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Germany May be Ready to Surrender Over Greece

Germany may be getting ready to give up on Greece.

After almost two years of fighting to contain the region’s debt crisis and providing the biggest share of three European bailouts, Chancellor Angela Merkel is laying the ground for what markets say is almost a sure thing: a Greek default.

“It feels like Germany is preparing itself for a debt default,” Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London, said in an interview. “Fatigue is setting in. Germany could be a first mover or other countries could be preparing too.”

Officials in Merkel’s government are debating how to shore up German banks in the event that Greece fails to meet the budget-cutting terms of its aid package and is unable to get a bailout-loan payment, three coalition officials said Sept. 9. The move capped a week of escalating German threats that Greece won’t get the money unless it meets fiscal targets and investors raising bets on a default.

Ring-fencing their banks and a hardening of rescue terms risk isolating Germany and unnerving global policy makers already fretting that the region’s political tussles are roiling markets and threatening growth. Underscoring the tone of weekend talks of Group of Seven finance chiefs, U.S. Treasury Secretary Timothy F. Geithner told Bloomberg Television that European authorities must “demonstrate they have enough political will” to end the crisis.
Credit Risks

European bank credit risk surged last week to an all-time high and the euro fell by the most against the dollar in a year. Investors have doubts whether Greece, whose two-year notes now yield 57 percent, will implement austerity moves fast enough to get a sixth payment from last year’s 110 billion-euro ($151 billion) bailout.

The Greek government’s top priority is “to save the country from bankruptcy,” Prime Minister George Papandreou said in a Sept. 10 speech in the northern Greek city of Thessaloniki. “We will remain in the euro” and this “means difficult decisions,” he said.

More evidence of rifts at the heart of policy making was exposed with the unexpected Sept. 9 announcement that Juergen Stark, a German, will quit the European Central Bank’s executive board over his opposition to the ECB’s purchases of bonds from debt-laden countries.

“Stark’s departure could be seen by financial markets as another indication of growing disenchantment in Germany towards the euro,” said Julian Callow, chief European economist at Barclays Capital in London. “This could complicate Germany’s involvement in additional bailout programs.”
Marseille Gathering

At the G-7 gathering in the French port of Marseille, ECB President Jean-Claude Trichet and European Union Economic and Monetary Affairs Commissioner Olli Rehn said they knew nothing about the talk in Germany of the so-called Plan B to protect banks. French officials said they weren’t working on a parallel proposal and Bank of France Governor Christian Noyer said his country’s banks have the capital to withstand a Greek default.

BNP Paribas (BNP) SA, Societe Generale (GLE) SA and Credit Agricole SA (ACA), France’s largest banks by market value, may have their credit ratings cut by Moody’s Investors Service as soon as this week because of their Greek holdings, two people with knowledge of the matter said on Sept. 10.

Moody’s said in June that the three banks were placed on review to examine “the potential for inconsistency between the impact of a possible Greek default or restructuring,” and the companies’ current rating levels.

Much more on this story at Bloomberg

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Reuters: Obama, lawmakers seek to salvage debt deal

(Reuters) – President Barack Obama and top congressional lawmakers on Saturday attempted to salvage a deal to stave off a catastrophic debt default after a collapse in deficit talks left both sides angry and frustrated.

Obama, a Democrat, called House of Representatives Speaker John Boehner and other congressional leaders to a meeting at 11 a.m. EDT at the White House on how the debt ceiling can be raised by August 2.

“They are going to have to explain to me how it is that we are going to avoid default,” a visibly angry Obama said on Friday after Boehner, the top Republican in Washington, informed Obama he was breaking off talks.

A senior Senate aide, speaking before the White House meeting, said the goal will be to work out a deal this weekend and have legislation ready to introduce on Monday.

With the Treasury set to run out of money to pay all of its bills on August 2, Obama feared the window may have closed for a “grand bargain” of spending cuts and tax increases in exchange for Congress raising the $14.3 trillion debt ceiling.

The battle in Washington is over spending cuts and taxes. Obama says he has agreed to deep spending cuts that make his own Democrats uneasy but that Republicans must allow some taxes to rise, a prospect they have rejected.

Summoned to the White House were Boehner, Senate Republican leader Mitch McConnell, Senate Democratic leader Harry Reid and Nancy Pelosi, the top Democrat in the House.

Boehner planned to reiterate to Obama that “we must have cuts greater than the debt limit increase,” a Boehner aide said.

