The London session has opened to the news that the Eurogroup finance ministers have rejected the EUR 3.3 bn of budget cuts presented to them by the Greek fin min yesterday. The rest of the currency bloc is playing hard ball with Greece: its wants EUR 300mn more cuts, a wide-ranging economic reform package and a commitment from all political parties that the measures will be implemented after general elections due in April, before signing off on the EUR 130bn new bailout deal.
This is obviously in the hope that Greek officials won't renege on decisions agreed today for political gain later on. Eurogroup head Juncker laid out the deal: there will be no more funds until these demands are not only agreed on, but also implemented. So now Greece has until another emergency Eurogroup meeting next Wednesday, and all the while Greece is teetering on the edge of bankruptcy.
The German Finance Minister today briefed German lawmakers on the latest Greek diagnosis from the Troika. And it doesn't make for easy reading. Schaueble said that Greece is likely to miss debt targets (yet again) and that current Greek pledges would leave Greek debt-to-GDP ratio at an unacceptable 136% by 2020, above the target 120%. It is becoming customary for Greece to miss these targets, which makes the latest bout of political wrangling in Athens pointless – the chances are high that even if fresh targets and measures are put in place to cut debt they won't be met. This begs the question: why is the Troika repeating failed methods at trying to get Greece on the straight and narrow?
The trouble with Greece is its bureaucracy, which is like a tangled web of flab and inefficiency. So even if targets are put in place there is insufficient infrastructure to implement them. This is why the Eurogroup wants to take control of some of the process such as tax collection etc.; however that crosses the boundary of a pure monetary union and comes with its own political obstacles.
In short we haven't heard the end of the Greek crisis, even if a token deal is agreed in Athens by next Wednesday. The good news is that the PSI discussions seem to be progressing nicely and ECB President Draghi hinted that the Bank could potentially forgo gains on its EUR 40bn of Greek debt, although it can't take outright losses like the private sector is being asked to do.
While Greece tries to dodge harsh labour market reforms the new Spanish government is diving straight in. PM Rajoy is expected to address the media at 1400GMT today to announce new far-reaching changes to Spain's labour laws, to try and help reduce Spain's 22% unemployment rate and 50% rate for young people. Nearly a third of Europe's jobless now live in Spain so Rajoy has to act quickly to stem the tide of emigration out of Spain, particularly of graduates, that could lead to a damaging brain drain. The new laws include making it easier to reduce labour costs, encouraging part-time work and professional training. A poll found that more than 58% of youths would accept a job paying less than the minimum wage while the majority of those polled said they would accept half the level of severance pay now on offer. Thus, if Spain can implement harsh reform it really gives no excuse for Greece to drag its feet.
But what does this all mean for markets? The Greek malaise I mentioned yesterday has turned into annoyance and threatens to stall the recent rally. The high beta assets like the Aussie and stocks indices the NASDAQ and the Russell 2000 in the US are all turning lower. The Aussie fell sharply across the board finding a low vs. the US dollar at 1.0680 on the back of a weaker growth and inflation assessment from the RBA. However, the main reason for the downgrade in the RBA's assessment was the risks from a Eurozone crisis, which reminds us all that markets may be rallying now but there are still many problems in the currency bloc that could de-rail risk even with the LTRO loans from the ECB.
The pound is the strongest performer today and broke away from other risky assets. It is currently attempting to break above 1.5850. PPI data from the UK today showed prices drop to 2-year lows, which supports the MPC's fresh round of QE announced yesterday, although the pound seems fairly immune to the negative currency impact of QE. We will have to wait and see if GBPUSD strength will weigh on other dollar crosses later today, the next resistance level of note above 1.5840 is 1.5880 then 1.5935 – the 200-day sma, which could prove to be extremely sticky. This has weighed on EURGBP, which again got stuck at 0.84; the next key support is 0.8350 – 100-hr sma. Apparently the GBP move is down to large EURGBP buying from a UK clearing house, thus it may not have broke away from the risk pack after all…
Ahead today watch out for US consumer sentiment to see if the better jobs data is feeding into consumer confidence and thus the real economy. As it's the weekend we would not be surprised if this mini-bout of profit taking dominates the session and causes tight ranges to persist.
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