The Fun Begins

Good evening Ladies and Gentlemen:

Today Gold blasted off like a rocket and finished the comex session at $1599.70 up 33.70 dollars.

Silver on a percentage basis fared much better rising by $1.66 to $29.53.  Today we have war of words between the USA and Iran on ships passing through the Straits of Hormuz. And also we had rumblings from Greece warning the EU to pay up or else Greece returns to the Drachma.

Gold is now trading in the access market at: $1603.70

Silver is now trading at:  $29.71.

Let us now head over to the comex and assess trading, inventory movements and amounts of silver/gold standing for delivery.The downward movement of gold and silver washed out many of the remaining weak longs and thus only strong hands remain. These guys are willing to take on the crooks and ask for physical delivery knowing full well what happened to MF GLobal.  The fact that gold and silver immediately rose to levels before the hit, the move is called a KILLER MOVE and to technical people this is a big thing.

Gold and silver should advance nicely this week.

The total gold comex OI  fell by 2908 contracts to 419,171 as gold had a pretty good day on Friday, the last day of the year.  The front options expiry month of January saw the dust settle and finally it shows an OI standing of 126 contracts, despite a delivery notices of  852 on Thursday night. We had a fall in OI of 855 contracts so we probably did not lose any gold to cash settlements.

The next big delivery month if February and here the OI fell from 240,297 to 235,859 which is normal.

The estimated volume at the gold comex today was quite weak at 115,462.  The confirmed volume on Friday was also tame at 106,598.  It seems that the comex gold players have moved their business elsewhere to purchase metal.  They are shying away from the crooked comex.

The total silver comex OI again remained quite constant at 105,669 dropping about 300 contracts.  The OI fell from 307 to 130 for a drop of 177 contracts.  We had 239 delivery notices on Thursday night and 82 delivery notices filed Friday night so we did not lose any silver to cash settlements. The next big delivery month is March and here the OI also remained constant at 59,262.  The estimated volume today was extremely light at 35,540 if you take into account that yesterday was a holiday.  The confirmed volume on Friday was very anemic at 26,234 contracts.

Inventory Movements and Delivery Notices for Gold: Jan 3 2012:

Gold	Ounces
Withdrawals from Dealers Inventory in oz	nil
Withdrawals from Customer Inventory in oz	8179 (HSBC)
Deposits to the Dealer Inventory in oz	nil
Deposits to the Customer Inventory, in oz	116,611 (Brinks)
No of oz served (contracts) today	86 (8,600)
No of oz to be served (notices)	36  (3600)
Total monthly oz gold served (contracts) so far this month	938  (93800)
Total accumulative withdrawal of gold from the Dealers inventory this month	nil
Total accumulative withdrawal of gold from the Customer inventory this month	118,893

We are starting to see a little more violent action at the gold comex.  However the dealer is still

very complacent. The dealer again so no gold deposited to its accounts nor did it see any withdrawals.

The only real action was with the customer.  The customer received this large deposit:

1.  Into Brinks:  116,611 oz  (3.63 tonnes)

The customer had the following withdrawal:  

1.  8179 oz out of HSBC.

there were no adjustments.  Thus the registered or dealer gold remains at 2.531 million oz or 78.7 tonnes

The CME notified us that we had 86 notices filed late Friday night for delivery today. This represents

8600 oz of gold.  The total number of gold notices filed so far this month total 938 or 93800 oz.

To obtain what is left to be served upon, I take the OI standing for January (126) and subtract out 

today's delivery notices (86) which will leave us with 36 notices left to be served upon.

Thus the total number of gold oz standing in this non delivery month is as follows:

93,800 oz (served) +  3600 oz (to be served)  =  97,400 or 3.02 tonnes of gold.

If we add the last 3 months of gold delivery in tonnage we get:  73.81 tonnes

against a total registered level of 78.7 tonnes or 93.78% are utilized in the delivery process and yet no gold enters the dealer.

end

And now for silver 

 the chart: January 3 2012:

Month of January now commences:

Silver	Ounces
Withdrawals from Dealers Inventory	268,115 (Brinks)
Withdrawals fromCustomer Inventory	300,798  (Brinks)
Deposits to theDealer Inventory	596,350 (Brinks
Deposits to the Customer Inventory	582,582 (HSBC)
No of oz served (contracts)	82  (410,000)
No of oz to be served (notices)	48  (240,000)
Total monthly oz silver served (contracts)	321  (1,605,000)
Total accumulative withdrawal of silver from the Dealersinventory this month	268,115
Total accumulative withdrawal of silver from the Customer inventory this month	1,186,363

We have been getting quite a bit of activity in the silver vaults lately.

The dealer had the following activity today:

Dealer deposit:  

1. 596,350 oz into Brinks.

Dealer withdrawal:

1. 268,115 oz out of Brinks.

so it looks like 596,350 oz entered Brinks as a deposit and a huge 268,115 oz were

withdrawn from the dealer Brinks

The customer:

A customer received 582,852 oz but it was not from Brinks as the deposit was to an HSBC vault.

The customer also had this withdrawal:

1. 300,798 oz  was withdrawn from Brinks.

so it seems that no silver entered the customer Brinks which would have indicated a settlement.

We had a tiny 2100 oz of silver leased from a customer to a dealer.

Thus the total amount of silver at the dealer or registered category rises to 34.83 million oz.

The total of both eligible and registered silver again rises to 117.909 million oz.

Why is so much silver entering and leaving these vaults?

The CME notified us that we had 82 delivery notices filed late Friday night for delivery today.

This is represented by 410,000 oz.  The total number of notices filed so far this month total 321 for 1,605,000 oz.  To obtain what is left to be served upon, I take the OI standing for January (126) and subtract out today's deliveries (82) which leaves us with 48 notices or 240,000 oz to be served upon.

Thus the total number of silver oz standing in this non delivery month is as follows:

1,605,000 oz (served)  +  240,000 oz (to be served) =  1,845,000 oz.

Now that the dust has settled in both gold and silver, we should have good readings as to what will stand for this option expiry month.

end

Let us now proceed to our ETF's SLV and GLD and then our physical gold and silver funds:

Sprott and Central Fund of Canada.

The two ETF's that I follow are the GLD and SLV. You must be very careful in trading these vehicles as these funds do not have any beneficial gold or silver behind them. They probably have only paper claims and when the dust settles, on a collapse, there will be countless class action lawsuits trying to recover your lost investment.

There is now evidence that the GLD and SLV are paper settling on the comex.

Thus a default at either of the LBMA, or Comex will trigger a catastrophic event.

Jan 3:2012:

Total Gold in Trust

Tonnes:1,254.57

Ounces:40,335,690.64

Value US$:64,429,378,970.13

   

Dec 31.2011

TOTAL GOLD IN TRUST

Tonnes:1,254.57

Ounces:40,335,690.64

Value US$:63,484,275,822.93

Dec 29.2011:

TOTAL GOLD IN TRUST

Tonnes:1,254.57

Ounces:40,335,690.64

Value US$:61,730,367,104.89

We lost zero oz of gold from the GLD.  It is very strange that for the past several days   we saw gold whacked in price and yet no gold left.  On Friday we saw gold rise and yet inventory remained constant. Today a big gain and again no gold enters its vault.

Strange operation!!

