Traders signal deeper cuts after Bank of Canada's interest rate shocker

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Cecile Gutscher and Theophilos Argitis, Bloomberg
10:35 AM, E.T. | January 26, 2015
Economy

Tags: Bank of Canada

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Bond traders reeling from the Bank of Canada’s shock interest-rate cut are betting Governor Stephen Poloz will do it again.
Yields on two-year government bonds are lower than those on six-month bills for the first time in almost two years, suggesting another cut after the central bank’s surprise move to reduce the rate on overnight loans by a quarter-percentage point to 0.75 percent on Jan. 21. Poloz called it insurance for an economy buffeted by the oil rout and deflationary pressures.
“In the front end of the curve, the major driver is central-bank monetary policy expectations, and this shows you the market is pricing in more easing,” Andrew Kelvin, senior fixed-income strategist at Toronto-Dominion Bank, said by phone from Toronto. TD is forecasting a further 0.25 percentage point reduction at the Bank of Canada’s March 4 meeting. “We think they’re likely to ease again in March.”
Two-year bonds are yielding 0.54 percent, five basis points less than six-month bills at 0.59 percent, implying slower economic growth. The longer-term securities last yielded less in May 2013.
Canada became the first Group of Seven nation last week to loosen monetary policy in response to the plunge in oil prices, saying the slump will weigh on everything from inflation to business spending. The bank downgraded its growth forecast to a 1.5 percent annualized pace, from an October estimate of 2.4 percent, following the drop that has taken crude, the country’s biggest export, down more than 50 percent since June. The commodity traded at $45.59 a barrel Jan. 23 in New York.
‘DOWNSIDE RISKS’
“We see further weakness in oil prices in the first half,” Kelvin said. “The fact they cut without much warning in January shows they want to be proactive about it, and that tilts the likelihood toward March.”
The oil shock “increases both downside risks to the inflation profile and financial-stability risks,” the Bank of Canada said in its report last week. The cut is “intended to provide insurance against these risks.”
Poloz said at a press conference the central bank would take out more insurance if economic conditions warrant. The BOC is assuming oil prices at about $60 per barrel, the average for Brent since early December. If they persist around $50, first- half growth could fall to 1.25 percent, the bank said.
A cut of 25 basis points “ain’t going to do that much for the economy,” David Madani, an economist at Capital Economics in Toronto, said by phone Jan. 23. “Clearly, the bank is spooked by the collapse in oil prices. If it really is concerned, there’s a really strong likelihood they’ll cut rates further.”
WIDE OPEN
Madani, the only forecaster in a Bloomberg survey conducted from Jan. 9 to Jan. 14 who said lower rates were in store, said the gap in the actual price of oil and the bank’s assumptions leaves the door wide open for another rate cut. He’s estimating it will come in April.
Doug Porter, chief economist at the Bank of Montreal, said he’s anticipating a rate cut as soon as March 4, the next time the Bank of Canada meets.
“The case for a second insurance move looks supported by oil prices merely moving sideways, let alone falling further,” Porter said in a note to clients last week.

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EU open to Greek debt extension, not forgiveness

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26 Jan6:57 PM

[BRUSSELS] Europe showed a willingness on Monday to give Athens more time to pay back its debts, but little sign that it would yield to a new Greek government's demands of debt forgiveness.

European Union leaders and policymakers responded to Greek anti-bailout party Syriza's election victory on Sunday with warnings that a debt restructuring for Greece would send the wrong message to other euro zone members.

Euro zone finance ministers gather in Brussels on Monday afternoon to consider how to deal with Greece after the change of government, especially given that the existing Greek bailout programme expires on February 28.

The euro fell to an 11-year low as Syriza's victory set Athens on collision course with international lenders and potentially threatened its place in the single currency.

Without a bailout plan Athens will not be eligible for the European Central Bank's plan of government bond purchases and will have problems financing itself on the market. If Greece refuses to service its debt owed to the euro zone, private investors are unlikely to lend to it either, officials said.

