Greeks Get 83% Participation in Bond Swap

Well, it’s a Jobs Jamboree Friday today, and I’m wondering just what kind of shenanigans the Bureau of Labor Statistics (BLS) will put out of a hat to paint a pretty picture for the government. But before we see the color of the labor report here in the U.S. for February, we have other things to talk about, so let’s not dawdle around!

Regarding the Greek bond swap (GBS), here’s the skinny on the whole operation from The Wall Street Journal this morning:

“Just over 80% of Greece’s private-sector creditors agreed to turn in their bonds for new ones with less than half the face value, touching off a massive debt swap that marks a seminal moment in Europe’s long-frustrated efforts to rescue its most financially vulnerable nation.”

The Greek government announced the results of its proposed restructuring early Friday morning. It said 83% of bondholders had voluntarily submitted to the deal. The government said it would invoke so-called collective action clauses that will impose the exchange on the vast bulk of reluctant creditors, bringing participation up to 96%.

The announcement that the restructuring will go ahead precipitates the largest-ever sovereign debt default and the first for a Western European country in half a century.”

I guess now we wait to see what the ISDA people decide about this invoking of the CACs (collective action clauses). The euro (EUR) has backed off its drive to 1.33, which it was on yesterday, but still remains above 1.32 this morning. This Greek deal does not remove the debt problem from the eurozone, folks. It simply kicks the can down the road, with a lot of tears and blood on the side of the road from those that took losses in this deal.

But it’s part of the stabilization (temporary, not everlasting) that’s going to allow the eurozone some breathing room. I know I’ve said this before, but for those of you who missed class that day, I truly believe that the euro will survive all this. In five years, the eurozone may not have all the members it has today, but the center will hold and will be far better off because of all this. At least the Europeans have recognized their deficit spending problem, and have taken steps to correct it. And in five years, the euro will be stronger because of these steps they have taken to reduce debt. The eurozone found the road to reducing debt. Here in the U.S., I doubt seriously if we’ll EVER find the road! Our GPS just doesn’t have the political will to go there!

But as always, I could be wrong about all this. It’s just the way I see it playing out. It’s the same sight I used to be the first to call the multiyear weak trend for the dollar in 2001, and the same sight I used to make the call that 2003 would be the “year of the euro” in 2002. The same sight that talked about a housing bubble in 2004. And the same sight that called for QE2 a couple of years ago.

Gold slipped back below $1,700 late yesterday, but has been steady since the slippage. I’ve written a lot about gold this week, so I won’t go there again, except to say that while the shiny metal could very well get weaker in price, it certainly looks as though it’s forming a nice base at $1,700. I guess we’ll have to wait and see eh?

I said to Mike Meyer yesterday that it sure appears to me that the euro has been dragging gold around lately, and I don’t like that. These are two different asset classes that have different pricing mechanisms, and while they very well could rally at the same time for different reasons, they “don’t have to rally” at the same time just because one or the other does.

The flight to safety that started on Tuesday — after the Chinese announcement about lowering their target for GDP from 8% to 7.5% — has backed off, and the U.S. Treasury’s 10-year yield is back over 2% this morning.

Yesterday, the European Central Bank (ECB) met and did leave rates unchanged, as I had suspected, but ECB President Mario Draghi did make a comment that was quite interesting in the press conference that followed the rate announcement. Draghi basically told the eurozone banks that the ball was now in their court, after providing them two rounds of the LTRO (long-term refinancing operations).

The ECB also lowered the growth forecast for the eurozone, which was no surprise. You don’t implement the austerity measures that are being implemented in the eurozone, and not expect to see slower growth.

A currency dealer friend of mine told me yesterday afternoon that they had seen a jump in volume, after what had been a pretty tame week up to that point, with significant flows into G-10 currencies.

This could be a very volatile day, not that we’ve had many recently that weren’t! But given the Greek news, the Jobs Jamboree and what how the markets feel about these things, they could lead to a very volatile day.

Besides the Jobs Jamboree, which is forecast to show that 210,000 jobs were created in February, down from the 243,000 that were supposedly created in January, we’ll see the color of the January trade deficit, which will continue to creep closer to $50 billion. On Monday, we’ll see the monthly budget statement, which is expected to be $229.4 billion (or maybe it might be more scary to type it like this: $229,400,000,000)! I don’t think that I have to use my new math abilities to say that annualized, this is about double the budget that was presented!

But who’s counting anyway? Certainly not the half of Americans that don’t pay taxes. Why would they care? But I need to stop right here, right now, before I go down a road I don’t need to go down. If you ask me nicely when you see me, I’ll tell you all about my plan for voting and those that don’t pay taxes.

