|
Commodity and Futures - Physical commodity and financial futures markets.
|
|
|
|
|
Posted by Monitor on February 21, 2010, 10:20 pm
Dollar to Reach $1.32 Per Euro on Rate Rise, Commonwealth Bank Says
The U.S. dollar will gain on bets the Federal Reserve will accelerate
increases in its target lending rate following an unexpected change in
its discount rate yesterday, Commonwealth Bank of Australia said.
The euro will drop to $1.32 while Australia=92s dollar may fall toward
86.45 U.S. cents on speculation the Fed will announce its first upward
adjustment to the benchmark rate since 2006 sooner than traders had
forecast, the bank said. Futures yesterday showed a 47 percent chance
the target rate for overnight lending will increase by at least 25
basis points by the Fed=92s September meeting.
=93Today=92s rise in the discount rate, along with the Fed=92s increase in
growth and inflation forecasts, suggests the risk is that the Fed=92s
first rise in the target on the Fed=92s funds rate is earlier=94 than
September, Sydney-based Richard Grace, chief currency strategist at
Commonwealth Bank, wrote in a note to clients. =93The move by the Fed is
U.S. dollar positive.=94
CBA expects the Fed to announce 25 basis points of additional
increases to the discount rate charged to banks for direct loans at
its April 28 and Aug. 10 meetings. That would take the rate back to
=93its traditional spread to the target on the Fed funds rate,=94 Grace
said.
=3DDebt Deals Haunt Europe=3D
Concerns that Greece and other struggling European nations may not be
able to repay their debts are focusing investor attention on another
big worry: Economies across the Continent may have used complex
financial transactions -- sometimes in secret -- to hide the true size
of their debts and deficits.
Investors long turned a blind eye to European governments' aggressive
bookkeeping, aimed at meeting the euro zone's budget ceilings. In
reports to the Eurostat statistics authority, Portugal classified its
subsidies to the Lisbon subway as equity. Greece insisted that large
portions of its military spending were "confidential" and thus
excluded from deficit calculations.
Now, suggestions that Greece's budget could be further constrained in
the coming years by interest payments on years-old bank transactions
has refocused attention on long-forgotten financial deals undertaken
by Athens and other euro-zone capitals to bring down budget deficits.
Many of these deals involved currency swaps. In such transactions,
countries might borrow in a currency not their own, for example, and
use a derivative to offset the risk of currency fluctuations. But
these instruments can also be used to artificially massage cash flows
and liabilities, to meet debt and deficit thresholds.
Goldman Sachs Group Inc. did as many as 12 swaps for Greece from 1998
to 2001, according to people familiar with the matter. Credit Suisse
was also involved with Athens, crafting a currency swap for Greece in
the same time frame, according to people familiar with the matter.
Deutsche Bank executed currency swaps on behalf of Portugal between
1998 and 2003, according to spokesman Roland Weichert. Mr. Weichert
said Deutsche Bank's business with Portugal included "completely
normal currency swaps' and other business activity, which he declined
to discuss in detail. The currency swaps on behalf of Portugal were
within the "framework of sovereign-debt management," Mr. Weichert
said. The trades weren't intended to hide Portugal's national debt
position, he said.
The Portuguese finance ministry declined to comment on whether
Portugal has used currency swaps such as those used by Greece, but
said Portugal only uses financial instruments that comply with
European Union rules.
Countries "look for things because it helps their arsenal of
techniques used to reduce their budget deficits," says James D.
Savage, a University of Virginia professor who is an authority on EU
budgeting. "The problem for Eurostat is the flourishing of new
financial instruments and techniques. Member states are going to try
to take advantage of them. There is always a catch-up game."
Contagion issues have deeply concerned both policy makers and
investors as the Greek debt crunch has unfolded over the past weeks.
The cost to insure against a Greek default remains near record highs.
Moreover, bond offerings from Spain, Ireland and Portugal in the past
two weeks have succeeded primarily because they paid higher-than-usual
yields.
Last week, such worries exacerbated market jitters over Europe's debt
woes and could complicate Greece's plan this week to sell more debt,
bankers and investors say.
Are there other hidden derivative deals out there? Euro-zone
governments are under no obligation to disclose the precise nature of
the agreements they enter into, making it nearly impossible for
investors to discern the potential risks associated with them.
Eurostat permitted the use of such transactions to adjust debt figures
until 2008.
Countries in the euro single currency have a rich history of exotic
maneuvers to make their debt and deficit numbers look rosy. Euro-zone
rules require governments to keep their debt to levels equivalent to
60% of their gross domestic products and their annual budget deficits
to no more than 3% of GDP.
To try to meet these targets, governments have sold state assets,
bundled expected future payments into securities to hawk and even, in
the case of Germany, tried to reappraise gold reserves for a fast fix.