And now for silver Jan 3 2012: 

Ounces of Silver in Trust	308,833,295.500
Tonnes of Silver in Trust	9,605.79

Dec 31.2011:

Ounces of Silver in Trust	308,833,295.500
Tonnes of Silver in Trust	9,605.79

 Dec 29.2011:

Ounces of Silver in Trust	308,833,295.500
Tonnes of Silver in Trust	9,605.79

Dec 27.2011

Ounces of Silver in Trust	308,833,295.500
Tonnes of Silver in Trust	9,605.79

we lost zero silver ounces at the SLV. Again this is very strange as we has witnessed silver beaten to a pulp in the last week down to around 27.00 dollars and then it rises big time to $27.53 and no silver enters their vaults.

Again a very strange operation!!

end

And now for our premiums to NAV for the funds I follow:

1. Central Fund of Canada: traded to a positive 3.9 percent to NAV in usa funds and a positive 3.9% to NAV for Cdn funds. ( Jan 3 2012.).

2. Sprott silver fund (PSLV): Premium to NAV fell slightly   to  24.35% to NAV  Jan 3. 2012
3. Sprott gold fund (PHYS): premium to NAV rose slightly to a 4.91% positive to NAV Jan 3. 2012).

It looks like our banker friends refuse to do battle with Eric.  He has the muscle to bury them with silver purchases.  They are staying away from him like a plague. The Sprott gold funds continue to show good positives to NAV reflecting good demand for physical gold.

end.

Now let us see some of the big stories which will shape the real physical price of gold and silver:

This morning we were greeted with this announcement from Greece, "Pay up or we will leave the Euro".

If Greece leaves, she surely will hyperinflate as prices will skyrocket with a weak drachma and the debts still 

denominated in euros. Greece's tax collectors and doctors are now on strike.

(courtesy zero hedge)

The Bluffing Resumes: Greece Warns Will Leave Eurozone If Second Bailout Not Secured

Submitted by Tyler Durden on 01/03/2012 08:12 -0500

• European Central Bank
  
• Eurozone
   
• Greece
   
• headlines
   
• Hyperinflation
 
• International Monetary Fund
   
• Morgan Stanley
   
• Newspaper
   
• Pension Underfunding

First Morgan Stanley issued the first market forecast of 2012 before the market has even opened, and now it is Greece's turn to threaten fire and brimstone (aka to leave the Eurozone, but according to UBS and everyone else in the status quo the two are synonymous) within hours of the New Year, if the second bailout, which as far as we recall was arranged back in July 2011, is not secured. Quote the BBC: ""The bailout agreement needs to be signed otherwise we will be out of the markets, out of the euro," spokesman Pantelis Kapsis told Skai TV." And cue several million furious Germans and tomorrow's German newspaper headlines telling Greece bon voyage on its own as it commences braving the treacherous waters of hyperinflation. In other news, the sequel to Catch 22 is in the works, and explains how Greek tax collectors (i.e., people who collect those all important taxes so very needed for government revenues) continues to strike. In it we also learn that the first strike of the year in Athens is already in place, with Greek doctors saying they will treat only emergency cases until Thursday, in protest at changes to healthcare provision. All in all, the complete collapse of the Greek debt slave society is proceeding just as planned.

More:

The government faces public opposition to the measures demanded by lenders. It has warned the alternative would be euro exit and financial chaos. The latest bailout was agreed in principle by EU leaders in October, conditional on Greece adopting further measures to cut its deficit and restructure its economy.

EU, International Monetary Fund and European Central Bank inspectors are due in Athens later in January to agree details of the bailout plan.

Greece's parliament approved the measures for this year in early December.

Protests

The budget, which includes further tax rises and spending cuts, was proposed by the interim coalition government of former bank governor Lucas Papademos.

But protests against the measures have continued in Athens. On Monday, Greek doctors and pharmacists went on strike in the country's first walkout of the new year.

State hospital doctors have said they will treat only emergency cases until Thursday, in protest at changes to healthcare provision.

So how long before doctors in all the PIIGS follow suit? At least such forced "eugenics" should solve the pension underfunding problem of broke Europe. Because last we checked morgue workers are still in operation.

end

The official release of the above story from Reuters:

(courtesy Reuters)

Greece: Clinch bailout or face euro exit

(Reuters) - Greece will have to leave the euro zone if it fails to clinch a deal on a second, 130 billion euro bailout with its international lenders, a government spokesman said on Tuesday.

It was an unusually public stark warning from the embattled country, aimed at shoring up domestic support for tough measures and possibly also at the lenders themselves.

"The bailout agreement needs to be signed otherwise we will be out of the markets, out of the euro," spokesman Pantelis Kapsis told Skai TV. "The situation will be much worse."

Greece is racing against the clock to agree with the EU, the IMF and private bondholders on the details of the rescue plan before a major bond redemption in March. It risks a default if there is no deal by this date.

Athens and its EU partners have repeatedly ruled out a euro exit, which could drag the bloc even deeper into crisis, and usually avoid saying this is a possible scenario.

But top Greek officials, who need to push through unpopular reforms to clinch the bailout deal, have warned over the past few days that a return to the drachma would be "hell" and that the country must stick to austerity to avoid it.

EU, IMF and ECB inspectors are expected in Athens mid-January to flesh out the new bailout plan agreed in principle by EU leaders in October to avoid a Greek default and a euro exit.

Opinion polls show Greek voters want the government to do all it takes to stay in the euro even if they disagree with austerity reforms.

Asked if the government would have to take extra austerity measures to make up for last year's fiscal slippages, Kapsis said: "We will see. There could be a need for extra measures."

The talks with bankers on a debt swap deal that is a key aspect of the rescue plan are particularly difficult.

"The next three to fourth months are the most crucial and that is the reason this government exists," Kapsis said.

Prime Minister Lucas Papademos said in a New Year's Eve address over the weekend that Greece must stick to reforms to stay in the euro.

(Reporting by Karolina Tagaris and Ingrid Melander; Editing by Jeremy Gaunt)/

end

In this paper, Peter Tchir discusses strange aspects with respect to the LTRO whereby bonds printed by the National Bank of Greece and then  guaranteed by the Greek central bank  (go figure!!).  These bonds are then  transferred by a repo to the ECB for fresh cash.

He then discusses a similar transaction with UNICREDIT bank of Italy printing a bond and selling it to themselves.  This bond is guaranteed by the Italian central bank (strange indeed) and then swapped a la LTRO  with the ECB for fresh Euro cash.
NO wonder the world is flocking to buy only physical gold and silver.


(courtesy Peter Tchir of TF MarketAdvisors)

Via Peter Tchir of TF Market Advisors,

Would a Ponzi by any other name smell as bad?

The bond market has always had clever names for bonds in specific markets.  Eurobonds, Yankee bonds, Samurai bonds, and now, Ponzi bonds.  I’m not sure what else to call these new bonds, but Ponzi bonds seems as good as anything.

I couldn’t find the new National Bank of Greece Preferred bond that was issued to the Greek government, but I did find a bond that was issued back in June.  Euribor + 1200 may seem like a big coupon, but I cannot imagine that any actual investor bought these bonds.

