It has been a quiet session overnight (and that will continue until the Germans come back from vacation) punctuated by Mario Draghi's attempt to jawbone the market into submission again, this time following the release of the ECB monthly report in which it basically regurgitated Draghi's still misunderstood speech in it said it may buy bonds if strict conditionality is ensured, the same conditionality that Spain said it would not comply with, yet which European bond traders continue to misunderstand, because Spain will not request a bailout as long as its 10 Years are trading below 8% yield. Of course, nobody wants to sell first, until the selling actually begins. Then it will be waterfall. In other news Greek industrial production rose by a tiny amount from below sea level, rising by 0.3% in June following a 2.9% decline previously. This however must be due to the Greek workers' enhanced efficiency - Greek unemployment just rose yet again to the mindblowing 23.1%, from 22.6% - a new all time high. And so the race between Spain and Greece over who can hit 50% unemployment first continues. Another notable economic milestone was crossed after the IFO institute euro-area economic climate indicator declined for first time this year, pushing the EURUSD to just above 1.2300. There were also more bad news from the UK whose trade deficit widened more than expected hitting GBP10.1 billion vs GBP8.7 billion estimated, with a record GBP28.3 billion good deficit, led by oil, cars and chemicals. In other news the European collapse continues unabated, yet the market which has long been nothing but a central bank policy tool and no longer discounts anything is perfectly oblivious to what is happening. There was one notable final change: the Chinese economy accelerated its own deterioration, and this time, courtesy of the specter of soaring food prices and a CPI print above estimates, it is very much powerless to even threaten with more easing.

From SocGen:

China's July activity data came in weaker than expected across the board

Industrial production decelerated further to 9.2% yoy and nominal retail sales growth stepped down to 13.1% yoy, both much below expectations. Total fixed asset investment growth remained at 20.4% yoy year-to-date, but the yoy rate for the single month of July slowed by 0.7ppt from the 21.1% in June.

The property sector continued to exert downward pressure on overall growth momentum. Despite the impressive rebound in housing sales (in volume terms, +13% yoy in July vs -3.3% yoy in June), property investment growth dropped below +10% yoy, within which investment in residential projects was up only 4.8% yoy in July. Moreover, total new starts declined 26.7% yoy in July and residential new starts contracted 30.4% yoy. The base effect was one of the factors contributing to such a sharp decline, but the trend since Q1 has been unambiguously sluggish.

Infrastructure investment did pick up, but was still too modest to offset the drag from the housing sector. Railway FAI growth recovered to -6.6% yoy in July from -21.5% yoy in June and highway FAI growth rebounded to +8.5% yoy from -6.9% yoy. This trend is set to persist in the coming months, with the help of credit expansion and acceleration in bond issuance.

We have been arguing that Beijing is unwilling to repeat the investment stimulus of 2009/10 and that a moderate boost to infrastructural investment without a relaxation in property policies will not be enough to lift overall growth substantially. Today's data reconfirms our view. And, unfortunately, the bottoming-out seems to be taking even longer than we initially anticipated.

Clearly, the easing policies announced so far have not fully passed through to the real economy. The central government's determination to cap property prices will continue to obstruct its push for public investment. We think the PBoC's options could be even more limited if food inflation continues from here onwards. We see the most likely action from the PBoC as further liquidity easing via reverse repo and required reserve ratio cuts, alongside increased bank lending. We continue to look for a 50bp RRR cut in August.

Given today's data and expectations for further incremental easing, we revise down our forecast for Q3 GDP growth from 8% yoy to 7.7% yoy, but our Q4 call for 8% yoy remains unchanged. This revision reduces our full-year growth forecast to 7.8% from 7.9%.

In other words, the economy of the entire world is rapidly deteriorating. But at least futures are up at last check.

and this is the way Europe plays kick the can.....

http://globaleconomicanalysis.blogspot.com/2012/08/complete-absurdity-in-greece-ecb-prints.html

Thursday, August 09, 2012 2:01 AM

Complete Absurdity in Greece: ECB Prints Euros to Give to Greece to Make Interest Payments to ECB

No entity is willing to stand up and say the obvious, that Greece is insolvent and cannot and will not pay back its debts.

Moreover, in spite of an ECB mandate that prohibits direct financing of governments, the ECB is doing just that.

Simply put, the ECB is printing euros, to give to the Greece, so that Greece can make interest payments to the ECB on maturing bonds.

Der Spiegel notes the absurdity of this setup in The European Central Bank's Discreet Help for Greece.

