German exports fall/Rumours of French downgrade/Huge gold imports into China/ ECB deposits of Euros at record levels again.

Good evening Ladies and Gentlemen:

Gold closed up by $8.20 to 1639.20.  Silver rose by 8 cents to $29.86. Since the gold shares have languished all day today, it is almost a certainty and the bankers will raid tomorrow. I urge you to please to do play with these crooks.  There are many facilities available to buy the physical precious metals.  The leverage business is now out so the only way you will win is to buy physical gold and silver and be thankful that you paid below the real price of these metals.

Before heading over the comex, the rumours of the street was an imminent French downgrading of their coveted AAA rating:

(courtesy GATA)


"Major banks advising clients that France has been put on 12hr notice regarding its AAA rating"
09:49 French Treasury source says France has not been informed of any imminent decision regarding its credit rating -- Reuters
* There have been rumors, again, that a sovereign rating downgrade for France is coming and today's version of the rumor indicated France had been given 12 hours notice
* €/$ 1.2700 

Let us head over to the comex and assess trading, inventory movements and amounts of metal standing for delivery.

The total gold comex rose by 3879 contracts as gold rose by almost $24.00 yesterday.  The bankers no doubt supplied much of the paper gold.  The front options expiry month of January mysteriously saw its OI rise from 16 to 30 for a gain of 14 contracts despite one delivery notice yesterday.  Thus we gained 15 contracts or 1500 oz of gold standing.  The next big delivery month is February and here the OI fell from 203,070 to 193,494 as those that needed to roll, did so.  The estimated volume today was very low at 125,399.  The confirmed volume yesterday was pretty good at 205,864.

The total silver comex OI continues in its narrow channel path.  Today the OI rests at 104,345 a drop of exactly 400 contracts from yesterday. The front options expiry month of silver also saw its OI rise from 57 to 83 for a gain of 26 contracts despite a delivery of 42 contracts yesterday.  We thus had a huge 68 contract increase in additional silver standing or  340,000 oz.  The next big delivery month is March and here the OI fell by around 500 contracts to 56,387.  The estimated volume today was a touch higher than normal at 37,257.  The confirmed volume yesterday came in at 43,989.  The volumes in the silver comex have been noticeably weaker these past several weeks.

Inventory Movements and Delivery Notices for Gold: Jan 11 2012:

Gold	Ounces
Withdrawals from Dealers Inventory in oz	nil
Withdrawals from Customer Inventory in oz	32 (Manfra)
Deposits to the Dealer Inventory in oz	nil
Deposits to the Customer Inventory, in oz	nil
No of oz served (contracts) today	14 (14000)
No of oz to be served (notices)	16  (1600)
Total monthly oz gold served (contracts) so far this month	1015  (101,500)
Total accumulative withdrawal of gold from the Dealers inventory this month	4297
Total accumulative withdrawal of gold from the Customer inventory this month	160,921

Again no gold was deposited to the dealer and no gold was withdrawn.
The only transaction was a tiny 32 oz withdrawal by the customer at Manfra.
We had a tiny repayment of a prior lease arrangement whereby the dealer repaid the customer 1598 oz.
Thus the total registered gold falls to 2.525 million oz or 73.53 tonnes of gold.


The CME notified us today that we had 14 delivery notices for 1400 oz of gold.  The total number
of gold notices filed so far this month total 1015 for 101,500 oz. To obtain what is left to be served upon, I take the OI standing (30) and subtract out today's deliveries (14) which leaves us with 16 notices or 1600 oz left to be served upon.

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

101,500 (oz served)  +  1600 (oz to be served upon)  =  103,000 oz or 3.21 tonnes of gold.
we gained  1500 oz of additional gold standing.

The total number of gold oz standing in tonnage for the past 3 months total : 73.89 tonnes.
This total is 73.89/78.53 or  94.1% of registered or dealer gold at all registered gold vaults.

end.

 And now for silver 

 the chart: January 11 2012:

Month of January now commences:

Silver	Ounces
Withdrawals from Dealers Inventory	nil
Withdrawals fromCustomer Inventory	426,528 (brinks, Delaware, Scotia)
Deposits to theDealer Inventory	nil
Deposits to the Customer Inventory	701,831(HSBC,Delaware)
No of oz served (contracts)	1 (5,000)
No of oz to be served (notices)	82  (410,000)
Total monthly oz silver served (contracts)	549  (2,745,000)
Total accumulative withdrawal of silver from the Dealersinventory this month	268,115
Total accumulative withdrawal of silver from the Customer inventory this month	1,916,094

Again we see massive silver flying all over the place.  However no silver entered the dealer and no silver left as a withdrawal.

The customer saw the following deposit:

Into Delaware:  1000 oz

Into HSBC:  700,831 oz

total deposit:  701,831 oz

We had the following withdrawal:

1. Out of Brinks  25,083 oz

2.  Out of Delaware:  1007 oz

3.  Out of Scotia:  400,438 oz.

total withdrawal;  426,528 oz.

we had another crazy adjustments at the Delaware silver vault:

1. 9988 oz was adjusted into the dealer as an inventory count error.

2.  23,935 oz was adjusted out as a customer inventory error.

I guess these guys have trouble counting.

The CME notified us that we had only one delivery notice (5,000 oz) filed today despite 42 delivery notices yesterday. The total number of silver notices filed so far this month total 549 for 2,745,000 oz.
To obtain what is left to be served upon, we take the OI standing for January (83) and subtract out today's
deliveries (1) and we get 82 notices or 410,000 oz left to be served upon.

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

2,745,000 (oz served)  +  410,000 (oz to be served upon) =  3,155,000 oz.

Please note that in both silver and gold the amounts standing have been increasing as the month progressed.
Some entities were in great need of physical metal.

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 11:2012:

Total Gold in Trust

Tonnes:1,254.16

Ounces:40,322,451.77

Value US$:65,895,926,430.52

Jan 10.2012:

TOTAL GOLD IN TRUST

Tonnes:1,254.57

Ounces:40,335,690.64

Value US$:65,997,485,839.05

JAN 9.2012

TOTAL GOLD IN TRUST

Tonnes:1,254.57

Ounces:40,335,690.64

Value US$:65,110,821,936.85

We finally lost 410,000  oz of gold from the GLD. This is the first removal from the GLD in the past month.

And now for silver Jan 11 2012: 

Ounces of Silver in Trust	305,970,641.100
Tonnes of Silver in Trust	9,516.75

Jan 10.2011:

Ounces of Silver in Trust	305,970,641.100
Tonnes of Silver in Trust	9,516.75

Jan 9.2011:

Ounces of Silver in Trust	305,970,641.100
Tonnes of Silver in Trust	9,516.75

we neither gained nor lost any silver today in the SLV.

end

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

1. Central Fund of Canada: traded to a positive 3.6 percent to NAV in usa funds and a positive 3.7% to NAV for Cdn funds. ( Jan 11 2012.).

2. Sprott silver fund (PSLV): Premium to NAV fell   to  29.98% to NAV  Jan 11 2012:
3. Sprott gold fund (PHYS): premium to NAV fell  to a 4.54% positive to NAV Jan 11. 2012).  

.

end.

Before proceeding I would like to bring the following to your attention.  China's gold imports surged to its highest ever and he probably suggests that the central bank of China is responsible for some of this volume.  Mainland China uses its port of Hong Kong to acquire its gold/silver metal.

(courtesy zero hedge)

China's Gold Imports From Hong Kong Surge to Highest Ever? - PBOC Buying?