Euro zone finance ministers are likely to signal they could extend the current bailout for Athens to give the new government time to negotiate economic policy with international lenders and talk about more time to pay back what Greece owes them.

Finnish Prime Minister Alexander Stubb said his country was ready to discuss an extension if the new government can commit to agreed contracts and promised structural reforms. "We will not forgive loans but we are ready to discuss extending the bailout programme or maturities ... But this will not change the fact that Greece must continue economic reforms," Stubb told reporters.

European Central Bank board member Benoit Coeure said that the ECB would not take part in any debt cut for Greece, but that changes to the debt maturities were possible. "He (Syriza leader Alexis Tsipras) has to pay, those are the European rules of the game," Coeure told Europe 1 radio. "There is no room for unilateral action in Europe, that doesn't exclude a discussion, for example, on the rescheduling of this debt." It was a message echoed across much of Europe, particularly in Germany, whose chancellor has led calls for budgetary rigour.

Germany's top-selling Bild newspapers led with "Greeks elect euro nightmare", the next page showing Syriza leader Alexis Tsipras punching the air next to the headline "What is this victory punch going to cost us?" It added that Germany had contributed 80 billion euros so far to the 240 billion euro Greek bailout package.

Germany's EU Commissioner, Guenther Oettinger, said a debt restructuring for Greece would send the wrong message to other countries in the euro zone. "If we cut debt (for Greece), that would give the wrong signal to Portugal or Ireland, Cyprus or Spain," Oettinger told German radio Deutschlandfunk, adding that the new government in Athens had to stick to agreements with its euro zone partners.

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• IMF's Lagarde rules out special treatment for Greece
• US 30-year yields near record low as Greece spurs safety bid
• Update: Euro steadies despite Greek worries
• Update: Euro hits 11-year low as Greek leftists sweep to power
• Euro briefly sinks to 11-year low vs dollar after Greek vote
• Euro tumbles on Greek vote results, approaches 11-year low

      

Tsipras to form anti-bailout Greek government after big victory

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Renee Maltezou and Costas Pitas, Reuters
6:34 AM, E.T. | January 26, 2015
International

