The Greek government survived last night’s confidence vote, but there was virtually no sense of relief on the single currency. There are just too many huge hurdles to overcome, including agreeing the new austerity plan and putting it into law ahead of the mid-July deadline. In the meantime, the EU need to agree a new bail-out package to keep the IMF on side and to do this, lay out a credible plan for voluntary private sector participation. This last element still looks the largest hurdle of all, quite simply because unlike the Vienna initiative that dealt with Eastern Europe back in 2008, this is primarily down to solvency, not liquidity. Also, back then, you could get the main bank investors around one (fairly large) table, something which is impossible for Greek bondholders. The EU is currently aiming for what looks impossible. Given that it has been talked about for over a month now, markets will be looking for some sort of idea of how it’s going to be achieved when EU leaders meet tomorrow.
Commentary
Guest post by FXPro
UK fiscal messages are mixed. The latest government borrowing numbers have put some downward pressure on the pound, although right now the reaction looks a little overdone in an FX market that appears moribund ahead of the Greek confidence vote. These numbers are always ‘lumpy’ month-to-month so it never pays to read too much into one month’s figures. The May figures are only the second of the new fiscal year and, once you strip out the impact of financial interventions, there’s been just a modest improvement in the overall borrowing position. Cumulatively, net borrowing (again, ex-interventions) is some 6% higher April-May vs. the same period last year. However, the bank Payroll Tax boosted receipts by some GBP 3.5bln in April of last year, so it could be argued that, without this, the underlying position has shown some improvement this year against last year. That said, 80% of the rise in expenditure (again, comparing April-May this year against last) has come from rising interest payments and net social security payments, reflecting the impact of higher borrowing and a still sluggish economy. In sum, the messages are mixed for the new financial year. Sterling’s softer stance in the wake of the numbers has also been exacerbated by comments by the Bank of England’s markets director Paul Fisher, who underlined that he was more worried about deflation and didn’t see inflation expectations materialising. This was also accompanied by a reminder that the Bank has not ruled out further stimulus. Although he’s not on the MPC, his comments have nevertheless weighed on the pound as markets have pounced on a welcome non-Greek event.
The upstaged Fed will keep things steady. The FOMC meeting, the results of which will be announced Wednesday evening, has been totally upstaged by a country 2% of the size of the US, but which nevertheless has implications for its decision. BIS statistics show the US to be the second biggest in terms of exposure to Greece, after France. Furthermore, at this point in time, the form and structure of any voluntary debt restructuring remains incredibly vague and uncertain. This, combined with the recent run of softer data in the US, will ensure that the Fed continues with its cautious tone on the economy, its disappointment with pace of labour market improvement and the key language which points to keeping policy accommodative “for an extended period”.
Signs of sentiment starting to wobble in Germany. The ZEW survey showed a fourth consecutive monthly drop in sentiment in Germany in the June data, although the decline from 3.1 to -9.0 was the biggest monthly fall in the expectations balance for nine months. The balance expressing current economic sentiment softened for the first time after a near continuous rising trend since the depths of mid-2009. Not surprisingly, the weaker run of recent economic data, combined with the ongoing issues in the eurozone, were both said to be impacting on sentiment. It’s not pivotal by any means, but the ECB should be taking note of such data against the backdrop of the current fiscal situation in the eurozone when it considers rates next month. A further rate increase, as indicated at the June meeting, would be unwarranted in our view.
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