Greece declared junk, Portugal, Others waiting in line. SEC yells fire after smoke is put out.

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Farmer Brown's picture
Farmer Brown
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Greece declared junk, Portugal, Others waiting in line. SEC yells fire after smoke is put out.

In a display of supreme prescience, Standard & Poors just downgraded Greece's debt to junk status.  As the brute and simple layman that I am, I am baffled at why the S&P is even necessary when rates on Greek 2-yr bills and other debt Greek instruments have been screaming "I AM JUNK!!!" for weeks now.  Could it be that Standard & Poors, in an effort to shore up its image after the mortgage-backed-securities fiasco that nearly sunk the world and rasied questions about S&P's (and other credit-rating agency's) ethics, is basically saying, "Hey, we didn't see this one coming either.  See, it's not that we were unethical, it's just that we were that stupid!"  

Standard and Poors new tagline:  "Our standards are poor - that much you can coun on."

http://www.cnbc.com/id/36802555

 

S&P Downgrades Greece to Junk; Portugal Also Cut

Europe's debt crisis worsened ominously Tuesday when two financially troubled countries— Greece and Portugal—saw their credit ratings downgraded as markets sold off their debt.

Greece was downgraded to junk status by Standard & Poor's, which lowered Portugal's rating as well.

 

 

Farmer Brown's picture
Farmer Brown
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Re: Greece declared junk, Portugal, Others waiting in line. ...

Woops.  That was supposed to be, "S&P yells fire after smoke is put out."   Anyway, you get the point.  Laughing

 

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machinehead
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Re: Greece declared junk, Portugal, Others waiting in line. ...

Here is an aspect of the euro crisis which I find highly pertinent, but which never gets mentioned in mainstream press articles about the escalating crisis:

GOLD PRICE NEWS - The gold price opened lower Tuesday but turned positive in morning trading. As sovereign debt concerns continue to plague Europe, the gold price reached a new all-time high of 867 euros.

The gold price has steadily risen in terms of nearly all global currencies over the past six months, although its gain in terms of the euro has been outsized. The 22.5% rise in the euro gold price compares to a 10.9% rise in the dollar-denominated gold price.

http://www.goldalert.com/stories/Gold-Price-Hits-Record-High-in-Euros

Gold buyers are reacting to the crisis. What they might be expecting is not only 'safe haven' buying of gold, but also another surge of bailout liquidity as the EU tries to patch its troubled currency.

Since the first oil shock in 1973, the remedy to troubled debt has been to restructure and pile on even more debt. No one should doubt that it can be done again, in the case of Greece and Portugal. But larger players (the UK, for instance) face the same overindebtedness issue. Greece is the harbinger of a new era of rich-country sovereign defaults.

And gold would be an asset whose value does not derive from sovereign authority or borrowing power. I wouldn't be surprised to see gold reach 1,000 euros this year, as the euro crisis deepens. Gold may be a barbaric relic, but it's not going to default or restructure on you!

 

 

Farmer Brown's picture
Farmer Brown
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Re: Greece declared junk, Portugal, Others waiting in line. ...

machinehead,

Although it should be evidently clear that I am a big fan of gold, I do not quite follow the logic in the above article.  It seems to suggest that gold is rising in Euros because Euro holders are buying gold.  While it could be true that some and even many Euro-holders are buying gold, it is not necessary for that to be happening to explain gold's price move in Euros.  The Euro is getting clobbered.  Everything is going up in Euros - be it gold or eggs, or milk or carrots.  That doesn't mean people are dumping euros and buying eggs milk and carrots either.  It just means the Euro currency is getting cloberred relative to almost everything else, as people flee Euro-denominated debt instruments, including savings accounts and other "check-book" accounts,  and seek refuge elsewhere. 

 

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machinehead
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Re: Greece declared junk, Portugal, Others waiting in line. ...

