Greek Bond Swap Deadline Approaches

As we draw closer to deadline for the Greek bond swap, it appears as though Greece will end up attracting enough investors to swap their current Greek bonds for new bonds. This news is positive for the euro (EUR), and we all know that what’s good for the goose is good for the gander, and all we have to do is switch goose for euro, and gander for currencies and metals. For instance, the Australian dollar (AUD) is back above $1.06, and gold is back to $1,700 this morning.

There are a few currencies this morning that are not participating in the euro-led rally. The Japanese yen (JPY), for instance, is getting hammered after Japan printed the largest current account deficit since comparable data began in 1985: 437.3 billion yen. The trend here is not good for Japan, folks. the government debt has been soaring for a decade now, but Japan always had that trade surplus, which feeds the current account. The Japanese don’t have that trade surplus to fall back on any longer. This is where I would normally tell you my opinion, which could be wrong, about how I view yen. But no can do!

The Reserve Bank of New Zealand (RBNZ) met last night (Thursday morning for them!) and left rates unchanged. RBNZ Gov. Alan Bollard has gotten under my skin for so long now, and this is just another example of his ability to do so. Bollard said:

“The domestic economy is showing signs of recovery. Household spending appears to have picked up over the past few months, and a recovery in building activity appears to be under way. That recovery will strengthen as repairs and reconstruction in Canterbury pick up later in the year. High export commodity prices are also helping to support a continuing recovery in domestic activity.”

OK, so that sounds as if he’s ready to remove the emergency rate cuts that were made last year, right? Wrong!

Bollard then went on to say, “RBNZ’s forecasts are not inconsistent with a story that would see rates remaining in one place for much of this year.”

So in other words, he doesn’t want to be different than the other central banks around the world. I would tell Bollard, if I had the chance, the same thing I used to tell my kids when they would say that “all the other kids are doing something.” I would say, “But don’t you want to be better than the other kids?” So Allan Bollard, don’t you want to be better than the other central banks, which allow inflation to build a strong foundation without batting an eye?

This euro-led rally in the currencies and metals this morning leads me to a thought that I heard years ago, back in the ’70s, when I first began my career in the markets. That’s right, I said the ’70s — 1973, to be exact. I know you’re sitting there thinking, “But I’ve seen him, there’s no way he’s that old!” HA! OK, back to the saying. When the markets want to rally, they’ll use any excuse to do so. This is what today’s rally looks like, as the markets are using the fact that Greece is swapping their old bonds for new bonds at HUGE losses to the holders, as a reason to rally.

Think about that for a minute, dear readers. The markets are making lemonade out of lemons, but “they’re never wrong,” right?

Speaking of the euro, the European Central Bank (ECB) is meeting this morning to discuss rates and other things on their collective minds. I expect that ECB president, Mario Draghi, will announce in a bit that the ECB will keep rates unchanged. They are currently at historic lows, so unless the ECB wants to be JUST LIKE the U.S. and Japan with their near-zero and zero interest rates, respectively, the ECB should just sit on their hands.

Yesterday, I saw a story title flash across the screen that the ECB’s balance sheet has soared to 3 trillion euros. Well, as best as I can find on the Internet — and believe me, this is difficult stuff to find — the Fed’s balance sheet is about the same size. So when you consider that the eurozone as a whole has a larger GDP than the U.S., having a balance sheet about the same size doesn’t seem to be so bad.

For those of you keeping score at home:

Global GDP in 2011 was $74.5 trillion
Eurozone $14.8 trillion, or 20%
USA $14.7 trillion, or 20%
China $10.1 trillion, or 14%
Japan $4.3 trillion, or 6%
And rounding out the top five, India at $4.1 trillion, or 5%.

The Bank of Canada (BOC) will also meet today to discuss interest rates. I don’t believe that BOC Gov. Mark Carney has come out of his “bunker” yet, so he’ll keep rates unchanged, as he continues to have a bunker mentality about global problems.