Tags: Greece

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Greek leftwing leader Alexis Tsipras struck a deal with a right-wing party to form a government to confront international lenders and reverse years of painful austerity following a crushing election victory by his Syriza party.
The success of the anti-bailout party reignites fears of a new financial troubles in the country that set off the regional crisis in 2009. It is also the first time a member of the 19-nation euro zone will be led by a party rejecting German-backed austerity, emboldening anti-austerity movements elsewhere.
Fresh from trouncing conservative Prime Minister Antonis Samaras on a campaign of "Hope is coming!", the 40-year-old Tsipras quickly sealed a deal on a coalition with the head of the small Independent Greeks party which, like Syriza, opposes Greece's bailout deal.
"From this moment there is a government in the country. The Independent Greeks give a vote of confidence in Prime Minister Alexis Tsipras. There is an agreement in principle," Panos Kammenos said after talks with Tsipras at Syriza's headquarters in Athens.
A deal with the right-wing party makes an unusual alliance between parties on the opposite end of the political spectrum but brought together by a mutual hatred for the EU/IMF bailout program keeping Greece afloat.
Reaction from financial markets to Syriza's victory was largely muted, with the euro recovering from a tumble to a 11-year low against the dollar on initial results. Greek stocks dipped slightly while 10-year bond yields rose.
With almost all votes counted, Syriza won 149 seats in the 300-seat parliament, two short of an absolute majority. But the result marked a comprehensive rejection of the years of austerity demanded by the European Union and International Monetary Fund in return for the 240 billion-euro bailout.
Syriza's campaign of hope resonated with voters worn down by huge budget cuts and heavy tax rises during the years of crisis that have sent unemployment over 25 percent and pushed millions into poverty.
"Greece leaves behind catastrophic austerity, it leaves behind fear and authoritarianism, it leaves behind five years of humiliation and suffering," Tsipras, pumping his fist in the air, told thousands of cheering supporters in Athens on Sunday.
Tspiras will be creating the first euro zone government elected to undo the orthodox conservative polices of strict budgetary rigor that German Chancellor Angela Merkel has championed for the bloc's most troubled economies although he has not laid out what his first moves in office would be.
For the first time in more than 40 years, neither the New Democracy party of Samaras nor the center-left PASOK, the two forces that had dominated Greek politics since the fall of a military junta in 1974, will be in power.
Tsipras also expects to talk to the heads of two other parties, the centrist To Potami and the communist KKE, a sign he may look for their support even if they do not join a formal coalition.
The Independent Greeks, a rightwing party with a hardline stance against illegal immigration, disagrees with Syriza on many social issues which could create tensions but it shares its opposition to the international bailout.
An alliance between the two sides would suggest a hardline stance against Greece's creditors, who have dismissed Tsipras's demands for a debt writeoff and insisted the country stay on the path of reforms and austerity to get its finances back on track.
Hours after Syriza's victory, ECB Executive Board member Benoit Coeure said that Greece had to pay its debts and warned Tsipras to play by the "European rules of the game".
"There is no room for unilateral action in Europe, that doesn't exclude a discussion, for example, on the rescheduling of this debt," Coeure told Europe 1 radio.
Together with last week's decision by the ECB to pump billions of euros into the euro zone's flagging economy despite objections from Germany, Syriza's victory marks a turning point in the long euro zone crisis.
But after the euphoria of election night, hailed by flag-waving crowds in Athens, Tsipras faces daunting challenges and can expect strong resistance to his demands from Germany in particular.
With Greece unable to tap the markets because of sky-high borrowing costs and facing about 10 billion euros of debt payments this summer, he will have to seek a deal to unlock more than 7 billion euros of outstanding aid by the time the bailout is due to expire on Feb. 28.
However, Syriza's victory will also encourage other anti-austerity forces in Europe and add impetus to calls for a change of course away from the focus on budget belt-tightening and structural reform favored by Berlin.
Those calls have come not just from anti-system movements such as Podemos in Spain but also from leaders such as French President Francois Hollande, who congratulated Tsipras on his win, and Italian Prime Minister Matteo Renzi.

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Radical Leftists Win Election In Greece – Future Of Eurozone In Serious Jeopardy BY THE DAILY COIN · JANUARY 25, 2015

Radical Leftists Win Election In Greece – Future Of Eurozone In Serious Jeopardy

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by Michael Snyder, The Economic Collapse Blog

Radical leftists have been catapulted to power in Greece, and that means that the European financial crisis has just entered a dangerous new phase.  Syriza, which is actually an acronym for “Coalition of the Radical Left” in Greek, has 36 percent of the total vote with approximately 80 percent of the polling stations reporting.  The current governing party, New Democracy, only has 28 percent of the vote.  Syriza leader Alexis Tsipras is promising to roll back a whole host of austerity measures that were imposed on Greece by the EU, and his primary campaign slogan was “hope is on the way”.  Hmmm – that sounds a bit familiar.  Clearly, the Greek population is fed up with the EU after years of austerity and depression-like conditions.  At this point, the unemployment rate in Greece is sitting at 25.8 percent, and the Greek economy is approximately 25 percent smaller than it was just six years ago.  The people of Greece are desperate for things to get better, and so they have turned to the radical leftists.  Unfortunately, things may be about to get a whole lot worse.

Once they formally have control of the government, Syriza plans to call for a European debt conference during which they plan to demand that the repayment terms of their debts be renegotiated.  But the rest of Europe appears to be highly resistant to any renegotiation – especially Germany.

Syriza says that it does not plan to unilaterally pull Greece out of the eurozone, and that it also intends for Greece to continue to use the euro.

But what happens if Germany will not budge?

Syriza’s entire campaign was based on promises to end austerity.  If international creditors refuse to negotiate and continue to insist that Greece abide by the austerity measures that were previously put in place, what will Syriza do?