National Bank Of Greece 3 Year Bond

The fact that NBG is the “book runner” of this bond is further demonstration that no real account bought these bonds – back when NBG sold actual bonds to actual institutions it hired banks like DB to lead the deals for them.  As further evidence of the “special nature” of these bonds is that the “Collateral Type” is “Govt Liquid Gtd”, which means the Greek government guaranteed these bonds.  So just like the Italian bonds, NBG issued these bonds to themselves, got a Greek government guarantee (how can a country that can’t borrow, provide a guarantee?) and took these bonds to the ECB to get some financing.  The ECB won’t buy National Bank of Greece bonds directly, they won’t buy Hellenic Republic bonds in the primary market, but they will take these ponzi bonds as collateral?  Not only have they gone with form over substance in skirting around rules, but they have clearly thrown out any reasonable attempts at being prudent with the use of their balance sheet.  Where do these guarantees show up?  Is anyone out their negotiating the haircut on these bonds?  Probably not since somehow a guarantee doesn’t count.  Yet NBG is likely at the PSI negotiating table since they own actual Greek debt in addition to these ponzi bonds.  All very confusing.

NBG has now issued preferred bonds to the same bankrupt country.  The bankrupt country provided €1 billion of capital to the insolvent bank.  Whether the country got the money by posting the bonds to the ECB as collateral, or from their last tranche of TROIKA money, I don’t know.  What I do know is that NBG is trying to use that money to buy back bonds and preferred shares at a discount to par (where they carry them at).  Those purchases would generate profits for the bank as they would book the difference between par and purchase price as income.  That would increase their equity capital.  In the case of preferred bonds/stock they buy back, I’m not sure how much of a benefit they get as retiring those issues would reduce capital by the face amount, but it certainly works on straight debt.  The scary part is that you can almost see the logic behind it.  You can see how they are attempting to use what little firepower they have left to keep the bank alive and pretend like all is good.  Yet, it is sacrificing the people and the country for the good of the bank.  Does Greece really benefit from buying these bonds/preferreds?  Greece has NO money!  Greece is living bailout to bailout yet, is finding ways to help the banks meet regulatory requirements.  Why are existing lenders letting Greece pile on more debt to save the banks?  I just don’t see how this works, and I really don’t understand how the IMF (US Taxpayer) can be comfortable with Greece using money to buy National Bank of Greece bonds.

Lets shift to Italy.  In Italy at least 3 banks issued bonds just ahead of the LTRO. 

Intesa SanPaolo 3 month Bill

UniCredit 3 month Bill

They issued bonds to themselves.  Yes, they sold bonds to themselves (I wonder how many sales credits the salesperson got?).

So after the bond purchase and sale, we have a bank with a matching asset and liability.

So the next step is for the Italian Bank to get a guarantee from the Italian government.  I assume there is some cost to this, but haven’t bothered to check because frankly the fee is small relative to the benefits received.

So now the Italian bank has a bond that is guaranteed by the Italian government.  That is marginally better than having their own debt, since if they stop paying on their debt, the Italian government would make payment on these bonds.  The beneficiary of the guarantee payments would be the other creditors of the Italian Bank, so the guarantee has minimal value at this stage.  The Italian Government has created a new liability – the contingent guarantee of this Italian Bank bond.  Thanks to “modern” accounting, or the market’s self deception, somehow a guarantee doesn’t count against the Italian government (or at least that is the hope).

Now the bank participates in LTRO and pledges the guaranteed bonds to the ECB.

The ECB loaned money to the Italian Bank.  The ECB deems it as “safe” because they received a bond Guaranteed by the Italian Government as collateral.  The Italian Bank gets money from the ECB, pays itself money on the bonds it issued, and owes the ECB interest on the money they received.  The Italian government is happy because they didn’t issue any debt, yet used their guarantee (which somehow they seem to think doesn’t count against them) to get one of their banks much needed money.

It is unclear from this chart (and to the world in general) where the ECB got the money to lend to the Italian Bank in the first place.  Right now the banks don’t seem to need the money they got from the ECB so they are lending it back to the ECB.  So at the moment the ECB is getting the money to lend to the banks, from the banks themselves, but ultimately where is the ECB getting the money to lend once the banks won’t lend it to them?  It is bizarre if you think about it.

It is one thing to read about how the ECB’s deposits have skyrocketed since LTRO, but to look at balance sheets of the entities involved makes it even more mind-boggling to me.

But this is where it gets really good.  The Italian Government and the ECB both put pressure on the Italian Banks to use at least some of the money to purchase Italian Government bonds.  Surely some of the money will be used for other purposes (it won’t permanently be lent to the ECB), but at least part will be used to help Italian banks finance existing Italian government bonds or to buy new ones.

So, here is what the world now looks like.  The Italian government has some money.  The Italian Government issued bonds AND guarantees to get that money!  If they could have issued bonds directly to the ECB they would not have incurred the Guarantee.  The size of the guarantee is likely to be larger than the Italian Government Bonds proceeds since even Italian banks won’t use all of the LTRO money to buy Italian government bonds.

The banks have cheap funding via the LTRO facility and some assets against it.  They pay an interest rate on the “new bonds” they issued, but receive that money back via the repo agreement that is part of the LTRO.  They are the proud owners of Italian government bonds with cheap financing.  They could have bought the bonds directly, except they cannot borrow cheaply.  Yes, the market had made some attempt to charge banks with bad risk management, awful assets, and opaque books, more than they charged the country they were domiciled in.  But rather than let the market (and common sense) rule, a mechanism to let banks fund themselves cheaper than the countries they rely on, was created.

The ECB has apparently created money, and can pretend as though they didn’t print money, and also pretend that they didn’t participate in financing sovereigns directly in new issues (I guess).

Countries and Their Banks are Becoming Indistinguishable

Asides from giving Ponzi a bad name (at least until the ECB just admits that they are printing faster than even Big Ben) this is tying the banks and the countries ever closer.  A long, long, time ago (1 month) it was conceivable that a bank could fail and the sovereign survive.  That is becoming less clear.  Whether Italian Banks use all of the LTRO proceeds for new sovereign debt is relatively immaterial, since they already hold lots of Italian government debt.  It was always very difficult to see how an Italian bank could survive a default (or haircut or restructuring) by Italy.  They just had too much exposure in addition to their other weak holdings.

It was possible to imagine the sovereign surviving a bank default.  A default by any individual bank didn’t necessarily bring the sovereign down.  It would likely drag other banks down and put pressure on the sovereign and the ECB to take drastic measures to support the banking system, but there was a real chance the sovereign (even one without money printing capacity) could survive.  But that may no longer be the case with LTRO and the Ponzi Bonds.  Once a bank defaults, the ECB would rely on the government guarantee.  The government debt burden would increase by the amount of that guarantee.  In addition to having to get new money into the rest of the banks, the markets would certainly start pricing in all of the other guarantees the government had made via this program.  The pressure on the surviving banks would be more than it would have been otherwise because investors will know they relied on government guarantees to remain solvent.

This program seems to ensure the destruction of the entire banking system and the sovereign if any reasonably large participant fails.  We have gone for “sovereign ceiling” to “weakest link” in terms of credit.  If this program become common and larger, we have effectively linked all the banks in the system, and the sovereign, to the WEAKEST bank.  Maybe that is an overstatement as this time (the program is new, and it isn’t huge yet) but it is already material and threatens to grow.  Intesa Sanpaolo did €12 billion this time around.  Their equity market cap is only €22 billion.  If all of the banks defaulted and Italian government debt went up by only €40 billion, maybe the market could handle it.  But this is just the first time Italy has done this.  Another LTRO is coming up.  We have also seen that Greece is using this “methodology” to get money to the banks via programs other than LTRO.