"There is no time to lose," Jean-Claude Juncker warned just a few days ago. Leaders must use "all means at their disposal" to save the currency union, the head of the Euro Group said. But one thing is becoming clear: Politicians are increasingly pushing the dirty work on to the European Central Bank (ECB).

Take Greece, for example, where liquidity is becoming scarce. The government in Athens needs to repay a maturing bond worth €3 billion ($3.7 billion) to the ECB by Aug. 20. The solution to that problem seems paradoxical: The ECB itself is pumping money into Greece, so that the country can in turn repay the ECB.

It's a controversial plan, because the central bank is prohibited from financing governments directly. As a result, no one is talking openly about the absurd flows of money. The ECB has only hinted that it will extend a helping hand to Greece.

Now, information has leaked regarding how the ECB plans to keep Greece on its feet until the next tranche of European Union-International Monetary Fund aid is paid out. The ECB has chosen a detour via the Greek central bank. It will allow it to issue additional emergency loans to the country's banks. These in turn are supposed to use the money to buy up Greek bonds with short maturities. This will scrape together €4 billion, according to the plan.

The Greek central bank will accept the dodgy bonds as collateral, and will provide the country's equally troubled commercial banks with freshly printed euros -- which ultimately come from the ECB.

What is particularly absurd is the fact that, for the past two weeks, the ECB has no longer been accepting Greek government bonds as collateral for its refinancing operations. But the Greek central bank -- which in reality is little more than the Athens branch of the ECB -- is still allowed to accept them. The fact that the euro bankers are willing to go through such contortions shows just how precarious the situation is. At the moment, a Greek default is being fought off from week to week -- and politicians are trying to duck responsibility.

and....

http://www.zerohedge.com/contributed/2012-08-08/greece-prints-euros-stay-afloat-ecb-approves-bundesbank-nods-no-one-wants-get

Greece Prints Euros To Stay Afloat, The ECB Approves, The Bundesbank Nods: No One Wants To Get Blamed For Kicking Greece Out

Submitted by testosteronepit on 08/08/2012 20:15 -0400

Bond

Central Banks

default

European Central Bank

Eurozone

Germany

Greece

International Monetary Fund

Wolf Richter www.testosteronepit.com

A lot of politicians in Germany, but also in other countries, issue zingers about a Greek exit from the Eurozone and the end of their patience. But those with decision-making power play for time. They want someone else to do the job. Suddenly Greece is out of moneyagain. It would default on everything, from bonds held by central banks to internal obligations. On August 20. The day a €3.2 billion bond that had landed on the balance sheet of the European Central Bank would mature. Europe would be on vacation. It would be mayhem. And somebody would get blamed.

So who the heck had turned off the dang spigot? At first, it was the Troika—the austerity and bailout gang from the ECB, the EU, and the IMF. It was supposed to send Greece €31.2 billion in June. But during the election chaos, Greek politicians threatened to abandon structural reforms, reverse austerity measures already implemented, rehire laid-off workers....

The Troika got cold feet. Instead of sending the payment, it promised to send its inspectors. It would drag its feet and write reports. It would take till September—knowing that Greece wouldn’t make it past August 20. Then it let the firebrand politicians stew in their own juices.

It’s easy to blame the Troika, and it can take the heat. History searches for the person who is responsible. But the Troika doesn’t have one. It was designed that way: a combo of multi-layered, undemocratic structures. And the Troika inspectors, though despised in Greece, are career technocrats, not decision makers.

So Chancellor Angela Merkel became a substitute. Greek tabloids treated her like a Nazi heir, with Hitler mustache and all. But she’s not the decision maker in the Troika, though she is a contributor. And she—though still unwilling to water down the bailout memorandum—consistently stated that Greece should remain in the Eurozone. She doesn’t want to be blamed.

In early July, the inspectors returned to Athens to chat with the new coalition government and check on progress in implementing the agreed-upon structural reforms. Soon it seeped out that their report would paint an “awful picture” [read.... Greece Flails About, Merkel Draws A Line, German Industry & Voters Back Her: It’s Almost Over For Greece].

In late July, the inspectors returned to Athens yet again and left on Sunday. After another visit at the end of August, they’ll release their final report in September. A big faceless document on which people of different nationalities labored for months; a lot of politicians can hide behind it. Even Merkel. And the Bundestag, which gets to have a say each time the EFSF disburses bailout funds.

