Toronto Gold Bullion Newsletter Archive - Daily FX report dated 17/06/2011

German Chancellor Angela Merkel appeared on Friday to give ground on her demands for private involvement in a new Greek rescue following talks in Berlin with French President Nicolas Sarkozy.

While insisting that private holders of Greek government bonds bear some of the cost of a new rescue, Ms. Merkel said she now backed a new package for Athens along the lines of the so-called Vienna Initiative.

That 2009 deal to help Romania involved private banks voluntarily agreeing to roll over debts, in practice meaning lenders buy new bonds to replace those that mature.

“What we are talking about is the involvement of private investors on a voluntary basis, and the Vienna Initiative, as it is known, is a good foundation and I believe we can achieve something on this basis,” Ms. Merkel said.

A Vienna-style “rollover” could reduce financing pressure on Greece for several years and is backed by the European Central Bank (ECB) and France, since it avoids the risk of rating agencies declaring Athens in default.

Ms. Merkel had been pressing for private investors to contribute up to a third of the second rescue package by accepting later repayment on their Greek bonds. Critics said this was akin to an obligatory involvement of private investors.

A default would force creditors to have to make debt provisions, reducing their profits, and trigger payment of default insurance known as credit default swaps that could badly destabilise markets.

Belgian Finance Minister Didier Reynders warned on Friday that a Greek default could be compared to the 2008 collapse of US bank Lehman Brothers, the event which triggered the global financial crisis, the worst since the 1930s.

“It seems that Germany is converging towards the European Central Bank’s view,” Forex.com research director Kathleen Brooks said.

Both Ms. Merkel and Mr. Sarkozy said time was short.

“We need a solution as soon as possible so that we have clarity ... We have been talking about this for the whole of May and June, discussing the same issues again and again without resolving them,” Ms. Merkel said.

“Germany and France are determined at the upcoming EU summit (next week) ... to say that we want a quick solution,” Ms. Merkel told reporters ahead of a working lunch with the French president.

“There is no time to lose,” Mr. Sarkozy said.

They also stressed that the rescue package be fully in accordance to the wishes of the ECB,

“This must be worked out together with the ECB so that there are no contradictions with the ECB,” Ms. Merkel said.

But both leaders steered clear of giving details of what exactly the new package, estimated to be almost as big as last year’s 110-billion-euro (US$155.8-billion) bailout, will look like.

“There will be meetings all next week. The sooner the technical details are worked out the better,” Mr. Sarkozy said.

“The aim of today’s meeting was to set down the basic principles as precisely as possibly. Once these principles are worked out then the modalities for the package can follow very quickly.”

Both leaders also called for a full report on Greece’s finances by the “troika” of Greece’s international creditors -- the European Union, the International Monetary Fund and the ECB -- to be presented as soon as possible.

Europe on Thursday sought to buy time, with the EU’s economic affairs commissioner Olli Rehn saying Greece could receive a 12-billion-euro fifth tranche of loans under last year’s first bailout.

He stressed that commitments as to the scale and scope of the second Greek rescue package -- tipped to be almost as big as the 110-billion-euro first one -- could wait until a July 11 meeting to be thrashed out.

An EU diplomatic source told AFP that the finer details could even wait until September, a position supported by Berlin, according to German media reports on Friday.

Mr. Rehn said the new phased approach “will avoid the default scenario” but warned that responsibility also fell on Greece.

Greece, though, is in political turmoil, with Prime Minister George Papandreou on Friday axing his finance minister Friday in a reshuffle a day after a party revolt by disgruntled backbenchers and angry protests in Athens.

Article provided via the Financial Post

http://www.financialpost.com/news/Merkel+signals+giving+ground+Greek+debt/4963445/story.html

" China's economy: Burgeoning giant or bubble ready to burst? "..

" more than two decades of unparalleled growth have transformed China from an economic backwater into a powerhouse sucking in commodities and capital from the rest of the world at an astonishing pace. "

At the height of the global economic crisis in 2008, governments everywhere opened the taps and flooded their financial systems with capital. But none came close to matching the scale, scope or speed of the Chinese response. Beijing pumped in close to $900-billion (U.S.), at a time when Washington was still debating spending its first $100-billion. Other major economies were staring at a job-crushing recession. China was worried because growth had fallen below double digits.

