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Wednesday, January 18, 2012

$10 TRILLION Liquidity Injection Coming? Credit Suisse Hunkers Down Ahead Of The European Endgame

When yesterday we presented the view from CLSA's Chris Wood that the February 29 LTRO could be €1 Trillion (compared to under €500 billion for the December 21 iteration), we snickered, although we knew quite well that the market response, in stocks and gold, today would be precisely as has transpired. However, after reading the report by Credit Suisse's William Porter, we no longer assign a trivial probability to some ridiculous amount hitting the headlines early in the morning on February 29. Why? Because from this moment on, the market will no longer be preoccupied with a €1 trillion LTRO number as the potential headline, one which in itself would be sufficient to send the Euro tumbling, the USD surging, and provoking an immediate in kind response from the Fed. Instead, the new 'possible' number is just a "little" higher, which intuitively would make sense. After all both S&Pand now Fitch expect Greece to default on March 20 (just to have the event somewhat "priced in"). Which means that in an attempt to front-run the unprecedented liquidity scramble that will certainly result asnobody has any idea what would happen should Greece default in an orderly fashion, let alone disorderly, the only buffer is having cash. Lots of it. A shock and awe liquidity firewall that will leave everyone stunned. How much. According to Credit Suisse the new LTRO number could be up to a gargantuan, and unprecedented, €10 TRILLION!
Here is how the strawman is now put in place for what may the biggest liquidity injection in modern history in just under two months.
February’s second 3-year LTRO looks set to be extremely large. Really extravagant claims (we have heard reports of €10 tn) are probably wide of the mark because this will not be a complete collateral free-for-all (unless NCBs choose to make it so, which for some of them is admittedly an open question; again, see rational player section below). But the idea of path-finder lightning springs to mind (High-speed cameras reveal that lightning evolves “bang BANG”, essentially); the last LTRO has removed any stigma, making managements who do not exploit the value on offer arguably careless at best. This is, on the face of it, very cheap protection indeed against any possibility of a liquidity crisis for three years.
Naturally, if indeed there is anything even remotely resembling a €10 trillion expansion in the ECB's sub €3 trillion balance sheet, all bets will be off as the ratio of the ECB to the Fed assets, a correlation which would imply a sub parity level on the EURUSD would gut corporate earnings in the US, all merely to prevent the disintegration of the Eurozone. And while this event will be welcomed by the Fed initially as it will send stocks exploding to potentially all time highs (and gold to well over $2000/ounce), it will cripple the US manufacturing model unless the Fed immediately responds in kind, and prints outright, and unsterilized, a non-trivial comparable amount. In other words, the world could very well enter the final round of global coordinated currency devaluation, aka FX war, together. Yes, that means coordinated printing by the SNB, BOE, PBoC, BOJ, etc, etc. Simply in a last ditch attempt to preserve the status quo. Which, unfortunately, after the knee jerk reaction, will fail. CS explains why:
But there are many problems, particularly at the systemic level. So, although an eye-catching number may trigger a rally (to be clear: 29 February is an eternity away in the current environment), Greece is a salutary reminder that treating a solvency problem as a liquidity problem, including buying time for solvency to be addressed and other dubious concepts, is a disaster for existing creditors, who are subordinated throughout by the senior rescue funds. It also shows that three years is an eternity and that timescales (such as the possible introduction of resolution regimes) are flexible. It remains unclear to us where the new capital for the European banking system is going to come from if not from existing bondholders and that, in some cases, that must involve senior, in our view. So the LTRO is another example of reducing idiosyncratic risk at the expense of systematizing risk, in our view.

The participating bank needs a plan for refinancing the LTRO; the lack of a plan means that financing will not be forthcoming, in a death spiral. So the massive provision of official liquidity will act as a long-term triage and increases the pressure (albeit over a longer period) to raise capital. It is a free lunch only for stronger banks, in some sense, and at the systemic level is anything but. Rather, it is paid for by those with senior exposure to weaker banks.
In fact, Credit Suisse is openly hunkering down as it now see the "endgame taking shape" - "We do not expect the downgrade of France to have an immediate impact, but it highlights very clearly to us the ultimate issue that has to be tested in the euro area. Will Germany hold together the euro as, when and if France becomes part of the periphery?"
Here is how the European endgame will look, through the prism of game theory.
The Nashing of teeth

We continue to analyse the euro area sovereigns in game theoretic terms, with the game looking from outside like aCDO where value allocation is a function of expected losses and of correlation (distribution of those losses in a tranche structure).