Alas, August 20 is the out-of-money date. September is irrelevant. Because someone else turned off the spigot. Um, the ECB. Two weeks ago, it stopped accepting Greek government bonds as collateral for its repurchase operations, thus cutting Greek banks off their lifeline. Greece asked for a bridge loan to get through the summer, which the ECB rejected. Greece asked for a delay in repaying the €3.2 billion bond maturing on August 20, which the ECB also rejected though the bond was decomposing on its balance sheet. It would kick Greece into default. And the ECB would be blamed.

But the ECB has a public face, President Mario Draghi. He didn’t want history books pointing at him. So the ECB switched gears. It allowed Greece to sell worthless treasury bills with maturities of three and six months to its own bankrupt and bailed out banks. Under the Emergency Liquidity Assistance (ELA), the banks would hand these T-bills to the Bank of Greece (central bank) as collateral in exchange for real euros, which the banks would then pass to the government. Thus, the Bank of Greece would fund the Greek government.

Precisely what is prohibited under the treaties that govern the ECB and the Eurosystem of central banks. But voila. Out-of-money Greece now prints its own euros! The ECB approved it. The ever so vigilant Bundesbank acquiesced. No one wanted to get blamed for Greece’s default.

If Greece defaults in September, these T-bills in the hands of the Bank of Greece will remain in the Eurosystem, and all remaining Eurozone countries will get to eat the loss. €3.5 billion or more may be printed in this manner. The cost of keeping Greece in the Eurozone a few more weeks. And on Tuesday, Greece “sold” the first batch, €812.5 million of 6-month T-bills with a yield of 4.68%. Hallelujah.

“We don’t have any time to lose,” said Eurogroup President Jean-Claude Juncker. The euro must be saved “by all available means.” And clearly, his strategy is being implemented by hook or crook. Then he gave a stunning interview. At first, he was just jabbering about Greece, whose exit wouldn’t happen “before the end of autumn.” But suddenly the floodgates opened, and deeply chilling existential pessimism not only about the euro but about the future of the continent poured out. Read..... Top Euro Honcho Jean-Claude Juncker: “Europeans are dwarfs”

and....

http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_15843_08/08/2012_456144

Talks on cuts stall on labor reserve issue

Troika review expected in October, rather than September, according to Dow Jones

Prime Minister Antonis Samaras and other government officials sought to appear upbeat on Wednesday on the progress of talks aimed at identifying 11.5 billion euros in budget cuts for 2013 and 2014 but differences between leaders of the fragile coalition government over the planned introduction of a labor reserve scheme to cut costs in the public sector appeared to be slowing the process down.
Meanwhile, European Union officials indicated that a review of Greece’s economic reform progress by the country’s international creditors -- the European Commission, European Central Bank and International Monetary Fund, known as the troika -- would be issued in October, not in September as originally expected. Shortly after the report by Dow Jones regarding the troika’s review, Alternate Finance Minister Christos Staikouras told Skai that the package of 11.5 billion euros in measures must be finalized by September 14 when eurozone finance ministers are due to convene in Nicosia for a Eurogroup summit.
Samaras, who on Wednesday met with Finance Minister Yannis Stournaras, told reporters that efforts were being made to make “the most effective cuts to the deficit with the least possible pain for citizens.” “We are looking everywhere,” Samaras said. He added that the government “will not return to measures that have failed in the past.” When asked by a reporter whether the government would resurrect the labor reserve scheme -- a failed plan to put thousands of civil servants on heavily-docked wages ahead of a review -- the premier dodged the question, stating that authorities were looking at an “overview of alternatives.”
However, Samaras’s coalition partners -- socialist PASOK leader Evangelos Venizelos and Fotis Kouvelis of Democratic Left -- are not keen on reviving the labor reserve scheme. Kouvelis is particularly opposed to the measure, which authorities have attempted to implement several times without success, dismissing it as “a fiasco.” Venizelos is also skeptical amid fears that such an initiative could lead to layoffs in the civil service, which he has categorically opposed.
Sources close to the former finance minister blamed Stournaras, claiming that inadequate planning led the new minister to fall back on the labor reserve option. Kouvelis is also said to be frustrated over a lack of communication between coalition party leaders and Stournaras.
Despite the objections, however, sources in both camps said the parties would not do anything to undermine the cohesion of the coalition.

The main leftist opposition party SYRIZA was quick to draw attention to the upheaval. It added that resorting to the labor reserve scheme confirmed that “the memorandum doesn’t work,” a reference to Greece’s second loan deal with creditors.

and......

