The EU - Part Problem Part Solution - Or Just FUBAR?

And you seriously thought it was getting better?

Moody's Investors Service has today downgraded Portugal's long-term government bond ratings to Ba2 from Baa1 and assigned a negative outlook. Concurrently, Moody's has also downgraded the government's short-term debt rating to (P) Not-Prime from (P) Prime-2. Today's rating action concludes the review of Portugal's ratings initiated on 5 April 2011.

The following drivers prompted Moody's decision to downgrade and assign a negative outlook:

1. The growing risk that Portugal will require a second round of official financing before it can return to the private market, and the increasing possibility that private sector creditor participation will be required as a pre-condition.

2. Heightened concerns that Portugal will not be able to fully achieve the deficit reduction and debt stabilisation targets set out in its loan agreement with the European Union (EU) and International Monetary Fund (IMF) due to the formidable challenges the country is facing in reducing spending, increasing tax compliance, achieving economic growth and supporting the banking system.

RATINGS RATIONALE

The first driver informing today's downgrade of Portugal's sovereign rating is the increasing probability that Portugal will not be able to borrow at sustainable rates in the capital markets in the second half of 2013 and for some time thereafter. Such a scenario would necessitate further rounds of official financing, and this may require the participation of existing investors in proportion to the size of their holdings of debt that will become due.

Moody's notes that European policymakers have grown increasingly concerned about the shifting of Greek debt held by private investors onto the balance sheets of the official sector. Should a Greek restructuring become necessary at some future date, a shift from private to public financing would imply that an increasingly large share of the cost would need to be borne by public sector creditors. To offset this risk, some policymakers have proposed that private sector participation should be a precondition for additional rounds of official lending to Greece.

Although Portugal's Ba2 rating indicates a much lower risk of restructuring than Greece's Caa1 rating, the EU's evolving approach to providing official support is an important factor for Portugal because it implies a rising risk that private sector participation could become a precondition for additional rounds of official lending to Portugal in the future as well. This development is significant not only because it increases the economic risks facing current investors, but also because it may discourage new private sector lending going forward and reduce the likelihood that Portugal will soon be able to regain market access on sustainable terms.

The second driver of today's rating action is Moody's concern that Portugal will not achieve the deficit reduction target -- to 3% by 2013 from 9.1% last year as projected in the EU-IMF programme -- due to the formidable challenges the country is facing in reducing spending, increasing tax compliance, achieving economic growth and supporting the banking system. As a result, the country may be unable to stabilise its debt/GDP ratio by 2013.

In other words, as the EU is increasingly looking for the private sector to share in the pain, we are going to help make sure it happens.  Over?  Not by a long shot.  Better?  No, but the direction is becoming clearer.

Greece - Balance Sheet is Unsustainable

In the news:

(Reuters) - Long-term investors standing aloof from the Greek debt crisis want holders of its government bonds to take a loss big enough to slash the country's debt to sustainable levels before they consider returning.

Greece is still expected to default at some point and for most investors who have dumped bonds over the past two years and who are crucial to put the ailing economy back on its feet, the longer that is delayed, the longer it will be before they consider looking at Greek assets again.

A likely second bailout -- currently under tortuous negotiation -- is seen only as a means to buy time for euro zone banks to provision for eventual losses and protect the bloc's larger economies from contamination, while the reforms attached to the package will be hard to implement in the face of deepening public resentment.

 Friends, Greece is not viable without a major restructuring of its debt.  Tax collections are laughable, tourism can only get you so far (see tax collections) and olives grow elsewhere.  This country cannot support the debt it has, will not support the debt its and any temporary fix is just that - temporary.  Debt needs to be almost halved in order for the country to make a go of it.  Propping up European banks and trying to keep the problem localized is not a strategy nor a solution.  Sometimes it just makes sense to mail the keys back.

Yasou!