As an investor, unnecessary complexity and off-balance sheet obligations scare me.  What is going on in Italy is limit long unnecessary complexity and has a decent amount of off-balance sheet contingent liabilities to go along with it.  Similar ideas seem to have worked in Ireland, have helped Greece keep NBG alive, and the program is not yet large (that we know of), so I’m not panicked right now, but I would start evaluating Italy from the weakest link perspective much more than trying to figure out “what dirty shirt is the least dirty”.  Greece had all sorts of ways to hide debt before anyone was looking too closely.  Clearly other countries are learning, and who knows what they already have hidden that hasn’t come to the surface (Spain did just miss their deficit by a full 2% points with zero warning).

end

From Zero hedge early this morning.  Germany was discussing whether there should be a 75% haircut on Greek debt trying to bring that level to levels the country can live.  An IMF official believes that a 50% haircut is not enough to sustain the country.  Germany;s Wellink states that the new LTRO has gone way to far as the ECB is printing euros like mad and swapping them with banks.  The banks are not using the euros for the carry trade. Instead they are plugging holes and using the proceeds to retire debt coming due:

(courtesy zero hedge)

EU and UK Headlines

Germany is studying a proposal to take 75% haircuts on Greek bonds as part of the planned debt swap. (Euro2day.gr/Kathimerini/Financieele Dagblad) Meanwhile, a 50% write-down on Greek debt may not be enough to bring it down to sustainable levels according to an IMF official. IMF staff are now working on a starker economic assessment than outlined last month in its loan-program review.  ECB's Wellink also questioned whether 50% write-downs were sufficient to allay the Greek debt fears while stating the new 3-year LTRO's from the ECB are a measure which goes too far. 

The German chancellor, Merkel, has warned that the year ahead will "undoubtedly" be harder than 2011. (Observer) Urging greater European co-operation to salvage the Euro, Merkel said the German economy was performing well "even if the next year will undoubtedly be more difficult than this one". The Greek PM Papademos, spelled out a continuation of harsh austerity measures, while the Italian president, Giorgio Napolitano, warned that sacrifices would have to be made if the country was to avoid "financial collapse".

end.

We are going to have another summit on the Jan 9. 2012 of which only Merkel and Sarkozy will be present:

(courtesy Dow Jones newswires)

Germany/France Summit:
Bilateral summit set for 9-Jan: The WSJ discussed the upcoming 9-Jan bilateral summit between Germany and France. The article noted that the summit, which will be the first of several European gatherings this month, will focus on preparations for a summit of all 27 EU leaders at the end of January. In addition, the article highlighted the recent flurry of cautious comments from a number of European leaders regarding the economic prospects for 2012. Focusing largely on France, the paper also noted how politics could get in the way of efforts to stem the sovereign debt crisis.

end

In this next commentary Ambrose Evans Pritchard predicts what he feels will happen in 2012 with respect to the various countries, France, Germany, Italy, the USA, Hungary, Austria, China, Japan, Greece, the Euro,

Ambrose Evans Pritchard:

By Ambrose Evans-Pritchard, International Business Editor
5:30PM GMT 02 Jan 2012

London Telegraph

There will be no Chinese credit explosion this time, no real help from post-bubble India or over-stretched Brazil.

It will be a global downturn on all fronts, aborting what remains of recovery even before industrial output in the OECD bloc has regained its pre-Lehman peak.

The second wave will hit with youth unemployment already at 45pc in Greece and 49pc in Spain; and with the US labour participation rate already at depression levels of 64pc.

We will hear more about Italy's Red Brigades, Greece's Sect of Revolutionaries, and America's militia groups, and how democracies respond. Proto-fascism in Hungary is our warning.

China's surgical soft-landing will slip control, like Fed tightening in 1929 and 2007, or Japan's squeeze in 1990. Once construction has run amok, bears will have their way.

Since the purpose of New Year predictions is to stick one's neck out, let me hazard that China will devalue the yuan in 2012. It will export yet more spare capacity into a deflationary world, until the West retaliates and starts to turn its back on globalisation. Capital outflows will accelerate. The idea that China can rescue anybody will seem quaint.

The strong yen has already pushed Japan back into deflation, and fresh recession. Public debt has reached one quadrillion yen, as noted acidly by Tokyo's R&I rating agency when it stripped Japan of its AAA rating last month. That is $12.8 trillion, or Italy plus Spain times four.

There is a graveyard full of Gaijin commentators who wrote off Japan too soon. Will the dam break this year at last, with tax covering less than half of spending, public debt at 237pc of GDP, ever fewer workers, and a state pension fund now selling government bonds? Perhaps. As R&I warns, Europe's woes have brought sovereign debt into very sharp focus.

America will look resilient for a few months. The payroll tax deal has averted a fiscal shock, but that is all. Money growth (M3) has sputtered out, and velocity is falling.

Politics on Capitol Hill will restrain Ben Bernanke from launching QE3 until the Tea Party can see the eye-whites of deflation. Six-month PCE inflation was 2.9pc in August, 2.4pc in September, 1.6pc in October, and 1.2pc in November. Not there yet. Prepare for a Wall Street squall first.

Whether the scare of early 2012 turns seriously ugly depends on the nerve of policy-makers. Shock absorbers are worn thin, but not exhausted.

Central banks have the means to prevent a 1930s outcome, even with rates at zero, if willing to deploy Fisher-Friedman monetary stimulus with conviction, buying assets from non-banks and targeting nominal GDP growth of 5pc. But policy defeatism is in the air, and Austro-liquidationists are winning the popular debate.

The second leg of our Kondratieff Winter comes at an awful moment for Euroland, just as the North-South split turns deadly.
The European Central Bank has guaranteed trouble by letting M3 money contract. Fiscal tightening into the downward slide will make matters worse. A credit crunch as banks shrink loan books by €1 trillion to meet capital ratios will do the rest. All policy levers are set on deep recession, and deep recession is what Europe will get.

Monetary union is too damaged to parry these blows. The ECB's Mario Draghi will cut interest rates to 0.5pc by February, just to keep pace with passive tightening. Half-hearted purchases of Italian and Spanish bonds will drift on, doing more harm than good. By reducing existing bond-holders to junior status, the ECB will ensure a slow exodus. Draghi knows this. His hands are tied.

The Bundesbank will wage guerrilla war against money printing through the pages of Die Welt and Handelsblatt, paralyzing the ECB's Council until Angela Merkel orders Jens Weidmann to desist.

By then it will be too late, deliberately so. Contraction will play havoc with budgets in Italy, Spain, Portugal, and France. Austerity alone will seem a Sisyphean task. Club Med leaders will not be able to command popular assent for such 1930s scorched-earth strategies.

Politics will fracture further, splintering to the hard Left and Right. The Front National's Marie Le Pen's will beat Maréchal Sarkozy into the French run-off invoking 'terroir' and the ancient franc. Escalating levels of coercion will be needed to uphold the Project, with EU commissars eating alone in the administered territories of Greece and Italy.