No economy policy speech from PM at Thessaloniki Fair

Prime Minister Antonis Samaras will not deliver the traditional keynote economic speech at September’s Thessaloniki International Fair, Kathimerini understands.
The trade far has for decades provided governments with the platform to present their economic policy following the summer break.
The speech is usually delivered on the first Saturday of TIF, a day after the prime minister inaugurates the fair. On Sunday, the premier tends to hold an extensive question and answer session with the press.
Kathimerini understands that Samaras will only official open the fair this year on September 8.
Sources said that since the Eurogroup meeting is being held on September 14, when the Greek program will be discussed, it would be pointless to make pronouncements about economic policy earlier.

and.....

http://www.telegraph.co.uk/finance/debt-crisis-live/9462653/Debt-crisis-live.html

12.39 From debt crisis to food crisis. The UN's food agency has warned today that the world could face a food crisis like that of 2007/08 if countries restruct exports on concerns about a drought-fuelled grain price rally.

In its latest update, the Food and Agriculture Organisation said its food price index climbed 6pc last month, after three months of decline, driven by a surge in grain and sugar prices.

Anxieties over extreme hot and dry weather in the US Midwest sent corn and soybean prices to record highs last month, driving overall food prices higher.

Grain markets have also been boosted recently by speculation that Black Sea grain producers, particularly Russia, might impose export restrictions after a drought there hit crops.

The FAO's senior economist and grain analyst Abdolreza Abbassian toldReuters:

There is an expectation that this time around we will not pursue bad policies and intervene in the market by restrictions, and if that doesn't happen we will not see such a serious situation as 2007/08. But if those policies get repeated, anything is possible.

Back in 2007/08, a mix of high oil prices, growing use of biofuels, bad weathe, soaring grain futures markets and restrictive export policies pushed up prices of food, sparking violent protests in countries such as Egypt and Haiti.

12.20 Ratings agency Fitch has carried out its quarterly survey of investors and found that the majority of them reckon banks will need a repeat of the European Central Bank's €1trn long-term refinancing operations.

Just over half of respondents believe fundamental credit conditions for banks will deteriorate and 82pc say that banks will need another LTRO within two years.

Fitch added that it is also "in the 2013/14 camp":

We don't project that another LTRO will be needed this year but many banks in southern Europe have become dependent on ECB facilities as their only real source of wholesale funding. If they are unable to de-lever in time, they will likely need some assistance to be able to pay back their LTRO take up.

11.33 Christian Noyer, a governing council member of the European Central Bank, has said that "there is no plan to prepare for the exit of any country from the eurozone".

Reuters has kindly translated an interview he gave with France's Le Pointmagazine in which he said:

An exit of Greece from the euro zone is not something which we envisage. There is no plan to prepare for the exit of any country from the euro zone.

He added that the bank was determined to bring down excessive risk premiums for member states in bond markets and should be ready to act very soon:

Don't have any doubt about the determination of the governing council and its capacity to act within the terms of its mandate.

Our operations will be of sufficient size to have a strong impact on the markets. We should be ready to intervene very soon, prioritizing short-term debt markets.

But he notes that the central bank could not substitute for political action by member states, which needed to press ahead with reforms to reduce their debts and market their economies more competitive.

10.46 Greece's deputy finance minister, Christos Staikouras, has said this morning that the country expects to get its next slice of international aid immediately after lenders give their final verdict in the middle of September on progress made under its bailout programme.

Cash-strapped Greece could run out of money within weeks if it does not receive its next aid instalment. As the Telegraph reported on 24 July,Greece could run out of cash by August 20.

To cover this month's cash squeeze, Greece plans to issue additional treasury bills, enabling it to access up to an extra €4bn of funds.

Greece is behind its targets agreed as conditions of the €130bn bailout deal. Mr Staikouras said that the troika of ECB, EU and IMF inspectors would return to Athens in early September and complete their review of Greece's progress by the end of the month; if that review is positive, that will pave the way for the next tranche of aid.

He told Greek television:

If that happens and the process is completed by September 14 - this is the framework we're working within, that's what we've agreed to - then obviously the tranche, if the review is positive as we expect it to be, will come immediately after.

10.23 On the markets this morning, the FTSE 100 is virtually flat at 5846 as is France's CAC at 6949. A rally earlier this morning - prompted by figures from China showing a drop in industrial production growth in June to 9.2pc, spurring hopes of further stimulus - has now faded.