In simplistic terms, we have stated that Portugal cannot rescue Greece (i.e., Greece's creditors), Spain cannot rescue Portugal, Italy cannot rescue Spain, France cannot rescue Italy, but Germany can rescue France.

In equally simplistic terms, we have stated many times that “crises are baked into the cake”.

With the CDO and game theory analysis, we have formally modelled both statements. In the game theory, we concluded that the most likely outcome is a series of ever-deeper crises and relief rallies culminating in a definitive moment. Before that definitive moment, our analysis suggests that both core and periphery parties playing hard-ball leads to an escalation of the crisis, but not calamity. Only at the decisive moment does a “collision” in our game of chicken model lead to catastrophe. We remain convinced that the decisive crisis has not been seen yet.
What we have not done before is put the two statements together. To do so, it strikes us that each “wave” of the series of crises represents the transition of a country or countries to the periphery. We started with the “Greek crisis”, still under way with, at the time of writing, both parties threatening hardball. Then we had the rest of the outer periphery, with Ireland “swerving” rather spectacularly and Portugal not so clear. This led to a set of rescue plans that made the implicit assumption that the periphery would broaden no further.

But the outer periphery was followed by Italy and Spain as the crisis emerged in the summer as truly systemic. The resulting crises have been forestalled, for now, by ECB action (SMP and 3-year LTRO). Now, the (well-flagged) action by S&P hints at the final crisis.

Current news on Greece raises the question of whether the (existing) core wants to “rescue Greece”, amid the usual nonsensical debate about laziness and doctors’ swimming pools. But our analysis suggests a steady narrowing of the core and broadening of the periphery as we head to the ultimate question. Would Germany want to rescue France? And – see the below section on the rationality assumption – would France want to be rescued? We are not gong to futurize French politics, but we note that we are already in a situation where it is not impossible that Le Pen eliminates Sarkozy in the first round, according to the polls. By definition, France finding itself on the periphery would damage France’s leadership position in Europe and risk a change in politics. Of course, we think the ultimate answers are “yes” and “yes”, but that frisson of doubt, in light of the consequences of the implications, will keep the market well on its toes.
Putting it all together: the rational national player assumption.
News agencies try to reconstruct the internal national debates of the euro area, which are often carried out fairly openly, it has to be said. But a country often has a simple choice to express to the world, and we model this in our game theory as “hard” or “soft”. We make, thereby, a key assumption, that a country acts in a way that appears rational when viewed externally as a single entity in that single action.

We have complained for years that countries cannot be seen as monoliths. We need to consider the possibility that the outcome of the internal game, since it is not fully transparent to the outside, can superficially seem irrational. Circumstances could be envisioned where a player chooses to play hard in a situation where he knows that it will damage national interests, i.e., playing hard will be worse for it than playing soft. For example, it might be rational for a player within France, lets say le Pen or Sarkozy, to play uncooperatively in the European context, if that is beneficial from a French or individual perspective. Even within the European context, a country playing "irrationally" aggressively can be part of a rational strategy of brinkmanship behaviour. For example, by trying to make a threat look more credible. We could be seeing this in German attitudes to Greece, as we explore below. The corollary is that this can only work up to the penultimate stage of the crisis, as only that way one can try to force the other player to do the right thing in the final stage. Overall, we see the risk to be vigilant with the rational monolithic player assumption in the euro area. And, of course, flexing it does not invalidate our conclusions, it merely points out that getting it wrong is a key risk in the analysis. This is framed by the historical context, where Europe has achieved disastrous outcomes under the incentives of the time.