Far from protecting credit ratings, Europe's self-defeating policies will bring a blizzard of downgrades. France's AAA will go, obviously. So will Austria's as banking woes deepen in Hungary, Ukraine, and Croatia. Vigilantes will take a closer look at Holland's household debt, off the charts at 270pc of disposable income.

The shrinking AAA core will leave Germany propping up the EFSF bail-out fund, until the weight of contingent liabilities endangers Germany itself. That will concentrate minds.

France's President Hollande will "triangulate", playing the pan-Latin card to discomfit Berlin and force a policy change. Portugal's Troika sacrifices will prove as futile as Greek efforts before. Lisbon's second bail-out will come just as Greece graduates from riots to insurrection, and Italy's Silvio Berlusconi will try to snatch power again by whipping up fury against Tedeschi. Bundestag patience will snap at such disorder everywhere.

Germany will not be able to fudge EMU any longer. It must either immolate itself, accepting a debt union and internal inflation to save a currency it never wanted and doesn't love; or opt instead to uphold fiscal sovereignty and the essence of its own democracy, and let the Project die.

The shrewd, equivocating, ice-cold Chancellor will quietly oust arch-europhile Wolfgang Schauble and let the Project die, always pretending otherwise.

Just an idle hunch. Guten Rutsch.

end.

Early this morning Iran threatens to retaliate if the USA Carrier Stennis returns after naval games by Iran:

(courtesy zero hedge)

Iran Threatens Retaliation If US Carrier Returns To Persian Gulf, Where 5th Navy Is Stationed

Submitted by Tyler Durden on 01/03/2012 07:15 -0500

• Central Banks
  
• Crude
   
• Hyperinflation
   
• Iran
   
• Reuters

Don't look now but oil is spiking as the market is finally realizing that the escalation in the Persian Gulf is more than just for show (which curiously was once again set off by Obama establishing a full financial embargo of all Iranian activity on New Year's Eve, leading the Rial to plunge to a new record low, and about to set a brand new scramble for physical gold in the country on the verge of hyperinflation). At last check WTI was up over $2.50 with the market realizing that either Dalio will be right (central banks going into overdrive) or the Iranian escalation will finally pass the trigger threshold, and Brent was over $110. Today's escalation, just as requested by the US, is not another missile launch but a threat by the Iran military to retaliate if the US carrier John Stennis were to once again cross the Straits of Hormuz and return to the Gulf. As a reminder, as of December 23, as was observed by Stratfor before the hacker takedown and reported here, the Stennis was within shouting distance. From Reuters: "Iran will take action if a U.S. aircraft carrier which left the area because of Iranian naval exercises returns to the Gulf, the state news agency quoted army chief Ataollah Salehi as saying on Tuesday. "Iran will not repeat its warning ... the enemy's carrier has been moved to the Sea of Oman because of our drill. I recommend and emphasise to the American carrier not to return to the Persian Gulf," Salehi told IRNA." Which is interesting because considering that the5th Navy is stationed in Bahrain, i.e., deep in the Gulf, there is no way that the Stennis or other carriers will not come back, meaning what is likely the terminal escalation has now been set in motion.

From Reuters:

"I advise, recommend and warn them (the Americans) over the return of this carrier to the Persian Gulf because we are not in the habit of warning more than once," the semi-official Fars news agency quoted Salehi as saying.

Salehi did not name the aircraft carrier or give details of the action Iran might take if it returned.

Iran completed 10 days of naval exercises in the Gulf on Monday, and said during the drills that if foreign powers imposed sanctions on its crude exports it could shut the Strait of Hormuz, through which 40 percent of the world's traded oil is shipped.

The U.S. Fifth Fleet, which is based in Bahrain, said it would not allow shipping to be disrupted in the strait.

Iran said on Monday it had successfully test-fired two long-range missiles during its naval drill, flexing its military muscle in the face of mounting Western pressure over its controversial nuclear programme.

Iran also said it had no intention of closing the Strait of Hormuz but had carried out "mock" exercises on shutting the strategic waterway.

The good news is that Iran has completed its 10 day wargame exercise without any major incidents. Which also means that the provocation level will escalate even more: after all the difference between the Tonkin Gulf and the Persian Gulf is just one word. Our advice, as usual, is to wait for the inevitable Goldman downgrade of crude which should be the catalyst to go all in on the viscous substance.

end

The USA response to the Iran warning:

(courtesy zero hedge)

US Re-escalates, Responds To Iran Warning

Submitted by Tyler Durden on 01/03/2012 11:21 -0500

• Iran

Earlier today, we reported of Iran's threat to further escalate if the US were to bring back its aircraft carrier (either CVN74 or any other one) back into the Persian Gulf. Now, the US has just decided to call Iran's bluff. From Bloomberg:

• CARRIER DEPLOYMENTS IN GULF WILL CONTINUE, U.S. SAYS
• PENTAGON SAYS NAVY TRANSITS THROUGH STRAIT OF HORMUZ ARE NECESSARY TO SUPPLY U.S. MISSIONS IN GULF REGION
• U.S. MILITARY MOVEMENTS IN PERSIAN GULF `REGULARLY SCHEDULED'
• U.S. RESPONDS TO IRAN WARNING AGAINST FUTURE CARRIER MOVES

And so the fully-armed grenade is now back in Iran's court.

end
And finally this commentary from C.K. Daly of Oil.com on the uSA vs Iran situation:
(courtesy CK Daly of Oil.com and zero hedge)

Guest Post: War Imminent In Straits Of Hormuz? $200 A Barrel Oil?

Submitted by Tyler Durden on 01/03/2012 13:59 -0500

• Afghanistan
 
• China
 
• Crude
 
• Crude Oil
 
• Guest Post
 
• Iran
 
• Iraq
 
• Israel
• Japan
 
• Middle East
 
• national security
 
• Obama Administration
 
• President Obama

Submitted by John C.K. Daly of OilPrice.com

War Imminent In Straits Of Hormuz? $200 A Barrel Oil?

The pieces and policies for potential conflict in the Persian Gulf are seemingly drawing inexorably together.

Since 24 December the Iranian Navy has been holding its ten-day Velayat 90 naval exercises, covering an area in the Arabian Sea stretching from east of the Strait of Hormuz entrance to the Persian Gulf to the Gulf of Aden. The day the maneuvers opened Iranian Navy Commander Rear Admiral Habibollah Sayyari told a press conference that the exercises were intended to show "Iran's military prowess and defense capabilities in international waters, convey a message of peace and friendship to regional countries, and test the newest military equipment." The exercise is Iran's first naval training drill since May 2010, when the country held its Velayat 89 naval maneuvers in the same area. Velayat 90 is the largest naval exercise the country has ever held.

The participating Iranian forces have been divided into two groups, blue and orange, with the blue group representing Iranian forces and orange the enemy. Velayat 90 is involving the full panoply of Iranian naval force, with destroyers, missile boats, logistical support ships, hovercraft, aircraft, drones and advanced coastal missiles and torpedoes all being deployed. Tactics include mine-laying exercises and preparations for chemical attack. Iranian naval commandos, marines and divers are also participating.

