Euro zone leaders reach debt deal; Gold, Silver demand up/price up $100/oz on week

   In Brussels, European leaders alongside the IMF negotiated with the financial institutions that own Greek debt in the form of bonds. They struck a number of key agreements the main one being a reduction in the value of Greek bond debt by half (banks take on the 50% loss on the nominal value of those bonds) wiping out $100B worth of debt commitments, bringing debt to a more managable level (120% of GDP down from 160%). Some of the insurers affected such as France's Groupama (wrote 2 billion euro worth of CDS) could bear an even greater burden due to their issuance of credit default swaps (CDS contracts) which they'd have to honour if it's determined that a credit event has taken place (unlikely though given that the deal was not forced on either party). CDS contracts on Greek debt stand at $75 billion up 50% since 2009. To woo insurance companies, the EU made available to it a €30B+ credit. Also helping Greece; Government crackdown on corruption which could increase tax revenue by as much as €1.2B in 2011 (will force more businesses to collect taxes on sales).

Just because Greece was taken care of doesn't mean the European situtation has stabilized; Italian bond rates are currently at 6.5% (November 2011, was 5.867% on Oct 27) up from 4.6% in June 2011 meaning that Italy needs to raise €600 billion from private investors over the next three years just to finance its current debt level. In comparison, it was when the ten year Greek bond yield initially hit 8% that Greek debt became unmanageable. To deal with that problem the European Financial Stability Facility (EFSF) increased its available funds from €440 billion to €1.0 trillion euros (US$1.4 trillion) giving more security to Spain and Italy at least for the next couple years. Problems at the negotiating table remain an issue due to differences between Germany and France. News of the deal pushed the euro to a 7 week high against the US dollar ($1.42). Update: On November 3rd the yield on Greece's 2 year bond topped 100% for the first time.
2010 deficit to gdp ratio by country: UK: 10.4% (government debt is 80% of gdp), Spain 9.2% (Spain's unemployment rate suprassed 20% in 2010, total government debt to gdp ratio is 60%), France 7% (gov debt 81% of gdp), Italy 4.6% (gov debt 119% of gdp, austerity has included cutting back on public holidays). (CBC: TSX, loonie, soar on Europe crisis plan) The budget deficits in most of those countries is a direct result of deflation due to prices being too high/governments of the weak economies having no control over the currency (monetary policy). Also during the week, the EU approved another €130B bailout package.
Here is where Greece is coming from, Last year they had 800,000 civil servents collecting $48,000 annually in full pensions, those pensioners became eligible for that at age 52. New austerity measures are likey to impact those people significantly. European banks typically leverage about 80 times (debt used to acquire additional assets), that puts the EU in a more preciarious situation than the United States (40 times leverage). More info Buyers of Greek Bonds Choose only 1 of 4

Update - A new problem has since been acknowledged: The European Stability Fund is having a difficult time attracting investors. Canada has already said no to investment while China has "no concrete plans". The Fund recently delayed a €3B bond sale citing market conditions.

Gold is up again! Gold soared by 1.4% to $1,747.70 (after reaching a one month high of $1,728.11/oz, up half a percent before the day even began) as demand remains strong in China (high inflation, economic uncertainty, real estate bubble) and the rest of the world where many still view the EU's most recent deal as only a temporary fix that doesn't solve the root of the problem. SPDR Gold Shares added 16.645 tonnes over the last three sessions. Silver was up 5.77% or $1.80. There's also a temporary slowdown in demand from India (Diwali festival of lights festivities are ongoing; Diwali is a five day festival however the entire event including other festivities runs from the middle of October to the middle of November, most of its gold demand came in preparation for the festival) and Thailand (recovering from the worst floods in fifty years). In India, gold trades on the Multi Commodity Exchange (MCX) where the price is commonly listed per 10 grams. Indian gold demand was up 38% in the second quarter of 2011 and 29% in the last 12 months. Just to give you an idea of how unprecedented the price of gold is today; Over history, the last bull market high was $850/oz.