Submitted by Tyler Durden on 01/11/2012 08:39 -0500

• British Pound
 
• China
 
• Eurozone
 
• Gold Spot
 
• Hong Kong
 
• India
 
• Nicolas Sarkozy
 
• People's Bank Of China
 
• Reuters
 
• Twitter
 
• World Gold Council

Submitted by GoldCore

China's Gold Imports From Hong Kong Surge to Highest Ever‎ - PBOC Buying?

Gold’s London AM fix this morning was USD 1,641.00, GBP 1,063.51, and EUR 1,286.25 per ounce.

Yesterday's AM fix was USD 1,627.00, GBP 1,051.91, and EUR 1,271.49 per ounce.

Cross Currency Table

Demand for gold bullion in China continues to surge.

Mainland China's imports from Hong Kong surged to 102,779kg/oz from 86,299kg/oz in October. This is a 20% increase from the already high number seen in October and a 483% y/y increase.

The run into Chinese Lunar New Year has again seen higher than expected Chinese demand for gold and China's voracious appetite for gold is surprising even analysts who are positive about gold.

As Chinese people's disposable incomes gain and concerns grow over inflation and equity and property markets, Chinese consumers and investors are turning to gold as a long term investment hedge.

There is informed speculation that commercial Chinese banks may have taken advantage of the recent price dip to build stocks of coins and bars and accumulate bullion.

China's demand for physical gold bullion has rocketed past India with the country now overtaking India in the third quarter as the largest gold jewellery market according to the World Gold Council.

There is also informed speculation that some of the buying was from the People's Bank of China with one analyst telling Bloomberg that “there is always the possibility that some purchases were made by the central bank.”

As we've stated in the past, the PBOC is gradually diversifying their huge FX reserves and likely will announce upward revision of total gold reserves again in the coming months. Whether official buying is responsible for the huge surge in gold imports from Hong Kong is more difficult to ascertain The Chinese Central Bank does not release their figures on gold purchases.

As of June, 30, 2009, they held 33.59 million ounces or 1,054 tons. This is the 5th largest holding by country but some officials are on record with regard to Chinese aspirations to hold as much gold as the Federal Reserve's 8,100 tonnes of gold reserves.

What is particularly bullish about the import data is that there is a ban on exporting gold from China so gold bullion is in strong hands in China.

Platinum group metals rose a third straight day due to concerns on supply disruption in South Africa, as the national grid warned about extremely tight power supply in January.  The gold-platinum spread narrowed to just below $165 an ounce, its smallest in two weeks. The price of platinum has been lower than that of gold since September 2011, as gloomy economic outlook dampened sentiment on platinum, while gold's safe-haven appeal helped limit its price decline.

Gold Spot $/oz - 5 Days

Finally, markets were looking forward to a meeting between German Chancellor Angela Merkel and Italian Prime Minister Mario Monti later in the day in Berlin, while IMF's Christine Lagarde, is to meet French President Nicolas Sarkozy in Paris. Markets are also watching Spain and Italy’s plan to sell as much as EUR17 billion in debt on Thursday and Friday respectively.

The continuation of the eurozone crisis and risk of global financial contagion will continue to support gold's safe haven status.

end



Early this morning we were greeted with a risk off situation where the Euro tumbled on weak data coming from Germany and Spain. Wolf Richter does a superb job explaining what is happening over in Germany. (see below)
Spanish industrial production fell 7.0% year over year.  The ECB continues to act as a magnet for bank deposits as last night it set a record to the tune of 486 billion euros as the LTRO carry trade,( whereby the ECB lends money to the banks who in turn buy their host sovereign debt) looks to me like it is totally moribund. In Hungary the forint dropped again to record lows following a statement by the ECB that it may suspend Hungary funding. Greece CPI is at 2.2% year over year indicating this nation is in complete downward spiral as economic activity is grinding to a halt with the many strikes and the massive run on their banks.

(courtesy zero hedge)

Risk, Euro Tumbles Under 1.27 On Weak European Data, Continued Flight To Safety

Submitted by Tyler Durden on 01/11/2012 07:14 -0500

• CPI
 
• Crude
 
• European Central Bank
 
• Fitch
 
• Flight to Safety
 
• France
• Germany
 
• Greece
 
• Hungary
 
• Recession

Over the past hour the EURUSD has tumbled by nearly 100 pips on what some believe is a liquidation program, but is largely driven off continued European data weakness (and with the recession here, we will be getting much more of this in the days to come), as well as continued scramble for safety. Germany auctioned off a 5 year note which received €9billion bids for €4billion target; the bund yield 2.3bps was indicative of a safe haven bid, and explains why bank deposits with the ECB rose to a new record €486billion. The strength is somewhat peculiar as it was earlier reported that the German economy contracted by 0.25 bps in Q4, which is never a good thing, but the assessment is that German weakness will hit others more than Germany itself. Elsewhere, Spanish industrial production declined -7.0% Y/y vs an estimated -5.4%, the worst decline since Oct. 2009. Spain 2-year yield down -34bps, causing spread to bunds to fall 33bps. We doubt that this contraction will last, or the BTP yield flirting with the 7% barrier especially after Rabobank finally noted what we have been saying for a while, namely that LCH will soon have to hike Italian margins again. In Greece, CPI rose 2.2% Y/y vs est. 2.7%; a decline which is seen as a symptom of economic downturn. Confirming the slowdown, we learn that Euroarea Q3 economic growth was reduced to 0.1%, meaning that the recession likely started in Q4. Hungary is again a center of attention, after the forint drops following an EU statement it may suspend Hungary funding (unless the country hands over its legislative apparatus to the EU entirely). Finally, we find out that French Fitch is now channeling France, after saying that the ECB must do more to prevent a cataclysmic Euro collapse. All this leads to a drop in the EUR to under 1.27, a slide in crude to under $102, and a decline in gold to $1634 after nearly hitting $1650 in overnight trading as the world realizes that a return in Chinese inflation (that SHCOMP surge isnt coming on its own) courtesy of a loose PBOC, will mean a prompt retrace of the metal's all time highs.

end.


Fitch was at it again today signalling trouble for the Euro:

(courtesy Fitch/GATA, Mark Jones)

ECB must do more to prevent "cataclysmic" euro collapse - Fitch

By Marc Jones

FRANKFURT | Wed Jan 11, 2012 1:55pm GMT

FRANKFURT (Reuters) - The European Central Bank should ramp up its buying of troubled euro zone debt to support Italy and prevent a "cataclysmic" collapse of the euro, David Riley, the head of sovereign ratings for Fitch, said on Wednesday.

Speaking to investors as part of a European roadshow, Riley said the collapse of the euro would be disastrous for the global economy, and while it is not Fitch's baseline scenario, it could happen if Italy did not find a way of its debt problems.
"The end of the euro would be cataclysmic. The euro is a reserve currency," Riley said. "What would that do in terms of financial and political stability?"
"It is hard to believe the euro will survive if Italy does not make it through," he said, adding that while many saw Italy as too politically and economically important to be allowed to fail, "one might also argue that it is too big to rescue."
The warning pushed the euro down to within touching distance of a new 16-month low versus the dollar.

Riley urged the European Central Bank to abandon its current reluctance to scaling up its purchases of troubled euro zone debt such as Italy's and drop its resistance to the bloc's bailout fund, the EFSF, borrowing directly from it.

