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FT's John Dizard: Gold borrowed from governments or ETFs may be propping up European banks

Section: Daily Dispatches

Just in case you think you own gold when you own ETF shares. ...

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Greek Debt Crisis No Nearer Resolution

By John Dizard
Financial Times, London
Sunday, December 11, 2011

It appears that the faulty plumbing connections in the euro-area banking system are now creating something I have never seen before: a crisis of confidence in a monetary system that leads to a frantic selloff in gold.

The partnership between the Federal Reserve and European Central Bank to provide hundreds of billions of relatively low-cost dollars for euro-area banks should have relieved the pressure to come up with greenbacks. Yet gold market people say European commercial banks are being driven to lend gold for dollars at negative interest rates just to raise some extra cash for a few weeks. There's not a lot of transparency about where the banks are getting the gold they are lending out, but it could be lent to them by either their national central banks or by gold exchange-traded funds.

As James Steel, a gold market analyst for HSBC Securities (USA), says: "Until the funding difficulties at European banks are resolved, it is difficult for us to see any near-term halt in gold lending. This may help keep gold prices on the defensive."

... Dispatch continues below ...


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The underlying problem in the euro area's crisis management at this point is a shrinking supply of attention span. All significant decisions are now being piled on to the desks of a small number of overwhelmed politicians and their underequipped staff. So critical tasks just aren't being completed.

For example, the financial media and trading desks have shifted their attention from the Greek mess to the Italian mess and then to the new treaty mess. But the Greek mess has not, announcements to the contrary, been sorted out. Even though the Greek political leadership and parliament have agreed with the Europe-ECB-IMF troika on the outlines for a deal, there is no deal agreed, and a hard default is still looming.

Timelines are important. There is a large lump of Greek government debt coming due in March 2012. There is not enough money in the Greek government’s coffers, or in the new aid package, to pay that instalment on time. So those bonds have to be exchanged for new paper with less value and longer maturities.

There is a lot of documentation that has to be circulated among the existing bondholders, and they need to get it at least 30 days before their signature is required, or some time before the beginning of February. This is becoming a problem.

As someone knowledgeable about the negotiations between the Greek government and the bondholders says: "There is still a big gap between the bid and the offer side." In other words, Greece wants the real value of a deal to bondholders to be much lower than the bank group negotiating for bondholders is willing to accept.

The issue for the foreign official sector, and the Greeks, is that the financing package for the Greek restructuring is based on the assumption that virtually all the present private sector holders of Greek government bonds will accept an exchange offer. If there are any bondholders who say, "Hey, this is a voluntary exchange, and I'm not volunteering, give me my 100 cents on the euro," then these "holdouts" have to be paid off with increased foreign official support. As my source says, "I think the troika will choke on that."

I've been suggesting for over a year that the only way to make sure that over 90 per cent of the existing bondholders are pushed into making the exchange will be through the passage through the Greek parliament of a "retrofit collective action clause" covering the roughly 93 per cent of Greek debt that is governed by Greek law. This "retro CAC" would provide that if a supermajority of, say, two-thirds of bondholders agree a deal, the deal will be binding on the remaining holdouts, whether they like it or not.

A bit rough, you may argue, but since it provides for a vote and a majority rule, it can be said there is something "voluntary" about the exchange. The law has to be introduced in the Greek parliament, and passed, though, before its provisions can be included in the exchange offer.

This is where euro-dithering has lost not just valuable time, but essential time. Because there was concern that the "retro-CAC" could, in some future crisis, be applied to, say, Italian or Spanish bonds, that possibility had to be taken off the table with some euro announcement. That has pretty much been done with the Merkel-Sarkozy statement of this previous week, which limited so-called "private-sector involvement," or bondholder haircuts, on euro-area sovereign debt. For now.

When the bank-bondholder group is confronted with the velvet-wrapped club of the parliament-imposed retro CAC, then it should be possible to conclude negotiations and finalise the documents.

But it is not going to be possible to get all this done by the end of December, which was the hope when the Greek political class finished signing on to the so-called bailout. Instead, optimistically, the documents will be ready by mid-January.

Given the timeline to a hard default, shortened by parliamentary friction and holidays, there is not another two weeks to be lost in delay and indecision.

The Greek situation still has a fatal sting in its tail.

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