The gloves are off, and not before time. There were some home truths for beleaguered Greece yesterday, with an EU Commissioner suggesting that Greece needs to agree on fiscal austerity or return to the drachma, while the Slovakian Prime Minister felt that the Greek situation had actually worsened since the first bailout a year ago. It is hard to disagree with these statements. For their part, Europe is definitely adopting a tough love approach to Greece, partially spearheaded by the Dutch. Exasperated by the inability of the Greek government to deliver on any of their previous pledges, Dutch Finance Minister Jan Kees de Jager is pressing for the establishment of an outside agency to manage the sale of state assets in Greece. These assets could also be used as collateral for any additional loans extended by the EU/IMF. Not surprisingly, the Greek opposition has rejected such a proposal. Concerned that the next tranche of bailout money (some EUR12bn) is due next month, and that satisfactory progress on privatisations is a condition of receiving this tranche, the Greek Finance Minister made some bold promises on Monday regarding the immediate sale of various prized state assets. Unfortunately, there is huge scepticism that the political will exists within Greece to actually deliver on these promises.
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Commentary
More British misery. The latest UK GDP figures confirm that there is still absolutely no respite for the long-suffering British economy. First quarter GDP growth was unrevised at 0.5%, following an identical decline in the previous quarter, confirmation therefore that, the economy continues to flirt with recession. Indeed, if not for a massive 1.7% percentage point contribution from the trade sector in Q1, the economy would be in the midst of a deep slump. Household spending fell by another 0.6% in the three months ended March, after a 0.3% fall in the previous quarter. Even more disturbing, capital spending dropped an alarming 4.4%, after a 1.8% fall in Q4. In the last two quarters, private expenditure has fallen by just under 2%, or close to 4% annualised. This is of course not a recent phenomenon – private expenditure has collapsed by a huge 7.3% in the last three years. To be frank, misery simply does not convey the hardship experienced within the British private sector since the global financial crisis. And the worst thing is, it still has a long way to go. No other advanced economy has come close to experiencing anything like this contraction in the private sector. Little wonder that the MPC is masticating so intensely on the issue of hiking rates.
Sovereign wealth funds ride to the euro’s rescue. The gradual loss of confidence in the euro evident in recent weeks gathered pace for a while yesterday. Most pronounced this month has been a distinct switch out of the euro into the other major European currencies (the Swiss franc and the pound). EUR/CHF made a new record low below 1.23 on Wednesday, while EUR/GBP lost another 0.7% to 0.8650. The ability of the pound to significantly outperform the euro on the day when some truly disturbing GDP figures were released was itself both remarkable and revealing. There is certainly a weight of money, be it European households, corporate treasurers, institutional investors and hedge funds who recognise that the common currency is quite vulnerable. The Greek situation looks very worrying; moreover, it is a relatively simple task to understand how Greece could set off a series of dreadful financial dominos right across Europe. There was some respite for the battered euro overnight, after the EC reported that Asian and Middle East investors bought close to one-quarter of the bonds issued by the EFSF yesterday. After threatening to break 1.40 yesterday afternoon, the EUR is close to 1.42 early in London trading.
The return of the bond bulls. With most attention focused on the recent correction in risk assets and high-beta currencies, it is the decline in government bond yields that has tended to fade into the background. For instance, the 10yr US treasury yield has fallen by a very creditable 45bp over the past six weeks to 3.16%, with surprisingly little comment. This is despite dire warnings regarding the outlook for longer-dated US government debt from the likes of Pimco’s Bill Gross, who believes that yields are set to rise sharply once QE2 completes next month. Not even the increasingly fractious debate in Washington regarding the lifting of the debt limit has unsettled bond investors, despite the approach of the August 2nd drop-dead date which Treasury has suggested represents the end of its ability to sustain borrowing under the $14.3trln cap. Concern that the US recovery has lost some impetus, combined with a desire to reduce risk in other asset classes such as equities and commodities, have certainly provided bonds with a real boost. In recent weeks, the much-improved performance of the dollar has also contributed to the decline in treasury yields. It is worth observing that 10yr US treasury yields are still well above last October’s low of 2.33%. Even so, against the backdrop of the extraordinary fiscal mess that the US currently finds itself in, it is remarkable that treasury yields have been able to decline over recent weeks. If Europe manages to defuse attention from its debt crisis, then we may see the scrutiny on the US debt limit issue intensify.
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