“We will be working throughout the weekend with leaders in the House and Senate to find a serious solution,” the aide said.

Financial markets are growing more edgy and U.S. banks and businesses are making contingency plans for the possibility of a debt default that would drive up interest rates, sink the dollar and ripple through economies around the world.

Credit rating agencies want spending restraints for the United States to keep its prized AAA rating that makes U.S. Treasuries the solid foundation for global investors and lowers borrowing costs for state governments, businesses, homeowners and consumers.

“We have now run out of time,” Obama said on Friday after talks collapsed on a deficit reduction package worth more than $3 trillion over 10 years.

Boehner said on Friday he was confident the debt ceiling would be raised next week. But he will have to overcome resistance from Tea Party movement conservatives in his own party and could run into problems for having signaled a willingness to give ground on revenue increases in closed-door talks at the White House.


Both Republicans and Democrats chafed at the compromises a far-reaching deal would require before the presidential and congressional elections in November 2012, with each side accusing the other of not doing enough and demanding too much.

Boehner said talks collapsed because the White House insisted on raising taxes while refusing to get serious about cutting spending and overhauling retirement and healthcare programs. Democrats say tax loopholes and Bush-era tax cuts for the wealthy must end as part of a U.S. fiscal rehabilitation.

A major barrier was how much revenue would be raised through tax reform — with Obama wanting $1.2 trillion over 10 years and Boehner putting $800 billion on the table.

“If not reversed within the next few days through crisis negotiations, this breakdown will be highly detrimental to the already fragile health of both the U.S. and global economies,” Mohamed El-Erian, co-chief investment officer at Pimco, the world’s top bond fund manager, told Reuters.


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Gensler Evolving in Derivatives War Sees No Deed Go Unpunished

Gary Gensler, chairman of the Commodity Futures Trading Commission, took his seat before a Senate appropriations subcommittee on May 4 to make his case for a $106 million budget increase.

Without the money, Gensler said, his agency wouldn’t be able to perform its new job of policing roughly $300 trillion in U.S. over-the-counter derivatives, a market that includes the credit-default swaps that helped push the U.S. economy into the worst recession in 70 years, Bloomberg Markets magazine reports in its August issue.

“In 2008, both the financial system and the financial regulatory system failed the test for the American public,” Gensler, 53, told the senators. “An investment in the CFTC is warranted, because, as we saw in 2008, without oversight of the swaps market, billions of taxpayer dollars may be at risk.”

Even before Gensler had a chance to make his rounds at the Republican-controlled House, he got its response. Representative Jack Kingston, a Georgia Republican, proposed a spending bill on May 23 that called for a 15 percent CFTC budget cut to $172 million.

Although the Dodd-Frank Wall Street Reform and Consumer Protection Act required the commission to write and enforce more than 50 new rules regulating derivatives trading and commodities futures, Gensler, who’d gotten an increase for the current year, needed to tighten his belt starting on Oct. 1, as at other agencies, Kingston said.

‘Thinking Has Evolved’

The news was the latest blow to the former Wall Streeter, who has been knocked around repeatedly since he began advocating in 2009 that the huge derivatives market had to be controlled — and that his CFTC was the agency to do it.

As a Goldman Sachs Group Inc. (GS) partner and then Treasury undersecretary, Gensler had lined up with the hands-off- derivatives crowd behind the $601 trillion global market.

He says the near-collapse of the world’s financial system changed his mind about regulation.

“My thinking has evolved,” Gensler says in his ninth- floor Washington office, which is decorated with artwork by his three daughters. “I was part of the consensus view on derivatives, and it’s fair to say that the consensus missed it. We should have done more to protect the American people.”

Gensler is an unlikely agitator for reform. While he was at the Treasury, the administration of President Bill Clinton refused to regulate OTC derivatives, the financial instruments that derive their value from an underlying asset. Gensler helped push an anti-regulation bill through Congress in 2000.


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Treasuries Decline for First Time in Three Weeks as Deficit Talks Collapse

Treasuries fell for the first time in three weeks as talks collapsed between President Barack Obama and House Speaker John Boehner over a deficit-cutting package as part of an agreement that would lift the nation’s debt ceiling.

Two-year note yields touched the highest in almost two weeks July 21 as Standard & Poor’s reiterated it saw a 50 percent chance of cutting the U.S. credit rating within three months and European leaders reached a deal to stem Greece’s debt crisis. Boehner said yesterday after markets closed he will instead talk with Senate leaders on a way to avoid a U.S. default. The U.S. will sell $99 billion in notes next week.

