FxPro Daily Forex Brief-Athens burning a hole in Europe’s pocket
Tuesday, 14 February 2012 | 09:30
Parliamentarians in Greece signed an austerity bill into law early yesterday, but this has not prevented Greek politicians from rapid back-pedalling. Critically, leader of the New Democracy Party, Antonis Samaras - also the leader in the polls for the upcoming election - has said that this deal will last for barely two months and that it should be renegotiated and altered thereafter. For the troika, which meets tomorrow to discuss whether to agree to the latest Greek bailout, this is dreadful news. Does it sign an agreement to disburse even more money into a bottomless pit, knowing that soon Greece will have a new leader who will attempt to rip the agreement up? Do Samaras’ remarks not make a mockery of the EU’s demand that all Greek leaders sign this austerity agreement into law? The troika wants cast-iron guarantees from Greece, but the latter is incapable of giving delivering them. Short of these guarantees, how can the troika, in all sincerity, release billions of euros of taxpayers’ money? Tomorrow’s meeting promises to be absolutely fascinating.
Greek debacle obfuscates progress in the peripherals. Amidst the unrelenting and understandable focus on the continuing drama in Greece, it is important to recognise the credit which governments elsewhere in southern Europe are receiving from bond investors. In Italy, the 10yr yield fell another 10bp yesterday to 5.50%, down 200bp since mid November. The Spanish 10yr yield dropped a further 8bp to 5.25%, a decline of 150bp since mid November. Portugal has been the most impressive, its 10yr yield declining another 40bp to 12.1% - in the past ten days the yield has collapsed by 600bp. The fall in the Portuguese 5yr yield has been even more telling, a decline of 850bp since early this month. It remains to be seen if these recent moves are sustainable. Notwithstanding the very determined and creditable policy responses from the respective governments in these countries, and their valiant efforts to comply with the demands of their major creditors, it still appears likely that at least one if not two of these sovereigns will need a significant debt restructuring at some point.
China’s policy challenges. Unsurprisingly Chinese Premier Wen Jiabao has confirmed that some policy “fine-tuning” will be necessary this quarter in response to recent economic developments. Although he did not specify what types of policy adjustments were being contemplated it would be remarkable if lower bank reserve requirements were not one of them. Also, there is plenty of scope to ease fiscal policy through targeted tax cuts and spending increases. Finally, during this more challenging period we are more likely to see the exchange rate remain relatively stable. Interestingly, Wen reiterated a message which other policy officials have made recently, namely that restrictions on real estate will not be altered as Beijing attempts to make housing generally more affordable. Interestingly, the FT reported yesterday that banks had been instructed to roll over loans made to local governments because in many instances the principal is unlikely to be repaid upon maturity. In order to prevent defaults and provisions, banks have been forced to extend loans, in some cases by as much as four years. Last June, the National Audit Office in China reported that loans to local authorities totalled CNY 10.7trln at the end of 2010, or around USD 1.7trln (roughly the size of the Canadian economy). According to S&P, close to one-third of these loans have already, or will, turn toxic in the next three years. To put this into perspective, bad loans to local government alone could equate to USD 500bn, or around 8% of GDP. This is a very big number. China cannot hope to realistically open its capital account (as a prelude to currency-convertibility) until this huge issue has been resolved.
Iran tensions are escalating rapidly. Greece and Syria are the two international stories dominating the attention of the press at present, but they could soon be replaced by the rapidly escalating tensions between the West and Iran. Sanctions imposed on the latter are increasingly strangling Iran’s oil income, with most major ship-owners now refusing to go to the country. The clincher was the EU’s decision on January 23rd to place an embargo on Iranian oil, in particular the ban on ship insurance to the country. According to Bloomberg, 95% of Europe’s tanker fleet is insured under European law, and these tankers are no longer able to get insurance. As a result, Iran’s oil is trapped at its terminals. Iran accounts for 11% of the world’s oil production. In response, Iran has been threatening to block shipping through the Straits of Hormuz, through which 20% of the world’s oil is transported. Both China and India at this stage have said that they will not reduce oil imports from Iran. Brent crude has jumped by 7% this month alone, to USD 118 per barrel currently. Over the weekend, Iranian President Ahmadinejad announced that he was set to announce a “major nuclear accomplishment” in a clear attempt to further international angst. The way things are shaping up, this situation is likely to only get worse. Financially, a sharp rise in oil prices at this incredible delicate time for the global economy would be very problematic.
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