If, as many suggest, the People's Republic of China lets the RMB increase in value relative to the USD, that will weaken demand for gold in the short term as investors see the new exchange rate as a sign of economic stability but in the long run, the stronger RMB will increase Chinese demand for Gold due to its greater purchasing power. Also, a stronger RMB will raise Chinese import demand, indirectly increasing Gold demand from abroad too.
Platinum group metals increase Platinum was up 2.77% ($44.2/oz) by the end of the trading day Thursday to $1,641.4/oz. Platinum, used in everything from surgical equipment to white gold plating to catalytic converters, is produced at a rate of only 5-6M ounces a year (5-10% as much as gold). South Africa produces 80% of the world's platinum. Spot palladium up 2.78% to $665/oz reaching another one month high (also recorded one month high the day before). Palladium began the year around $799.5/oz but since then has dropped 20%, platinum began the year at around $1770/oz but has dropped 7.8% since.

Other Notes: In the July-September 2011 period the US economy grew 2.5% up from the 2.3% estimate.
Total EU-Canada (ex UK) trade is $50 billion (6% of total Canadian trade). News of the Greek debt deal boosted the exchange rates of a number of currencies against the American dollar however not versus the Chinese Yuan or Japan's Yen (Euro up 2% to US$1.42, Canadian dollar up 1.5 cents to above parity at US$101.02). Many non US currencies actually strengthened versus the euro and dollar (US & Cdn).
Sony buys out its partnership with Ericsson for $1.5B giving Sony complete control over its smartphone business, allowing it integrate more of its products and software. Ericsson will now be able to focus more on its wireless technologies. Total world debt represents about 5X total GNP.

August 8, 2011: Stocks Fall Hard, Dow Records Its Second Largest Loss Since 2008, In Just Two Days; Credit Swap Prices Rise By Record Amount (insurance, banks)

On Friday, August 5, 2011 the Dow Jones recorded its largest single day loss since the 2008 recessionary period, just following that the S&P downgraded its credit rating to AA+ from AAA (even though other debt-laden countries such as France were allowed to keep their AAA rating) and another record breaking day ensued on Monday, August 8 when the Dow fell twice as much, 635 points (5.55%). All three American indices fell by a significant amount (S&P 500 6.66%, Nasdaq 6.90%), that compares to drops of 3.77% in Shanghai, 2.18% in Japan, 2.17% in Hong Kong, 3.39% in the UK and 4.04% in Toronto.

Investor confidence is also at a low point evidenced by the rising popularity of Credit Default Swaps (CDS, if a government default occurs, holders of the bond are able to exchange it with the seller of the CDS for its face value less value of defaulted debt, if there's no default, the seller earns an annual rate of interest, 1bp = 1 basis point = $1000 annually on contract protecting $10 million worth of debt). Overall, the average credit swap for the 6 biggest banks by assets was 32.3% higher to 210.9 bp (highest since May 2009). Bank of America default swaps rose 42.2% (to 295 bp) at the same time AIG was suing it for $10 billion in losses claimed on mortgage bond investments, Morgan Stanley swaps up 40.1% to 280.1. Swaps on the biggest insurers was up to its highest level since July 2010. (SFGate: Bank of America Leads Surge in Credit Swaps on Downgrade Concern) There was concern also that S&P might lower its ratings of major US banks but it shot down that rumour saying that none of the banks have a higher rating than the AA+ US rating. Though risky, on the year, bonds have had the second highest rate of return second only to gold (price of gold up 43.93% or $527.70 (August 9, 2010 - August 9, 2011).

The market volatility, inflation and overall economic tightening are errily reminiscent of the 2008 recession, the big problem now though is that the US government has used up most of its arsenal (quantitative easing, stimulus) leaving it highly vulnerable. Grmike's advice: Don't take cheap energy for granted! It's the best remedy for an economy on life support. Per kWh of energy production: coal 4 cents, natural gas 9 cents, renewables 23 cents.