“It’s certainly a negative thing for Treasuries,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. “The deep divisions between the parties make an agreement much tougher, but we still have the potential for 11th-hour emergency measures.”

Yields on benchmark 10-year notes rose six basis points, or 0.06 percentage point, to 2.96 percent yesterday in New York, from 2.91 percent on July 15, according to Bloomberg Bond Trader prices. The price of the 3.125 percent securities due in May 2021 fell 15/32, or $4.69 per $1,000 face amount, to 101 3/8.

Thirty-year bond yields increased one basis point to 4.26 percent. Two-year note yields were up three basis points to 0.39 percent and reached 0.41 percent on July 21, the highest level since July 8.

Treasuries pared weekly losses yesterday before Boehner’s announcement amid bets Obama and lawmakers would reach a deal to reduce the deficit, raise the debt limit and avert a default.


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WSJ: Why Gold Won’t Soon Crash


Has gold reached its peak? Don’t bet on it.


ReutersWiener Philharmoniker gold coins at the Ginza Tanaka store in Tokyo. Gold prices have rallied this year, part of a decade-long rally.

On July 18, the price of gold hit a record high of $1,602.10 an ounce. After a sixfold rise over the past 10 years, compared with a 32% total return for the Standard & Poor’s 500-stock index, it is easy to imagine that the end of the gold rush is at hand.

But some market watchers say the reasons to own gold may be getting stronger. Cash earns nothing, with the U.S., European Union and China, among others, keeping interest rates artificially low. And paper currencies feel thinner than ever, with the possibility of government defaults in Europe and even in the U.S. The only thing worse than earning nothing on your cash is having its purchasing power go down if the dollar shrivels in value.

Those issues, even individually, can be supportive for gold,” says David Wilson, a commodity strategist at Société Générale. “None of them are going away.”A look at past bull markets in gold can help investors identify the moment when the rally has lost its legs.

The first is frothiness. Back in 1980, during gold’s previous peak, inflation was rising by 1% a month and interest rates were pushing 14%. The mood approached hysteria as the price of gold doubled in less than two months. South Africa’s international distributor of Krugerrands ran out of the popular gold coins, New York Federal Reserve President-elect Anthony Solomon was forced to dismiss rumors of a return to the gold standard, and the $1.6 trillion invested in gold exceeded the $1.4 trillion value of U.S. stocks.

While the enthusiasm for gold today is high—see the recent flurry television commercials advertising gold coins—most analysts agree that it hasn’t turned into outright euphoria.


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Barrons cover: Bubble Trouble

Most seasoned investors are familiar with the great company/bad stock phenomenon, in which a fast-growing, innovative business becomes so well appreciated by the market that its shares become quickly and chronically overvalued. The rapidly emerging social-networking industry is approaching the status of great sector/bad stocks, much as dot-com companies did about a decade ago—even if, so far, there are only a few social-media stocks that are publicly traded, issued by secondary players in the industry, at that.

There is no set definition for a social-media company, but all involve large networks of individuals directly sharing and customizing information, or accessing tailored consumer offerings, via the Internet or email. The recitation of 10- and 11-figure implied values for several companies founded just a handful of years ago has become familiar to anyone paying even a little attention.

Depending on how you carve up the industry, eight leading companies that have either gone public, filed plans for an initial stock offering or are widely expected to do so by the end of next year are now estimated to be worth a combined $200 billion. Together, these eight companies—Facebook, Groupon, Zynga, LivingSocial, Twitter, LinkedIn (ticker: LNKD), Pandora Media (P) and Zillow (Z)—collected $3.5 billion in 2010 revenue. That’s $1 billion less than, say, Washington Post (WPO), whose market value is $3.4 billion. Leaving aside Facebook, which seems to have the best shot at supporting its hypothetical $100 billion value through its market position, growth and profit margins, the rest have negligible profits at this point.


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A Golden Moment for Domestic Refiners $WNR $MPC $HFC $MRO


A Golden Moment for Domestic Refiners


Refiners like Marathon Petroleum, HollyFrontier and Western Refining are reaping the “mid-continent advantage” as U.S. crude prices stay below world levels. A big boost to margins.

Rising oil production in the U.S. and Canada is keeping U.S. crude prices sharply below those in the world market. That has been a boon to independent oil refiners such as Marathon Petroleum (ticker: MPC), HollyFrontier (HFC) and Western Refining (WNR), which are benefiting from plentiful oil supplies in the middle of the country.

