An emergency meeting of euro-area finance officials overnight failed to break the impasse over how or whether to involve creditors in a second Greek bailout package, the conclusion being that more time was needed to satisfy both sides. Because of the ongoing deadlock, finance officials have agreed to recommence discussions on Sunday, a day earlier than planned. The next European Council meeting is due to take place on June 23rd. In simple terms, the ECB and France want to avoid a declaration of default, while Germany wants private sector involvement as the cost of continually asking their taxpayers to bail-out Europe’s fiscal miscreants. As suggested by Luxembourg’s finance minister Luc Frieden overnight, the dispute may take more time to resolve. Amidst the uncertainty, Greek, Portuguese and Irish 10yr yields all reached record euro-lifetime highs yesterday. While the bankers are fighting over how to rescue the country from financial ruin, the situation back in Greece continues to darken. The two largest labour unions in the country have called the third general strike of the year today which will close banks, hospitals and ports. Also, the Finance Ministry in Greece revealed yesterday that the budget deficit for the first five months of this year actually widened to EUR10.3bn, up from EUR9.1bn in the comparable period of last year. The problem is not spending cuts, but collapsing revenues – the latter fell 7.1% in the first five months of 2011 vis-a-vis 2010. So much for more stringent tax collection. Based on this evidence, it appears that tax avoidance in Greece, already endemic a year ago, has actually become even more prevalent. Based on this evidence, Europe has got to hope that those Greek state asset sales go well or else they have no hope of getting their money back.
Guest post by FxPro
Commentary
Bernanke issues stern warning on debt limit. In a strongly-worded warning to Washington overnight, the Fed Chairman has chastised those politicians who are insisting on fiscal consolidation as the price to pay for lifting the debt ceiling. Quite rightly, Bernanke claimed that failure to raise the debt ceiling in time could result in ‘severe disruption’ in financial markets and that linking it to deficit cuts was the ‘wrong tool for that important job’. The Treasury Department has stated that August 2nd is the drop-dead date for the debt limit. Also, Bernanke suggested that brinkmanship on this issue risked raising doubts over America’s creditworthiness.
No respite for high-inflation UK. Unfortunately, there is no real sign in the latest CPI figures that inflation pressures in the UK are easing in any way. Even the fall in the core rate last month from 3.7% to 3.3% is nothing to get excited about, given that it was at 3.2% two months ago and much of the blip higher was due to the later timing of Easter this year. The core rate also excluded the strong increase in food and (non-alcoholic) drink, which contributed nearly 0.2 percentage points to headline inflation in May. However, even though the headline rate held steady at 4.5%, in all likelihood there’s worse to come. The Bank has long suspected that headline inflation could touch 5% and the further increases in domestic utility prices recently announced are almost certain to ensure this is the case in the coming months.
Despite the softer data recently, both at home and overseas, it’s clear that the less hawkish on the MPC are going to have to hold their nerve for several months to come as inflation moves higher. Their arguments for doing so, in terms of the temporary nature of inflationary pressures, the continued spare capacity in the economy and fragility of the recovery will no doubt be seriously tested along the way. The bottom line is that we are heading for even more uncomfortable times over the coming months for the UK economy and the Bank of England will find it tough to sit tight on rates credibly, even though this is probably the right thing to do.
Expect more rate rises from the PBOC. The data deluge from China this week confirms that the economy continues to record very decent growth, albeit with the disturbing side-effect that inflationary pressures are still building.
In the month of May, retail sales rose by 16.9% YoY, down from the recent peak of 19.1%. After adjusting for inflation, what has been noticeable over recent moths is a discernable slowing in real sales growth. That said, real sales growth of more than 10% is entirely acceptable and would be the envy of any advanced economy tight now. Property investment also remains relatively buoyant – home sales rose 16% in the first five months of this year. Separately, industrial production rose 13.3% YoY in May, again a healthy outcome, while fixed asset investment increased by a staggering 26%. For those looking for evidence that China is headed for a hard landing, there is scant support for their thesis in these figures.
More troubling, however, especially for policy officials, is the continued rise in inflation. May consumer prices rose 5.5% YoY, not as bad as some commentators were suggesting but still the highest for three years. According to a spokesperson for the National Bureau of Statistics, food inflation accounted for 3.5 percentage points of the 5.5% increase. The other contributor to accelerating inflation is housing costs, up 6% YoY last month. Producer prices also remain elevated, up 6.8% YoY.
Clearly, the PBOC still has more work to do in terms of constraining not just prices growth but also growth in credit availability. As a result, it is no surprise to that the PBOC lifted the reserve requirement yet again yesterday by another 50bp to 21% for the major banks and 19% for smaller banks. Unfortunately, the myriad of reserve requirement increases announced over recent months has failed to have much impact on borrowing – it appears indeed that these restrictions are merely pushing credit availability to the shadow of the banking system.
Higher interest rates are what is needed, and quite possibly much higher ones than currently exist. In coming months, we could expect at least 50bp, and possibly even 100bp, more tightening from the PBOC. To combat the scourge of accelerating inflation, the PBOC is likely to continue to allow an appreciating exchange rate to play a role.
Share