The exercises have put Iranian warships in close proximity to vessels of the United States Fifth Fleet, based in Bahrain, which patrols some of the same waters, including the Strait of Hormuz, a 21 mile-wide waterway at its narrowest point. Roughly 40 percent of the world's oil tanker shipments transit the strait daily, carrying 15.5 million barrels of Saudi, Iraqi, Iranian, Kuwaiti, Bahraini, Qatari and United Arab Emirates crude oil, leading the United States Energy Information Administration to label the Strait of Hormuz "the world's most important oil chokepoint."

In light of Iran’s recent capture of an advanced CIA RQ-170 Sentinel drone earlier this month, Iranian Navy Rear Admiral Seyed Mahmoud Moussavi noted that the Iranian Velayat 90 forces also conducted electronic warfare tests, using modern Iranian-made electronic jamming equipment to disrupt enemy radar and contact systems. Further tweaking Uncle Sam’s nose, Moussavi added that Iranian Navy drones involved in Velayat 90 conducted successful patrolling and surveillance operations.

Thousands of miles to the west, adding oil to the fire, President Obama is preparing to sign legislation that, if fully enforced, could impose harsh penalties on all customers for Iranian oil, with the explicit aim of severely impeding Iran’s ability to sell it.

How serious are the Iranians about the proposed sanctions and possible attack over its civilian nuclear program and what can they deploy if push comes to shove? According to the International Institute for Strategic Studies’ The Military Balance 2011, Iran has 23 submarines, 100+ “coastal and combat” patrol craft, 5 mine warfare and anti-mine craft, 13 amphibious landing vessels and 26 “logistics and support” ships. Add to that the fact that Iran has emphasized that it has developed indigenous “asymmetrical warfare” naval doctrines, and it is anything but clear what form Iran’s naval response to sanctions or attack could take. The only certainty is that it is unlikely to resemble anything taught at the U.S. Naval Academy.

The proposed Obama administration energy sanctions heighten the risk of confrontation and carry the possibility of immense economic disruption from soaring oil prices, given the unpredictability of the Iranian response. Addressing the possibility of tightened oil sanctions Iran’s first vice president Mohammad-Reza Rahimi on 27 December said, “If they impose sanctions on Iran’s oil exports, then even one drop of oil cannot flow from the Strait of Hormuz.”

Iran has earlier warned that if either the U.S. or Israel attack, it will target 32 American bases in the Middle East and close the Strait of Hormuz. On 28 December Iranian Navy commander Rear Admiral Habibollah Sayyari observed, "Closing the Strait of Hormuz for the armed forces of the Islamic Republic of Iran is very easy. It is a capability that has been built from the outset into our naval forces' abilities."

But adding an apparent olive branch Sayyari added, "But today we are not in the Hormuz Strait. We are in the Sea of Oman and we do not need to close the Hormuz Strait. Today we are just dealing with the Sea of Oman. Therefore, we can control it from right here and this is one of our prime abilities for such vital straits and our abilities are far, far more than they think."

There are dim lights at the end of the seemingly darker and darker tunnel. The proposed sanctions legislation allows Obama to waive sanctions if they cause the price of oil to rise or threaten national security.

Furthermore, there is the wild card of Iran’s oil customers, the most prominent of which is China, which would hardly be inclined to go along with increased sanctions.

But one thing should be clear in Washington – however odious the U.S. government might find Iran’s mullahcracy, it is most unlikely to cave in to either economic or military intimidation that would threaten the nation’s existence, and if backed up against the wall with no way out, would just as likely go for broke and use every weapon at its disposal to defend itself. Given their evident cyber abilities in hacking the RQ-170 Sentinel drone and their announcement of an indigenous naval doctrine, a “cakewalk” victory with “mission accomplished” declared within a few short weeks seems anything but assured, particularly as it would extend the military arc of crisis from Iraq through Iran to Afghanistan, a potential shambolic military quagmire beyond Washington’s, NATO’s and Tel Aviv’s resources to quell.

It is worth remembering that chess was played in Sassanid Iran 1,400 years ago, where it was known as “chatrang.” What is occurring now off the Persian Gulf is a diplomatic and military game of chess, with global implications.

Washington’s concept of squeezing a country’s government by interfering with its energy policies has a dolorous history seven decades old.

When Japan invaded Vichy French-ruled southern Indo-China in July 1941 the U.S. demanded Japan withdraw. In addition, on 1 August the U.S., Japan’s biggest oil supplier at the time, imposed an oil embargo on the country.

Pearl Harbor occurred less than four months later.

Three countries completed bill auctions early this morning and all are inside the 3 yr "safe zone".

As expected these bond yields fell as these auctions will be used in the LTRO  (long term repo operation) whereby the banks in the host sovereign swaps the treasury bills for newly issued euros.  Please note that the carry trade looks to be dead in the water as the ECB announces another rise in euro overnight deposits to the tune of 446 billion euros.

We received notice early this morning that the ECB had record overnight deposits back into its fold basically stating that the carry trade LTRO is out the window. The sole purpose now of the LTRO is fill the cracks at major banks as well as fund the redemption of sovereigns (through the LTRO) and bank debt.

(courtesy zero hedge)

Belgium, Netherlands Complete Bill Auctions; ECB Deposit Facility Usage Soars To Second Highest Ever

Submitted by Tyler Durden on 01/03/2012 06:32 -0500

• Belgium
  
• Bond
   
• Carry Trade
   
• European Central Bank
   
• France
   
• Germany
 
• Italy
   
• Netherlands

While nothing out of Italy or France was on the bond docket today, other countries in Europe will be issuing bonds on a virtually daily basis as the continent prepares to roll an record amount of debt in Q1, and in January as well (full calendarhere). As such we saw new Bill issuance from Belgium and from Netherlands. The waffle country sold €1.280 billion in 3 Month T-Bills at a 2.13 Bid To Cover, a plunge compared to the 8.59 previously, albeit with the yield dropping from 0.78% to 0.264% as it falls flatly within the risk-free period defined by the 3 Year LTRO. Belgium also issued €1.155 6 Month T-Bills at a 2.01 Bid To Cover compared to 2.76 previously and a rate plunging from 2.438% to 0.364%. Elsewhere the Netherland also took advantage of the now mixed LTRO euphoria to sell €4.65 billion in Bills, specifically €2.99 billion in March 2012 Bills pricing at 0.00% (compared to negative -0.007% before), and €1.66 billion December 2012 Bills at a yield of 0.05% - obviously the market is still enamored with Netherlands as a safe haven on par with Germany. And speaking of the LTRO, that carry trade concept is now dead with the year end cash parking theory scrapped following the announcement thet banks parked the second highest amount in history at the ECB, or €446 billion, just shy of the €452 billion hit on December 27.

