Worrisome signs series: US less than a percent away from recession

Over the past four decades and more, one reliable indicator has pointed to recession every time successfully and few years ahead. That indicators is the spread between short dated (2 year) and long dated (10 year) treasury yields.

The spread between 2-year and 10-year treasury yields dropped to just 95 basis points on friday, which is the lowest level since late 2007, eve of great recession.

Every time that spread has dropped to negative, recession followed. Last time it was in negative was back in 2006, which was followed by Great Recession of 2008, before that back in 1999, which followed dot com bubble burst and US recession of 2001.

Similar can be seen in prior recession too.

And biggest worries are, growth is already weak enough and central banks’ stimulus across globe at highest. There may be few tools left to Central banks’ arsenal to tackle such a situation and if triggers another global recession.


Greece cash reserves dangerously low, EU and IMF are preparing “take-it-or-leave-it” ultimatum

Greece still needs to find more than E1 billion in order to cover salary and pension payments it will face at the end of this month, an EU source has told MNI, after the cash-strapped government was forced to tap an emergency escrow account in order to meet a critical payment to the International Monetary Fund.

EU sources confirmed to MNI that Greece used a reserve account of Special Drawing Rights (SDR) to cover an E750 million IMF loan repayment due Tuesday. A Bank of Greece source said that the money in the account was available and unclaimed, and a last-minute solution was found to meet the IMF deadline. However, the funds need to be returned in a few weeks’ time.

“Greece right now has around E90 million only in reserves to pay wages and pensions in May,” which amount to around E1.2 billion, a senior EU source said.

“The quick fix of the SDR account just keeps the Greek government going without default but it now has to race against time to raise the money,” to meet its internal obligations. MNI reported Monday that the EU was getting increasingly worried whether Greece would made the payment after Prime Minister Alexis Tsipras informed the EU and the European Central Bank last week that he was unable to raise the amount.

High ranking EU sources have said that Commission President Jean-Claude Juncker and ECB President Mario Draghi were in constant contact with Athens to find the solution and that Draghi himself wanted to make sure that “things will stay in course.”

The government’s search for liquidity in lieu of the frozen E7.2 billion in bailout funds has included a drive to recover excess cash from local administrations and other public entities. As of Monday, the government said, its collected around E600 million, but a second senior Eurogroup source told MNI that any further cash collected raised from government organizations that haven’t handed in reserves would only cover a few more weeks of liquidity needs.

On Monday, while Eurogroup President Jeroen Dijsselbloem said he could not have a clear picture of the Greek liquidity situation, Finance Minister, Yiannis Varoufakis said “let’s not hide, liquidity is a terribly urgent issue.”

Both sources indicated that despite the positive statement on bailout talks by the Eurogroup Monday, key differences remain as neither side seems to be backing down from pension, labour and fiscal adjustments.

“The creditors will not back down because, first, the budget must be balanced which could mean further measures,” one official said. “Second, labour and pensions reforms are important,” he added, reiterating that there is still no clear picture on the Greek budget situation.

The second official commented that “both sides want a speedy solution, the climate in discussions is more positive and productive but no real breakthrough has been achieved.”

“We would wait to see in the following weeks, but so far as Mr Varoufakis said, the government remains firm to its position. But this is not possible,” the source said.

While some progress is said to be reached on issues such as non-performing loans on Greek bank balance sheets, privatizations and taxation, the talks could be stuck at any point when a difference of opinion emerges in the estimations of the fiscal situation, the sources said.

“Bigger gaps mean further measures,” the first source said wandering whether the Greek side will be able to accept it. “But liquidity is indeed running out so sooner or later we would have to come to a decision,” he added, mentioning that any extension of the programme is not realistic because it would mean that Greece will be able to cope through an extension without funds.

Sources have told MNI that if the two sides fail to agree in the next three weeks, the EU and the IMF are preparing a complete package proposal that will be presented to the Greek government with a “take-it-or-leave-it” ultimatum.

Greek banks post haircut collateral value at €93 billion

Greece’s banks hold enough eligible collateral to access an additional €14 billion in Emergency Liquidity Assistance funds, two Eurosystem sources have told MNI, suggesting that just weeks of increasing support remains for the country’s beleaguered financial system.

The total value of Greek banks’ eligible collateral after haircuts last week was about €93 billion, two Eurosystem sources confirmed, highlighting the limited scope for the ECB to further step up ELA support as political negations with the country’s international creditors drag on.

