Greek debt restructuring moves ever closer
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Greek debt restructuring moves ever closer

The growing consensus yesterday was that European banks were moving towards a partial voluntary restructuring of Greek debt.  There are many questions still to be answered, not least how US banks will be involved and how rating’s agencies will view the arrangements with regards to default.

This allowed for some partial relief during Monday’s session, with EUR/USD putting on nearly two big figures from the lows near the 1.41 level seen during Asian hours.  However, as we detail below, one can’t help thinking that we’ve come full circle, with the rates, terms and political interference leading to the current deal looking very much like the actions that kicked things off four years ago in the US sub-prime market.

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Coming full circle on debt. There have been frantic meetings over the past few days to secure a voluntary agreement on rolling over Greek debt.  The French model appears to be gaining some momentum, whereby 70% of maturing debt over the coming two years is rolled over, but there remain many questions, not least whether it could be viewed as purely voluntary. Slicing this 70% rollover element, 50% is seen being invested in 30-yr Greek paper, with the remaining 20% being invested in what reports are saying would be a fund of high quality securities that would back the 30-yr bonds. The interest rate on the rollover would be equivalent to that being charged in the current bailout (under the European Stability Mechanism – ESM), which averaged at 5.8% and was subsequently cut by 1% in return for further austerity measures.

. Some decent buying out of Japan helped the euro stage an impressive bounce yesterday back to the 1.42, after threatening 1.41 late in the Asian session. European politicians were lining up to declare that their banks were generally cooperative on the idea of voluntarily rolling over their Greek debt. At the same time, the bonds of Greece, Portugal and Ireland came under renewed assault. Reports out of Greece suggested that up to four deputies from the Pasok party would not vote in favour of the austerity package on Wednesday. With the Pasok party accounting for 155 of the 300 seats in Parliament, it promises to be a very close vote.    .

Greek austerity vote will be close. Tomorrow’s key vote in the Greek Parliament on Prime Minister Papandreou’s package of asset sales and cost cuts will be a very close run thing, with some members of his own Pasok party already suggesting they will vote against some of the key privatisations that have been earmarked in the bill. Greece needs to accept the austerity plan in order to convince the EU and the IMF to release the next tranche of bailout money, which is needed to pay EUR6.6bn in maturing bonds in August. Greek government officials have claimed in recent days that without the bailout money they will not have enough money to pay wages and pensions past mid-July.

Gold conflict. The reaction of gold over the past couple of sessions has taken it back below the $1,500oz level for the first time in over a month. It’s difficult to put it all down to the firmer tone of the dollar, not least because gold has fallen vs. most other currencies during this time. Also, it does not fit with the notion of risk aversion and investors shifting to ‘safe’ assets. As always, one doesn’t have to look far to hear bullish noises, with UBS’s latest investor survey placing it as the asset class of choice for the remainder of 2011. However, looking at past relationships, this may struggle to be the case should the dollar continue to benefit from the recent trend towards generalised risk aversion.The other factor that may be putting some pressure on gold is concern as to the sustainability of demand from India and the Far East. This proved fairly instrumental in supporting the price during the early part of the year, even though, on a comparative basis, the price action in gold may have appeared a little disappointing overall. However, more recently some support has come from the fall in global real interest rates seen over the past week. We’ve pointed out before the fairly strong inverse relationship between the gold price and real rates (that available over and above inflation). This is probably worth watching over the coming week as a further push lower in bond yields, combined with real rates falling could reverse some of the negative forces currently being felt on the gold price.


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