Good times for Midwestern refiners could last several years, lifting stocks like Marathon Petroleum, which was spun off from Marathon Oil (MRO) on July 1.


Patrick Semansky/Bloomberg NewsMarathon Petroleum owns six refineries. Its giant Garyville complex in Louisiana can process 464,000 barrels a day.

Marathon Petroleum shares, near 40, trade for less than seven times projected 2011 profit of $6 a share. “Marathon has top-tier refining assets and is benefiting disproportionately from the mid-continent advantage,” says Evan Calio, an energy analyst at Morgan Stanley, who began coverage after the spinoff with an Outperform rating and a $54 price target. His earnings estimate is above consensus at about $7 a share for both 2011 and 2012.


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Why I’m Not Going Near Spotify (and Why You Shouldn’t Either) – James Allworth – Harvard Business Review

Unless you’ve been living somewhere without net access for the past week or so, you have heard about Spotify, an online music service that just launched in the U.S. The initial reviews have been pretty positive, and it has generated a lot of buzz, although it’s quite similar to some services that have been available here for some time (Rhapsody comes to mind). But there’s something pretty insidious buried inside music rental models like this. It’s prime territory for a bait-and-switch strategy. In fact, this approach could be exactly what the music labels are relying on.



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Beyond a default: Catastrophic calculations

It’s easy to understand why the government will have more trouble borrowing if it fails to pay its debts. It’s a bit harder to see why ordinary Americans, the city of Pittsburgh, hospitals in Iowa, or medium-size corporations will have more trouble borrowing.

But they will.

And their trouble borrowing is the primary way a default, or even something too close to it for the market’s comfort, could deal a body blow to the economy.

It all comes back to U.S. Treasury bonds, which are the foundation of almost all other financial products — the base of the global financial pyramid.

If the federal government’s borrowing costs rise, so will everyone else’s. Mortgages rates will jump, car loans will be harder to come by, universities won’t be able to float bonds, cities won’t be able to fund themselves.

Treasuries are supposed to set the rate of “riskless return” — the price of loaning someone money and knowing, with perfect certainty, that they’ll pay you back, with interest. So when lenders decide how much to charge, they start with the riskless rate and then add to it to cover the risk that you won’t pay them back, and the inconvenience of having to wait for you to pay them back.


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The Debt Crisis: If Treasury Bonds Aren’t Safe, What Is?

How can you lower your portfolio’s risk in a world of rolling government-debt crises? Start by taking a deep breath. Then, see if you need to do some tinkering—but not too much.

With Europe in turmoil, investors are so eager for a “safe haven” that this week they were willing to accept a return of only 0.01% a month to hold Treasury bills. Such yields on short-term Treasurys are barely a sliver above their all-time lows, even as Uncle Sam’s own debts may be teetering on the brink of default.


Christophe Vorlet

Fears are rampant that the U.S. may lose its triple-A credit rating, that the economy will stay stagnant, that inflation will eventually surge and that the dollar will wither. Lately, U.S. Treasurys and the dollar have rallied mainly because other nations are in even more of a mess.

Amid such uncertainty, you can’t reduce one set of risks without raising others. If, for instance, you buy gold, you lower the risk that a collapsing dollar will crush your wealth. But you incur other hazards by paying all-time-high prices for an asset that generates no investment income, lacks intrinsic value and has a weak record of combating inflation. Other hedges carry other risks and trade-offs.


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Best Currency Forecasters Say Dollar Slump Coming to an End as Index Falls

The best currency forecasters say the dollar’s 12 percent slide over the past year is coming to an end as Europe’s deepening debt crisis discourages bets against the world’s reserve currency.

Led by Schneider Foreign Exchange Ltd., the five most- accurate firms during the six quarters through June 30 as measured by Bloomberg see the dollar trading at $1.42 per euro on average by year-end, compared with $1.43 on July 8. Against the yen, they predict the greenback will rise to 83 from 80.64.

While Moody’s Investors Service added to Europe’s woes last week by lowering Portugal’s credit ranking to junk, the dollar is regaining its status as a haven after the worst performance over the past year among 10 developed-market currencies based on Bloomberg Correlation-Weighted Indexes. The dollar is up 5.9 percent from a 17-month low on May 4 against the euro.


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Why Europe Is Really Freaked Out Over A Greek Default

European Central Bank chief Jean-Claude Triche...