Such moves were criticized at the time, but European leaders deemed
them acceptable as they sought to begin the long-planned currency
union.
France arranged a deal with the soon-to-be privatized France Telecom
in 1997 under which France Telecom paid the government a lump sum of
more than 5 billion euros. In return, France agreed to assume pension
liabilities for France Telecom workers. The quick cash injection
helped bring down France's deficit and permit it to join the euro.
A 1996 Italian currency swap, arranged by J.P. Morgan, allowed Italy
to receive large payments upfront. That helped keep its deficit in
line. The downside was greater payments later.
Greece for years simply omitted large portions of its military-
equipment spending from its deficit calculations. European regulators
eventually prevailed on Greece to count everything. The result, in
2004, was a massive revision of Greek deficit figures from 2000 to
2003. Greece, which had reported its 2000 budget deficit as 2.0% of
GDP, added another 1.9 percentage points of GDP for military spending,
pushing the country beyond the 3% deficit limit. But by 2004, Greece
had already gained entrance to the euro.
Investors paid little attention to the often-opaque derivative deals
until concern about a Greek default recently began to rattle markets.
The closer scrutiny comes against a backdrop of exploding deficits and
fears about the stability of the euro. Governments across Europe
pumped hundreds of billions of euros into their economies to combat
the financial crisis.
European officials said last week that EU regulators didn't know about
a particularly controversial "off-market" currency swap structured in
2001 by Goldman Sachs for Greece. Officials say they believe the
problem isn't widespread but a number of prominent European
politicians, including German Chancellor Angela Merkel, have called on
authorities to have a closer look at the transactions and whether
banks helped governments distort their books.
A 2008 Eurostat report, however, says questions about how to account
for off-market swaps like the one used in Greece were raised as early
as 2007. The report said it provided detailed guidance about how to
handle some forms of them. Eurostat didn't respond to a request for
comment.
Eurostat tried for years to change the rules on use of swaps. European
finance ministries in 2000 overruled Eurostat, arguing that they
needed as much flexibility as possible to manage debt loads.
It wasn't until 2008 -- a decade after the deals became popular --
that Eurostat was able to revise its rules to push countries to
include swaps in their debt and deficit calculations. Still, critics
say that too little is known about countries' continued exposure to
the deals that are already out there.
Governments have found eager collaborators to help them massage their
books both on Wall Street and in the City of London.
Between 1998 and 2000, Goldman structured 12 currency-swap agreements
with Greece, allowing the country to lock in an exchange rate. The
swaps had another advantage: The fixed rates meant under European
accounting rules that Greece could record its foreign-currency debt at
the rates in the swap contract -- no matter how rates fluctuated
later. That could protect it from seeing its recorded debt levels
spike in the future.
But even though the swaps prettied up the accounting, they didn't
affect the underlying economics: A drop in the euro would leave Greece
with a losing swap position. In 2000 and 2001, that happened,
according to people familiar with the situation.
In 2001, Goldman and Greece came up with a now-controversial solution:
A new "off-market" swap. It agreed in the future to convert yen and
dollars into euros at an artificially favorable rate. Greece could use
that rate when it recorded its debt in the European accounts --
pushing down the country's reported debt load by more than 2 billion
euros, according to people familiar with the matter.
All told, the marginal benefits were small. Greece's total debt as a
percentage of GDP fell from 105.3% to 103.7%, and its 2001 deficit was
reduced by a tenth of a percentage point in GDP terms, according to
people close to Goldman.
Greece's remaining exposure to the complicated arrangement remains
unclear.
Read more: http://www.bigcapital.wordpress.com/
|
| Similar Threads | Posted | | US RATE FUTURES-Bets rise on Fed rate hikes in early 2010 | July 16, 2009, 9:21 am |
| IMF: Euro adoption in 2011 for Estonia appears within reach | October 29, 2009, 3:45 am |
| Euro May Reach $1.4860 This Week on Risk Appetite, Helaba Says | November 2, 2009, 12:02 pm |
| JPY May Rise to 80 against the Dollar by Mid-Year | February 6, 2009, 9:53 am |
| Gold to Rally, Reach Record as Dollar Declines, Morgan Stanley Forecasts | January 21, 2009, 5:55 am |
| China Signals That It May Allow Currency to Rise Against Dollar | November 11, 2009, 8:43 pm |
| Ausie Dollar, Euro Dollar, & Canadian | June 2, 2006, 12:04 am |
| Canadian Dollar , Euro Dollar, Coffee | June 8, 2006, 1:31 am |
| Dollar May Decline to 84 Yen, Bank of Tokyo-Mitsubishi UFJ Says | December 27, 2008, 8:48 pm |
| The DOLLAR, the EURO and the UGLY | November 6, 2007, 9:35 pm |
|
|
|
Yahoo! 
Google 
Windows Live 
del.icio.us 
digg 
Netscape 
XML Sitemap