Average:

end

The USA reported dismal consumer spending.  Consumer spending is 70% of GDP,

This is a very important report:

(Courtesy Reuters)

U.S. Consumer Spending The Weakest In The Post-World War II PeriodIt's up to the consumer to drive the U.S. economy and lift world growth in 2012, and the outlook is far from encouraging.
Over the past three and half years, growth in U.S. consumer spending has averaged a paltry 0.2 percent adjusted for inflation, the weakest in the post-World War II period, Morgan Stanley says.
While the employment picture is gradually brightening, wage growth is going in the opposite direction, keeping a lid on consumer behavior. Over the past year, pay for blue-collar workers adjusted for inflation fell 12 cents from the previous year, according to the Bureau of Labor Statistics. That was the steepest decline since the stagflationary days of 1980.
Pay for all workers has fallen 16 cents this year in real terms.
Consumer buying power, modest over the holiday season, remains constrained by heavy debt loads. Total U.S. household debt as a percentage of disposable personal income is down from its 2007 peak at 130 percent, but it remains well above its 1970-2000 average of 75 percent.
Consumer spending rose 1.7 percent in the third quarter, far below the 3.6 percent it averaged in the decade before the 2007-2008 recession. So it is hard to see world growth accelerating significantly until the U.S. consumer, who drives over 70 percent of U.S. GDP growth, revives.
There are other factors holding Americans' spending in check. The Federal Reserve last week reported early signs of tightening credit conditions, and government stimulus spending dries up this year. At the same time, uncertainty persists over the payroll tax cut and jobless benefits, which currently add 0.50-0.75 percentage point to GDP but are set to expire in February.
On top of that, businesses are pulling back on capital expenditure as tax breaks expire, while exports wane as a growth driver amid the upheavals from Europe. Most economists expect at best only modest U.S. economic growth around 2 percent in 2012 despite a recent batch of encouraging data.
"The year ahead is fraught with risks," said Tom Porcelli at RBC Capital Markets. "In fact, consumer fundamentals are decidedly weaker than this time last year."
If the U.S. employment report, due on Friday, shows marked improvement, it would lift optimism. But most economists expect only gradual gains of 150,000 new jobs added in December, up from 120,000 the prior month.
Although the average pace of job growth has nearly doubled over the past three months compared with the prior period, it remains well below the 200,000-250,000 mark viewed as healthy labor market conditions.
Wages may rise too. They are forecast to have climbed 0.2 percent in December after a drop in November. But buying intentions remain weak. The Conference Board reported in its U.S. consumer confidence survey for December that even though overall sentiment has improved, those in the market for big-ticket items like cars or houses mostly plan to buy used, not new -- a sign of extremely cautious attitudes.
That would explain why analysts forecast no acceleration in new car and truck sales data for the United States, due on Wednesday. They are seen holding steady at a 13.6 million annualized rate in December. Likewise, the ISM manufacturing index is expected to have ticked up only a slightly, to 53.2 from 52.7 in November.
"Still muddling through," is how Macroeconomic Advisers summarized the economic outlook for 2012.
A recent growth spurt might have given the U.S. economy some resiliency to withstand a euro-zone recession, weakening stock prices, rising credit costs, fiscal drag and a higher dollar. But the United States, and with it the world economy, remain vulnerable to shocks in the year ahead.
-END-

It looks like the USA has a pension fund deficit hole to fill:

(courtesy Financial times/Dan McCrum/Nicole Bullock and zero hedge)

January 2, 2012 5:01 pm

Funding gap doubles for US corporate pensionsBy Dan McCrum and Nicole Bullock in New York

The funding gap for US corporate pension plans almost doubled in 2011 as bond yields dropped and stock market performance failed to keep up with rising liabilities, to leave a far greater hole than at the height of the financial crisis.

From a moderate surplus at the end of 2007, pension plan assets at S&P 500 companies now cover only about 74 per cent of estimated liabilities, calculates Credit Suisse, a deficit of roughly $450bn.

At the start of the year the S&P 500 pension funding gap was estimated at $250bn, according to Credit Suisse…

end  (for the rest of the article see financialtimes.com)

The USA reported that their year end federal debt hit 15.22 trillion dollars.
Since their GDP is around 15.1 trillion dollars, its debt to GDP is now nicely over 100% at 100.3%.

(courtesy zero hedge)
-

US Closes 2011 With Record $15.22 Trillion In Debt, Officially At 100.3% Debt/GDP, $14 Billion From Breaching Debt Ceiling

Submitted by Tyler Durden on 01/03/2012 16:49 -0500

• Bond
 
• Debt Ceiling
 
• Gross Domestic Product

While not news to Zero Hedge readers who knew about the final debt settlement of US debt about 10 days ahead of schedule, it is now official: according to the US Treasury, America has closed the books on 2011 with debt at an all time record $15,222,940,045,451.09. And, as was observed here first in all of the press, US debt to GDP is now officially over 100%, or 100.3% to be specific, a fact which the US government decided to delay exposing until the very end of the calendar year. We wonder, rhetorically, just how prominent of a talking point this historic event will be in any upcoming GOP primary debates. And yes, technically this number is greater than the debt ceiling but it excludes various accounting gimmicks. When accounting for those, the US has a debt ceiling buffer of... $14 billion, or one third the size of a typical bond auction.

end.

Here in this next piece, Kyle Bass describes how the USA is going to get out of their mess:

they are going to export their way out!!.  How, by killing the dollar and causing hyperinflation.

Got gold?

(courtesy GATA/intelhub)

Senior Obama Admin Official: "We Are Going to Kill the Dollar"
The Intel Hub
January 2, 2011
According to investor Kyle Bass, a senior Obama administration official stated that their economic plan moving forward involves killing the dollar.
Speaking at AmeriCatalyst 2011, which took place in early November 2011, Kyle explained what the Obama administration official apparently told him.

"The governments idea right now is we are going to export our way out of this and when i asked a senior Obama administration official last week how are we going to grow exports if we will not allow nominal wage deflation, he said we are just going to kill the dollar."

Chris Duane, of Dont-tread-on.me, wrote that this simply means that they are going to print more and more dollars until all of our purchasing power is destroyed which will cause Americans to need more and more dollars to buy the same amount of goods.
http://theintelhub.com/2012/01/02/senior-obama-admin-official-we-are-going-to-kill-the-dollar/
The full length clip can be viewed here.

I am going to leave you with this important Bloomberg article as the author correctly

states who will purchase the staggering number of bonds coming due this year and the following years?  Each country has their own mess so the only ones purchasing debt are the central banks of each respective country:

(courtesy bloomberg)

World’s Biggest Economies Face $7.6 Trillion Bond Tab as Rally Seen Fading

By Keith Jenkins and Anchalee Worrachate - Jan 3, 2012 11:33 AM ET

Governments of the world’s leading economies have more than $7.6 trillion of debt maturing this year, with most facing a rise in borrowing costs.

Led by Japan’s $3 trillion and the U.S.’s $2.8 trillion, the amount coming due for the Group of Seven nations and Brazil, Russia, India and China is up from $7.4 trillion at this time last year, according to data compiled by Bloomberg. Ten-year bond yields will be higher by year-end for at least seven of the countries, forecasts show.

Investors may demand higher compensation to lend to countries that struggle to finance increasing debt burdens as the global economy slows, surveys show. The International Monetary Fund cut its forecast for growth this year to 4 percent from a prior estimate of 4.5 percent as Europe’s debt crisis spreads, the U.S. struggles to reduce a budget deficit exceeding $1 trillion and China’s property market cools.

“The weight of supply may be a concern,” Stuart Thomson, a money manager in Glasgow at Ignis Asset Management Ltd., which oversees $121 billion, said in a Dec. 28 telephone interview. “Rather than the start of the year being the problem, it’s the middle part of the year that becomes the problem. That’s when we see the slowdown in the global economy having its biggest impact.”