Will Syriza back down and lose all future credibility with Greek voters?

Since 2010, the Greek people have endured a seemingly endless parade of wage reductions, pension cuts, tax increases and government budget cutbacks.

The Greek people just want things to go back to the way that they used to be, and they are counting on Syriza to deliver.

Unfortunately for Syriza, delivering on those promises is not going to be easy.  They may be faced with a choice of either submitting to the demands of their international creditors or choosing to leave the eurozone altogether.

And if Greece does leave the eurozone, the consequences for all of Europe could be catastrophic…

Syriza risks overplaying its hand, said International Capital Strategies’ Rediker. “Given that the ECB controls the liquidity of the Greek banking system, and also serves as its regulator through the SSM (Single Supervisory Mechanism), going toe-to-toe with the ECB is one battle that could end very badly for the Greek government.”

If the ECB were to stop funding the liquidity of the Greek banks, the banks could collapse—an event that could lead to Greece abandoning the euro and printing its own money once more.

Milios didn’t believe it would come to that, saying, “No one wants a collapse of banks in the euro zone. This is going to be Lehman squared or to the tenth. No one wants to jeopardize the future of the euro zone.”

Hopefully cooler heads will prevail, because one bad move could set off a meltdown of the entire European financial system.

Even before the Greek election, the euro was already falling like a rock and economic conditions all over Europe were already getting worse.

So why would the Greeks risk pushing Europe to the brink of utter disaster?

Well, it is because economic conditions in Greece have been absolutely hellish for years and they are sick and tired of it.

For example, the BBC is reporting that many married women have become so desperate to find work in Greece that they are literally begging to work in brothels…

Some who have children and are struggling to support them have turned to sex work, to put food on the table.

Further north, in Larissa, Soula Alevridou, who owns a legal brothel, says the number of married women coming to her looking for work has doubled in the last five years.

“They plead and plead but as a legal brothel we cannot employ married women,” she says. “It’s illegal. So eventually they end up as prostitutes on the streets.”

When people get this desperate, they do desperate things – like voting radical leftists into power.

But Greece might just be the beginning.  Surveys show that the popularity of the EU is plummeting all over Europe.  Just check out the following excerpt from a recent Telegraph article…

Europe is being swept by a wave of popular disenchantment and revolt against mainstream political parties and the European Union.

In 2007, a majority of Europeans – 52 per cent – trusted the EU. That level of trust has now fallen to a third.

Once, Britain’s Euroscepticism was the exception, and was seen as the biggest threat to the future of the EU.

Now, other countries pose a far bigger danger thanks to the political discontents unleashed by the euro.

At this point, the future of the eurozone is in serious jeopardy.

I have a feeling that major changes in Europe are on the way which are going to shock the planet.

Meanwhile, the rest of the globe continues to slide toward another major financial crisis as well.

So many of the things that preceded the last financial crisis are happening once again.  This includes a massive crash in the price of oil.  Most people have absolutely no idea how critical the price of oil is to global financial markets.  I like how Gerald Celente put it during an interview the other day…

I began getting recognition as a trend forecaster in 1987. The Wall Street Journal covered my forecast. I said, ‘1987 would be the year it all collapses.’ I said, ‘There will be a stock market crash.’ One of the fundamentals I was looking at were the crashing oil prices in 1986.

Well, we see crashing oil prices today and the banks are much more concentrated and levered up in the oil patch than they were in 1987. From Goldman Sachs to Morgan Stanley banks have been involved in major debt financing, derivatives and energy transactions. But much of this debt has not been sold to investors and now we are going to start seeing some big defaults.

By itself, the Greek election would be a significant crisis.

But combined with all of the other economic and geopolitical problems that are erupting all over the planet, it looks like the conditions for a “perfect storm” are rapidly coming together.

Unfortunately, the overall global economy is in far worse shape today than it was just prior to the last major financial crisis.

This time around, the consequences might just be far more dramatic than most people would ever dare to imagine. www.google.com/+EricAu118