The risk of the simplification can be highlighted by a simple example. The rational action of the College of Cardinals under the post-13th century papal conclave is collectively to fill the vacant Papacy immediately. Individually, as well, the cardinals have the same incentive; no matter how beautiful the ceiling of the Sistine Chapel, they can see it anytime. So any sensible rational expectation of the smoke colour, based on treating the conclave as a single rational entity, is white at all times, including on the first day. That assumption would have led our observer astray by 82 rounds over 50 days between 1830 and 1831. Similarly, as we head into elections in France, already referred to above, and to Germany, the assumption is likely to come under some stress. We think that understanding of the internal “game” is most central in these two countries, particularly Germany. This is because, in our view, the periphery playing “soft”, rationally or irrationally, cannot make the crisis resolve on its own. Or, austerity is not sufficient. The central question, now hoving into view, is whether France and Germany, when the time comes, can co-operate. By then France may be in an embarrassingly inferior position, possibly forcing a Nationalist response that is apparently irrational when viewed externally but rational when viewed in consideration of internal incentives.

Between Greece, French elections and the downgrades, the situation remains as deeply uncertain as ever. The effect of the LTRO may last a while longer, buoyed by a negative market, but we are on the alert for a turn.
Finally, CS' appendix on why what started with Greece, will likely end with it:
We no longer publish views on Greece because the situation is too fluid to permit it, but we would observe that a key is whether sufficient voluntary participation can be induced to enable a CAC to be credibly introduced. In this case, “free-loading” on anything other than the 20 March bond becomes dangerous if a further restructuring is thought necessary, which we regard as the market’s expectation. In a game-theoretic sense, which is still the only way we can look at it, the dominant strategy, if a restructuring on more burdensome terms is expected with probability 1, is to volunteer now. The exception is the basis holders but, as we have pointed out many times, CDS are a tiny fraction of bond outstandings so basis holders are unlikely to tip the balance. Free-loading on March is a much more subtle game given that there is not time for a second round and the authorities would still like to avoid a hard event. What would they be willing to pay for this? How much 20 March is held outside the ECB and banks which are under official influence? etc. As we write, both parties seem to be playing “hard”, suggesting a suboptimal outcome of a hard default. As examined above, at this relatively early stage of the game we should expect a “swerve”, most probably by the core. But continued playing hard might be the outcome of rational behaviour by either party, given the multi-stage nature of the game. What message would paying the 20 March in full on Greece’s behalf give to the rest of the periphery?
The last bolded sentence is precisely what we warned about last week when we said that should Greece devolve into a full out coercive restructuring, the one real question would be: "who is next?"
Needless to say, if Credit Suisse is even 20% correct in its estimates, and the more we think about it, the more plausible it is that 20 days ahead of the Greek default the ECB will bend over to provide every last penny European banks may need, and then some, to firewall exposure fall out (since none except for UniCredit actually did a capital raise and we all saw what happened then), then all bets are truly off. Should the ECB indeed escalate events to this degree, then we are about to leave the paradigm started with the late 2008 bailout of Lehman, and enter one in which every incremental swing in the global socio-economic sinewave could well be the last.
As such, attempting to predict what happens after becomes futile.
Incidentally, those curious what a €10 trillion expansion to the ECB's balance sheet without a proportionate response by the Fed, would do to balance sheet correlation, and implicitly, to the EURUSD pair (the correlation was explained previously here), this presents it vividly.

Zero Hedge

Greece, creditors in new push to avoid costly default

(Reuters) - Greece and its creditors were back at the drawing board on all terms of a planned bond swap on Wednesday in a last-ditch bid to overcome an impasse in talks and stave off a painful default.

Talks broke down last week over the interest rate Greece will offer on new bonds and a plan to enforce investor losses. Both sticking points were on the table when negotiations resumed in the late afternoon in Athens between the two sides.

"All variables are being considered," said a Greek government official, who requested anonymity, calling the interest rate on the new bonds Greece will offer in the swap the most "visible" aspect of the talks.

"After the temporary pause in the negotiations last week, the parties have reconsidered and are back," the official added.

Athens needs a deal with the private sector within days to avoid going bankrupt when 14.5 billion euros (12 billion pounds) of bond redemptions fall due in late March.

Greece's foreign lenders have warned no further aid will be released until the bond swap deal is done, and investors fear a disorderly default could provoke a shock to the financial system that would tip the global economy into recession.

With analysts warning the costs of failure are too high for either side to leave without agreement, earlier worries of a prolonged stalemate have given way to hopes of a deal by the end of the week or early next week.

