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Greece Gets Closer To Deal With Creditors

The usual story out of Greece today as the country appears to be a little bit closer to a deal with its creditors. This deal will determine how much of a loss the creditors will accept with their bond holdings.

These talks will continue all weekend long and officials said some kind of announcement will occur this weekend. Talks between the two parties have collapsed twice already as the IMF and European leaders want Greece to push for even more debt reduction. If Greece fails to do this, the latest talks could also collapse.

Sources close to the discussions have said that bondholders have made significant concessions towards the interest rate the new Greek bonds would carry. The creditors could accept rates as low as 3.6%.

Major euro financial institutions such as the ECB are calling for more budget cuts and reforms in Greece if the country wants another 30 billion bailout package. This demand comes as major austerity measures have already hit the country amid widespread protests by Greeks.

If this situation continues, volatility could creep back into the market as investors wonder if Europe will ever fix their debt related problems.

Greece and Private Creditors Close To Deal According To EU Official

A deal between private creditors and Greece appears to be getting closer to being done according to Olli Rehn, the EU’s monetary commissioner. Discussions between the two parties have been going on for a while now as they figure out how to swap shorter-dated bonds for new, longer-maturity ones. Many analysts believe an agreement must be done in order to avoid a messy default.

Rehn said he believes a deal will get done, “The next three days will be very crucial for that future … three years,” he said.

“In other words, we are just about to close a deal on the private sector involvement between the Greek government and the private creditor community, if not today maybe over the weekend, but in any case preferably still in January rather than in February,” he told participants in the debate in Davos hosted by CNBC.

The main sticking point in negotiations is with the coupon on new, long maturity bonds. The IMF and EU want it low enough so Greece’s debt will fall to 120% of GDP by 2020. It is currently at 160% of GDP.

The EU and IMF are also pressuring Greece to make more cuts to its bloated budget to ensure it gets another bailout.

Greek Talks Continue As Time Is Running Out

Negotiations on a debt swap deal with private creditors in Greece resumed today. The ECB is now part of the negotiations after IMF chief Christine Lagarde said public sector holders of Greece’s debt may need to take losses as well.

Greece is looking to get a deal done quickly to avoid a potentially catastrophic default when a bond redemption comes due in March. Greek officials are hoping to finish talks this week. The IMF put pressure on the ECB yesterday saying that public holders of Greek debt may need to accept losses if losses taken by the private sector don’t bring Greece’s debt to a sustainable level.

“We are ready to make an effort if everyone else (including the ECB) makes an effort,” a source close to the talks told Reuters.

The main area of disagreement is interest rate on the new bonds. The IMF and some euro countries are insisting the interest rate must be low enough in order for Greece’s debt to fall to 120% of GDP by 2020, down from the current 160%.

The main danger from Greece right now is that an uncontrolled default could cause a wide spread banking crisis in Europe.

The markets are largely ignoring Greece right now as earnings and news from the Fed have helped keep the bull rally going. Futures are up about 0.5% right now as the Dow is set to open 70 points higher, the Nasdaq will open 9 points higher and the S&P is set to open 6 points higher.

U.S. To IMF – “No Intention” of Giving More Money

Earlier we wrote a story about the IMF looking to raise an extra $500 billion in order to fight the euro debt crisis. Well, there’s one country that isn’t lending them the money and that’s the United States. A U.S. Treasury official told CNBC earlier today that the U.S. has “no intention” of giving more money to the IMF.

The U.S. Treasury spokesman believes the Europe can solve its own problems and doesn’t need the IMF to prop it up. This is in line with the administration’s position of European countries enacting more measures to fight the debt crisis.

The IMF believes global potential financing needs about $1 trillion in the next few years. “Based on staff’s estimate of global potential financing needs of about $1 trillion in the coming years, the Fund would aim to raise up to $500 billion in additional lending resources,” an IMF statement said.

“This total includes the recent European commitment of about $200 billion in increased Fund resources. At this preliminary stage, we are exploring options on funding and will have no further comment until the necessary consultations with the Fund’s membership have been completed,” it added.

Regardless of what anyone thinks the IMF needs, the global markets will dictate the response in the end.

IMF Looking To Boost Its Rescue Fund

The International Monetary Fund (IMF) is looking to boost its lending power by $600 billion as it continues to help countries that are still struggling from the European debt crisis. Other nations believe that Europe must do more to support its ailing members instead of the IMF stepping in all the time. The Group of 20 officials will meet in Mexico City tomorrow and Friday.

“Many countries want the Europeans to move ahead with tougher and clearer measures, which at this moment translates to more resources to its stability fund,” said a senior Brazilian government source attending the meeting.

In a statement, the IMF said it will need $500 billion to lend to member countries that need it. IMF sources told Reuters on Tuesday, the other $100 million is need as a “protection buffer.”

These same sources added the IMF estimates a $1 trillion global financing gap over the next two years if economic conditions worsen around the world. The Euro reacted positively to the news with the EUR/USD pair up 1.5% at 1.2853.

The IMF has already received a promise from euro zone nations for $200 billion, but G20 officials in Mexico have said there is some resistance to this.

The U.S. with support from Canada, Japan and Korea have been pressuring European countries to do more when it comes to additional measures, a source told Reuters. European countries on the other hand believe they have done more than enough and want more IMF resources now

“If, with the parallel discussion, we can achieve extra measures from the Europeans and afterwards agree on promises of additional resources for the IMF from non-European countries in the G20, I think it would be a good result,” the source said.

Hopefully, both sides can reach some kind of consensus to keep the situation under control. With the recent slew of credit downgrades, global markets will most likely react strongly to any news coming out of Europe.

Greece On The Brink

Joint talks between Greece and its creditors broke down on Friday with Greece warning of a potentially catastrophic results if a bond swap deal isn’t done in the very near future. This bond swap deal would see creditors voluntarily give up their promised returns which will in turn help Greece slash its debt to more manageable levels and convince the EU and IMF to continue letting the country borrow cash.

Both sides are digging in for what looks like a game of chicken to see who will flinch first. Now is not the time to do this though, as a debt default for Greece would be disastrous.

Discussions with Greece and the official sector are paused for reflection,” said the Institute of International Finance (IIF), which leads talks for private bond holders, to Reuters.

“Unfortunately, despite the efforts of Greece’s leadership, the proposal put forward … has not produced a constructive consolidated response by all parties.”

Talks had appeared to be going well but began breaking down earlier today. “Yesterday we were cautious and confident. Today we are less optimistic,” said a source close to the negotiations.

“I’m sure that’s exactly what it is. You have a situation where there was an initial agreement to write off at one level, then it’s a write-off at a higher level and I’m sure there’s some people looking at it saying we can get a better deal,” said Gary Jenkins, director of Swordfish Research.

“When you’re dealing with a sovereign, you don’t have a huge amount of tricks up your sleeve, because if they choose not to pay you there’s not an awful lot you can do,” he added.

Economic news is beginning to sound like a broken record as Europe continues to be the main focus for investors around the world. Greece has been the main focus for months, but there are rumblings of multiple credit downgrades coming as soon as today for other countries including France. It should come as no surprise that investors are negatively to news out of Europe today with each of the major stock indexes are down about 1%.

Greek Bailout Funds Military Purchases

Here’s a thought experiment. What country do you think of when you hear out of control defense spending and a shrinking middle class? Most would immediately think of the United States but today comes the news that Greece has been using bailout funds for defense purchases. Instead of solving their debt crisis the money that came from the IMF (US) and the EU (Germany) decided to go for a 360. We gave them the cash and they have turned around and bought military hardware. Sign Up For Our Free Weekly Newsletter

Greece’s standpoint is that they must have a strong military. Cause you never know when they might have to breach the walls of Troy again. They say Turkey’s military build-up is cause for concern and that they must keep pace. Here I was thinking their shattering financial situation was the real cause for concern. But hey what’s a few Euros when you can just print some more.

Purchases on the military hardware have run the range from American-made Apache attack helicopters to German submarines. So the countries that are pushing for Greece to solve their fiscal issues are giving them money so they can turn around and give it back via arms purchases. So glad they are on top of this sovereign debt issue. I was actually getting concerned.

An unnamed source in Zeit Online said that if Greece receives the next tranche of bailout funds in March there is a good possibility another arms deal could be brokered. All of this military build-up should be a concern from a domestic political standpoint. Greece has a proclivity for military coups and the current stress on the political climate there makes the situation all the more volatile.

Could Another Global Recession Be Coming?

Many economists now believe that another global recession in 2012 is inevitable. The eurozone crisis continues to get worse as contagion spreads through Italy and Spain and is now on the doorstep of power house countries including France and Germany. Recoveries are slow in other areas including the U.S.

Policymakers are also worried even though they could fix it if they would act and not sit around and watch it implode. Christine Lagarde, managing director of the IMF, warned in September that the world economy was entering a “dangerous phase.” Fast forward to today and these treats are happening now. Earlier this month in Brazil she told journalists, “The global economic outlook will be lower, and in certain parts much lower than what we had initially envisaged.”

This gloom outlook is shared by people in the private sector as well. Jan Hatzius, Goldman Sachs chief U.S. economist, said that growth is being held back by higher taxes and efforts to pay back personal and corporate debt. “That combination is likely to see another two years of sub-par growth in the major advanced economies, extending into 2013,” he said.

The global economy will still see growth as economists are forecasting about 3% in 2012, it was 4% in 2011. The main problem is that another recession would put even more stress on the sovereign debt market which is already on the verge of collapse.

Plus there is an election year coming in the U.S., so any hopes of cooperation between the two parties will be thrown out the window, well actually it already has. Economists expect the U.S. economy to continue its modest recovery.

Following last year’s strong recovery following the 2008-9 crisis, this year is being seen as a disappointment. Until the sovereign debt issue is fixed once and for all in Europe, uncertainty will reign supreme over the markets.

IMF – EU Treaty Agreement A Partial Solution

The treaty agreement by euro zone countries on Friday not a complete solution for the euro zone’s debt crisis according to the International Monetary Fund (IMF) chief economist Oliver Blanchard.

“I’m actually more optimistic than I was a month ago, I think there has been progress,” Blanchard told the Globes business conference in Tel Aviv.

“What happened last week is important: it’s part of the solution, but it’s not the solution.”

Blanchard did not elaborate on what further steps were needed.

The new agreement will see euro zone economies integrate even more. There was opposition from Britain though who refused to ratify the treaty. European leaders also agreed they should provide 200 billion euros in bilateral loans to the IMF in order to help struggling EU economies.

“The commitment to give us 200 billion euros makes a major difference in the sense that we can now go out and talk to other countries and say, ‘the Europeans have given us money, can you help?,” Blanchard said.

“Whether this gives us the whole bazooka or not, I hope so.”

When asked if diverse statements from EU policymakers were causing volatility in the markets, Blanchard responded, “A lot of the volatility is coming from statements from Europe, showing the range of opinions and inability to get to a logical decision process.”

This agreement did help the markets on Friday as the major indices all saw gains of more than 1.5%. Now let’s see how long this agreement can keep uncertainty out of the market.

Geithner Will Discuss Idea Of U.S. Federal Reserve Loaning To IMF To Help Euro Zone

It is being floated around that the U.S. Feral Reserve along with seventeen euro zone national central banks may help provide the International Monetary Fund with the money it needs to aid the countries engulfed in the European sovereign debt crisis.

The German newspaper Die Welt reported anonymous sources saying the euro zone central banks could pay at least 100 billion euros ($134.2 billion) into a special fund that could be used for programs for nations struggling to control their debts. “Also other central banks, for example the U.S. Federal Reserve, are apparently prepared to finance a part of the costs,” the paper said in an advance copy of an article to appear on Monday. United States Treasury Secretary Timothy Geithner may discuss the idea in the coming weeks when he visits Europe, the paper said.

Geithner is set to hold talks with several European leaders in the coming week and will urge them to take decisive action at an EU summit aimed at preventing the euro zone debt crisis spiraling out of control. A Treasury official said on Friday that the United States was not planning to make bilateral loans to the IMF and the lender’s resources were adequate.

Geithner will meet with French President Nicolas Sarkozy, new Italian Prime Minister Mario Monti, and Spanish Prime Minister-elect Mariano Rajoy on the December 6-8 trip, which will include stops in Frankfurt, Berlin, Paris, Marseille and Milan, the Treasury said in a statement on Friday.

Geithner and President Barack Obama have expressed concern that a wider crisis would hurt U.S. growth. The Treasury chief has said he wants Europe to eliminate the threat of “cascading defaults.”

The Treasury’s chief economist, Jan Eberly, on Friday said a European recession brought about by the debt crisis would pose serious risks to the U.S. economy, with 15% of total U.S. exports going to the euro-zone’s 17 member countries. “That’s a substantial exposure from U.S. economy to what happens in Europe, so that’s absolutely a source of concern,” Eberly, the assistant secretary for economic policy, told reporters.

Geithner is hoping for a warmer reception this go around in Europe as the reception he received at the EU summit is September was a bit chilly.

Italy In Preliminary Talks With IMF About Financial Support

Italy has held preliminary talks with the International Monetary Fund (IMF) about financial support to help them deal with the euro zone’s debt crisis. There’s even been talk of it being co-funded by national European central banks, but as of right now no decision has been made according to several sources close to the discussions.

Mario Monti, the new Italian Prime Minister, briefed EU finance ministers on Italy’s fiscal plans during the EU minister meeting yesterday. No formal request has been made for IMF assistance yet but sources say this may happen after he presents his budget to Italy’s cabinet on December 5.

Sources close to the situation say that talks between Italy and the IMF have been going on for weeks, but quickened last week after Germany said the European Central Bank (ECB) could not directly assist Italy. “Discussions are currently around a 400 billion euro ($530.6 billion) contingency package. Italy has not filed a request but things are building in that direction,” the source said.

Other banks may have to help out since the IMF only has $380 billion available to lend to all countires. The IMF has denied talks are going on and their statement reads, “The IMF wishes to reaffirm that there are no discussions with the Italian nor Spanish authorities on any form of IMF financing.”

These talks come as many economists believe the Euro Zone is entering into a crucial 10 day period to save itself.

“We are now entering the critical period of 10 days to complete and conclude the crisis response of the European Union,” said Economic and Monetary Affairs Commissioner Olli Rehn as EU ministers met yesterday.

Stocks are poised to open higher today with futures for the major indexes up more than 2%.

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