Market Update: Greek deal postponed
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Week 13 - 17 February 2012
The main event this week was a non-event, a decision to postpone the approval of a crucial second bail-out loan that Greece needs so badly in order to pay creditors 14.4bn euro (EUR) on maturing bonds on 20 March.
The week started off in a positive mood as the Greek parliament had agreed to austerity measures demanded by the troika; the EU Commission, the European Central Bank and the International Monetary Fund. It was thought that this would pave the way for an approval of a second bail-out for Athens later in the week and then followed by a deal with private investors on a restructure of Greece’s debt. Or in short, a controlled default.
However, comments Sunday from Germany’s finance minister Wolfgang Schäuble, indicated that the process might not run so smoothly. He said that promises from Greece were no longer enough, actions were needed.
Mid-week an emergency meeting of eurozone finance ministers was postponed. It was becoming clear that not only Germany but also Finland and the Netherlands were losing patience with Greece, and they openly discussed the possibility of a disorderly default on Greek bonds. However, this would lead to a collapse of the Greek banking sector with severe contagion to other European banks and elevate pressure on other vulnerable sovereign bonds.
As we write, the latest news is that on Monday eurozone finance ministers will meet and most likely approve the second bail-out package for Greece. Despite the growing impatience with the lack of progress in Greece, the incalculable consequences of a disorderly default are too big to deal with.
Greece dominated the financial news again this week, but here is a selection of other important news:
Japan’s GDP shrunk for the third time in four quarters between October and December and the Bank of Japan surprised us by increasing its asset purchase program, weakening the yen.
Most economic news from the U.S. came out positive. There was a solid report on manufacturing activity and initial jobless claims fell to their lowest level in nearly four years. Also, January housing starts pointed to a clear upward trend. However, there was a smaller than forecasted retail sales in January.
Moody’s downgraded six European sovereigns – including Italy, Spain and Portugal – and put the UK, France and Austria on “negative outlook”. Denmark is now one of the few countries left with a triple A rating. Furthermore, Moody’s is threatening to downgrade a large number of European banks.
Finally, oil prices climbed to a multi-month high.
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JGAM