“The constraints imposed by market forces [on government deficits inside a single-currency union] might either be too slow and weak, or too sudden and disruptive.”
– The
Delors Committee report on European monetary union, getting it exactly right in 1989

GREEK BONDS have lost one-half to three-quarters of their face value. Six national strikes have all ended in violence already this year. In the three months to April, public investment spending fell 42% from the start of 2010, but total spending still rose – and tax revenues sank – forcing the budget deficit still wider as the economy shrank 5.5% year-on-year.

What to do? Greece’s debt cannot be serviced, much less repaid. Everything says default – stop paying, write it down or write it off, with or without the lenders’ consent. Default is certain, and history says it would be better for creditors if the restructuring came before Greece misses a payment.

Uruguay’s “pre-emptive” restructuring of 2003, for instance, cost its creditors 8% of their money, according to an IMF study. Argentina’s “post-default” restructuring of 2005, in contrast, cost the affected bondholders some 75% of their original investment.


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Europe declares war on rating agencies – Telegraph’s AEP

A chorus of policy-makers from Europe and across the world have denounced Moody’s drastic downgrade of Portuguese debt as an act of financial vandalism, accusing the “Anglo-Saxon” rating agencies of driving states into bankruptcy and destabilising the global system.

Europe declares war on rating agencies

Politicians have denounced Moody’s drastic downgrade of Portuguese debt as an act of financial vandalism.

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Venezuela’s Chavez says he was treated for cancer

By Daniel Wallis and Andrew Cawthorne

CARACAS (Reuters) – Venezuela’s flamboyant socialist leader Hugo Chavez said on Thursday he had undergone an operation to remove a cancerous tumor, posing a serious challenge to his near-total dominance of national politics.

The announcement, which confirmed rumors swirling for nearly three weeks, convulsed the South American OPEC nation ahead of what was already looking like a tight race for a presidential election next year.

Speaking from Havana where he underwent surgery June 10, a pale and emotional Chavez gave no indication when he would return to Venezuela. Nor did he name a temporary substitute to lead the country of 29 million people.

“They confirmed the existence of a tumorous abscess, with the presence of cancerous cells, which needed another operation to extract the tumor completely,” he said in his first address to the nation since his surgery.

Chavez, 56, said he was receiving “complementary treatments to combat different types of cells that were found” — possibly implying chemotherapy.


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Insiders Sound an Alarm Amid a Natural Gas Rush $NG_F

Jennifer Pitts/The Journal Record, via Associated Press, left; Mark Peristein for The New York Times

“It’s time to get bullish on natural gas,” said Aubrey K. McClendon, left, chief executive of Chesapeake Energy. “This could have profound consequences for our local economy,” said Deborah Rogers, a committee member at the Federal Reserve Bank of Dallas.


Natural gas companies have been placing enormous bets on the wells they are drilling, saying they will deliver big profits and provide a vast new source of energy for the United States.

But the gas may not be as easy and cheap to extract from shale formations deep underground as the companies are saying, according to hundreds of industry e-mails and internal documents and an analysis of data from thousands of wells.

In the e-mails, energy executives, industry lawyers, state geologists and market analysts voice skepticism about lofty forecasts and question whether companies are intentionally, and even illegally, overstating the productivity of their wells and the size of their reserves. Many of these e-mails also suggest a view that is in stark contrast to more bullish public comments made by the industry, in much the same way that insiders have raised doubts about previous financial bubbles.


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Misfires in Marketing at BlackBerry $RIMM


TORONTO—The stream of high-profile departures from Research In Motion Ltd.’s marketing department over the last few months has put the spotlight on an area where the BlackBerry maker has traditionally been weak: understanding and talking to ordinary consumers.

Long a company whose primary customers were telecommunications carriers and corporate IT departments, RIM has been struggling in a world where the fast-changing desires of retail consumers are driving smartphone sales. For the past two years, RIM has had more consumer subscribers than corporate ones, analysts estimate.

Going Mainstream

Research in Motion’s annual corporate and consumer subscribers.

RIM executives were slow to see that smartphone buyers wanted high-powered handsets to play games and surf the Web, putting them behind in the smartphone “arms race,” as co-Chief Executive Mike Lazaridis described it on a conference call last week. The slowness resulted in product delays, and a backed-up slate of six or more BlackBerry models as well as potentially a PlayBook tablet with a 10-inch screen to roll out between late August and early next year, say people familiar with RIM’s product strategy.

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