In Australia overnight, Aussie job creation received a hit last month, and lost 15,000 jobs. But don’t go out and start with your impression of Chicken Little here. In December, Australia posted a 36,000 job loss, but that was reversed with a positive 46,000 in January. So we’ll have to wait a month or two to tell if is this is a trend. Somehow I doubt it, as the mines that were flooded last year are coming back on board. Hopefully, Aussie employers don’t do their version of a bunker mentality, because China lowered their GDP target.

Speaking of China, the Chinese applied the brakes once again on renminbi (CNY) appreciation, making that every day this week so far. Speculators are backing away from the renminbi in droves, as the forward markets have some semblance to them. Good riddance to them! The speculators have made dealing in renminbi very difficult for years. So if they never come back, that will be too soon for me.

But what’s with China applying the brakes here? We’ve seen this many times in the past nine years that we’ve dealt in renminbi and followed the Chinese moves. It’s really the opposite of what happens here in the U.S. The Chinese don’t want the markets to believe that the renminbi is a one-way street of appreciation, so they apply the brakes every now and then to remind the markets that it’s not a one-way street.

Whereas the U.S. applies the brakes on the way down, instead of the way up. The U.S. cannot allow all its creditors to believe that they are going to get paid back with inflation — tremendously weakened dollars — which they will, but for now, instead of just allowing the dollar to go to what Doug Casey calls “its intrinsic value,” there are circuit breakers and we have these periods of dollar strength.

So we talked briefly about the Greek bond swap proposal, and I gave you the breakdown of what each bondholder receives. But the problem is that unless Greece attracts enough bondholders that want to swap bonds, the deal falls through. So 90% of total holders is the goal. If that’s not met, then the next deal breaker is 60%, but if 60-90% accept, then the Greeks have to decide to implement CACs (collective action clauses), which would force the holdouts to take losses on their bonds. And if CACs are implemented, then the ISDA people might view this as a default, which would begin to trigger CDS (credit default swaps).

So 90% is the goal for the Greeks. The deadline is around 2 p.m. CST today, but we won’t know the details until tomorrow morning. But for now, the markets are saying they believe that even if the goal isn’t met and CACs are implemented, it’s not going to bring about systemic risk. That’s why they are buying euros this morning and selling dollars.

Before I go to the big finish, I saw this come across yesterday, and immediately began to choke. January consumer credit soared to $17.77 billion versus $10.45 billion forecast. Add to that December’s total of $16.27 billion and what you’ve got here is another trip down the “we spend more than we make” road.

And this also made me choke. From The Wall Street Journal: “Federal Reserve officials are considering a new type of bond-buying program designed to subdue worries about future inflation if they decide to take new steps to boost the economy in the months ahead.

“Under the new approach, the Fed would print new money to buy long-term mortgage or Treasury bonds but effectively tie up that money by borrowing it back for short periods at low rates. The aim of such an approach would be to relieve anxieties that money printing could fuel inflation later, a fear widely expressed by critics of the Fed’s previous efforts to aid the recovery.”

Then this:

“The Dutch Freedom Party has called for a return to the guilder, becoming the first political movement in the eurozone with a large popular base to opt for withdrawal from the single currency.

“‘The euro is not in the interests of the Dutch people,’ said Geert Wilders, the leader of the right-wing populist party with a sixth of the seats in the Dutch parliament. ‘We want to be the master of our own house and our own country, so we say yes to the guilder. Bring it on.’

“Mr. Wilders made his decision after receiving a report by London-based Lombard Street Research concluding that the Netherlands is badly handicapped by euro membership, and that it could cost EMU’s creditor core more than 2.4 trillion euros to hold monetary union together over the next four years. ‘If the politicians in The Hague disagree with our report, let them show the guts to hold a referendum. Let the Dutch people decide,’ he said.”

The Dutch leaders must want something from the eurozone, because they normally fall in line right behind the Germans.

To recap: The Greek bond swap deadline approaches and more holders of Greek bonds have announced that they will participate in the bond swap, thus reducing further the fear factor on the euro. The euro is leading most currencies and metals higher this morning. The yen is not participating, as they posted the largest current account deficit on record for them. And China is applying the brakes just to prove the renminbi is not a one-way street.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning