Banks Squabble With EU Over Greek Debt Losses

By Aaron Kirchfeld - Oct 24, 2011

The world’s biggest banks are squabbling with European leaders over the size of losses on their Greek bonds as they seek a deal to cut the country’s debt load, two people with knowledge of the discussions said.

The financial companies, represented by the Institute of International Finance, proposed a loss of 40 percent on Greek debt, said one of the people, who declined to be identified because talks are confidential. The European Union is calling on investors to forfeit as much as 60 percent, making a compromise at 50 percent possible, the person said.

The talks are part of an attempt to solve the two-year-old sovereign-debt crisis that has pushed Greece closer to default, roiled global markets and dented confidence in the survival of the 17-nation currency. EU leaders are scrambling to reach an agreement on bolstering the region’s rescue fund, recapitalizing banks and relieving Greece to avoid contagion spreading to Italy and Spain before another summit in two days.

Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers, said talks on private-sector involvement in a second aid package for Greece are focusing on losses of “about 50 percent, 60 percent.”

Charles Dallara, managing director of the IIF, the lobby group for 450 of the world’s biggest financial companies, said on Oct. 22 that “discussions are making progress, albeit limited.” The group remains “open to explore options on a voluntary approach built on a realistic outlook for the Greek economy and restoration of Greece’s market access,” he said.

Larger Writedowns

EU policy makers have been calling for larger writedowns amid a deteriorating Greek economic and financial situation, as highlighted in a draft report last week by the European Commission, the European Central Bank and the International Monetary Fund, collectively known as the troika.

Greek two-year notes currently trade at about 40 percent of face value. Under the terms of a July 21 accord with the IIF, the banks would take losses of 21 percent on the net present value of their holdings of the nation’s debt. That plan includes up to 35 billion euros ($49 billion) in high-quality collateral for the investors.

One option being considered involves a swap with no collateral of any kind in a so-called hard restructuring, people familiar with the matter said on Oct. 21. Other plans involve an exchange with a 50 percent reduction in net present value, or upfront bond exchanges into either European Financial Stability Facility bonds or new 30-year Greek government debt, the people said. Upfront exchanges could involve a 50 percent discount off face value.

To help European lenders shoulder sovereign losses, lenders may be required to raise about 100 billion euros in capital by mid-2012, according to two people briefed on the matter. The European Banking Authority tested lenders to see how much money they’ll need after writing down bonds from countries such as Greece and marking up stronger debt including that of Germany, they said.

Reuters reported the 40 percent proposal by banks late yesterday.


Still waiting for a European solution

The BNN Chase by Marty Cej:

European leaders have adjourned to Wednesday, taking fresh proposals from the weekend’s summit back to their respective parliaments where dismay and disappointment will be expressed in a multitude of languages. Formal plans should be drawn up by Tuesday and announced at the completion of another summit Wednesday.

There will be three main pillars to the plan: A haircut for holders of Greek debt that is likely to become more of a buzz cut; larger European bank recapitalizations, and some kind of external support for the EFSF bailout mechanism that assures markets that those in greatest need of bailouts or backstops – Greece now, Italy soon – will get what they need when they need it. The next three days ought to see plenty of leaks to the media as governments try to lessen the shock to markets and voters of coming to an actual decision.

The solution will be televised.
In the meantime, central bankers elsewhere continue to wrestle with the impact of the European debt crisis on their own economies. Federal Reserve Bank of Dallas President Richard Fisher was one of three Fed members to dissent from Open Market Committee decisions in August and September to lower borrowing costs and stimulate the U.S. economy through “unconventional” means. Fisher doesn’t like “Operation Twist” – the Fed’s plan to sell shorter-term bonds and buy longer-term bonds in a bid to push yields at the long end lower – and he doesn’t care who knows it. Fisher sits down with us at 1:00 pm on Headline.

Our conversation with Fisher comes less than 24 hours before Bank of Canada Governor Mark Carney must explain to markets why interest rates won’t be raised anytime soon even as inflation accelerates beyond the central bank’s preferred target pace.

Canada’s benchmark rate is expected to remain unchanged and the accompanying statement is expected to be explicit in its assessment of the threats to the Canadian economy from the European debt crisis and U.S. unemployment. A survey released today by the National Association for Business Economics shows U.S. companies’ hiring plans at their worst level since January 2010.


Caterpillar doesn’t seem to be feeling the pinch, though. A few minutes ago, the world’s biggest maker of heavy yellow earth-moving equipment, reported higher-than-expected third-quarter earnings, record revenue and thousands of new jobs. The company said it expects year-end profit at the high end of its previously announced range and “2012 is shaping up to be better.” The quarterly earnings report from Caterpillar is always full of economic analysis and detail from around the world and this one is no different. Paul Bagnell has the file.

As I was typing that last bullet point, three deals were announced: Healthcare provider Cigna agreed to buy Healthspring for $3.8 billion; Oracle agreed to buy cloud computing company RightNow Technologies for $1.5 billion and J.M. Smucker agreed to buy a majority stake in Sara Lee’s coffee business for $350 million up front and another $50 million over the next 10 years.
Back to earnings, we’ll be taking a look at numbers from Netflix, Texas Instruments and West Fraser Timber.

This week sees Canadian earnings season pick up with numbers beginning tomorrow from CP, CNR and Astral Media. Wednesday will be busy with Rogers Communications, Corus, Agnico-Eagle, Mullen Group, Methanex, Goldcorp, Sherritt, Lundin Mining and Open Text.

Ivan Lo Equedia Weekly Says...

The high risk, high reward profile in Canada is dominated by companies listed in the TSX Venture exchange - in particular, the junior mining sector with its higher-risk, less liquid, and more speculative member companies.

Under the current global economic and political environment, there will undoubtedly be periods of volatility leading to downside pressures.

While the first few months of 2011 were strong, the performance of the TSX Venture has been under extreme pressure since early March. It has been severely battered as risk aversion has strangled the equity markets. When flight to safety is the number one priority, the Venture is always going to get hit the hardest. In a market where liquidity has always been a concern, things can go real bad when money is pulled out.

But does that mean you should stay away?

Gauging the TSX Venture

Generally, the gauge for investor sentiment is the strength of an exchanges' daily trading volumes; in other words, liquidity. In the case of the junior mining sector, the strength of the TSX Venture volumes have been dwindling at an extreme pace.

In January 2011, the S&P/TSX Venture set a new record for daily-traded volumes - reaching a yearly and all-time high of over 600 million shares traded per day. Since then, volume has tumbled averaging below 200 million shares per day in the last few months. I consider this number to be the absolute minimum level of liquidity support for the TSX Venture. If the average traded volumes continue to dip below this number, we are going to see some rock bottom prices soon.

To get a better grasp of what's going on, let's look back at the Venture's history.

Predicting the Future by Looking at the Past

Over the last 10 years - but excluding the 2008 crash - typical corrections on the TSX Venture have ranged from 17-31%, with the longest correction lasting over a 19-week period. Based on rolling 52-week highs and lows, the Venture has seen a decline of 47% from March 7, 2011 to October 4, 2011 - a range of 28 weeks. This clearly shows us that this is not a typical correction.

The TSX Venture in its current state is now back to levels not seen for 8 years, when gold was trading just over $400/oz and the TSX Venture exchange was barely nearing its second anniversary.

To put the crash of 2008 into perspective, let's look at the previous bear runs of other junior exchanges in Canada, including the Vancouver Stock Exchange (VSE), the Canadian Venture Exchange (CDNX), and the TSX-Venture (TSX-V) since 1983.

The Venture's 80% drop in 2008 is the single largest decline ever in the 25 year history of any of the past Canadian junior exchanges. The biggest drop in the junior exchanges aside from 2008 was during the crash of 1987 when the junior market in Canada dropped 54% over a one-year period. So far this year, we have declined 47% over a 7-month period.

What's Next?

In 1987, the market was under pressure for nearly four years before a new upward trend was established. In 1996, following the Bre-X scandal, the market was under pressure for three and a half years. Luckily, in most other cycles of corrections, the markets recovered in just over one year.

Regardless, those numbers can be daunting. However, there is a bright side.

While additional market pressures are still on the table and Europe remains a mystery, there is a strong possibility that we could have a recovery in the junior sector despite the negative sentiment.

First of all, current low interest rates offer very few alternatives for deployment of capital. Just last week, I talked about how badly the world's largest bond fund has performed in this low interest rate environment (see Prepare for Upside).

Second, metal prices remain significantly above average historical prices. That means many mineral projects can be developed into high margin operations. As such, many of the juniors remain well funded, opening the potential for exploration spending to create speculative interest in new discoveries.

Third, balance sheets of the majors continue to strengthen and that means more potential for M&A activity, including takeovers of exploration and development companies. We have already seen it over this past year including last week's takeover announcement of Hathor by Rio Tinto - just one of many takeovers and consolidation attempts this year. I fully expect this trend to continue - especially given the current major decline in share prices for many of the juniors.

Last, but certainly not least, exploration capital continues to flow - unlike the climate in 2008 when a junior explorer couldn't even raise a few pennies to put something into production.

Big Money

Last month, Metals Economics Group indicated that 2011 non-ferrous exploration budgets would exceed US$17 billion on expenditures related to precious and base metals, diamonds, uranium, and some industrial minerals; the focus of these expenditures on gold exploration with copper being second. According to MEG, this represents an increase of about 50% from the 2010 - setting a new all-time high. That means there is a lot of smart money being risked.

Record levels of exploration spending should drive new discoveries and strong reserve/resource growth over the next year, which should improve the equity valuations in the junior sector. This, along with high metal prices, should lead to a rebound in mining equities in the coming months if the overall equities market turns around.

Room for Growth

Last week, we saw PMI Gold jump from a low of $0.56 cents to a high of $1.30 in two days following the announcement of more than tripling their current gold resource at Obotan.

For those who don't recognize the name, PMI Gold's Obotan project lies approximately 8 km southwest of Abzu Gold's Mpatasie-Golden Reef concessions in Ghana.



Abzu is a company we featured earlier this year (see report here.) Like many other junior explorers, it too has taken a hit.

However, just last week they announced the discovery of a new mineralized zone on its 100% owned Asafo concession located along the eastern margin of the Kibi Belt, Ghana. The new discovery is centered on a drill hole that returned 4.72 g/t gold over 20.00 metres at a vertical depth of only 28 metres. (see news release)

The great thing about gold exploration in Ghana is the simple geology associated with gold bearing zones. Drilling by Keegan Resources and PMI Gold have clearly shown us that it doesn't take much to add ounces. Those are just some of the reasons why Keegan and PMI have attracted so much interest with their African gold projects. And that's what I am banking on with Abzu.

Over the next month, I anticipate Abzu to release drill results on their most advanced target, the Nangodi concessions where previous explorers have identified numerous targets, where prior drilling intercepted (see picture below):

52m @ 3.24g/t Au (NGRC009)
26m @ 2.24 g/t Au (NGRC017)
51m @ 2.4 g/t Au (NGRC018)
13m @ 2.48g/t Au (NGRC019)*.

*(based on incomplete, unpublished historic data provided by Red Back. This information is historic in nature and is not 43-101 compliant. A Qualified Person has not reviewed drilling or sampling procedures or QA/QC undertaken at the time of drilling. However, Abzu has no reason to doubt the validity of the information).

These targets are near the Burkina Faso border (well-known for its resource rich properties) and are approximately 30 km southwest of and along strike from the Youga Mine where Endeavour Mining Corporation anticipates gold production of approximately 84,000 ounces this year.

There is no reason to doubt the validity of the information from the past drill results. As such, I anticipate the upcoming drill results by Abzu on their Nangondi to be similar to the historic results provided by the original owners. If the results come back similar, Abzu should garner some serious interest.

On many of Abzu's properties, there is gold at surface, the geology is simple, and there are countless artisanal miners on Abzu's properties - all great attributes.

All of the targeted vein systems being tested by Abzu are anticipated to be analogous to those discovered by Keegan Resources at their Esaase deposit, just northeast of Abzu and PMI Gold's Obotan Project to the southwest.

Interest on projects within the Ghana area have garnered strong speculative capital by both the institutions and retail investors. As Abzu continues to drill, I strongly believe their numbers will speak for themselves.

What to Expect

For the rest of 2011, I will be adding my exposure to juniors that are associated with strong management and that have active exploration and development programs on top-quality targets/assets over the next 6-12 months.

Risk tolerance will continue to be a major factor in determining the junior mining sector market valuations. That means we should be aware of the potential macroeconomic factors (Europe, politics, China etc.) that help to shape broad investor risk tolerance.

That being said, I still believe that strong overall fundamentals (metal prices, low interest rate) underline the junior mining sector. If you have an iron-clad stomach, accumulating positions during corrective market phases could prove very rewarding.

Many of the stocks listed on the Venture have lost bid support. In cases and scenarios such as this, strong companies have been hit based purely on liquidity of the markets, as opposed to the business itself. When people pull their bids, stocks can drop really fast - but that also means that stocks can bounce back just as fast.

Patience.



Until next week,

Ivan Lo
Equedia Weekly