needs no aid program”, & the next day, headlines scream, “Spain may soon Request for a Bailout”. Spain seems to have taken center stage position of peaking crisis from Greece these days. Eurozone finance ministers met in Luxembourg on Monday to discuss Spain, Greece,Portugal and other issues related to the region’s debt crisis, including what needs to be done to establish a single supervisory authority for Eurozone banks. 
ESM Managing Director Klaus Regling said, “We are ready to provide the financing to the FROB for the bank recapitalization of Spanish banks, probably starting in November and we are preparing the transfer of EFSF to the ESM.” Meanwhile Eurogroup Juncker said, “To a large extent I’m satisfied with the fiscal consolidation measures taken so far by the Spanish government. It is neither up to me nor to us as members of the Eurogroup to advise the Spanish government to make a request.”
German Finance Minister said, “Spain needs no aid program. Spain is doing everything necessary, in fiscal policy, in structural reforms. Spain has a problem with its banks as a consequence of the real estate bubble of the past years. “That’s why Spain is getting help with banking recapitalization. And of course Spain, like other Eurozone countries, is suffering from the problem of contagion, speculation on financial markets… but Spain needs no aid program. That’s what the Spanish government says again and again.”

Gold Inflows on the Rise on Bailout Expectations from Eurozone:

The fourth quarter could mean more market volatility than what was seen in the third quarter, and that can have serious implications for the US Dollar. There are many issues that could roil the market, including the U.S. fiscal cliff and debt ceiling, an unresolved Eurozone Debt Crisis and the signs of prolonged economic weakness, and a slowing economy in China. Further there are numerous geopolitical tensions in the Middle East that could spill over. Investors & Traders continue to build net-long positions in Gold & Silver as the Eurozone crisis build up momentum, on expectation of Bailout requests by Spain, Greece among others. Commodity-based exchange-traded products (ETP) rose to a record $207 billion in the third quarter globally, led by Gold. 
Based on inflows and price increases, assets in the third quarter rose by $31 billion, bringing the total assets under management to $207 billion. Gold saw inflows of $7.7 billion last quarter, and including price increases, assets rose by $23 billion to $151 billion. The last time inflows were this large into gold ETPs was in the second quarter of 2010, when the situation in Greece had first come to a critical level. Silver saw $477 million of inflows in the third quarter, and the large price increases pushed up assets by $5 billion to $20 billion.  Base Metals ETPs saw net inflows of $81 million, to bring third-quarter total assets to $1.9 billion. 
Central bank actions have supported commodity prices in general as the banks will likely keep monetary policy accommodative as countries need to work through debt problems. Spain may eventually request a bailout to support its ailing economy & that could trigger a big rally in Gold and all other commodities. People will be more positive on the Euro but till then, there’s going to be pressure on the Euro which will lift the US Dollar. Weekly Gold movements have seen rises for the last seven weeks but have been tapering off in the last week. Gold prices have been unable to take out the $1,800 an ounce area, with the market retreating from last week’s highs after a surprising U.S. labor report, but Gold has support around $1747. It’s clear that the buying momentum evident last month has undoubtedly slowed down – both Friday’s reaction and recovery post (jobs report) highlighted that sellers lack conviction while buyers are prepared to step in during pull-backs.

Related Reading - Gold Market Dip Buying Strategy

Spain Budget Black Hole:

The black hole in Spain’s budget has grown faster than Prime Minister Mariano Rajoy’s attempt to cut it. Harshest austerity measures have failed to contain the deficit as the economy sinks deeper into recession. The Eurozone has already set aside 100 billion euros for Spain to recapitalize its banks, only around 40 billion of which is expected to be used in the coming weeks, but there are also expectations in financial markets that Madrid will also have to request a government Bailout in the coming weeks or months. Spain will miss its deficit targets in 2012 and 2013 and its debt will jump to more than 90% of GDP next year as it recapitalizes its banking sector, the IMF said on Tuesday. The International Monetary Fund said in its fiscal monitor report that the country’s deficit would reach 7% of GDP in 2012 and 5.7% in 2013, compared with European Union-agreed targets of 6.3% of GDP this year and 4.5% of GDP next year. Spain replaced Greece, Portugal and Ireland as the epicenter of the Eurozone debt crisis after it missed its budget targets by a wide margin in 2011.
Spain Government has pledged to rein in the public finances but overspending regions and the recapitalization of a banking sector crippled by bad debts from a decade-long property bubble is making the task difficult to achieve in the short run. Spain said last week the public deficit would reach 7.4% in 2012 but that would include one-off elements from the recapitalization of the banks that the European Commission has agreed not to take into account when assessing Spain’s efforts. The Commission will publish updated economic forecasts on November 7.
Economy Minister Luis de Guindos reiterated on Monday that Spain would meet the targets and said there was no need for additional measures despite a deepening economic contraction. The government has based its budget plan for next year on a recession of 0.5% while the IMF forecast a recession of 1.3% in the country in 2013. Under current policies, Spain would not return below the EU ceiling of 3% of GDP until 2017 and its debt-to-GDP ratio would hit 90.7% in 2012 and 96.9% in 2013, the IMF also said in the report. That takes into account a full disbursement of the 100-billion-Euro European credit line Spain sought in June to prop up its lenders. Madrid said last month it expected to tap only around 40 billion euros. But that would still put the debt at around 84.7% of GDP in 2012 and 90.9% of GDP in 2013, reported Reuters.