Goldman Sachs says 45 billion euros ain't enough:

In a note to clients this morning, Goldman's chief European economist, Erik Nielsen, said that the €45bn bailout currently on the table is not large enough to cover Greece's borrowing needs. After the recent surge in Greek borrowing costs, Nielsen believes IMF officials are now leaning towards a fully funded rescue package that will keep Greece from having to tap the money markets until its economic health has improved.

"On my numbers, a one-year fully funded programme needs to provide a minimum €50-55bn; an 18-month programme will require some €75bn, and a three-year programme a minimum €150bn. I think the latter number is out of reach even for the present political environment of generosity, so the debate is between €55bn and €75bn," wrote Nielsen.

"I suspect that some haggling is now going on between the IMF and the eurozone on the burden sharing of a bigger programme, but I rather doubt that the Europeans can do more than the already announced €30bn for the first year. If so, I suspect that the IMF will have to settle for something like a 12-month fully funded programme worth a total of €50-55bn, or could it be an 18-month programme worth some €80bn?"

http://www.guardian.co.uk/business/2010/apr/27/greece-needs-bigger-bailo...

Sadly, Nielson is probably right. After the multi-trillion-dollar Looterfests in the U.S., €45bn sounds like barely enough to run the office coffee pool. Tighten those belts, we can't afford scones no more!

The point is, a bailout can and probably will be done. But it serves only to kick the can a year or two down the road, when the debt problem will be even bigger, and affecting more countries. Plus, by then, there is likely to be a new problem: higher inflation, coupled with higher interest rates.

Remember that these debt rollover problems are taking place with sovereign interest rates at generational lows, on average. As welcome as global economic recovery will be, it inevitably will push up rates. Double-plus ungood! Gold, baby, gold!

 

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machinehead
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Re: Greece declared junk, Portugal, Others waiting in line. ...
Farmer Brown wrote:

machinehead,

Although it should be evidently clear that I am a big fan of gold, I do not quite follow the logic in the above article.  It seems to suggest that gold is rising in Euros because Euro holders are buying gold.  While it could be true that some and even many Euro-holders are buying gold, it is not necessary for that to be happening to explain gold's price move in Euros.  The Euro is getting clobbered.  Everything is going up in Euros - be it gold or eggs, or milk or carrots.  That doesn't mean people are dumping euros and buying eggs milk and carrots either.  It just means the Euro currency is getting cloberred relative to almost everything else, as people flee Euro-denominated debt instruments, including savings accounts and other "check-book" accounts,  and seek refuge elsewhere. 

 

Yes, you're right -- a weaker euro currency will surely increase gold's euro price. It's common to say the same about the dollar, but today the dollar index is stronger, and so is the dollar gold price. In other words, gold seems to be rising in all currencies.

One might ask which is the 'lead market' for gold. It appears to me that gold makes most of its moves overnight, before the U.S. market opens. Then it usually does little during the trading day. This implies to me that the U.S. is not the 'lead market' for gold. London may still hold that honor. After all, that's where gold traded during the dark years when it was illegal in the U.S.

If one accepts this analysis, then gold hitting a record high in euros may be a leading indicator, quite aside from the simple explanation of euro devaluation. The euro's problems are structural. Gold is an alternative monetary asset which can benefit from intractable structural problems. What are middle eastern and Asian countries that hold euro reserves doing? If I were them, I'd be cutting back on euros at the margin, while adding gold as a hedge.

Brainless's picture
Brainless
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Re: Greece declared junk, Portugal, Others waiting in line. ...

The euro is being 'cloberred' for sure. Not only gold is worth more euro's, same for gasoline and the exchange rate for the currency of the country i am moving to in october changed from 1 euro = 48.8 Baht just 2 months ago to now 1 euro = 41.99 baht. As i earn my money in euros this is not what i hoped for. Better change it to invoicing in the local currency, or should i go straight to ask payment in gold. :).

 

idoctor's picture
idoctor
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Posts: 1731
Re: Greece declared junk, Portugal, Others waiting in line. ...

The END OF THE EURO - as we know it

 

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