"In the end, something is likely to be agreed partly because no side is going to want to see a disorderly default," said Ben May, European economist at London-based Capital Economics.

"A lot of what's been going on is manoeuvring from both sides to get a better deal. There's likely to be an element of brinkmanship taking place from both sides in order to get the best terms."

One source close to the talks said logic dictated that a deal will come together one way or the other and a banking source close to negotiations said it was imperative a deal is reached by early next week at the latest.

Greek officials were cautious about predicting the outcome of the talks, and Finance Minister Evangelos Venizelos told parliament the talks were at a "delicate" stage.

"The only thing I can say at this stage is that we're optimistic," said another Greek government official who declined to be named.

The talks between Prime Minister Lucas Papademos and Charles Dallara, head of the International Institute of Finance representing the private creditors began just after 1600 GMT.


Greece has ratcheted up pressure on hedge funds and other holders of Greek debt ahead of the talks by threatening to consider legislation that forces creditors to take losses if not enough bondholders signed up to the deal.

A law on so-called collective action clauses forcing holdouts to accept losses could be drafted if Greece deems the participation rate unsatisfactory, Greek officials said.

A debt swap is necessary to clinch a new rescue package for Greece but it will push Athens into temporary default irrespective of the size of investor losses, a senior analyst at Fitch Ratings told Reuters on Wednesday. He said the terms of the agreement will influence the rating of the new bonds.

"We would mark it appropriately with a default rating, which we would probably maintain for a short period before we put the replacement bonds on a new rating that we have not decided on yet," Fitch's lead analyst for Greece, Paul Rawkins, said.


Still, hedge funds holding Greek bonds that mature in March may have the strongest hand.

The Greek government wants to swap out that maturing debt for new, lower-yielding bonds and a small cash payment as part of a programme in which bondholders would voluntarily write down 100 billion euros from Greece's debt of over 350 billion euros.

But some hedge funds in London and New York that snapped up chunks of Greece's next big maturing bond, the March 20 2012 issue, for around 40 cents on the euro, are balking.

A team of European Union, International Monetary Fund and European Central Bank officials are already combing through Greece's books as part of efforts to finalise the new, 130 billion euro rescue package the country needs to stay afloat.

The bailout, together with structural reforms, aim to reduce Greece's debt to a more manageable 120 percent of gross domestic product in 2020 from about 160 percent now.

The debt swap deal would see creditors voluntarily giving up 50 percent of the nominal value of the bonds they hold.

The real loss, known as net present value, is estimated at between 60 and 70 percent depending on the coupon, maturity and discount rate. The hit on individual banks would also depend on the price at which they bought Greek bonds.

The main stumbling block in the negotiations has been the low coupon, or interest payment, offered on the new bonds.

Bloomberg News quoted a U.S. hedge fund manager as saying that Greece was nearing a deal that would give creditors cash and securities with a market value of about 32 cents per euro of government debt.

Bruce Richards, CEO of New York-based Marathon Asset Management LP which is a member of a Greek creditors' committee, told Bloomberg he was "highly confident the deal will get done."

No one was immediately available at Marathon to confirm the comments.

The talks come against a backdrop of rising anger among ordinary Greeks, who have been hit hard by the tax increases and spending cuts which were part of a first bailout agreed in 2010.

They now fear more austerity and wage cuts with the second bailout and thousands marched to parliament on Tuesday in an anti-austerity protest, waving banners reading "EU, IMF out!."

Greece has entered its fifth consecutive year of austerity-fuelled recession, with unemployment at record highs and nearly one in two youth out of work.

A 48-hour strike by journalists on Tuesday and Wednesday, part of a broader protest by workers in Athens, was also timed to coincide with the arrival of a technical mission from the "troika" of foreign lenders this week.

Iran planning attacks on U.S. targets in Turkey

The Turkish newspaper Zaman reported Tuesday that Turkish intelligence has warned that Iran’s Revolutionary Guard is planning attacks on the American embassy and American consulates throughout the country.

According to the report, Turkey’s security forces have warned police in all 81 districts throughout the country, telling them to remain alert and vigilant.

