(from USAGOLD.com) -- Gold has rebounded to 3-week highs above 1526.43 on safe-haven flows. With nearly 61.8% of the recent correction now retraced, it's looking increasingly like the debt woes in both Europe and the US have prompted the dominant uptrend in the gold market to re-exert itself.
Moody's put a bunch of UK banks, primarily ones with big mortgage books, on review for possible downgrade. Meanwhile, China's Dagong Global Credit Rating Co. downgraded UK sovereign debt to A+ from AA-, with a negative outlook. While the pound remains fairly stable against the dollar, it fell versus the euro. Gold set a new all-time high against sterling at 945.28.
German GDP has returned to pre-crisis levels; Q1 GDP was confirmed at +1.5% q/q and +4.9% y/y (wda). Good news right? Except this is a pretty strong indication that monetary policy is too loose...at least for Germany. This poses a conundrum for the ECB, given that much of rest of Europe is a wreck. Do they hike rates again to slow down the German economy and ease inflationary pressures at the expense of the EU periphery that can't pay its debts even at present rates? Or do they keep policy loose in the hope that the periphery recovers at the risk of inflation, not just in Germany, but across the EU.
A good article in Der Spiegel today sheds some light on just why the ECB has been so adamantly opposed to a restructuring of Greece's debt. Basically, the ECB is holding a bunch of bonds and asset backed securities on its books as collateral. Some of that collateral might have to be severely marked down, or perhaps even rendered worthless in the event of a sovereign default (restructure). This story goes a long way toward explaining why Portugal got a bailout even though it was quite apparent that the Greek and Irish bailouts did nothing more than buy a little time?
The ECB's Christian Noyer (France) reiterated the central banks position today saying that a Greek “restructuring is not a solution, it’s a horror story." He largely avoided the spin of a "soft restructure" and put it quite simply: “If we restructure Greek debt, that means Greece defaults.” Noyer reminded the audience in Paris that the biggest holders of Greek bonds are Greek banks and they would be "badly damaged" in the event of a default. The Greek people aren't going to like it, but the ECB's position is that this is a Greek problem and therefore Greece must stick to its austerity and privatization plan.
