After receiving around a trillion euros, European banks are well prepared to offset losses from a Greek default, yet the EU may still allow Athens to miss another deadline.
Ilya Spivak of DailyFX discusses Greece, the diminishing chances of QE3 in the US and other fundamental issues in the interview below.
Ilya Spivak is a currency strategist with DailyFX, whose expertise is in fundamental analysis, economic and market themes. Ilya Spivak applies a top-down global macro approach to longer-term investing in the G10 currencies. Ilya has headlined seminars on FX trading around the world and is regularly cited in leading publications including the Wall Street Journal, the Daily Telegraph, CNBC, CNN Money and Reuters.
Time is running out for Greece. Will the EU let Greece announce a bankruptcy? Does it all depend on the PSI or on other calculations?
The EU has allowed Greece to miss quite a few deadlines before, so history suggests Athens will not be allowed to default even if they fall short on the latest commitments. With that in mind, a default in Greece is no longer the threat it was as recently as December. The two 3-year ECB LTRO operations allotted banks close to €1 trillion to offset losses from a blow-up within the currency bloc, which is more than enough to cover all outstanding Greek debt. This means even in the event of an outright default, a subsequent market-wide credit crisis is unlikely to follow.
The ECB has a preferred status over private bondholders. Will this impact the chances of Portugal to return to the markets?
The decision by the ISDA to allow the ECB to opt out of Greek PSI hurts the viability of CDS as a viable hedge, which can weigh on demand for other debt-strapped countries’ bonds including Portugal. With that in mind, the integrity of CDS was already substantially tarnished by the PSI arrangement as a whole. After all, when investors take a 50-70 percent haircut and that doesn’t trigger CDS, the ECB opt-out is likely to have a relatively small marginal affect in and of itself
Is there still a chance of seeing QE3 in March? Do you think the Fed might choose to extend Operation Twist instead?
At this point, it seems very unlikely that a QE3 program will materialize in the near to medium term, if at all. Last week, Ben Bernanke signaled as much at his semi-annual Congressional testimony, saying the improvement in employment has been “more rapid” that the bank anticipated. Considering this was preceded and followed by similar sentiments from other FOMC members, it was almost certainly a concerted effort to project a policy position rather than a misunderstood comment.
The Republican primaries are heating with “Super Tuesday”. Do you think that ongoing uncertainty about the candidate can impact the dollar?
The Republican race is not making a splash in currency markets at the moment and seems unlikely to enter into the picture in a meaningful way in the coming months. The election will likely begin to matter more as traders are able to meaningfully compare and contrast the candidates’ fiscal policy platform, but with the primary race still relatively close and other more pressing issues in no short supply, we are unlikely to see this side of the story emerge as a price-mover just yet.
Apart from the resources industry, the Australian economy is showing some signs of slowdown or weakness, in housing, corporate profits and retail sales. Will the Australian dollar eventually feel it? Or do commodity prices remain the main drivers or AUD?
Commodity prices are not truly a “driver” of the Australian Dollar and never have been in a direct way. Rather, commodities and the Aussie follow parallel paths by virtue of their sensitivity to the global business cycle, particularly as it relates to China. With two major sources of uncertainty – a possible blow-up in the Eurozone and additional stimulus from the Fed – essentially resolved last week with the second LTRO outing and Ben Bernanke’s congressional testimony, the focus has returned to the overall macro landscape. Here, expectations continue to call for a sharp slowdown in global GDP growth in 2012 courtesy of a recession in the Euro area. The currency bloc is China’s top export market, so a drop-off in performance bodes ill for the East Asian giant. Indeed, China downgraded its 2012 growth outlook to the weakest since 2004 just this week. In turn, commodity prices and the Aussie have scope to decline as overall global growth slows and Chinese demand follows.
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