Chris Beauchamp, markets analyst at IG Index, commented:

Even a raft of Chinese data seems to be unable to provoke much of a reaction in markets at present. After several days of quiet, traders had plenty of economic news from the world's second-largest economy to digest. Industrial production was weaker, while consumer price growth slowed, giving Beijing more room to boost stimulus to help revive the flagging economy. Normally, the prospect of stimulus in China gets investors fairly excited, but today the reaction has been more muted.

09.59 Commenting on those trade deficit figures - which will not be music to the ears of leaders hoping for an export-led recovery - Alan Clarke at Scotiabank said:

Very hard to take anything positive from this data, it's a big downward surprise. Oil was one of the biggest drivers in the decline in exports, but even stripping erratic elements out, it's still bad.

Against the backdrop where our main trading partners, Germany and continental Europe, are very weak, this is no surprise, and the scope for improvement anytime soon is limited.

Probably won't move markets, quite backward looking, telling us about Q2, which we know about, already pretty depressed about growth.

09.54 Amid all that ECB bulletin excitement, numbers were published on the UK's latest trade deficit. In June, Britain's total goods and services trade deficit hit a record high following a sharp drop - 7.4pc - in goods exports.

The Office for National Statistics said the June trade deficit widened from £2.718bn to £4.308bn, the largest since records began in 1997.

This was driven by a bigger-than-expected widening in the goods trade deficit, which grew to £10.119bn from £8.364bn.

09.41 Still with the ECB bulletin, it contains a quarterly survey of professional forecasters, who retain their estimate of 2.3pc inflation this year. For next year, they expect annual price gains to average 1.7pc, a decrease from the 1.8pc previously estimated. In the longer term, the inflation forecast remained at 2pc.

09.24 As the ECB cut its growth forecasts for this year and next (see 09.10), the bank cautioned that in the longer term, it expects the eurozone economy to recover only very gradually:

Looking beyond the short term, the Governing Council expects the euro area economy to recover only very gradually, with growth momentum being further dampened by a number of factors. In particular, tensions in some euro area sovereign debt markets and their impact on financing conditions, the process of balance sheet adjustment in the financial and non-financial sectors and high unemployment are expected to weigh on the underlying growth momentum, which is also affected by the ongoing global slowdown.

09.21 Echoing Mario Draghi's comments last week, the ECB's bulletin suggests that the bank may intervene in bond markets in tandem with Europe's bailout funds if nations commit to improving their economies and fiscal positions. The central bank said it "may undertake outright open market operations of a size adequate to reach its objective", adding:

The adherence of governments to their commitments and the fulfilment by the European Financial Stability Facility/European Stability Mechanism of their role are necessary conditions.

09.13 Here's some detail from what the ECB said in its August bulletin:

The risks surrounding the economic outlook for the euro area continue to be on the downside.

They relate, in particular, to the tensions in several euro area financial markets and their potential spillover to the euro area real economy. Downside risks also relate to possible renewed increases in energy prices over the medium term."

Inflation expectations for the euro area economy continue to be firmly anchored in line with the Governing Council's aim of maintaining inflation rates below, but close to, 2 percent over the medium term.

Here's a link to the bulletin in full.

09.10 That report from the ECB is now out. The bank has cut its growth forecasts for this year and next, predicting a 0.3pc contraction this year - slightly worse than the 0.2pc contraction expected last quarter - and for 2013, they anticipate growth of 0.6pc, down from a previous estimate of 1pc.

08.22 Today, the French constitutional court is meeting to decide if adopting the European fiscal pact requires an amendment to France's constitution. It is thought that the court could deliver its verdict late in the evening today or early tomorrow. Earlier this week, jurists told Reutersthat the verdict was too close to call.

Signed in March, the fiscal pact must be ratified by 12 of the 17 eurozone nations before it can come into force in January.

Francois Hollande, the French president, wants to avoid writing a fiscal rule into the constitution and instead hopes to pass a powerful form of law through parliament that will hold ministers to the EU budget targets.

If the Council, France's highest constitutional body and made up of a mixture of career jurists and former politicians, rules against him and decides the pact requires a constitutional amendment, that could delay ratification by several weeks.

Catharsis Ours

Thursday, August 9, 2012

ECB Re-Regurgitates Draghi As Greek Unemployment Rises To New Record, China Deteriorates With No Easing In Sight

Thursday, August 09, 2012 2:01 AM

Complete Absurdity in Greece: ECB Prints Euros to Give to Greece to Make Interest Payments to ECB

Greece Prints Euros To Stay Afloat, The ECB Approves, The Bundesbank Nods: No One Wants To Get Blamed For Kicking Greece Out

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