The rating agency S&P offered its initial verdict on the European debt rollover plan, but there should be little surprise that it views what’s been proposed as ‘an effective default of its debt obligations’. If we take a quick glance at the proposed rollover from France (which has the biggest exposure to Greek debt), it looks like a default. This being the case, the agencies are not deviating on the basis of collective agreements or any other assumptions.
If it looks like a duck, swims like a duck and quacks like a duck then it probably is a duck. S&P views an exchange of debt with less favourable terms than the original issue without “adequate offsetting compensation” as a default. We can be pretty sure that the rating agencies are going to stick to their guns on this one. Default is a pretty well-defined event, whatever moves politicians want to make in terms of renaming it or presenting it in another way. Having been caught out on sub-prime, rating agencies have shown themselves to be determined not to be found wanting on the sovereign debt crisis. What’s on offer looks, smells and feels like a default in their eyes and they’re not likely to budge from this view.
Guest post by FXPro
Commentary
GOP more amenable to debt-ceiling deal. With less than one month until the August 2nd drop-dead date for reaching the $13.4trln US government debt ceiling, the Republican Party seemed to offer the Democrats an olive branch over this past weekend. Senator Cornyn, a Republican leader, claimed that his party would accept a shorter-term deal on the debt limit if that was the only possible option available. There is also some minor ground being given by some Republicans on tax, with acceptance of ‘revenue-raising’ measures as long as taxes are not increased. What seems to be under consideration here is the closing of some tax loopholes. Unattractive and unsatisfactory as it may be, both sides may opt for a short term increase in the debt limit combined with some spending cuts and tax increases (or revenue-raisers). It will not impress either investors or the rating agencies but, given the intransigence in Washington and the inability of the electorate to get its collective head around the notion of austerity, it is little wonder that it has come to this. Tough decisions on US fiscal policy look set to be kicked into the long grass once more.
SNB can breathe easier. After last week’s retracement, the Swiss franc fell further yesterday in response to more signs that the local economy is slowing. In real terms, retail sales fell by 4.1% year-on-year in May, well below expectations. This is a very volatile series – in the previous month, real spending rose by 7.8%. Nevertheless, looking through the noise of this series, there is a sign that the pace of spending is weakening. Last week, the Swissie had the worst week for more than two years, as risk appetite returned after the Greek Parliament voted in favour of a harsh austerity package. The currency’s decline was further perpetuated by the news that the manufacturing sector dipped significantly last month, weighed down by the strength of the currency. For its part, the SNB will probably welcome these recent developments. It has been expressing some reservations in recent months over its ultra-loose monetary policy and the potential for an unsustainable boost to credit demand. Softer growth and a lower currency would therefore be a welcome relief. According to Der Sonntag, the SNB will be examining the extent to which the strong currency has impacted on the economy very closely at its next regular meeting tomorrow.
Germany in a pickle over tax cuts. At a time when Germany’s liabilities are on the rise as they form the backbone of funding for Europe’s fiscal miscreants, an intense internal debate is brewing over the issue of whether to reward German taxpayers with tax cuts. Chancellor Merkel is keen to get a package of tax measures through, in part as a reward for the taxpayers for their ongoing support and forbearance. Under the proposal, small and medium-income earners will see their tax bill reduced. Unfortunately, the opposition-controlled Upper House opposes the idea, suggesting that any responsible government should not be making these promises at a time of considerable financial uncertainty. It is easy to see its argument, notwithstanding Germany’s admirable fiscal situation – the budget deficit for this year could fall to close to 2% of GDP.
Juncker concedes that Greek asset sales mean loss of sovereignty. In a refreshingly candid interview over the weekend, Eurogroup Chairman Juncker confessed that the Greek asset sale regime insisted upon by both the EU and the IMF represented a significant loss of sovereignty for the country. Juncker suggested that one model that could be used to flog Greek state assets could be the ‘Treuhand Agency’, used from 1990-1994 to sell off 14K East German firms after unification. For its part, Greece remains acutely sensitive to any suggestion that its sovereignty is being infringed. It remains to be seen how the Greek public responds once the details of how this privatisation agency will operate emerges.
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