“I Am A Citizen, Not Of Athens Or Greece, But Of The World” – Socrates (Ancient Greek Philosopher, 470 BC-399 BC)
Greece’s government heads into a second day of intense talks with its private creditors in a push to reach an agreement that would ultimately slash the nation’s debt and avert a collapse of its economy by way of default. The clock is ticking on the crucial bond swap deal, with time running out to reach the compromise needed to avoid an unruly default. The swap deal is key to a second financing package which is required before the March 20th deadline. The bond payment will cost 14.5 billion euros, at this moment in time Greece (quite simply) doesn’t have the money…
The talks broke off on Jan. 13th and resumed with Papademos, 64, and Venizelos, 55. IIF Managing Director Charles Dallara, 63, and Jean Lemierre, 61, a special adviser to the chairman of BNP Paribas SA, are leading the negotiations for the creditors.
The new bonds will probably pay annual interest of 4 percent to 5 percent and have a maturity of 20 years to 30 years. They may trade for about half of their face value, the net present value of the deal for the bondholders will be about 32 cents on the euro, a circa 68% write down.
Greek two-year notes dropped yesterday, pushing the yield up 676 basis points, or 6.76 percentage points, to a staggering 171 percent. It climbed to 184.56 percent, the most on record, on Dec. 10. The Greek security maturing in October 2022 advanced for a seventh day, with the yield sliding 11 basis points to 33.7 percent.
Horst Reichenbach, head of the European Commission’s unit to help rebuild the Greek economy, said yesterday on German TV channel ARD;
Things are moving ahead slowly, we should not expect any miracles. We must be more generous as far as timeframes go when it comes to Greece’s reforms. It’s clear the Greeks have been forced to make enormous sacrifices, and in many areas. So strikes and demonstrations are not that surprising.
On the other hand, the political class knows that it must negotiate, that it must perform, that it must convince creditors, and that something must change in Greece. The Greeks are good at making plans but not so good at implementing them. Our job is to implement existing plans, to advance this capacity and strengthen it.
No one I speak with dares imagine what would happen if the coming weeks to not lead to a good result, if the private banks’ participation cannot be agreed and if the next tranche of aid is not paid out.
Fitch Ratings has said the October agreement would amount to a “default event” once implemented, while the International Swaps and Derivatives Association has said it wouldn’t trigger credit-default swaps bought by investors as insurance against the country failing to meet its obligations. Whilst on the subject of Fitch, the smallest of the big three agencies, its senior director, Ed Parker, stated at a Fitch conference in Madrid today that its review of six eurozone states would result in downgrades of one to two notches for most of these countries. The agency put Belgium, Spain, Slovenia, Italy, Ireland and Cyprus on negative watch towards the end of 2011. Its review is set to be concluded by the end of January.
S&P stripped France and Austria of their top-notch triple-A ratings last Friday and downgraded seven other eurozone countries. Portugal and Cyprus were relegated to junk status. The ratings of Cyprus, Italy, Portugal and Spain were cut by two notches. Austria, France, Malta, Slovakia and Slovenia were all cut by one notch.
ECB overnight lending to banks rose again, to €3.3bn from €2.3bn the previous day. At the same time, funds deposited with the central bank fell sharply, to €395bn from €528bn.
USA Debt Ceiling
I’ll cover the USA debt ceiling raise in another article, but for now it’s interesting to note that the mainstream media hardly gave any recognition to the fact that the motion to raise the ceiling was rejected by USA politicians yesterday, as Ben Bernanke continues to be the wizard of Oz behind the curtain the USA has in fact actually simplistically, similar to Greece but in a stellar scale, run out of money. The increase would push the U.S. debt ceiling to $16.394 trillion, a raise of circa $2.4 trillion since August 2011. The U.S. Treasury reached the previous limit at the end of December, and has been using special accounting manoeuvres to delay the increase in order to allow for the vote. On Tuesday the Treasury started what amounts to looking down sofas in the Oval office for loose change, in desperation they’re ‘dipping into’ a federal pension fund so they can continue selling debt securities, it’s also accessed the Exchange Stabilisation Fund.
European equities rose for a fourth day and the euro strengthened as Spain sold more bonds than its planned target. Copper climbed to a four-month high due to signs that China will relax credit controls.
The Stoxx Europe 600 Index had gained 0.2 percent 10:00 a.m. in London, extending a five-month high. Standard & Poor’s 500 futures slipped 0.1 percent, having climbed as much as 0.4 percent earlier in the session. The euro rose 0.3 percent to $1.2890 and the cost of insuring European sovereign debt fell to the lowest in more than six weeks. Spanish 10-year yields rose five basis points to 5.20 percent, while French yields fell two basis points to 3.12 percent after reaching 3.16 percent, the most since Jan. 12. Copper jumped 1.7 percent.
Market snapshot at 10:30 am GMT (UK time)
Asia/Pacific markets enjoyed a positive session, the Nikkei closed up 1.04%, the Hang Seng closed up 1.3% and the CSI closed up 1.91%. the ASX 200 closed flat down 0.07%. European bourse indices have been positive the successful debt auctions by Spain and France helping to keep the positive mood seen over the past few days buoyant. The STOXX 50 is up 0.46%, the FTSE is up 0.14%, the CAC is up 0.76%, the DAX is up 0.19%. The SPX equity index future is down 0.7%. ICE Brent crude is up $0.84 a barrel whilst Comex gold is up $4.6 an ounce.
Economic calendar release data to be mindful of during the afternoon session
13:30 US – CPI December
13:30 US – Housing Starts December
13:30 US – Building Permits December
13:30 US – Initial & Continuing Jobless Claims Weekly
15:00 US – Philadelphia Fed January
A Bloomberg survey forecasts initial jobless claims of 384,000 for week ending 14 Janaury, compared with the previous figure of 399,000. A similar survey predicts a figure of 3,590,000 for continuing claims (week ending 07 January), compared to the previous release of 3,628,000.