A return to the haircut schedule used late last year would shave €6 billion off post-haircut collateral, according to the sources, reducing it to about €87 billion and in turn limiting the scope for further ELA increases to just €8 billion.

Greece liquidity reserves unclear ahead of IMF payment

Greece faces a tense 24-hour standoff with two of its major international creditors this week as Eurozone Finance Ministers prepare to meet in Brussels and speculation mounts as to whether the cash-strapped country will be able to meet a €750 million payment to the International Monetary Fund, sources have told MNI.

As investors focus on the negotiations between Greece and its creditors and the wording of any statement from the latest round of face-to-face talks in the Belgian capital, the real “thriller”, according to one source, revolves around Greece’s cash reserves. Prime Minister Alexis Tsipras has, since Thursday, been coordinating communications between Athens and its creditors in order to find a solution to the rapidly deteriorating situation. And while it is possible that the IMF cash will be found “at the last minute” for repayment Tuesday, some are bracing for the worst.

“No one wants a default by accident,” a well-placed EU source told MNI. “But the IMF has refused to grant Greece an extension and delay the payment.”

Greece has used pending debt payments as leverage in its negotiations with creditors in the past, the sources explained, but on this occasion it appears as though EU officials understand the severity of the country’s cash position.

“The situation has been blurry as to whether Athens has the funds … to either pay the IMF on May 12 or (government) salaries and pension obligations at the end of the month,” the Senior Eurosystem source explained. But on Wednesday, the source went on to say, after further explanations given by Tsipras as well as indications by the central bank of Greece that the special account held for paying state obligations did not have the necessary funds yet, the EU became increasingly worried.

The potential cash crisis comes amid a increasing series of leaks from both the Greek government and EU officials that indicate progress is being made and that negotiations, now partly in the hands of Deputy Foreign Minister Euclid Tsakalotos, have taken on a more positive tone in the absence of combative Finance Minister Yiannis Varoufakis, who will still represent Greece at Monday’s Eurogroup.

However, while the EU source insisted that “paying the IMF on Tuesday has nothing to do with the progress of the negotiations” a Greek government official said Sunday that “we would like to see a Eurogroup statement so we can go ahead with the IMF payment.”

“The money could be there, it could be not. We will see on Tuesday,” said the official after the governmental meeting. He did not elaborate whether Greece has managed to gather the amount and is making it a political decision to repay the IMF based on the outcome of the Eurogroup meeting, or whether the amount has still not been raised.

He insisted though that the Eurogroup could pave the way for the ECB to loosen its policy on Greece Wednesday.

EU officials played down the IMF deadline during a regular briefing with journalists Friday in Brussels, insisting that Athens is expected to “easily” cover its upcoming obligations.

However, MNI sources have said the EU has been quietly trying to resolve the liquidity issue and has been leaking positive notes in order to avoid increasing market speculation and de-stabilizing the country’s fragile banking sector, which, according to a report in the country’s ‘I Efimerida ton Sintakton” newspaper citing a Bank of Greece email, has lost E35 billion in deposits since Syriza came to power in late January.

“There has been constant communication between officials to avoid an accident. Several scenarios have been put on the table,” one EU source said.

“Experience elsewhere in the world has shown that a country can suddenly become unable to pay its bills,” Germany’s Finance Minister warned in an interview published this weekend in the Frankfurter Allgemeine Sonntagszeitung newspaper, adding the Germany would do what it takes to keep Greece in the Eurozone “under responsible conditions.”

Multiple sources told MNI last week that European Commission President Jean-Claude Juncker will push for a deal by the end of the month in order to avoid Athens losing pending loan tranches, although the same sources indicated a deal is still quite far off and obstacles on key issues remain.

On the other hand, the sources have said, the so called hardliners within the EU and the IMF are preparing a complete package for Greece and will present it to Athens at the end of May if the negotiations are not concluded successfully by then.

Tsipras, meanwhile, has been putting a brave face at home as he seeks to quell any political concern that his Syriza party is losing its grip on the negotiations, assuring lawmakers in Parliament Friday that Greece will meet it financial commitments to both its creditors and its citizens.

“I am sure that they all understand that democracy must be protected within the EU,” Tsipras said. “Europe cannot sustain less democracy. If a crime is committed at the country which gave birth to democracy, then no one will silence this crime.”