New Issue Hype - Buyside Gets the Pipe

On the tape (Reuters):

LONDON, July 5 (IFR) - Rising disquiet over new issue bond market practices has prompted a rethink among debt syndicate officials regarding the processes they employ and the manner in which they transmit information to investors, bankers said.     Underwriters have been discussing ways to fairly provide investors with information on price and the size of order books.     So-called price whispers, where dealers float a level with a small group of investors could be a thing of the past, for instance.     Another practice that is about to change is regular updates on the size of order books and the controversial, some would say cavalier, use of internal tickets to inflate the magnitude of investor interest. 

Investors routinely overstate their true interest in order to receive a larger allocation of bonds at pricing.     "I think both sides need to be careful. The world has changed - all the clients we deal with are trying to operate higher standards," said the syndicate official.

 This has been the buy/sell side conundrum forever.  If the deal looks hot (and you know it was -as it always is - pre-shopped to the big guys) you have to double or triple what you want to end up with.  Then, god forbid, it falls apart you end up with an over allocation.  The street knows the chronic padders, but this crap inflates the book to monstrous proportions.  I can't think of a way around this.  Blame it on the street for hyping, blame it on the buyside for padding - whatever.  This is the way it is.  It also allows the street to reduce pricing due to demand and see how many people drop from a deal or increase the size of the deal to meet demand.  Accrues to the issuers benefit either way.  Who wins:  street gets underwriting commission and follow on trades, issuer gets lower rates and more money, and the buyside?  Well, someone has to be left holding the bag.

USA - CDS Spreads Higher than Mexico

Bloomberg:

Trading of credit-default swaps insuring U.S. Treasuries has doubled as the government struggles to agree on plans to cut its budget deficitand raise the $14.3 trillion national debt limit.

A total of 819 contracts covering a net notional $4 billion of debt were outstanding as of May 20, up from 449 contracts covering $2 billion a year ago, according to the Depository Trust & Clearing Corp. Average daily trading volume surged to $490 million last week from $10 million the week before, making the U.S. the fourth most active among 1,000 contracts tracked by DTCC, up from 633rd.

Swaps insuring Treasuries for five years are trading at 50 basis points, according to CMA. That compares with 37 basis points in April and a record 100 basis points at the peak of the financial crisis in 2009. One-year contracts are now more expensive than Panama, the Philippines and Mexico, CMA prices show.

Anyone else see the humor here?

More of the Same Change - The Patriot Act Lives

So much for change.


Congress on Thursday passed a four-year extension of post-Sept. 11 powers to search records and conduct roving wiretaps in pursuit of terrorists. Votes taken in rapid succession in the Senate and House came after lawmakers rejected attempts to temper the law enforcement powers to ensure that individual liberties are not abused.



The measure would add four years to the legal life of roving wiretaps — those authorized for a person rather than a communications line or device — of court-ordered searches of business records and of surveillance of non-American "lone wolf" suspects without confirmed ties to terrorist groups.


The roving wiretaps and access to business records are small parts of the USA Patriot Act enacted after the Sept. 11, 2001, attacks. But unlike most of the act, which is permanent law, those provisions must be renewed periodically because of concerns that they could be used to violate privacy rights. The same applies to the "lone wolf" provision, which was part of a 2004 intelligence law.


And Harry Reid:  "If the senator from Kentucky refuses to relent," Reid said, "that would increase the risk of a retaliatory terrorist strike against the homeland and hamper our ability to deal a truly fatal blow to al-Qaida."   Remember the foaming at the mouth when the act became law?  So much for that.


Sleep well America, you are being watched by Big Brother.  Emperor O.

Greece - Ouzo and Uh-Oh, Restructuring Lite

Greece continues to find ways to avert a default/restructuring of its debt. The problem here is that the austerity measures are not enough, there aren't enough assets to privatize (at fire sale prices) and the country just cant get its act together.