As big as the US news was, the potential for a financial armageddon came from Europe where the world's 8th and 12th largest economies (Italy and Spain) are also facing possible defaults down the road as high borrowing rates make it harder to borrow and borrowing is something the countries cannot do without (interest on debt is already very high). The European Central Bank (ECB) risked its own downgrade by buying up Italian and Spanish bonds in a bid to lower interest rates enough to keep those economies afloat. The fix is short term only, it doesn't change the long term outlook for either economy but does have long term negative ramifications for the European Central Bank which has now committed itself to buying €2.5 billion worth of Spanish and Italian bonds, daily; That's a significant increase from the €80 billion worth of debt in total that the ECB invested in Greece, Ireland and Portugal. The move lowered Italy 10 year bond yields (interest rate) by 0.7 to 5.3% and Spain bond yields by 0.9 to 5.14%. The European Reserve Fund has put together a $1.5 trillion rescue package for Italy and Spain, France which is in its own fiscal quagmire will be responsible for a couple hundred billion of that. Can the euro withstand the European debt crisis? Will the bond between EU countries become stronger or weaker? What is an appropriate level of debt? those are just a few of the many questions that have investors frustrated.On August 11, 2011 Italy and France joined Greece, South Korea and a growing list of other countries in banning short selling (borrowing stocks/securities/assets from a broker, selling them to another group with the intent of returning them to the broker some time later) after it was rumoured that short sellers were trying to exploit a French downgrade. A Europe-wide ban is unlikely given the Europe's lack of authority to impose it.

Some other things to take note of

Italy is home to the third largest bond market in the world (valued at about US$ 2 trillion) meaning a bond crisis would have an even more devastating effect on the country. Italy is also the world's 7th leading export nation (US$ 458 billion in 2010).

French banks hold a lot of France's debt, which credit agencies are beginning to take a closer look at. Holding French debt is getting more expensive and that is taking a toll on them, on August 10, 2011 Societe Generale lost around 14% of its market value (down to $24.11 billion), Credit Agricole 11.8% (to $14.59 billion), BNP Paribas 11% (down to $68.12 billion); In Italy, Intesa Sanpaolo lost 15.4% (to $29.45 billion); In Spain, Banco Santander 9.48% (to $70.14 billion) and Banco Bilbao 10.42% ($37.55 billion). BNP Paribas Credit Agricole and Societe Generale rank 2nd, 10th and 18th among all companies in terms of assets ($2.7 trillion, $2.2 trillion and $1.5 trillion (Forbes: March 2011 The Global 2000 List) but their combined market value has fallen to $74 billion about the same as the Royal Bank of Canada (August 10, 2011 at the close of the market) making them severely undervalued (considering Societe Generale earned about the same amount of net income as Royal Bank of Canada ($5.3 versus $5.6 billion), had more than twice as many assets but only half the market capitalization. Further complicating things for France is the 0% 2nd quarter gdp growth announced on August 12, 2011, which follows 0.9% growth in the first three months (business stocks increased which didn't happen in the second quarter, consumer spending ended with the 2010 fiscal year). Only if France's gdp grows by at least 2% in 2011, will it be able to lower deficit to 5.7% of gdp which is important since that could determine whether credit rating agencies downgrade the country's debt.

The Canadian dollar was the only major currency to lose ground against the greenback (August 8, 2011). Possible reasons for that include 0.78% drop in the price of oil (down to US$ 80.45 or about 20% off what it was a couple months ago); even more concerning for Canada is that heavier oil (crude) was down 5.15% to $103.74 a barrel, government policies designed to keep the exchange rate from being too high as to encourage exports (60% of exports go to the USA) and Canada having one of the lowest bank rate/interest rates in the world (was as much as 4X lower than Australian rates). Gains by Canada's gold companies have helped to buffer against losses in other sectors (on August 10th, gains by Canada's gold miners pared losses suffered by oil and technology companies). When oil companies begin to release their second quarter results (Crescent Point Energy, Canada's 12th biggest oil company with $11B in market cap, experienced 158% increase in 2011 2Q earnings, up to C$184.9M or 59% of revenue compared to a loss of C$102M in the previous qtr), they should begin to prop up Toronto's Stock Exchange.
Of concern in Canada is a widening trade deficit; in June it was up to $1.6 billion or $5.2 billion with countries other than the United States making it even harder for the country to lessen its reliance on trade with the USA (in the USA, the trade deficit was $53.1 billion in June, the highest since October 2008). For Canada, both imports and exports fell but exports fell by a wider margin.