Greece bail out deal agreed

The RBA minutes state that the Australian Central Bank will ease, though only if “demand conditions were to weaken materially” – suggests to me that an (expected) imminent rate cut is unlikely. Apparently growth and inflation are on trend. Still believe the A$ is overvalued – indeed, I’m short against the US$;

The Japanese have joined the Chinese and suggested that they could contribute to the Euro Zone bail out funds – most likely through the IMF. China is seeking additional representation at the IMF – no hope. They are also seeking a deal with the EU to be called a “market economy”, access higher tech material/know how and be able to buy defence equipment. Same old issues. Look, its simple, a collapse of Europe would be near fatal for China and Japan – they have to contribute – it’s in their own interest;

Japan reported a record trade deficit for January – Yen1.48tr. The 2011 trade deficit was Yen2.49tr, the 2nd largest since World War 11. The Yen’s strength and a weaker global economy has impacted the country’s exports, as has an increase in oil imports, given problems with their nuclear power stations. Early days, but I believe (increasingly) that the country is facing significant economic problems, which will result in a weaker (much weaker?) Yen. (For full disclosure purposes, I’m short the Yen against the US$ and the NOK – the Norwegian Central Bank Governor is to speak today – likely to try and talk down the NOK, I suspect);

In spite of the recent cut in RRR’s, China will continue with a “prudent monetary policy” reports a senior Chinese official. Does not sound like a imminent cut in interest rates. February inflation is expected to fall below 4.0%, following January’s rise to 4.5% (Chinese New Year effects). However, I for one am not convinced that inflation is under control and suspect that China may face increased inflationary pressures later this year, in particular, if Oil remains at current levels.

Just 1 issue – a reduction in flows of hot money into China should enable the PBoC to reduce RRR’s further. I continue to believe that the Yuan may actually be fully valued, with downside risks more likely, ex politically motivated factor ahead of the upcoming US Presidential elections;

No great surprise. The FT includes details of a report prepared by the Troika, which reveals that Greece will need an additional bail out, even following the current 2nd bail. Debt to GDP would fall to just 160% of GDP under a “tailored downside scenario”, which would require E245bn, far higher than the E170bn under a “baseline” scenario – the baseline scenario assumes that the Greek economy will stop shrinking next year and grow by +2.3% in 2014. If there’s one thing you know about Greece, it’s that the situation will always be much, much worse. Even under a favourable scenario, Greece would require an additional E50bn by the end of the decade, in addition to the E130bn in new aid (till 2014).

The report adds that “The Greek authorities may not be able to deliver structural reforms and policy adjustments at the pace envisaged in the baseline (scenario). Greater wage flexibility may in practice be resisted by economic agents; product and service market liberalisation may continue to be plagued by strong opposition from vested interests; and business environment reforms may also remain bogged down in bureaucratic delays”. If that’s not a totally damning indictment of Greece, I don’t what is. Finally, the report states that “prolonged financial support on appropriate terms by the official sector may be necessary” – some hope.

Greek banks will need E50bn to be recapitalised, rather than the E30bn initially estimated. The privatisation programme would be delayed by 5 years and bring in only E30bn by 2020, rather than the E50bn initially forecast.

Finally, the report concludes that the proposed bond swap, resulting from the PSI, would create a privileged class of investor, who would chase off potential new bond investors once Greece attempted to return to the capital markets. And yet the EZ is pursuing this course of action !!!!!

I’ve been reading a great summary, prepared by Reuters, of the various steps that the Greeks need to take to implement their part of the deal. Alice in wonderland, cloud cuckoo land etc, away with the fairies, all come to mind.

I don’t believe I need to add anything else.

In spite of the above the EZ has reached an agreement on the 2nd bail out (which remains at E130bn) and, in addition, has revised terms on private sector bondholders re PSI – the haircut has been increased to 53.5% – it should be 80%+. The EZ forecasts that debt to GDP will be 120.5% in 2020 – yeah sure. (By the way, the 120% target has no economic relevance – it has been chosen as it happens to be approximately Italy’s debt to GDP and the EZ does not want to undermine the sustainability of Italy’s debt). The spread on bi lateral loans has been reduced to 150bps over the maturity of the loans. National Central banks will pass on any profits on maturing Greek bonds – will reduce Greece’s debt to GDP by 1.8% and the ECB will, in effect, forgo its “profit” on its holdings of Greek debt. The Troika will have a permanent presence in Athens – good luck – I suspect that their personal insurance premiums are going to rise significantly. The Greeks will, with 2 months, introduce legislation which prioritize debt repayments. Mrs Lagarde chose her words carefully in respect of the size of the IMF’s contribution – looks as if the IMF will contribute less (as a % of the overall E130bn bail out) than previously – sensible guys.