(NYT) Despite pressure from lenders for Greece to show a unified front in solving its debt crisis, Prime Minister George Papandreou had little apparent success Tuesday in persuading his political rivals to back additional tax increases and spending cuts. The ruling Socialists have a comfortable six-seat majority in the 300-seat Parliament and should be able to pass the measures without the support of the opposition. But Greece’s creditors have been pressing Mr. Papandreou to seek consensus for the deeply unpopular reforms before presenting them to a Greek public weary of a year of austerity, arguing that some degree of political consensus would make implementation easier. - New Democracy, a resolute "NO", Communists "NO", Popular Orthodox Rally "Unclear" (the Fed would be proud of their “We say no to indefinite consensus but yes to joint responsibility,”  Consensus?  Not happening.

And of course the many faces of the Eurozone and various lenders also throws confusion into the ring:

OECD head Angel Gurria said in an interview published on Tuesday that rescheduling Greece's debt would not be a bad idea as it would be the lesser of two evils, with many fearing the country could default. "The decision to move toward a rescheduling of Greek debt doesn't seem like a bad one to me," Gurria was quoted as saying in daily Le Figaro when asked whether Greece should restructure its huge debt. "It gives Greece time to digest its adjustment measures. For markets, allowing a delay in repayment is a lesser evil which does not imply a reduction in the principal," said Gurria, secretary general of the Paris-based Organization for Economic Co-operation and Development. Is this not still a default?????  Article here: OECD on Greek Debt

Hold it, stop the presses - note the word allowing?  From Citi:

“It is certainly possible to envisage forms of restructuring which fail to trigger CDS, but we are doubtful that they will be employed in practice,” said Michael Hampden- Turner, a strategist at Citigroup in London. “We suspect that European and ECB policy makers will duck the hard decisions.”

European officials are trying to avoid tripping swaps, with French Finance Minister Christine Lagarde saying this week that “anything that would constitute a credit event, is for me off the table.” Speculation is increasing that a restructuring of Greek bonds may be possible without meeting the International Swaps & Derivatives Association’s definitions of such an event.

That could be avoided if changes are voluntary rather than binding,Hampden-Turner said. But even a voluntary restructuring, or “reprofiling” as officials are calling a possible maturity extension, might still trigger the contracts, he said. 

Back to the show:

(Reuters) Dutch Finance Minister Jan Kees de Jager was quoted as saying by the paper that reprofiling of Greece's debt is a "serious option" but only as a possible final piece in a "total package."  De Jager said Greece should first fulfill its promises over reforms, but he also argued for a form of reprofiling in which private investors would remain involved to avoid the necessity for a 'credit event' (sounds like a credit event to me, just saying), the paper cited him as saying.  This could take place via a voluntary extension of the debt maturities by a maximum of three years, the paper said.The Dutch newspaper also said euro zone countries are considering a suggestion from De Jager to take the privatization process of Greek assets out of the hands of the Greek government and to hand it over to an independent organization.  Article here: Kees de Jager on Greek Debt

Moodys weighed in:

"A Greek default would be highly destabilizing and would have implications for the creditworthiness of issuers across Europe," Alastair Wilson said in a telephone interview. "This would result in more highly polarized credit worthiness and ratings among euro zone sovereigns, with the stronger countries retaining very high ratings and the weaker countries struggling to remain in investment grade." Wilson said that the focus after any Greek default would be on Portugal and Ireland, who have also agreed bailouts with the EU and the IMF. Asked if Portugal and Ireland would be at risk of falling into junk territory in case of a Greek default, he said: "Potentially yes ... If there were to be a Greek default there could potentially be multi-notch downgrades to the weakest sovereigns." He said Spain, Italy and Belgium were not in the same category as Portugal and Ireland but would also come under significant market pressure and could face rating downgrades.

Bottom line:  Initial thoughts seem to be pointing to a "voluntary" extension so as not to trip CDS.  Should this be the case, Greek 10 yrs in the low $50s might make sense.  If this is a precursor to  a haircut (CDS triggered), bonds are not as attractive.  Either way, Greek banks are hosed.