"Can the euro be saved without more active engagement from the ECB? Quite frankly we think no," Riley said, adding that the bank had plenty of scope to expand its balance sheet with unleashing a wave of inflation across the euro zone.
"Why not have the ECB come out and say 'We are going to cap interest rates', say 'We are not going to allow interest rates to exceed 7 percent' or whatever level they see is the limit?.. Why not turn the EFSF into a bank so it can borrow from the ECB so it doesn't have to go to the market?"
GREECE THE JOKER IN THE PACK

Fitch has warned that the economic outlook for the euro zone has darkened further in recent months, but it has said it does not expect to strip France of its triple-A rating for this year at least. By contrast, Standard & Poor's has singled out France for a possible two-notch cut from its top rating.

Still, Riley cautioned the euro zone's second-biggest economy was in a precarious position as the crisis rumbled on.

"France is the weakest AAA country in the euro zone," he said, adding it had the additional burden of being the main country alongside Germany underpinning the euro zone's bailout fund.

Greece, meanwhile, remained a major threat for the euro zone.

Last year's move to force investors to take losses on their Greek bonds had destroyed the pre-crisis assumption that no euro zone country would default, while the current debate on Greece potentially leaving the euro was forcing investors to fundamentally rethink their view of the single currency.

"Arguably Greece leaving euro could be the beginning of the end for the euro," Riley said. "Greece is still the joker in the pack. It still has the potential to plunge the euro zone into crisis."

James Longsdon, Fitch's head of European bank ratings, added that any sign of euro zone breakup would lead the public, firms and investors to pull their cash out of banks in a panic.

"If you are a depositor in a bank where you have concerns, not only over your sovereign but even the domination of your deposits, then it is hard to imagine anything other than (bank) deposit instability relatively quickly," Longsdon said.

Riley, however, reiterated that a euro split was not Fitch's current expectation, saying that the likely internal trauma of leaving the single currency would deter Athens from reverting back to the Drachma.

"We don't think Greece will leave the euro. The cost benefit analysis doesn't add up," Riley said.

-END-

Here is a Reuters account on what is going on in Greece.  Banks are liquidating their sovereign Greek debt and these bonds have been picked up by hedge funds at huge discounts.  The hedge funds are calling the bluff that they will not default and the hope is that the bonds will be paid at par.  The hedge funds realize that the ECB cannot allow Greece to default as this will trigger massive credit default swaps and this is the reason for a "voluntary haircut"

(courtesy Reuters)

Hedge funds play hardball over Greek restructuring: Reuters reported that hedge funds have built up such powerful positions in Greek bonds that they could derail a voluntary restructuring deal. The article said that the funds would prefer to either let Greece go under, which could trigger the CDS that many of them own, or hope to get paid off in full if enough holders sign up for a deal with Athens. It added that this approach puts them in direct conflict with the IMF, which wants to push Greece's debt burden to an affordable level. The article, which discussed how Greece may insert collective-action clauses into existing bonds to force dissenting minorities into accepting a deal, went on to cite a source who said that the take-up rate may come in at only 60%, significantly less than the 90% rate that the IIF was targeting back in June.

and this from the Wall Street Journal on Greece:

Europe worried about having to provide more support for Greece: The WSJ, citing people familiar with the matter, reported that some Eurozone countries are worried that they will have to provide more support for Greece. Such concerns have been fueled by thoughts that a restructuring deal with private creditors is unlikely to sufficiently reduce the country's debt burden. The paper added that this is one of the reasons why negotiations have dragged on for months. The article, which also discussed the potential for Greece to insert collective-action clauses into existing bonds to reduce the ability of uncooperative bondholders to derail a deal, went on to note that officials hope to announce the structure of a debt swap deal by next week, with a formal exchange offer to follow.

end

And finally this commentary from zero hedge as to what UBS thinks will happen with the Greek
haircuts and what it means for Europe:

(courtesy zero hedge)

The Coercive Greek Restructuring Is Now Imminent: UBS Explains What It Means For Europe (Hint: Nothing Good)

Submitted by Tyler Durden on 01/11/2012 12:11 -0500

• Bond
 
• CDS
 
• Central Banks
 
• default
 
• European Central Bank
 
• France
• Greece
 
• Gross Domestic Product
 
• International Monetary Fund

Over the weekend, and before it became a popular topic in the mainstream media and an issue of political debate, UBS first among the "non-fringers" discussed the topic of not only a coercive Greek restructuring (i.e., one in which there is no "agreement" of the bondholders) but that it is, in fact, imminent. Since then, the din over this issue has escalate with reports over the past two days, that Greece may enforce collective action contracts as well as force bondholders into a deal, since various hedge fund hold-outs have been holding Europe hostage, a development foreseen here in mid-2011. Unfortunately for Europe, which apparently has no idea what is going on, and whoever is advising it financially is certifiably an idiot, the coercive path is precisely what the end outcome may end up being. Naturally, while this is preciseley what shouldhave happened long ago (and saved taxpayers everywhere hundreds of billions in Greek bailout funds), the fact is that it goes contrary to everything the imploding status quo and collapsing ponzi house of cards is doing to prevent an all out catastrophe, as a coercive transaction actually will have unpredictable and adverse spill over effects in virtually every aspect of European financial markets, which in turn will migrate to the US. The good news is that CDS, despite the constant attempts of the crony and corrupt ISDA otherwise, will once again become an instrument of hedging, which ironically in the long run will be stabilizing. But not before some serious short-term fireworks. UBS explains.

• Today Dow Jones reported an unnamed troika official as saying that the Greek government will be “…retroactively introducing collective-action clauses, but not necessarily using them” via the legislative steps needed in order to “facilitate the negotiations with the private sector”. While there has been no confirmation or denial of this statement either from the Greek government or from the troika (of the EU, IMF and ECB), we expect that official and market discussion of CACs and further steps towards coercive restructuring will increase and intensify from this point onwards,  leading to a coercive restructuring of some kind around the time of the 20 March bond redemptions.
• If we are correct in this view, the timing of the polemic over Greece turning increasingly towards coercive restructuring makes sense. On Monday of next week troika inspectors return to Athens to begin their next quarterly review and begin discussions over the details of Greece’s second aid package. Early-January was also the date by which the Greek government had expressed a desire to  have completed negotiations with the private sector over the voluntary PSI as laid out in the 26 October EU summit statement.
• However, at the time of writing, it does not seem that a deal is close with the private sector, so the statements credited to the troika (which in a similar form also surfaced in the autumn) would appear to indicate the next – logical – steps on the part of Greek government. As we have stated  in published research for some time, we believe that a voluntary PSI will likely not take place, owing to the  difficulty of achieving sufficient investor participation, and that the negotiations will be abandoned in favour of a coercive move¹.
• With about 94% of its bonds governed by domestic law, the Greek state is in a position whereby it could change the terms its debt relatively easily in order to avoid a technical default within the rules of the bonds themselves. It could pass a law in its parliament which inserted collective-action  clauses retroactively into the bond contracts, allowing the proposals of the Greek government to be imposed on all bond holders via the agreement of a certain proportion of bond-holders. In theory, there is no reason why this “deciding” proportion of bondholders would need to  represent more than 50% of holders.
• The introduction of CACs in this way would not likely trigger a credit event in CDS contracts - at least in itself, as at that point the bondholder’s cash flows would still be theoretically unaffected. Instead, the CDS trigger would probably be the use of them in any subsequent restructuring
• The framework for negotiation for the Greek government is provided to it by the 26 October EU leaders summit, in which a target of 120% debt/GDP by the end of 2020 was stated with a 50% haircut in the PSI the means to achieve that. However, with Greece missing on both growth  and deficit targets, the need for deeper restructuring is continuous. As a result, we expect that the authority will be given to the Greek state for both a coercive restructuring, and – probably – a more extensive one from a decision to do so at another EU summit.

