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.

Only 1 of 4 Greek Bond Options Attracting Private Investment (coupon of 5% for last 20 yrs) & Update on Greece: Is it doing enough to avoid a default (austerity measures)

   Private bond holders are choosing overwhelmingly only one of the four bond/coupon options being offered by the Institute of International Finance (the one with the highest payout; payout is 5% annually for the last 20 years, 4-4.5% for the first 10), complicating things for the euro zone which previously made a deal with holders of Greek bonds built on the assumption that investors would show just as much interest in the other three (proposal was first made July 21, the other 3 options though having the same net present value, would've provided more flexibility for the eurozone). (Reuters: Investors chose most expensive Greek debt option) The other 3 options are discount bond exchanges rolling over into other financial instruments over the next 15-30 years. Private sector involvement is important considering that over €189B is expected to come from that source before 2020. Greece is issuing the bonds at a 21% net present loss. Any restructuring of deals with bond holders would certainly get a negative response from the markets where there's already speculation that Greece's bailout creditors are trying to shift more of the losses over to private bondholders. (Time.com: Greece's Debt Inspectors Back in Athens on Thursday)

As of today (October 4, 2011) Greece only has enough cash to cover expenses through November (the bailout tranche for November was €8B ($10.9B). The next round of bailout money to keep Greece out of default after November, was put on hold in early October due to news that Greece's deficit for 2011 will be 8.5% of gdp (€18.69B which is higher than the 7.8% of gdp/€17.1B deficit projected earlier); News of the higher deficit was also made worse by the fact that Greek gdp contraction will be greater than first thought (5.5% smaller than 2010 gdp versus the anticipated 3.8% recessionary figure). Greece's gdp shrank for 12 consecutive quarters (last quarter that recorded growth was the one ended August 2008); In contrast Germany's gdp hasn't had a problem growing (two consecutive quarters as recently as January 2011 (ended) when it grew 4% & 3.9%. For German bonds, as of February 14, 2011 the 10 year yield was 3.33% (highest since Jan.14, 2010), 2 year yield 1.41%. Between January and mid February 2011 investors made a 4.3% return from Greek bonds, 0.8% from Spanish and 0.1% from Irish but lost 2.1% from German bonds. The eurozone's rescue fund, which has already provided aid to Ireland and Portugal, is €440 billion ($595B) in size. Also anounced on Tuesday: US Fed will purchase up to $5 billion worth of 8-10 year treasury notes (Due between November 2019 and August 2021) in an attempt to lower long term borrowing costs (buying more bonds helps to lower yields/interest rates). Belgium and France stepped up to the plate when Brussels-based Dexia faced problems stemming from their exposure to Greek debt). The shift over to US treasuries as a safe investment haven (30 year long bond) lowered yield rates to 2.70%, the lowest the yield has been since January 2009. (Bonds rise as Greece debt woes spur bank fears)

This question has come up a lot: Is Greece doing enough to reduce the deficit and finally take responsibility for its own debt? I think it has but I'll let you decide.

Pensions: 1. 20% of any amount over 1200 euro will be taken away (ie €2000 pension will be lowered to €1880). Only about half a million Greeks get pensions over 1200 euro. 2. Pensions going to people younger than 55 will lose 40% of any amount that exceeds €1000 while another three million pensioners will be affected by auxillary pension cuts of up to 50% (that loss is just the beginning for those three million because their pension funds are already insolvent). When people retire they sometimes receive lump sum payments, that will be lowered anywhere from 20% to 30%.

Taxes: Taxes will be rendered on 855,000 low income earners for the first time ever after the tax income threshold was lowered from €8 to €5000 (annual gross income). There's also a reduction in the tax free allowance from 12 to €8,000 that will levy an additional €700 in annual tax burdens on those Greeks affected. Net monthly pay lowered by €150 as early as next month for nearly all of the salaried taxpayers represented among the 855,000 people affected.

On Sunday October 2, 2011 the Greek cabinet completed a plan to reduce staff in the civil service by 30,000 overall. (KCTV5: Greek deficit projected at 8.5% of GDP) That figure seems unfathomable considering the public transport employee representatives stated on September 22 that their staff is already low, 20% lower than it was just a couple months ago.

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).

Making matters worse