Rare Earth Processing - A Primer

I just wrote a piece on my rare earth thesis on Seeking Alpha, and thought I would put a primer on the processing of rare earths on the blog, so here it is (from Kidela Capital):


Cell phones, iPods, LCD screens, hybrid cars just some of the many devices containing Rare Earths that we’ve come to rely on in this green information age. While there’s a growing awareness of the importance of Rare Earths in these new technologies, the same can’t be said for the illusive question of just how Rare Earth Elements end up in these products. Mining REs is relatively simple but producing individual elements from the ore is tremendously difficult. Rare Earth processing often requires dozens of procedures each resulting in minute changes in the complex RE stream.

Separating and extracting a single Rare Earth Element especially one of the Heavy Rare Earths takes a great deal of time, effort and expertise. Not to mention money processing facilities cost hundreds of millions of dollars to build. It’s something to think about, next time you text a friend or take your Prius out for a spin. But wrapping one’s head around the vast array of separation and extraction techniques for REEs is far easier said than done. It’s terribly complex and there just isn’t much information out there. For your benefit, here’s a basic primer on RE processing.

1. Milling
After rocks containing REEs are removed from the ground, they go to a facility where the valuable mineral material in the ore is separated from impurities. This process is known as milling or beneficiation. Here’s how it works: The mined ore is crushed into gravel, which in turn is ground up into progressively smaller particles.

These particles are sifted and sorted by such means as flotation and electromagnetic separation to extract usable material and set the waste products called tailings aside. This milling process is usually carried at or near the mine site with the tailings stored in special facilities built to rigorous engineering and environmental standards.

For scarce resources like Heavy Rare Earths, this beneficiation process could be considered critical because it takes advantage of every scrap of material available. This practice can also make a marginal mining facility more practical than it might otherwise be and may in fact be used to extract ore from a facility previously believed to be exhausted.

2. Electromagnetic Separation
This milling method uses magnetic principals to separate Rare Earth bearing minerals from other materials in the mined ore. Monazite along with bastnaesite the primary commercial source of REs mined around the world is highly magnetic, meaning it can be separated from non magnetic impurities in the ore through repeated electromagnetic separation.

This technique uses a magnetic separator device that consists of a belt moving on two rollers, one of which contains strong magnets. When powdered ore is dropped onto the belt, magnetic and non magnetic particles within the ore will fall away differently from the magnetic roller.

3. Flotation Process
This is another beneficiation method that’s used to separate bastnaesite from other minerals. First, the ore is ground into a fine powder and added to liquids in flotation tanks. Chemicals are added to cause impurities to settle out and air is pumped in to create air bubbles. The finer bastnaesite particles stick to the bubbles which rise to the top and form a froth that is then skimmed off.

4. Gravity Concentration
Although they are commonly used in the gold industry, devices called Falcon Concentrators are also used in Rare Earth extraction at the milling stage. These concentrators contain rotating cones or bowls that are spun at high speed to generate a gravitational or centrifugal force which acts to separate small particles by exploiting minute differences in density and specific gravity between the valuable minerals and waste products.

Compared to other beneficiation technologies, gravitational separation offers lower installed and operating costs. It also tends to also have less environmental impact as gravity concentration does not require the use of chemicals. All of these milling processes produce mineral concentrates that contain a substantially higher proportion of REs. But there’s still much work to be done to separate the concentrate into its constituent REEs and this is why things start to get really tricky.

5. Hydrometallurgy
As the generations of scientists who have tackled the problem can attest, isolating REs safely and effectively is not only a very long and costly exercise but extremely complicated. The complex separation and extraction techniques in use today like ion exchange and solvent extraction are rooted in of a branch of geologic science known as hydrometallurgy.

In hydrometallurgy, mineral concentrates are separated into usable oxides and metals through liquid processes, including leaching, extraction and precipitation. By these means, the elements are dissolved and purified into leach solutions. The RE metal or one of its pure compounds is then precipitated from the leach solution by chemical or electrolytic means.