Competition for Buyers

The amount needing to be refinanced rises to more than $8 trillion when interest payments are included. Coming after a year in whichStandard & Poor’s cut the U.S.’s rating to AA+ from AAA and put 15 European nations on notice for possible downgrades, the competition to find buyers is heating up.

“It is a big number and obviously because many governments are still in a deficit situation the debt continues to accumulate and that’s one of the biggest problems,” Elwin de Groot, an economist at Rabobank Nederland in Utrecht, Netherlands, part of the world’s biggest agricultural lender, said in an interview on Dec. 27.

While most of the world’s biggest debtors had little trouble financing their debt load in 2011, with Bank of America Merrill Lynch’s Global Sovereign Broad Market Plus Index gaining 6.1 percent, the most since 2008, that may change.

Italy auctioned 7 billion euros ($9.14 billion) of debt on Dec. 29, less than the 8.5 billion euros targeted. With an economy sinking into its fourth recession since 2001, Prime Minister Mario Monti’s government must refinance about $428 billion of securities coming due this year, the third-most, with another $70 billion in interest payments, data compiled by Bloomberg show.

Rising Costs

Borrowing costs for G-7 nations will rise as much as 39 percent from 2011, based on forecasts of 10-year government bond yields by economists and strategists surveyed by Bloomberg in separate surveys. China’s 10-year yields may remain little changed, while India’s are projected to fall to 8.02 percent from 8.36 percent. The survey doesn’t include estimates for Russia and Brazil.

After Italy, France has the most amount of debt coming due, at $367 billion, followed by Germany at $285 billion. Canada has $221 billion, while Brazil has $169 billion, the U.K. has $165 billion, China (PRCH)has $121 billion and India $57 billion. Russia has the least maturing, or $13 billion.

Rising borrowing costs forced Greece, Portugal and Ireland to seek bailouts from the European Union and IMF. Italy’s 10- year yields exceeded 7 percent last month, a level that preceded the request for aid from those three nations.

Bad Combination

“The buyer base for peripheral Europe has obviously shrunk at the same time that the supply coming to the market is increasing, which is not a good combination,” said Michael Riddell, a London-based fund manager at M&G Investments, which oversees about $323 billion.

The two biggest debtors, Japan and the U.S., have shown little trouble attracting demand.

Japan benefits by having a surplus in its current account, which is the broadest measure of trade and means that the nation doesn’t need to rely on foreign investors to finance its budget deficits. The U.S. benefits from the dollar’s role as the world’s primary reserve currency.

Japan’s 10-year bond yields, at less than 1 percent, are the second-lowest in the world, after Switzerland, even though its debt is about twice the size of its economy.

The U.S. attracted $3.04 for each dollar of the $2.135 trillion in notes and bonds sold last year, the most since the government began releasing the data in 1992. The U.S. drew an all-time high bid-to-cover ratio of 9.07 for $30 billion of four-week bills it auctioned on Dec. 20 even though they pay zero percent interest.

Tougher Year

With yields on 10-year Treasuries (USGG10YR) below 2 percent, an increasing number of investors see little chance for U.S. bonds to repeat last year’s gains of 9.79 percent. The U.S pays an average interest rate of about 2.18 percent on its outstanding debt, down from 2.51 percent in 2009, Bloomberg data show.

‘Given how well they have done, we don’t think they’re any longer a very good hedge,” Eric Pellicciaro, head of global rates investment at New York-based BlackRock Inc., which manages $1.14 trillion in fixed-income assets, said in a Dec. 16 telephone interview.

The median estimate of 70 economists and strategists is for Treasury 10-year note yields to rise to 2.60 percent by year-end from 1.95 percent at 11:27 a.m. New York time. In Japan, the forecast for the nation’s benchmark note yield is 1.35 percent, while it’s expected to rise to 2.50 percent in Germany, from 1.90 percent today.

Central Banks

Central banks are bolstering demand by either keeping interest rates at record lows or reducing them, and by purchasing bonds in a policy know as quantitative easing.

The Federal Reserve has said it will keep its target rate for overnight loans between banks between zero and 0.25 percent through mid-2013, and is now selling $400 billion of its short- term Treasuries and reinvesting the proceeds into longer-term government debt in a program traders dubbed Operation Twist.

The Bank of Japan has kept its key rate at or below 0.5 percent since 1995, and expanded the asset-purchase program last year to 20 trillion yen ($260 billion). The Bank of England kept its main rate at a record low 0.5 percent last month, and left its asset-buying target at 275 billion pounds ($431 billion).

The European Central Bank reduced its main refinancing rate twice last quarter, to 1 percent from 1.5 percent. It followed those moves by allotting 489 billion euros of three-year loans to euro-region lenders. That exceeded the median estimate of 293 billion euros in a Bloomberg News survey of economists. The central bank will offer a second three-year loan on Feb. 28.

‘Flush With Liquidity’

The money from the ECB may be used by banks to buy government bonds, according to Fabrizio Fiorini, the chief investment officer at Aletti Gestielle SGR SpA in Milan.

“The market is now flush with liquidity after measures taken by central banks, particularly the ECB, and that’s great news for risky assets,” Fiorini said in a telephone interview on Dec. 20. “The market will have no problem taking down supply from countries like Spain and Italy in the first quarter. In fact, they should be able to raise money at lower borrowing costs than what we saw in recent months.”

Italy’s sale last week included 2.5 billion euros of 5 percent bonds due in March 2022, which yielded 6.98 percent. That was down from 7.56 percent at an auction Nov. 29. It sold 9 billion euros of bills on Dec. 28 at a rate of 3.251 percent, compared with 6.504 percent at the previous auction on Nov. 25.

‘Phony War’

Investors should be most worried about the period after the ECB’s second three-year longer-term refinancing operation scheduled in February, according to Ignis’s Thomson.

“The amount of liquidity that has been supplied by central banks, with more to come from the ECB in February, suggests the first couple of months will be a sort of phony war as far as the supply is concerned,” Thomson said.

The ECB has bought about 212 billion euros of government bonds since starting a program in May 2010 to contain borrowing costs for Greece, Portugal and Ireland. It began buying Spanish and Italian debt in August, according to people familiar with the trades, who declined to be identified because they weren’t authorized to speak publicly about the transactions.

“There’s a lot of talk that the ECB might have to give more direct support to the governments,”Frances Hudson, who helps manage about $242 billion as a global strategist at Standard Life Investments in Edinburgh, said in a Dec. 22 telephone interview.

Following is a table of bond and bill redemptions and interest payments in 2012 for the Group of Seven countries, Brazil, China, India and Russia, in dollars, using data calculated by Bloomberg as of Dec. 29:

Country    2012 Bond, Bill Redemptions ($)      Coupon Payments
Japan             3,000 billion                   117 billion
U.S.              2,783 billion                   212 billion
Italy               428 billion                    72 billion
France              367 billion                    54 billion
Germany             285 billion                    45 billion
Canada              221 billion                    14 billion
Brazil              169 billion                    31 billion
U.K.                165 billion                    67 billion
China               121 billion                    41 billion
India                57 billion                    39 billion
Russia               13 billion                     9 billion

To contact the reporters on this story: Keith Jenkins in London at kjenkins3@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

end.

I hope you all had a great holiday weekend.

Happy new year to all

Harvey