The report states that according to Turkish intelligence, it is likely that a cell of the Quds Unit of Iran’s Revolutionary Guard is planning to break into the U.S. Embassy or one of its consulates. The intelligence further stated that the cell is planning on staying at a five-star hotel in the city in which the attack is being planned, cautioning forces to focus on foreigners residing in those hotels.

Moreover, the report states that Hezbollah may take part in such attacks against Americans.

According to Turkish intelligence, Iran is attempting to support the operations of small, illegal Turkish organizations in the wake of Turkey’s decision to establish a NATO radar within its territory, and due to Ankara’s condemnation of the Assad regime in Syria.


Central banks increase gold lending

Central banks increased the amount of gold they lent for the first time in a decade in 2011
Gold prices are set to power to a new record above $2,000 in the next year or so, but the fresh peak will come as it nears the end of a decade-long bull run, GFMS says
Spot gold traded steady at $1,650.84 an ounce Wednesday, off the one-month high hit in the previous session on improved global economic outlook, while investors shifted focus once again to the troubles of euro zone
Centerra Gold has said pending discussion of the water and forest law amendment in the Mongolian parliament has delayed gold production from the Gatsuurt project
West Africa-focused miner Avion Gold has boosted gold resources by some 1.1 million indicated ounces and 500,000 inferred ounces from its main exploration projects in Mali and Burkina Faso
Gold production of Argonaut Gold went up 8% to 19,700 ounces in the last quarter of 2011; total production touched 72,000 ounces in 2011
British Columbia-based Western Star Auction will be auctioning the world’s largest cut emerald, Teodora, weighing 57,000 carats or 25 pounds on 28 January
Navaho Gold has received the final assays from drilling at the Rose Mine Project in Nevada, the US, which show elevated gold intercepts in three of the 10 holes drilled
Canada-based Kinross Gold erased 19.46% of its value, with shares dropping to $10.65 a share on Tuesday, after it disclosed Tasiast project setback
Canada's Primero Mining said fourth quarterly gold production fell about 7% to 23,100 ounces, hurt by lower ore grades and lack of grade predictability

City Wire

Oil rises as Saudi seeks to keep prices high

AFP - Oil prices climbed Tuesday after Saudi Arabia said it would like to keep prices high at around $100 a barrel and in the wake of positive economic data from energy-hungry China, analysts said.

New York's main contract, West Texas Intermediate crude for delivery in February, jumped $2.06 to $100.76 a barrel.

Brent North Sea crude for March gained $1.12 to $112.46 in London midday deals.

"Crude is trading higher, bolstered by news from an interview with the Saudi oil minister that Saudi Arabia is aiming to keep the price of oil at $100 per barrel or above, to finance its increasing domestic expenditure," said Westhouse Securities analyst Peter Bassett.

Saudi Oil Minister Ali al-Naimi, in an interview with CNN on Monday, also said that his country's output could be boosted by around 2.6 million barrels per day to offset a potential cut in Iranian exports.

But Iran on Tuesday warned Saudi Arabia to reconsider its vow to make up for any shortfall, saying Riyadh's pledge to step into the market was unfriendly.

The United States and the European Union are ramping up sanctions on Iran aimed at sharply reducing Iran's oil exports and income in the hope of halting its alleged development of atomic weapons.

The oil market also reacted to news that China's economy grew by 8.9 percent in the last quarter of 2011, which although slower than the previous three months was better than the 8.6 percent expected.

China is the biggest consumer of energy and the second largest economy in the world.

Price gains were limited, however, by news that Nigeria's unions had ended a week-long strike over fuel costs following the president's decision to reduce petrol prices.

The strike begun on January 9 and had shut down Africa's most populous nation and largest oil producer, bringing tens of thousands out into the streets in protest.

France 24

Huge ID project offers multitude of challenges

Shambhu Sharma had arrived with nothing that could prove who he was. He had no passport, no ration book, no voter identity card or anything similar. Four years ago, he said, he was pick-pocketed and everything was taken.

As India goes about trying to provide a unique identity number to each of its citizens, it is people like Sharma who provide officials with some of the most testing challenges.

The Government's scheme accepts 17 separate forms of photo identification and 32 as proof of address, but some individuals genuinely have nothing.