The Brazilian central bank (BCB) cut rates again yesterday. UGH! For the first time in a long time, the Brazilian Celic rate (like our fed funds rate) is in single digits at 9.75%. The BCB cut 75 basis points (3/4%), which surprised the markets that were looking for 50 basis points to be cut.

Again, the Brazilian government and central bank are like a comedian who with one hand waves off the applause he’s receiving and with the other hand gives the crowd the “give me more” hand gesture. It’s all a big game for the Brazilian government and central bank. They know they need the investment flows to finance their infrastructure projects that are required to hold the World Cup and Olympics, but don’t want investors to think that buying into Brazilian reais is a one-way street, so they keep throwing out the spike strip to slow down the rise of the real.

Just let the markets decide what rates should be has always been my theory. Not a central bank that arbitrarily sets a rate that most likely is stale by the time they get around to raising the rate! If the markets decided what rates should be, instead of a central bank, I think you would have less-violent recessions and boom sessions. But that’s just me.

And I know that there will be some readers that attempt to take me to the woodshed saying that it was the markets that got us in this mess to begin with. And that appears to be true, but there were regulations in place to prevent all that from happening — they just weren’t enforced! And who was supposed to be the sheepdog watching the herd? The president of the Federal Reserve of New York. I’ll leave that there.

The Chinese finally allowed the renminbi (CNY) to appreciate overnight — the first time this week, so they were glad to see Greece kick the can down the road. I’ve told you many times in the past, but there are new readers every day. China has a vested interest in the eurozone staying afloat. China exports more to the eurozone than they do to the U.S., so they can’t have their No. 1 market collapse.

And a reader sent me a story yesterday that plays well with my thought that China’s economy will not collapse, as many others have said it would for over two years now. From The Associated Press: “A sharp jump in sales of its luxury cars and sport utility vehicles in China helped German automaker BMW AG increase net profit by 51% last year.”

I had an opportunity to talk to a couple of customers yesterday at a lunch meeting, and I made a point that plays well with this story. In the past decade, we’ve seen a growing middle class in both China and India that was never there before, that now wants cars and the gas to drive them. That’s demand for oil that was never there before, so there’s no surprise that the price of gas is higher.

In Canada yesterday, the Bank of Canada (BOC) met and left rates unchanged, as BOC Gov. Mark Carney’s bunker mentality remains in place. But Carney did throw the markets a bone, with a comment that conditions that kept him on the sidelines are letting up. In other words, he’s ready to come out of his bunker.

So I guess you’ve all heard about how Germany is asking for the return of their gold that’s held in the U.S. Pretty interesting to me. So not only are individuals here in the U.S. questioning holding gold here, the Germans are too!

I saw a short clip of a Lou Dobbs interview of Bart Chilton of the CFTC. Now, longtime readers know that I don’t hold the CFTC in high regard, given their inability to recognize manipulation that’s going on in gold, and especially in silver. I thought it was interesting that Chilton did say that he was aware that 30% of the silver market is controlled by one player. Of course, he wouldn’t blurt out the name of the “player,” but we all know who he’s talking about.

And in other news from last night, three top executives of MF Global Holdings are set to receive bonuses of as much as several hundred thousand dollars each under a plan by the trustee overseeing the firm’s bankruptcy case. I know there are contracts that have to be paid, but couldn’t this stuff be kept under the table? This can’t sit well with the investors that lost truckloads of money in the company.

Then, my friend, and fellow guitar playing analyst/ writer Steve Sjuggerud the other day went back to a thought he’s previously talked about, and one that I’ve talked about before (so see, great minds do think alike!). The thought, that Australia is Steve’s favorite candidate for the next Switzerland. Here’s a snippet of Steve’s latest letter, DailyWealth:

“The situation in Australia today shares a lot of similarities with what caused Switzerland’s currency to soar:

– Australia is very rich (its government owns its gold and resources).
– Australia has very little debt (it will be net debt free by 2020).
– It’s a safe haven (it likely won’t be invaded).
– It has strong banks today (particularly after the economic crisis).
– It has a legitimate rule of law.
– It has a strong currency (implicitly backed by resources).

A lot of that sounds like Switzerland of old to me!”

Thanks, Steve! And by the way, it was great to share a table for lunch in Orlando last month.

To recap: Greece got 83% of old bondholders to agree to the new bonds at losses, and they announced that they would invoke the CACs, which will force those not accepting the terms to accept them. We’re still waiting for the verdict from the ISDA people on whether is triggers the CDSs. The euro has slipped a bit from yesterday’s euphoria, which has dragged down gold to just below $1,700 this morning. It’s a Jobs Jamboree Friday, so let’s all get our camping gear and head down to the river for the jamboree!

Chuck Butler
for The Daily Reckoning