That is the plot. And here is what will likely happen:

• In a coercive restructuring, the consequences of the treatment of euro area central banks could be negative either way. If, on the one hand, the bonds purchased in the Securities Markets Programme (SMP) suffer the same fate as those held by private sector investors, the political  consequences of that would effectively be fiscal transfers of tens of billions of euros (whether there is a formal recapitalisation of central banks or not) might be problematic. If, on the other hand, euro area central banks are made whole (for example, by swapping the bonds in advance for cash or for new bonds), then the precedent of Eurosystem seniority may cause significant problems of contagion in the Spanish and Italian bond markets.Indeed, the more bonds bought in those markets for the SMP, the more investors might see themselves subordinated.

As such, the constant fear of what may be announced tomorrow explains the endless drip in the EURUSD, which ironically may strengthen once the overhangs in Europe - the S&P two notch downgrade of France, and the forced bankruptcy of Greece, finanly occur. Then again, in a globalized world in which nobody has any clue what the cause-effect linkages really are, maybe it will simply precipitate the rest.

end




Here is Bloomberg discussing the huge overnight gain in euro deposits from the banks.
European banks are de-leveraging and shedding many assets instead of loaning to consumers.  Many of these banks have assets greater than the GDP of their host nation:

(courtesy Bloomberg)

Europe Banks Hoarding Cash Resist Draghi Bid to Avoid Crunch

By Anne-Sylvaine Chassany and Gabi Thesing - Jan 11, 2012 6:02 AM ET

Banks are hoarding the European Central Bank’s record 489 billion-euro ($625 billion) injection into the banking system, thwarting attempts by policy makers to avert a credit crunch in the region.

Almost all of the money loaned to 523 euro-area lenders last month wound up back on deposit at the Frankfurt-based central bank instead of pouring into the financial system, according to estimates by Barclays Capital based on ECB data. Banks will use most of the money from the three-year loans to meet their refinancing needs for this year and next, analysts at Morgan Stanley and Royal Bank of Scotland Group Plc estimate.

“It’s illusory to think that the measure will translate into credit generation,” Philippe Waechter, chief economist at Natixis Asset Management in Paris, said in an interview. “It will assuage some of the anxiety banks have regarding their liquidity needs. But they’ve engaged into a massive overhaul of their strategy and shrinkage of their balance sheets, which is, coupled with the deteriorating economy, not compatible with increasing credit.”

Governments are urging European banks to keep lending to companies and individuals while requiring them to raise an additional 114.7 billion euros of core capital by June to weather a deepening sovereign-debt crisis. Instead of raising equity, most lenders across Europe have vowed to meet capital rules by trimming at least 950 billion euros from their balance sheets over the next two years, either by selling assets or not renewing credit lines, according to data compiled by Bloomberg.

ECB Deposits

That has stirred concern among policy makers that banks will cut lending and throttle growth in the euro region.

Banks have been parking almost all extra liquidity from the ECB loans back at the central bank. Barclays Capital estimates firms used 296 billion euros of the Dec. 21 three-year loans to replace maturing shorter-term ECB borrowings. That left only 193 billion euros of additional money for the financial system. Overnight deposits with the ECB have jumped by about 223 billion euros since the loans to a record 486 billion euros, suggesting the central bank funds haven’t so far reached customers.

Banks account for about 80 percent of lending to the euro area, making them “crucial to the supply of credit,” according to recently installed ECB President Mario Draghi. By contrast, U.S. companies rely more on capital markets for financing, selling bonds to investors.

Refinancing Needs

The ECB lending, and a follow-up loan offering on Feb. 28, won’t ease the pressure on banks to shrink, say analysts including Huw van Steenis at Morgan Stanley in London.

“The ECB loans will largely be used to pre-fund 2012 and some of 2013’s bank refinancing needs, but it will not stimulate lending,” Van Steenis said. They will “just stop it falling off precipitously.”

Euro-area banks have more than 600 billion euros of debt maturing this year, the Bank of England said in its financial stability report last month. The first ECB loan offering should help cover about two-thirds of that amount, Goldman Sachs Group Inc. analysts say. Morgan Stanley’s Van Steenis estimates banks may reduce assets by as much as 2.5 trillion euros in two years, a process known as deleveraging.

The volume of loans to households and companies in the 17- nation euro area shrank in November for the second consecutive month, the ECB said on Dec. 29. Loans were still up 1.7 percent over the year-earlier period, slowing from a 2.7 percent increase in the 12 months through October.

Merkel, Sarkozy

When granted, loans are getting costlier for borrowers. Since July, interest margins have increased, with investment- grade borrowers in Europe paying an average of 91.6 basis points more than benchmark rates, up from 84.4 basis points during the first half of 2011, according to data compiled by Bloomberg. A basis point is one-hundredth of a percentage point.

“We must avoid a credit crunch for our economies,” European Union President Herman Van Rompuy said on Jan. 9. “The recent measures by the European Central Bank on a long-term lending facility for the banks are welcome in this context.”

The European Banking Authority, which oversees the region’s regulators, asked banks on Dec. 8 to retain earnings, curb bonuses and raise equity to boost core capital before resorting to cuts in lending.

The EBA followed both French President Nicolas Sarkozy and German Chancellor Angela Merkel in urging banks to keep lending. Sarkozy said on Oct. 27 that he had asked firms to shift “almost all” of their dividends into strengthening balance sheets and to make bonus practices “normal.” Merkel said on Oct. 9 she was “determined to do whatever necessary to recapitalize the banks to ensure credit to the economy.”

‘No Credit Crunch’

Bankers have said they haven’t restricted lending and that demand for credit is slowing as growth slows.

“All banks I talk to keep lending to small- and medium- size enterprises and households,”Christian Clausen, president of the European Banking Federation, an industry association, said on Dec. 9. “That part of the bank will keep rolling.”

There is “no credit crunch,” Frederic Oudea, chief executive officer of Societe Generale (GLE)SA, France’s second- biggest lender, and chairman of the French Banking Federation, said last month. “The reality is that credit is available,” he said in an interview on BFM radio on Dec. 16.

Even so, companies across Europe say credit is tightening.

‘Double Punch’

In France, where credit to the private sector increased by 3.7 percent in November compared with a year earlier, the majority of the country’s company treasurers said they encountered “very strong tensions” in negotiating bank loans, with more than 50 percent of respondents saying the process led to more expensive terms, according to a December survey by the French Association of Corporate Treasurers.

The majority of those polled said obtaining bank financing was “as difficult as at the end of 2008,” after Lehman Brothers Holdings Inc. collapsed.

U.K. banks expect to toughen their criteria on loans to companies and households in the first quarter because of strains in the wholesale funding market, the Bank of England said Jan. 5in its fourth-quarter Credit Conditions Survey.

Belgian credit growth slowed to 3.1 percent in the 12 months to the end of October, from 3.6 percent at the end of September, the country’s central bank said on Dec. 12.

In Italy, some companies with annual sales of 30 million euros to 40 million euros are charged as much as 10 percent interest on loans, Emma Marcegaglia, chief of the country’s Confindustria lobby group, said in an interview on Dec. 20.

Draghi’s Priority

With the ECB’s injection, “deleveraging may happen in a more orderly way, but it doesn’t mean it will be painless,” said Alberto Gallo, head of European credit strategy at RBS. Banks are faced with high long-term financing costs, a deteriorating economy and difficulties raising capital, he said. “It’s what I call the double punch: A combination of negative growth and banks’ deleveraging will affect lending activity.”

Even the ECB’s Draghi, who has made it one of his priorities is to keep credit flowing into the economy, said the central bank’s loan offerings may fail to achieve that goal.

“Monetary policy cannot do everything, but we’re trying to do our best to avoid a credit crunch that might come from a lack of funding,” Draghi said Dec. 19 at the European Parliament in Brussels. “We have to be extremely careful here, because there may be other reasons that create a credit crunch.”

Draghi may be wary of the U.S. experience with multiple rounds of bond purchases. That so-called quantitative easing hasn’t stimulated lending, Natixis’s Waechter said.

‘Kick the Can’

“Lending really picked up when the economy got better,” he said.

The ECB cut its forecast for euro-area economic growth in 2012 to 0.3 percent on Dec. 8 from a September prediction of 1.3 percent. The central bank expects the economy to expand 1.3 percent next year.

In the U.S., almost all categories of bank lending fell in 2009 and 2010 and didn’t start improving until last year, when the Federal Reserve stopped its second wave of quantitative easing,according to data by the U.S. institution. Banks increased their holdings of Treasury and agency securities in 2009 and 2010, showing they were using the Fed’s cheap money to own safe government paper.

Because quantitative easing tends to improve capital markets first, the healing will be even slower in Europe given its reliance on banks for borrowing, according to Gallo.

“The ECB loans are a kick-the-can measure that doesn’t fix the banks’ structural problems,” Gallo said. “Deleveraging needs to happen.”

To contact the reporters on this story: Anne-Sylvaine Chassany in London atachassany@bloomberg.net; Gabi Thesing in London at gthesing@bloomberg.net.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

end

This next commentary from Wolf Richter, describes in detail what is happening inside Germany
as to its exports.  It seems that the recession has finally caught up with this powerful export nation:


(courtesy Wolf Richter/www.testosteronepit.com)

Germany’s Export Debacle

Submitted by testosteronepit on 01/10/2012 21:23 -0500

• Auto Sales
 
• China
 
• Detroit
 
• Deutsche Bank
 
• Eurozone
 
• Ford
 
• Germany
• Greece
 
• Gross Domestic Product
 
• International Monetary Fund
• Monetary Policy
 
• Recession
 
• Unemployment

Wolf Richter   www.testosteronepit.com

Christine Lagarde, managing director of the IMF, told the South African Business Day yesterday that the Eurozone is likely to avoid a recession in 2012, an inexplicable statement in light of some ugly trends. Germany, the economic superstar with unemployment at a 20-year low and exports at an all-time high, produces 34% of the Eurozone’s GDP—and it has smacked into a wall.

Signs have been accumulating. But on Tuesday, Deutsche Bankpublished a report that lent more weight to them: Germany’s economy would shrink during the first two quarters of 2012. The recession has arrived. Uncertainty around the debt crisis would impact the willingness of companies to make investments. Budget cuts in Eurozone countries would hit exports. Unemployment would tick up a notch to 7.25%. However, political progress in overcoming the crisis would allow exports, and thus the German economy, to recover in the second half. For all of 2012, Deutsche Bank predicted essentially stagnation.

And manufacturing revenues fell by 1.1% in November from October, though they’re still positive for the year, the Federal Statistical Office announced today. More ominously, exportorders have been crashing for months—a harbinger of sharply declining future exports. In 2011, exports reached a record of €1.07 trillion. In a country whose GDP is only €2.37 trillion! But orders from non-Eurozone countries plummeted by 10.3% in November.

The debt crisis has been slamming one peripheral Eurozone country after another. Greece is teetering after five years of recession. Troika inspectors are on their way to demand yet more cuts. And the Prime Minister threatened everybody with the nuclear option. For that whole mess, read.... Greece’s Extortion Racket Is Maxed Out.

But now the core of the Eurozone is getting slammed.

Siemens shed doubts on its outlook. The forecast made in November is "very ambitious," cautioned CFO Joe Kaeser. "Headwinds have become rougher." In November, the technology conglomerate with $96 billion in revenues had announced a growth target of 5% for 2012. That’s out the window. Kaeser blamed uncertainties caused by the debt crisis and criticized the "hesitant" political steps taken to solve it. The whole sector would be hit by a reduction in industrial demand in the first half, though he still expected demand to improve in the second half (that second-half optimism is reminiscent of the one displayed by Ford, GM, and others in early 2008).  

There were company-specific clouds as well. Delays and uncertainties at large North Sea wind-power projects would darken the result for the first quarter. And he warned of more restructuring expenses at Nokia Siemens Networks. Siemens had desperately tried to sell it, but since no willing buyers emerged, it would have to lay off 17,000 employees, about 20% of NSN’s workforce.

And the European auto market is going to hit the skids in 2012,according to Carlos Ghosn, CEO of Renault and Nissan. Speaking at the Detroit auto show, he predicted that auto sales would drop 3% in Europe. The first quarter would be particularly lousy. How do you prepare for this? "You have to utilize your inventory, limit production, and pay attention to costs. And for the rest, pray," he advised.

It gets worse. Philips, the Dutch maker of electronics and lighting products, blamed weakness in Europe for declining sales in its healthcare equipment division—previously considered immune to the debt-crisis. The problems also pressured prices in its lighting division. The company had already announced that it would cut 4,500 jobs.

German exporters are getting hit from two sides: trouble in the Eurozone and slowing demand in China—its imports, up 22.1% in November year over year, were up a disappointing 11.8% in December. Suddenly, German executives are keeping a hopeful eye on Chinese monetary policy.

They’ve been through this before. During the financial crisis, German export orders fell off a cliff, and GDP printed the worst two quarters in the history of the Federal Republic. But then QEx-inflated growth elsewhere, particularly in China, drove German exports to a record. And by 2011, the media were gloating over the "German success Recipe." For its unique aspects and for just how premature all the gloating was, read....“German Success Recipe” or Blip?

end

A new problem has surfaced in Europe and that is the state pensions totaling 30 trillion euros of obligations.  This obligation is almost 5 times the combined debt of European countries in the study which of course is unsustainable:

(courtesy Bloomberg)

Europe’s $39 Trillion Pension Threat Grows as Regional Economies Sputter

By Rebecca Christie and Peter Woodifield - Jan 11, 2012 5:04 AM ET

Even before the euro crisis, people were worried about Europe’s pension bomb.

State-funded pension obligations in 19 of the European Union nations were about five times higher than their combined gross debt, according to a study commissioned by the European Central Bank. The countries in the report compiled by the Research Center for Generational Contracts at Freiburg University in 2009 had almost 30 trillion euros ($39.3 trillion) of projected obligations to their existing populations.

Germany accounted for 7.6 trillion euros and France 6.7 trillion euros of the liabilities, authors Christoph Mueller, Bernd Raffelhueschen and Olaf Weddige said in the report.

“This is a totally unsustainable situation that quite clearly has to be reversed,” Jacob Funk Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington, said in a telephone interview.

A recession threatening the world’s second-biggest economic bloc, along with efforts to reduce debt across Europe, is exacerbating the financial risks. Stable or falling birthrates, plus rising life expectancies, are adding to pressures, with the proportion of economic output devoted to spending on retirement benefits projected to rise by a quarter to 14 percent by 2060, according to the ECB report.

Ageing Populations

Increased retirement ages and lower benefits must be part of any package to hold the 17-nation euro area together, according to analysts, including Fergal McGuinness, the Zurich- based head of Marsh & McLennan Cos.’s Mercer’s pensions consulting unit for central and eastern Europe.

Europe has the highest proportion of people aged over 60 of any region in the world, and that is forecast to rise to almost 35 percent by 2050 from 22 percent in 2009, according to a report from the United Nations. That compares with a global estimate of 22 percent by 2050, up from 11 percent in 2009.

The number of people aged over 65 in the 34 countries in the Organization for Economic Cooperation and Development is forecast to more than quadruple to 350 million in 2050 from 85 million in 1970.Life expectancy in Europe is increasing at the rate of five hours a day, according to Charles Cowling, managing director of JLT Pension Capital Strategies Ltd. inLondon.

In so-called developed countries, the average lifespan will reach almost 83 by 2050, up from about 75 in 2009, the UN said.

Cutting Costs

Governments and companies have taken steps to reduce future costs with policy makers having increased retirement ages in countries, including France, Germany, Greece, Italy and the U.K.

“Irrespective of whether you’re inside or outside the euro or anything else, raising retirement ages is one of the structural reforms that all of Europe has to do,” Kirkegaard said. “The crisis has forced them to address this. This is actually a positive thing in many ways.”

By 2060, the average French pension benefit will be 48 percent of the national average wage, compared with 63 percent now, said Stefan Moog, a researcher at Freiburg University in Freiburg, Germany.

Pension managers and governments are relying on economic growth to safeguard the promises they make. If the euro zone grows too slowly to bolster public and private coffers, theretirement plans may become unaffordable, according to Mercer’s McGuinness.

Benefits’ Squeeze

“The amount of money countries are going to spend on social security and long-term care is going to go up,” McGuinness said in an interview. “Governments with more generous social-security systems will have difficulty affording them. They will have to recognize these costs will impact their ability to reduce borrowings.”

State pension obligations in France and Germany are three times the size of their economies, according to data compiled by Mercer. It’s more sustainable in France than Germany because of France’s higher birthrate.

Last year, there were 4.2 people of working age for every pensioner in France. The ratio will fall to 1.9 by 2050, according to a report by Economist magazine in March. In Germany, the proportion will decline to 1.6 from 4.1 in the same period.

“That is going to put a lot of pressure on Germany’s ability to meet their promises,” McGuinness said. “What they are more likely to do is cut back benefits. Governments face a lot of longevity risks.”

Add to Risks

Private pension funds are under pressure too with benchmark euro-area interest rates at the lowest level since the 13-year- old currency was introduced. Low rates mean pension plans have to hold more assets to back their long-term payout projections.

Unless growth returns, fund managers will effectively be forced to take on more risk, said Phil Suttle, chief economist of the Washington-based Institute of International Finance.

“That creates problems because they all head into sectors that seem a great idea now, and then they blow up, whether it’s commodities or equities or whatever,” Suttle said. “You’re going to intensify the boom-bust cycle.”

The growing doubts facing the euro area is another planning hurdle as companies reconsider investment strategies amid concerns that Greece may default on its debt and spark a broader euro breakup.

The implied probability of one country leaving the euro by the end of 2013 fell to 49 percent on Jan. 10 from 51 percent a week earlier, based on wagers at InTrade.com, an Internet betting market. The probability of one country departing by the end of 2014 is 59 percent.

Rates Benefit

Pension plans in countries such as Greece or Portugal may benefit from exiting the euro as higher interest rates that would likely accompany a return to their national currencies would cut the cost of liabilities, while assets invested abroad would almost certainly gain in value, according to Mercer, a unit of Marsh & McLennan Cos.

PensionDanmark, Denmark’s seventh-largest pension fund by assets, sold all its Germangovernment bonds last year, Chief Executive Officer Torben Mogen Pedersen told reporters in Copenhagen yesterday.

“Our government debt investments are all in Scandinavian non-euro countries,” Pedersen said. “We think 2012 will be a very hard year for European investors.”

In Britain, which has refused to join the euro, occupational pension funds have moved the risk of ensuring adequate retirement income to the employee from the employer in the past decade to curb pension-fund shortfalls.

Funding Gap

Unfunded public-sector U.K. pension obligations across 1,500 public bodies totaled 1 trillion pounds ($1.57 trillion) in March 2010, the Treasury said Nov. 29 in the first set of audited Whole of Government Accounts. That compares with a total of 808 billion pounds of outstanding U.K. government bonds and accounts for 90 percent of all public-sector pension liabilities.

Royal Dutch Shell Plc (RDSA), Europe’s largest oil company, was the last member of the benchmark FTSE 100 Index to close its defined-benefit pension plan to new entrants when it made the decision last month to do so. The company plans to introduce a fund for new employees next year that makes them responsible for ensuring they have enough to live on in old age.

Governments may have to follow the same path for their own employees as well as increasing the retirement age to at least 70 and possibly 75 to make the pensions affordable, Cowling wrote in an article published in July by Public Service Europe.

To contact the reporters on this story: Rebecca Christie in Brussels atrchristie4@bloomberg.net; Peter Woodifield in Edinburgh at pwoodifield@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

end

the Italian prime minister, Mario Monti states that he is very worried about
citizen protests to his austere measures to tackle Italian financial problems:

(courtesy Bloomberg)

Monti Warns of Italy Protests as He Meets With Merkel

January 11, 2012, 7:35 AM EST

By Tony Czuczka

Jan. 11 (Bloomberg) -- Italian Prime Minister Mario Monti made a plea for more help to overcome the debt crisis before he met with German Chancellor Angela Merkel, warning that his austerity measures might trigger anti-European protests without signs of progress.

“I am demanding heavy sacrifices from Italians,” Monti was cited as saying in an interview with German newspaper Die Welt published today. “I can only do this if concrete advantages become visible.” If not, “a protest against Europe will develop in Italy, including against Germany, which is seen as the ringleader of EU intolerance, and against the European Central Bank.”

Monti, the premier who has pushed through budget cuts demanded by the European Union after Silvio Berlusconi quit, arrived in Berlin for talks with Merkel on stemming the debt crisis that began in Greece in late 2009 and infected Italy, Spain and France last year. The two leaders are due to hold a news conference at about 1 p.m. Berlin time.

The EU could help Italy with “a lowering of the interest rate,” Berlin-based Die Welt quoted Monti as saying. He didn’t elaborate, according to the interview. If EU policy doesn’t change, “Italy, which has always been a very Europe-friendly country, could throw itself into the arms of populists.”

Greek Debt Swap

European leaders are striving to tamp down the crisis on multiple fronts as they set the stage for an EU summit on Jan. 30 that’s meant to focus on bolstering jobs and growth in the region. Pressure is meanwhile growing to complete a Greek debt swap agreed by leaders in October that is needed to put a second rescue plan in place and keep the euro area together.

Merkel and International Monetary Fund Managing Director Christine Lagarde discussed Greece and the euro-area debt crisis in Berlin late yesterday, said Steffen Seibert, Merkel’s chief spokesman. Lagarde is due to meet with French President Nicolas Sarkozy in Paris at about noon today.

Merkel and Sarkozy are scheduled to travel to Rome on Jan. 20 for joint talks with Monti, who heads the euro area’s third- largest economy. Both have expressed support for Monti’s effort to bring down Italy’s debt, the EU’s second-highest after Greece. Two days earlier, Monti will meet with British Prime Minister David Cameron in London.