"It creates many problems for me. I cannot open a bank account, or buy rail tickets or a gas-cylinder connection. It means I have to get one on the black market," sighed Sharma, who works for an non-governmental organisation. "I cannot even buy a sim card."

The task being undertaken by the authorities is enormous. India's population is about 1.2 billion and growing all the time. By 2030 it is expected to have overtaken its Asian neighbour, China, reaching more than 1.53 billion.

The Indian Government is dedicated to giving each of its citizens a unique, 12-digit number under a scheme called Aadhaar, or Foundation. By the time it is completed it will be 10 times bigger than the world's current largest biometric database. Some estimates say it will cost a total of $36 billion.

The reasoning behind the scheme is simple: officials believe giving citizens such a number will make the provision and distribution of services more efficient and help to reduce the corruption that infects Indian society. It will probably also be used to help to control and monitor illegal immigration.

When Prime Minister Manmohan Singh began the scheme 18 months ago in a village in the state of Maharashtra - handing out ID numbers to 10 members of a tribal community - he declared: "The poor did not have any identity proof. Due to this shortcoming, they could not open bank accounts or get ration cards. They could not avail the benefits of Government welfare programmes because of this, and many times these benefits were pocketed by others. We will give every opportunity to live a dignified life to our poor."

The man overseeing the task is Nandan Nilekani, an IT and software pioneer who made his reputation and billion-dollar fortune as a founder of the technology giant Infosys.

In 2009, the entrepreneur left Infosys to head the Government's ID number project. Nilekani has given voice to several of the difficulties confronting the task and yet he says good progress is being made.

"We have enrolled 110 million people, we have issued 60 million numbers. By March we will have enrolled 200 million but 600 million is the goal by 2014."

It is not just the sheer weight of numbers Nilekani is dealing with, or the technical and logical challenges. He has had to confront a legendarily slow-moving bureaucracy, as well as concerns from civil rights activists over privacy issues. The Government will also have to prepare its various departments and service providers with the technology and know-how to make use of the number.

"For us this about empowerment. It's about people who don't have an acknowledged existence by the state, suddenly going from a world of no ID, to a world of online ID. They are leap-frogging in some sense," said Nilekani.

He sees a clear parallel between what he is doing and the recent anti-corruption movement that has gathered momentum in India, led by the social activist Anna Hazare, whose demand for a national ombudsman captured the attention and the imagination of the country's middle-class.

"It's especially relevant to what you would call retail corruption, which people face in their everyday lives. Using technology, you can create a portable model of benefits."

He explained that if someone was not getting good treatment from, for instance, a particular food distribution store, they could go elsewhere and use their ID number there.

Critics have raised concerns about the project's cost, the efficiency of the technology, the role of the Government and the civil liberties implications of creating such a database.

One of the most vocal has been R. Ramakumar, an associate professor at the Tata Institute of Social Sciences. On the issue of civil liberties, he asked: "How will the home ministry use this information?"

Enrolment is voluntary but the Government has advertised heavily to promote the scheme and set up centres in villages and towns across the country.

Recently, a team working out of a former factory in the north of Delhi was inputting data and taking fingerprints and retinal scans.

One inputter, Rajendra Singh, said a common problem was grease or dirt on people's hands preventing the fingerprint machine from working. He said it took between two and five minutes to register someone and give them a receipt. (The actual 12-digit number gets sent in the post).

Harpreet Singh, who has a business selling old car parts, was sitting as his fingerprints and retinal scan were completed. He said he had registered eight family members and returned to do himself.

"It will make things easier because I will have just one number for everything."

Another centre, near one of the city's railway stations, was equipped for dealing with the more difficult cases, when people had no real documents or paperwork.

In those cases, an individual can use a photograph clipped to a letter that has been signed by an MP or local elected politician.

In the case of Sharma, the man who was pick-pocketed, the problem was solved by a government-appointed "introducer", an individual who has already been registered themselves and who knows the person individually. For Sharma, a man who worked nearby, Kersher Singh Rawat, was prepared vouch for him.

Sharma sat down as a young woman entered his biographical details into a laptop computer. He then had the retinal scan and prints were taken of each of his fingers.

"I now plan to get a legal gas cylinder and pay the government price," he said, explaining how he intended to make use of his new ID. "I hope to get a voter card and a ration card."