Unlike deficit-ridden governments in the U.S. and Europe, Beijing was – and still is – swimming in surpluses. So money was no object. The Chinese leadership was highly motivated to do whatever it took to get the economy back on the fast track. Strong economic growth is vital to maintaining the country’s improving living standards, keeping social unrest in check, greasing the wheels of China’s unique version of state capitalism and ensuring that the Communist Party’s hegemony remains unchallenged.

More than two decades of unparalleled growth have transformed China from an economic backwater into a powerhouse sucking in commodities and capital from the rest of the world at an astonishing pace. Canada, Australia and other major resource producers have ridden this rocket to considerable prosperity of their own. Now, the Big Red Machine stands at one of those crucial inflection points. Has it become the world’s biggest bubble economy, a giant Ponzi scheme, in the words of one critic, that’s about to unravel? Or is it truly an awakening giant on the verge of global domination, the only supposedly Communist state ever to successfully embrace a capitalist model as a means of maintaining social order and ensuring the party keeps its tight grip on the levers of the power?

China’s heavy pump-priming worked. Major infrastructure and social-housing projects got off the ground quickly. A flood of subsidies kept large numbers of factories open, avoiding the spectre of millions of unemployed migrant workers taking to the streets. But the influx of cheap credit and investment capital has also created dangerous bubbles in real estate and other assets.

Now Beijing is engaged in a tougher exercise: slowing the economic freight train to corral steadily rising inflation, without sending it off the rails. If there is anything more worrisome to a Politburo member than an army of unemployed migrant workers, it’s an army of workers facing price increases of 10 per cent or more for certain staple food items and other living costs. The new five-year plan – No. 12, if you’re keeping track – outlines a bold agenda designed to shift the focus of growth to boost domestic consumption, reduce reliance on low-cost manufacturing, develop the nascent service sector and invest heavily in “emerging strategic industries,” such as bio-technology.

There is a joke in China that rapid economic development has benefited everyone but workers, farmers and entrepreneurs without good party connections. Those plugged in to the right networks have enjoyed phenomenal success. China now ranks second to the U.S. in billionaires, with 128. Millions of other people have been lifted out of poverty. But most of the gains from the long-running boom have eluded a huge swath of households. Nearly half a billion people struggle to get by on less than $2 a day.

If this latest transformation works, economists calculate China will be able to live with lower annual growth, as wages rise and income disparities diminish. The large cadre of China boosters believe the pragmatic and nimble leadership will manage this essential but tricky rebalancing act. They argue that the country remains on course to supplant the fiscally challenged and politically paralyzed United States and Europe as the world’s next superpower – one poised to tower over its rivals for the rest of this century, much as the British owned the 19th century and the Americans most of the 20th.

The equally large group of China skeptics, though, insist this is a house of cards on the verge of collapse from myriad external and especially internal strains exacerbated by a broken growth model.

On the international front, the bumps on the road to superpower status include a host of monetary, investment and trade actions that have drawn the ire of other nations, led by a deliberate strategy of keeping the yuan artificially cheap while China deploys a fraction of its more than $2.8-trillion in reserves to snap up energy producers, mineral deposits and farmland around the world. But Beijing has done an excellent job of protecting and enhancing its political and economic interests abroad, not least because of its status as the world’s No. 1 creditor and biggest buyer of just about every major commodity.

It’s on the domestic front where China’s frailties stand out – a feeble financial system, falling consumption as a share of GDP, weak job growth, major inefficiencies in state-dominated sectors and unfavourable demographics stemming from the one-child policy – and where dreams of global domination are most likely to come unglued.

Within a single generation of sustained high growth, China has vaulted past Japan to become the second-largest economy. And it will most likely overtake the United States within two decades or sooner. But by some important measures, China will remain far from the top. Even if per capita national income tripled, it would still amount to only about one-quarter of the U.S. level, ranking somewhere near Hungary in about 45th place.

That would give China another first. No other country has managed to build such a huge economy and yet remain separated from the rich countries by such a wide gap in average incomes. The climb up the ladder still has a long way to go.

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