After delivering 20 billion euros ($26 billion) of deficit cuts within weeks of taking office in November, Monti is now focusing on a package of measures aimed at boosting growth. He is seeking to open up closed professions to more competition and overhaul the country’s labor laws, and said he will present an outline of his plan to EU finance chiefs at a Jan. 23 meeting in Brussels.

Germany and France can’t solve Europe’s problems alone, Monti was quoted as saying in Die Welt.

“We are a strong, a proud country, and basically we have an effective economy,” he said. “You know, I’ve always worked for an Italy that resembles Germany as much as possible.”

--Editors: Alan Crawford, Patrick Henry

To contact the reporter on this story: Tony Czuczka in Berlin at aczuczka@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

end.
Italy's 10 yr bond yield;

Snapshot

SUMMARY			ONE-YEAR CHART INTERACTIVE CHART
Value	6.99
Change	-0.125 (-1.899%)
Open	7.10
High	7.10
Low	6.95

Unicredit bank shares closed today at 2.58 euros.

end

Yesterday we brought you stories on hyperinflation hitting Iran.

Now the Iranian interest rates exceed 20%:

Iran Interest Rates Raised To 20% To Fight Hyperinflation; Iran Nuclear Scientist Killed In Street Bomb Explosion

Submitted by Tyler Durden on 01/11/2012 08:23 -0500

• headlines
 
• Hyperinflation
 
• Iran
 
• Mohammad
 
• Uranium

Yesterday we reported how as a result of a financial embargo enacted on by the US on New Year's Day, Iran's economy had promptly entered freefall mode and is now experiencing hyperinflation as the currency implodes. Today EA WorldNews gives us the response, which confirms that indeed the economy is in terminal shape following an interest rate hike to 20%. From the Source: "State news agency IRNA has no news on the Iranian currency this morning, but it does feature an interview with an official, noting the rise in interest rates to 20%. The effort is to reduce the flow of cash in the economy, but the official says it will increase capital investment by banks in an "impressive market"." As noted before, every incremental creep worse in the status quo merely makes the probability of escalation higher due to a lower opportunity cost of "irrationality" although we hope we are wrong. And in other unreported so far news, EA also informs us that in a street bomb explosion in Tehran earlier, one Mostafa Ahmadi Roshan, deputy head of procurement at the Natanz uranium enrichment facility, was killed. Are predator drones now patrolling over the Iran capital? Who knows, but Iran is already spinning the news.

Tehran Bomb. Fars explains who is behind this morning's explosion killing a University professor and wounding two people (see 0700 GMT): "The Secret is in the Headlines --- American Diplomacy Seasoned with Terror":

As [US Secretary of State Hillary] Clinton condemned Iran's peaceful nuclear enrichment and a Council on Foreign Relations report claimed insufficient confidence in Iran, a terrorist incident occurred in Tehran."

Deputy Speaker of Parliament Mohammad Reza Bahonar condemned the bomb as an act of "global arrogance". Khabar Online adds that there were shouts of "Death to America" in the Majlis.

At this point we have lost count where in the escalation dance we are. As always keep an eye on Brent.

end
.and this is just in:
(courtesy zero hedge)

2nd Carrier Arrives: CVN 70 Carl Vinson Joins CVN 74 Stennis In Arabian Sea, Off Straits Of Hormuz

Submitted by Tyler Durden on 01/11/2012 14:33 -0500

• Hong Kong

While we await for Stratfor's website to get back up and be fully operational, and provide its weekly aircraft carrier location updates, we have to go low tech, and rely on the Navy itself for an update of US naval aircraft carrier assets. We were not surprised to discover that the solitary CVN 74 John Stennis which for the past 2 months has been all alone in the Arabian Sea, just off the Straits of Hormuz, has finally found its new soulmate CVN 70 Carl Vinson which has arrived by way of Hong Kong, now that CVN 77 Geroge H.W. Bush is back in port. And so the US now has two carriers where there was one, and the US is quite ready to proceed with its joint-Israeli wargame operation titled simply enough "The Great Prophet".

Average:

It looks like the debt ceiling drama is about to begin:
(zero hedge)

The US Debt Ceiling Theater Is Back: Think The Issue Is On Autopilot? Think Again

Submitted by Tyler Durden on 01/11/2012 09:14 -0500

• Bank of America
 
• Bank of America
 
• Debt Ceiling
 
• default
 
• Florida
 
• New Debt Issuance
 
• President Obama
 
• Rating Agency

As Zero Hedge reported first, the US is once again, in just 5 short months (see chart), back at the debt ceiling, with just $25 million in new debt issuance dry powder, or in other words, no space of more debt absent resorting to the same "technique" last seen in late July when the Treasury plundered from government retirement accounts in order to accommodate new debt, such as yesterday's issuance of 3 Year bonds, and today's 10 Year bonds. And as The Hill reported yesterday, Obama is expected to request that Congress allow the incremental and final $1.2 trillion debt expansion (of the $2.1 trillion total) within a few days. So it is all on autopilot right? Wrong. As Bank of America explains below, it is very likely that the US will not have a debt ceiling hike for at least a few weeks, meaning that while a debt hike will ultimately come, it will very soon be all the song in dance, potentially overtaking the GOP drama, coupled with the pillaging of government retirement accounts yet again and likely leading to more rating agency action as the US debt fiasco is once again brought front and center. And the last thing the market needs is to experience the August 2011 collapse which brought it to 2011 lows and sent it gyrating for 400 DJIA points daily, in essence breaking the market as noted previously. And the worst news is that even with $1.2 trillion in new debt capacity, the total amount is guaranteed to not last through 2013, and should tax withholdings dip as trends are already indicating on adverse year over year comps, the $1.2 trillion in new debt may be exhausted as soon as September, which at this point may be the only thing that derails an Obama reelection if indeed he is running against "Wall Street."

First, here is why the debt ceiling is called the debt target:

Bank of America explains why the "debt ceiling dance" is back.

An issue that will not go quietly

Just when the debt ceiling controversy seemed like last year’s news, it’s back. At the start of the year, the gap between the current debt outstanding and the debt limit narrowed to less than $100 billion. Under the terms of the August 2011 deal, that condition allows President Obama to request an increase in the debt ceiling. However, as we discuss in detail below, the President has delayed the request to allow a convoluted “debt ceiling dance” required under current budget law. As a result, the Treasury is preparing to take similar “extraordinary” steps as last year to  avoid hitting the ceiling. We expect a $1.2 trillion increase to become law in the end, but only after some noisy political theater — all of which should further add to the uncertainty emanating from Washington DC this year.

How it’s all supposed to go down

The Budget Control Act (BCA) of 2011, enacted last August, authorized two prior debt limit increases totaling $0.9 trillion, raising the ceiling to nearly $15.2 trillion. As of December 31, 2011, actual debt outstanding was less than $0.014 trillion below this limit — well within the $0.1 trillion (or $100 billion) threshold to allow the President to request an increase. (Since the quantities involved are so large, expressing everything as trillions helps to keep relative sizes in context.)

The process spelled out in the BCA for raising the debt ceiling goes like this:

• Once the Treasury informs the President that the outstanding federal debt is closing in on the limit, he can request an increase from Congress.
• Congress can then reject that request by majority vote in each house.
• The President can respond with a veto to maintain the increase.
• At that point, Congress can try to override the veto, which requires a two-thirds majority vote in both houses.