Pain in Spain Spreads to the once Wealthy:

Home foreclosures in Spain, which disproportionately affected lower-income immigrants after the real estate bubble burst, are spreading to formerly well-to-do families and businessmen as they run out of ways to pay mortgages in a deepening recession. Spanish business people, upper middle class families and their loan guarantors, typically the parents of first-time buyers, now account for 60% of foreclosures in Madrid, according to AFES, an association that advises homeowners facing repossession, reported Bloomberg. Spain’s worsening foreclosure crisis comes as ministers from all 27 nations in the European Union meet today. Carlos Banos, president of Madrid-based AFES, said parental guarantors “are the Saddest of all cases” the association sees. “The kids lose their homes, go live with mom and dad and then mom and dad lose the home that they worked all their lives to pay for because it backed their children’s debts.” “The economic crisis is wiping out businesses and the finances of families that were comfortably off” and “foreclosures are now massively threatening businessmen and families in high income areas,” Banos said. 
Unemployment is the root of all of this and the worst affected areas are Madrid, Barcelona, Valencia and Andalucia.” Fitch Ratings has said repossessed properties in Spain are worth 48% less on average than the value assigned when their mortgages were originated. Under Spanish law, a bank can pursue a borrower for the difference if a foreclosed property is sold for less than the outstanding mortgage. Lenders can also garner present and future assets and earnings of borrowers and their guarantors, including pay checks and pensions. “These people completely lose their purpose in life,” Banos said. “Everything they had or will ever have in the future will go to the bank.”

Eurozone makes No Substantial Progress on Greece:

Greece’s capital will grind to a halt today for German Chancellor Angela Merkel’s first visit since the financial crisis began, with 7,000 officers deployed around Athens to prevent violence at planned protests. Merkel has become the face of austerity in a country suffering a fifth year of recession, seen in Greece as mainly due to German-led conditions attached to emergency loans. While Samaras has called the chancellor’s visit a “very positive development,” opposition and union leaders are planning to use Merkel’s visit to capture Greeks’ anger and frustration. “Germany is doing whatever we can to help Greece on its difficult path,” German Finance Minister Wolfgang Schaeuble said yesterday. “The chancellor isn’t the troika. The chancellor is traveling to Greece the same way she travels to many other European countries and just as the Greek prime minister was in Berlin.” She last visited Greece in July 2007.
Eurozone Finance Ministers spent more than two hours discussing an upcoming report by the European Commission, the European Central Bank and the IMF – known as the troika – on Greece’s debt-reduction program, with divergences emerging inside the Eurozone and with the IMF over how best to proceed, officials said. While Jean-Claude Juncker, the chairman of the Eurozone’s 17 finance ministers, and IMF Managing Director Christine Lagarde both said they were pleased with Athens’ progress, they said more still needed to be done. Further discussion will take place once the troika report is published, probably next month. One point of contention was whether to grant Athens up to two more years to meet its budget and other targets. While the IMF is believed to favor leeway, countries such as the Netherlands and Finland have concerns about offering more time. Under the German insistence that nations eliminate excessive borrowing as a condition of financial support, Greece is completing the fifth year of a recession that has knocked 17% off annual output.

More Aid for Portugal from Eurozone:

Eurozone finance ministers signed off on a further tranche of financial aid to Portugal on Monday and said the country was working hard to put in place the budget cuts and structural economic adjustments demanded of it. In a statement following a meeting in Luxembourg, the Eurogroup, made up of the finance ministers of the 17 euro zone countries, said Lisbon was carrying out its reforms faster than expected and was broadly on track to meet its goals. It has been given an extra year to meet its deficit targets. “The Eurogroup notes with satisfaction that the government’s active preparation of a return to the financial markets in 2013 has recently been met with success,” it said, adding that it had approved the next disbursement of 800 million euros from the Eurozone’s temporary EFSF bailout fund. 
A further 3.5 billion euros from the Eurozone and the IMF is expected to be disbursed at the end of the month, it said. The Eurogroup also welcomed the Portuguese government’s decision to backtrack on a plan to increase the social security burden on employees, an initiative that had met with widespread popular unrest. Portugal’s deficit target was lifted to 5% of GDP from 4.5% for 2012, and to 4.5% of GDP from 3% for 2013. The next 4.3 billion euros of Portugal’s package, worth a total of 78 billion euros, were also cleared for release. Those loans will come from the euro area’s temporary bailout fund, a separate pool of EU funds and the IMF, reported Bloomberg.

IMF warns of Deepening Global Slowdown:

The IMF said the global economic slowdown is worsening as it cut its growth forecasts for the second time since April and warned U.S.and Eurozone policymakers that failure to fix their economic ills would prolong the slump, reported Reuters. Global growth in advanced economies is too weak to bring down unemployment and what little momentum exists is coming primarily from central banks, the International Monetary Fund said in its World Economic Outlook, released ahead of its twice-yearly meeting, which will be held in Tokyo later this week. “A key issue is whether the global economy is just hitting another bout of turbulence in what was always expected to be a slow and bumpy recovery or whether the current slowdown has a more lasting component,” it said. “The answer depends on whether Eurozone and U.S. policymakers deal proactively with their major short-term economic challenges.” The IMF said “familiar” forces were dragging down advanced economy growth: fiscal consolidation and a still-weak financial system, the same problems that have plagued the world since the global financial crisis exploded in 2008..
Courtesy CommodityTradeMantra.com - Comprehensive market intelligence (EconMatters author archive here)

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