Greek deal fails to excite
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Greek deal fails to excite

Tuesday followed an all too familiar pattern, namely markets becoming immune to setbacks ahead of the event, and then slumping once the deal on Greece was finally announced. The reason is simple.

The deal, at its best, saves Greece from a near-term default and likely exit from the eurozone with it, but does nothing to secure its longer-term future. Of course, there are many reasons to question whether the numbers behind the deal will make an exit more likely, or just a possibility.

The core reason   to consider is that Greece needs to grow and, although the minimum wage has been cut, the other measures to restore competitiveness will take years, rather than the usual more timely impact that default, devaluation or inflation brings.

Furthermore, there remains a great deal of conditionality, meaning that Greece has to achieve a list of measures and pass more legislation before the funds are released, not to mention that private sector bond-swap.

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Although the euro has held up relatively well, it’s notable that the high-beta currencies such as the Aussie, Korean won and Kiwi have struggled over the past week. There’s certainly a sense of fatigue and focus will now shift to what extent the ECB’s auction of 3Y funds can lift this next week but this alone would be a poor prop on which to base fresh rallies.


More fragments of good news in the UK. Not for the first time, the UK sits somewhere between the US and what we are seeing in Europe as a whole. It has not had the run of positive data-surprises that have been witnessed in the US, but nor has it been beset by the never-ending fiscal woes of the eurozone. Yesterday’s borrowing numbers certainly fit into this category. The main (ex-interventions) measure recorded a stronger than expected surplus in January (GBP 10.7bln), a month that is characterised by high level of corporate tax receipts. This element was up 8.6% vs. January of last year, with overall receipts up 5% for central government as a whole in the first 10 months of the financial year. So, unless there is a marked deterioration in the public finances in the remaining two months of the financial year, the borrowing target forecasts by the Office for Budget Responsibility (OBR) on which the Chancellor has to rely should be met. The real concern however lies with the impact of the current austerity measures on the economy, which naturally have the potential to impact on the borrowing numbers further down the line. Indeed, it was such concerns that under-pinned Moody’s decision last week to put the UK’s AAA rating under review. The real issue is what the Chancellor will do in response. The OBR was already fairly conservative in its view of the economy for this year which, back in Nov 2011, they expected to grow just 0.7%. And the latest survey from the Institute of Directors shows only 35% of members thinking there is a high or very high risk of recession this year. By nature, such people tend to be bullish but, in terms of the outlook for investment and hiring, such views are helpful at the margin. Finance ministers though should be more cautious and circumspect, which is why the UK Chancellor should stick to his guns when he stands up to present his latest budget four weeks tomorrow.

Public sector involvement potentially worthless.   The big focus in recent weeks has been the private sector involvement in the latest Greek aid package, but it’s the part played by the public sector (governments and central banks) that is far more interesting but also concerning. At the time of the first bailout back in 2010, interest rates applicable to lending, whilst below market rates, were still designed to be being punitive. Now, with rates lowered again as part of this package (by 1.5% for 5 years and beyond), some contributors will actually make a loss on such loans.   The main omission in the statements released overnight is the extent and impact of the ECB’s involvement in the latest deal on Greece. Profits from the ECB’s holdings of Greek debt (as part of its bond-buying program) will be passed to national central banks, which “may be allocated by Member States to further improving the sustainability of Greece’s public debt” according to last night’s statement. But this will be an uneven field, for those who are losing out on lending to Greece will be unlikely to disburse such profits to Greece as well.   Furthermore, national central banks have agreed to give up profits on their holdings of Greek paper in their investment portfolios, estimated to be EUR 12bln, which would eventually cut 1.8% from debt/GDP ratio by 2020. We don’t have the equivalent numbers for the ECB, but of course they will invariably be higher in terms of their impact, given holdings are around EUR 40bln (we’ll try to dig them out or infer them once more PSI details are available).   But it does create one more perverse aspect of about the Greek debt dynamics, that if there is an eventual default (still a distinct possibility), the loss of these revenue streams – gains from ECB and NCB holdings – would serve to increase the debt/GDP ratio because the underlying debt defaults and eliminates profits. Of course, this would be more than offset by the write-down taken by the public sector on their debt holdings. So, whilst public sector involvement is to be welcomed, once again it does create a situation in which any eventual restructuring would have to be greater than otherwise and the prior public sector contributions would become worthless.

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