An inconvenient calendar

The wrinkle to these plans is that, according to the BCA, once the President makes the request to raise the debt ceiling, Congress has 15 days to hold a vote to reject it. If it fails to do so, the debt ceiling increase would occur regardless. However, the House is not back in session until January 17, while the Senate returns on January 23. Recall that the whole design of the BCA was to allow members — mostly Republicans — to symbolically vote “no” on the debt ceiling increase while allowing it to (eventually) pass and avoid a default. Thus, the President agreed to postpone his request not for economic or budgetary reasons, but to allow these legislative machinations to occur.

Back in the real world

In the meantime, the federal government must deal with the real consequences of fast approaching the debt ceiling (Chart 1). The Treasury is preparing to once again adopt so-called “extraordinary measures” to keep the government from running out of “headroom” on the debt ceiling. These basically involve temporarily halting issuance of non-marketable securities, such as for various government trust funds, to allow more marketable debt to be issued in order to pay for ongoing programs. Similar tactics were used not just last year, but also in 1996 and 2002 though 2004. These actions are likely to be just temporary band-aids until the debt ceiling is actually raised.

Securing the no votes

The unwieldy structure of the BCA is the result of a compromise agreement among disparate policy factions – it hardly represents optimal fiscal policy. This condition of at least dollar-for-dollar future deficit reduction in exchange for increasing the debt ceiling was one key component to get Republican support for the BCA. Another was to grant both houses of Congress a vote on the proposed debt ceiling increase. This allows members to be on-record of voting against it. Last week, Republican Senator Marco Rubio (Florida) released a letter highly critical of President Obama’s handling of the issue and promising to vote against the increase. Political consultants suggest that most Republicans will vote against the President’s request — once Congress is back in session.

It also means that we will probably go several weeks before another $1.2 trillion increase in the debt ceiling is adopted, mostly likely because the process will take time to play out. That said, we see no scenario in which the debt ceiling is not raised, or in which there is any meaningful risk of default. We suspect that the opposition may die in the Senate, given that Democrats still have a majority. There is no expectation that either the House or the Senate will be able to muster enough votes for a veto override. But, in the meantime, the rhetoric should be just as heated as last summer’s debt ceiling debate.

It’s the process, stupid

It is worth remembering that the amount of outstanding debt is determined directly by current and past budget deficits, so no amount of future promised deficit reduction will change the near-term need to raise the debt limit. That fact, unfortunately, is likely to be completely lost in the current debate. Indeed, the convoluted process required to raise the debt ceiling is just another example that little substantive is likely to be accomplished in Washington DC this election year — it is designed for political showmanship, not for difficult but needed bipartisan forward progress on the long-term budget.

Thus, a better solution than freezing the debt limit would seem to be to reform the budget process so that changes to the debt ceiling must be passed along with spending and revenue decisions — as part of the budgeting process, and within the appropriation bills. In that way, politicians would be held accountable for budgetary choices that increase debt issuance when they are made. Unfortunately, this approach has been tried before, and Congress found ways to circumvent its own self-imposed rules. Thus, we are likely to revisit this debate on a regular basis, including in early 2013, after the new Congress convenes. This marathon dance still has a long way to go.

endDave from Denver discusses the Debt ceiling drama:
(courtesy Dave from Denver/The Golden Truth)

WEDNESDAY, JANUARY 11, 2012

The Debt Limit Ceiling and Insanity

"Insanity is doing the same thing over and over and expecting different results."  - Ben Franklin, Albert Einstein, et al...

The debt spending by the Government - and even worse, the acceptance of it by Taxpaying Americans - is completely insane - by any definition of the word.  But first I wanted to comment that yesterday I had speculated that the cost of Bernanke's housing market support proposals sent to Congress a week ago would cost Taxpayers in the range of $500 billion to one trillion dollars.  Barclays is out today saying that Bernanke's Fed alone is likely to spend $500 - $750 billion buying mortgages.  But Bernanke is also asking for Obama to chip in Taxpayer money.  It remains to be seen just how much QE + deficit spending will total on this next round of economic "stimulus," aka big bank bailout confetti.  Here's the report from Bloomberg this morning:  LINK

I don't know about anyone else, but the situation surrounding the latest request by Obama to raise the debt ceiling had me a bit confused.  I had thought that the deal reached in August ultimately raised the ceiling to $16.4 trillion.  So I researched it a bit because the media is making it sound like what Obama is asking for is in addition to what was done in August.  So here's how it works:  In Feb 2010 the debt ceiling was set at $14.294 trillion.  On August 2 it was raised to $14.694 trillion so that the Government didn't have to shut down until a new ceiling was reached. Then in September, a deal was reached that put the ceiling at $15.2 trillion but would ultimately take the debt ceiling up to $16.4 trillion, contingent on budget cuts.  So right now the Treasury is at the $15.2 trillion limit and Obama has to get Congressional approval in order to utilize the final $1.2 trillion of capacity. 

What's getting lost in all of this is that since August 2, the Government has borrowed $200 billion per month ($15.2 - $14.2 divided by 5 months).  This is insane.  The debt limit agreement in September was intended to take the Treasury thru 2013.  Theoretically by then the Government was supposed to agree on massive budget cuts.  I would bet my last silver eagle the budget cuts will never happen.  In the meantime, the Government is borrowing at a record rate, spending at a record rate and tax revenues - the ultimate indicator of economic health - are coming in lower than was forecast when the fiscal 2012 budget was proposed. 

Just think about this number for a minute:  the Federal Government is borrowing at a rate of $200 billion per month right now.  That's $278 million per hour in a 30 day calendar month.  That is insanity.  Based on that, the math from the original debt limit deal is tragically wrong and Obama and his happy Government spenders will run out of borrowing capacity by the end of June 2012.  That's insane.  California is a great microcosm and reflection of the fiscal insanity at the Federal level.  Yesterday an hour and a half after the stock market closed, California announced that its current fiscal budget deficit is $2.5 billion wider than was forecast 6 months ago.  I honestly don't know how California's Government stays open.  Here's the LINK

The situation in California can easily be extrapolated to the national level.  Despite the smoke and mirrors being used by the Government number crunchers and readily reported by the mainstream media, this country will not stop borrowing to spend until the rest of the world no longer accepts the dollar.  You are insane if you don't think that can happen - just ask anyone who is familiar with the collapse of the German mark in 1923...

Ron Paul had a very impressive showing in New Hampshire.  He finished 2nd with 23% of the votes.  In 2008 I think he had something like 2% of the votes.  Romney was expected to runaway with the NH primary anyway.  Despite the "Live Free or Die" slogan  on the NH license plate, it seems that voters in NH love insanely corrupt free-spending liberals masquerading as Massachusetts Republicans.  That's insane too. 

Gold and silver are putting on an impressive recovery from their post-MH Global manipulated collapse in December.  Yesterday I mentioned that Jim Sinclair stated in an interview that "something is going on behind the scenes that is not yet evident" and that it was being reflected by quiet buying in the gold and silver markets.  I would concur with this analysis and right now every sell-off intra-day in gold and silver is being bought. 

If you don't think that the Government and the Fed are going to have to print a lot more money in order to feed the $278 million per hour borrowing - and to prop up the de facto insolvent banking system - you are crazy.  If you don't start moving as much as can into gold and silver (and the extraordinarily undervalued mining stocks), you are insane.

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It is time to say goodnight.I will see you tomorrow nightHarvey