Gold predicted to peak at $2,000 as precious metal ends bull run

As the global economic backdrop improves and investment in the "safe haven" metal wanes - "probably some time next year" - the price will retreat, according to respected metals consultancy GFMS.

Worries over nations' debt problems and currency devaluation have helped gold rise more than 600pc over the past 10 years, passing $1,920 an ounce in September.

Gold is likely to soar past that previous record in the final three months of this year or the first quarter of 2013, possibly breaking above the $2,000 mark, GFMS believes.

"Concern over nearly all currencies' long-term value remains acute, and this includes the US dollar, which to a large extent has found favour simply as the 'least bad' option, especially in light of growing fears over the break-up of the eurozone," GFMS said in an update to its annual gold survey.

However, the consultancy sees the gold price weakening as the broader financial landscape normalises over the next few years. Last year investors hunting for a refuge from the turmoil saw the value of gold transactions around the world hit a record at roughly $80bn, even though it slipped in terms of tonnage, said GFMS.

Within that, central banks are estimated to have bought a net 430 tonnes in 2011, a more than five-fold increase on the previous year and the highest level recorded since 1964.

Their buying was driven by "notably higher enthusiasm" from some emerging market nations, believed to be a reaction to the debt problems of other countries and also a move to diversify rising foreign exchange reserves.

The update followed a recent survey of gold miners by PwC which found they believe gold will hit $2,000 this year.

The Telegraph

Bank of Italy forecasts sharper recession in 2012

AFP - The Bank of Italy forecast Tuesday an economic contraction of between 1.2 and 1.5 percent this year depending on borrowing costs, a much sharper decline than the government's estimate of 0.4 percent.

"The uncertainty that surrounds the medium-term perspectives of the Italian economy ... are extraordinarily high and are directly linked to the evolution of the eurozone debt crisis," the central bank said in its economic bulletin.

The bank advanced two scenarios, each based on interest Italy must offer to borrow on sovereign bond markets.

The first scenario was calculated with a rate of about 7.0 percent currently demanded by investors for 10-year Italian debt and widely considered to be unsustainable.

Under these circumstances, the bank said, the Italian economy would contract by 1.5 percent in 2012 and would remain stalled in 2013.

In a second scenario, under which borrowing prices fell by 2.0 percentage points from current levels, the economy would contract by a 1.2 percent in 2012 before rebounding by 0.8 percent next year.

Italy, the eurozone's third largest economy, saw economic activity contract by 0.2 percent in the third quarter of 2011, according to official data.

The central bank expected it to have shrunk by an additional 0.5 percent in the last three months of the year, which would give an annual growth rate of 0.4 percent.

Italy's debt pile of more than 1.9 trillion dollars ($2.4 billion), equivalent to about 120 percent of gross domestic product, has policymakers and investors on edge.

It must borrow around 450 billion euros this year, in large part to honour payments related to that debt.

Meanwhile, the central bank noted that a pick-up in employment that began in late 2010 "stopped in the final months of last year."

It said that "the priority is now the creation of conditions to relaunch the Italian economy" following several austerity plans designed to reduce the public deficit and debt, the last of which was adopted in late December.

The government of Prime Minister Mario Monti is expected to approve Friday a programme designed to increase economic competition and reform labour laws.

Finally, the 2011 public deficit should be close to Rome's target of 3.8 percent, the central bank said.

That nonetheless still exceeds the eurozone target of no more than 3.0 percent.

France 24

Treasury dips into pension funds to avoid debt

WASHINGTON (Reuters) - The Treasury on Tuesday started dipping into federal pension funds in order to give the Obama administration more credit to pay government bills.

"I will be unable to invest fully" the federal employees retirement system fund beginning Tuesday, Treasury Secretary Timothy Geithner said in a letter to Democratic and Republican leaders in Congress.

The House of Representatives is expected to vote on Wednesday on the Obama administration's request to raise the country's legal debt limit to $16.394 trillion.

However, unless the lower chamber and the Senate are able to shore up enough votes to block the White House request, the debt limit will be increased by $1.2 trillion next Friday and a repeat of last year's debt ceiling debacle will be averted.