Although hydrometallurgy originated in the 16th century, its principal development took place in the 20th century. The development of ion exchange, solvent extraction and other processes now permits more than 70 metallic elements to be produced by hydro metallurgy including the REEs. Here is a run down on some of these techniques.

6. Fractional crystallization
Devised by British chemist Charles James in the early 1900s, fractional crystallization is based on differences in solubility. In this process, a mixture of two or more substances in solution is allowed to crystallize either through evaporation or by a changing the temperature of the solution. This precipitate will contain more of the least soluble substance. The process is repeated until purer forms of the desired substance are eventually attained.

Like all early extraction techniques, fractional crystallization is very slow and tedious. James found that an enormous number of stages of crystallization were required to get the high purity of individual REEs. Despite these constraints, James’ methods were widely adopted by other chemists. Fractional crystallization continued to be considered be the best technique of separating REEs until the discovery of ion exchange technology in the 1940s.

7. Ion Exchange
The ion exchange method was first used during Second World War as a way to separate fission products obtained from nuclear reactors. In this process, a solution containing a RE mixture is filtered through minerals called zeolites or through synthetic resins that act as zeolites. Zeolites exchange ions in the ion exchange process, zeolite ions are added to the solution and RE ions bind tightly to the zeolites.

Various solutions are then used to wash out elements one at a time. Each is then mixed with acid to create an oxalate compound and then heated to form the usable oxide. These oxides which are a mixture of various REEs and oxygen are now ready to be broken down into their constituent elements albeit through yet more complicated processing steps that we’ll talk more about later.

8. Solvent Extraction
The process of solvent extraction uses chemical agents to break down the components within a substance. Those materials which more soluble or react more readily to a particular acid or base get separated from the rest. The separated materials are then removed, and the process begins all over again with the introduction of more chemicals to leach out more components.

When it comes to Rare Earths, these steps need to be repeated again, again and again sometimes hundreds of times, depending on which REE you’re trying to produce. The solvent extraction method used today to separate REEs relies on the slightly different solubility of rare earth compounds between two liquids that do not dissolve in each other.

Because the Rare Earths are all so close to each other in terms of atomic weight, chemical separation methods require multiple stages to complete the extraction process. One stream in this process often takes hundreds of steps, involving a cascade of dozens of different tanks and machines for mixing, settling, filtering and evaporating all the various solutions. One advantage solvent extraction has over ion exchange is that it can be continuous a counter current system can be employed in which the many, many extraction steps are carried out in a continuous stream, progressively increasing the degree of separation until the substance in one phase in nearly pure.

9. Rare Earth Metals
These methods produce compounds like RE oxides, which have a growing number of useful applications today and as such can be considered end-products in the Rare Earth supply chain. However, demand is also growing for RE metals which means even more refining in the long hydro metallurgic process.

As is the case with every preceding step, it’s not easy turning chemical compounds into a single metal. Several techniques have evolved to meet the tremendous challenges associated with distilling Rare Earths down to their purest form. The primary types of metal recovery processes are electrolysis, gaseous reduction and precipitation. A common technique for REEs is metallothermic reduction which uses heat and chemicals to yield metal from RE oxides. In this process, the oxides are dispersed in a molten, calcium chloride bath along with sodium metal. The sodium reacts with the calcium chloride to produce calcium metal which reduces the oxides to RE metals.

Calcinations is an extraction technique that also employs thermal principles. In this instance, ovens and other devices like induction furnaces and arc furnaces are used to heat up substances to the point where volatile, chemically combined components like carbon dioxide are driven off. Another extraction technique is sorption, in which one substance takes up or holds another. It is actually a combination of the two processes absorption, in which a substance diffuses into a liquid or solid to form a solution, and adsorption, in which a gas or liquid accumulates on the surface of another substance to form a molecular or atomic film.

(Sourced from www.proactiveinvestors.com.au)