The Global Markets Weekly – 2/17/12

Posted February 17, 2012 by Editor

[private]Greece: Time to Slide Away?

Markets have largely shrugged off the twist and turns of the ongoing debate regarding the €130B Greek bailout package.  Greece needs €15B by March 20 to meet another major debt buy back or face default.  Eurozone leaders are increasingly concerned that the Greek government will not deliver on its various fiscal promises and that the upcoming April elections will lead to a vastly different and more polarized government, less likely inclined to further reform and austerity.  In addition, even if the necessary reforms and austerity are undertaken, the additional €130B is delivered, and private investors accept the proposed 70% haircut, Greece would still face a sovereign debt to GDP ratio of 120% by 2020—only back to where it was in 2007 before the crash.  As a result, more countries, particularly those like Germany with a triple-A credit rating, are now more open about not throwing good money after bad and letting Greece default and leave the Eurozone.

They further argue that the Eurozone and the global financial system are better able to handle a Greek default and exit—Eurozone economic data have gotten no worse, banks have cut their Greek exposure in half, banks are more liquid with a more apparent ECB backstop, and that contagion could be contained as investors know Greece may be a “special case.”

This may be a sanguine view, as investors made similar arguments about Lehman being “fully” discounted.  Moreover, the peripheral countries are actually moving into a deeper recession, undermined by fiscal austerity and an ongoing credit crunch.  This may mean that yet another Greek deadline may be missed (the latest is the Monday EU finance ministers meeting) and that another stop-gap may be undertaken to provide a small bridge loan to Greece to tide them over the March 20 financing hump.

• U.S.:  The indicator calendar slows down this week after favorable news on the economy and the budget.  Congress avoided creating a big economic pothole next month by finally agreeing to extend $180B mini-stimulus package to year-end.  While unlikely to act on Obama’s budget proposals, Congress will have to extend the debt ceiling that may expire before the election and deal a large swing in potential fiscal drag.  In early 2013, Bush era tax cuts expire, the 2011 stimulus wears off, and the first wave of 2011 spending austerity really kick-in.
• Eurozone:  All eyes will remain on Greece, where we worry that another Eurozone deadline will be missed this Monday.  Important consumer and business surveys arrive, led by the flash PMIs.  The bulk of survey evidence has been less downbeat and suggests that the economy stabilized in Q1 after a modest decline in Q4.
• UK:  Further BoE stimulus is far from certain.  In the BoE inflation report, risks are balanced rather than skewed to the downside now and some members are not convinced of the strength of the disinflationary force, something we may learn from this week’s MPC meeting minutes.  The Q4 GDP report will give consumer spending detail, important given the turnaround in retail sales of late.  The CBI industry survey will be scanned for any building strength, while the public sector borrowing may continue to surprise, despite economic underperformance
• Japan:  While Q4 GDP growth turned negative, evidence suggests a decent lift-off for Q1 as weakness was in exports with a modest inventory overhang.  The BOJ decided to expand asset purchases, surprising investors.  Interpreting this week’s trade report will be clouded by seasonal influences but a severe deterioration is expected.
• Emerging Markets/Regions:  One bank we follow, Turkey, meets this week.  Policy rates are expected to be held steady as the central bank sees how the economy handles the European downturn.  Policy remains dovish, supporting growth at the expense of inflation.  We also take a look at the case for a more vigorous policy easing in India and that the Mexican economy remains on track.

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