Geithner said Treasury started suspending reinvestments in a federal pension fund known as the G-Fund -- a tool Treasury has had to employ six times over the past 20 years in order to keep the country below the statutory debt limit.

The Treasury Department has already tapped another seldom-used fund in order to allow the government to continue borrowing without running afoul of the country's laws.

Chicago Tribune

Did Israel postpone joint drill with US?

WASHINGTON – The postponement of a major US-Israel drill planned for the coming weeks was initiated by Jerusalem, according to US media reports.

Israel reportedly asked to put off the exercise because of defense budget cuts, Jewish news agency JTA reported Tuesday. Meanwhile, Yahoo News, quoting US defense officials, said the postponement request came directly from Defense Minister Ehud Barak.

"Minister Barak called Secretary Panetta and asked if we could take the exercise off the calendar. The Israelis were concerned that they did not have the resources in place to carry it out effectively," a US official was quoted as saying by Jeffrey Goldberg of The Atlantic.

The postponed drill was slated to be held within weeks, yet now it appears it will not be held before the second half of the year, at the earliest.

According to Yahoo, American sources expressed concerns that Israel's request to put off the aerial defense exercise was a warning that Jerusalem is keeping all options open, including a possible strike on Iran's nuclear facilities in the spring.

Pentagon spokesman, John Kirby, said the exercise was canceled for routine reasons of wanting “optimum participation” by both sides, JTA reported.

“It is not at all uncommon for routine exercises to be postponed,” Kirby said. “There were a variety of factors at play in this case, but in general, leaders from both sides believe that optimum participation by all units is best achieved later in the year. We remain dedicated to this exercise and naturally want it to be as robust and as productive as it can be.”

According to earlier reports, Israeli officials said the Americans asked to delay the drill so as not to heighten tensions with Iran over its nuclear program.


'SOPA turns anyone who runs a site into policeman'

If this law passed I will no be able to post any more, at least as Im been doing it now

Greece Running Out of Time as Debt Talks Stumble

Greece is running out of time to avoid becoming the first euro nation to default after talks with lenders stalled ahead of a March 20 bond payment that will cost 14.5 billion euros ($18 billion) the country doesn’t have.

Prime Minister Lucas Papademos is due to meet tomorrow with a group representing private Greek bondholders after a five-day break to discuss forgiving at least half of the nation’s debt in the euro area’s first sovereign restructuring. Greece’s official creditors begin talks Jan. 20 on spending curbs and budget cuts that will determine whether to disburse additional aid. Edward Parker, a managing director at Fitch Ratings in London, said today Greece is unlikely to make next month’s bond payment.

“The next few weeks will be the most difficult in the Greek program,” said Athanasios Vamvakidis, a foreign-exchange strategist at Bank of America Corp. in London. “All this needs to be completed by mid-March to avoid a disorderly default. Not an impossible task, but clearly very challenging with very much at stake.”

Until the debt swap and loan accord are in place, the country faces “acute economic risks,” Papademos said on Jan. 13. Greece sold 1.625 billion euros of 13-week Treasury bills today at a yield of 4.64 percent, with short-maturity debt sales the only source of market financing available for the nation. Bonds repayable in 2022 are worth about a third of their face value.
Tough Talking

Greece and its creditors are “running out of time,” Moritz Kraemer, the head of sovereign ratings at Standard & Poor’s Corp., said in an interview yesterday with Andrea Catherwood on Bloomberg Television’s “Last Word.” Kraemer said he can’t say “whether there will be a solution at the end of the current rocky negotiations. There’s a lot of brinkmanship going on right now.”

Concern that Papademos won’t have domestic backing to achieve spending cuts needed to win more funds or that they will further hamper growth helped drive Greek two-year yields to an all-time high of 185 percent on Jan. 10. The yield on Greek benchmark debt maturing in October 2022 fell 46 basis points to 33.55 percent today, after hitting a record of 36.14 percent on Dec. 21.

Greece plans to pay lenders 50 cents for each euro the government borrowed under the terms of a bailout plan agreed on Oct. 26. Its 4 percent notes due in August 2013 trade at about 27 cents. Fitch says an agreement would amount to a “default event” once implemented, while the International Swaps and Derivatives Association says it won’t trigger credit-default swaps bought by investors as insurance against the country failing to meet its obligations.