The Greeks are to introduce legislation to enforce losses on private sector bondholders who refuse to participate in the proposed PSI deal – effectively CAC’s. I’m not sure how the EZ can avoid triggering CDS’s on Greek Sovereign debt.

In summary, no real new news – most of the detail was generally expected;

However, the most interesting (and potentially positive) announcement was Mr Junker statement that the EFSF/ESM may be increased in size “significantly” – ie above the E500bn set at present – “significantly” !!!!!, Hmmm. I’ll believe that when I see it, especially as it came from Mr (“you can lie if necessary”) Junker. The final decision as to the size of the EFSF/ESM will be taken at the next EU Council meeting at the beginning of March;

Expect additional assistance for Portugal and Ireland as a result of the above deal, in due course. Good news. However, a haircut (I believe around 40%) will be necessary re Portuguese debt – it’s current debt load is unsustainable;

The EU has forecast that Spain’s debt to GDP will rise to 78% in 2013, up from just 40%, just before the current crisis. The IMF forecasts that Spain’s budget deficit will amount to -6.8% this year (as opposed to just -4.4% agreed with the EU) and declining marginally to -6.3% next. With the need to recapitalise banks (estimated at E90bn – personally, I believe that Spanish banks will need much more equity, as they themselves acknowledge that they are saddled with over E175bn of extremely dodgy property loans – quite frankly much more, more likely), Spain’s debt to GDP will head towards 90%. The current GDP forecast of growth of +2.3% for the current year is clearly complete and absolute rubbish. The IMF has pencilled in a contraction of -1.7%. Unemployment above 22% does not help, especially as some 25% of Spain’s GDP was construction related – wont come back for years and years. Furthermore, Spain does not have much else to boost the economy – the tourism sector is likely to be hit by the EU slowdown. As a result, pray tell me how Spain is to be sorted out.

The market has focused on Italy, as its headline debt to GDP is much higher than Spain’s. However, Italy has a lot more flexibility than Spain and, in addition, is a rich country, particularly the north, with a reasonable industrial base.

Spanish and Italian bond yields continue to converge – from a near 200bps margin at the peak of the crisis to currently around 30bps. However, as I keep banging on, I believe that Spanish yields will exceed Italian in due course;

Almost a throw away line, but is Mervyn King proposing to change indeed expand the BoE’s mandate. He hinted that the banks mandate could be widened to take into account an assessment of growth, employment, credit conditions etc, rather than just the 2.0% inflation target – which the BoE has not met for well over a year – in setting monetary policy. Personally, a sensible suggestion in my view, though I’m sure will raise some controversy from the monetarists. Inflation projections were raised, though still below 2.0% by the year end. Early days, but inflation may prove trickier in the future, in particular, if oil remains at current levels;

OK a Greek deal has been agreed – will buy a bit of time (a few months ?) until the next crisis. The 2nd ECB LTRO is due on 29th Feb – expectations are for a reduced take up. Only 7 national central banks (including France, interestingly – the only “core” EZ country to do so – reflects “issues” re French banks, do you think !!!) went along with the new ECB collateral rules which, in any event, are pretty tough. Draghi has done a good job and banks accept that the normal stigma attached to accessing ECB funds has been removed. However, lack of available collateral and reluctance by certain central banks (including Germany) to the new collateral rules is expected to negatively impact the size of the take up. Having said all that, it remains my view that banks who do not take up as much as possible of this cheap (and likely cheaper) money are crazy – they can justify it on economic grounds, as the stigma issue is not that relevant. In addition, they can, if they wish, repay these loans after 1 year. I understand that some industrial companies (with financing arms) are considering accessing ECB funds.

The current view is Euro Zone financials will take up (much) less than the previous E489bn. Given the increasing uncertainty globally and a fear that there will not be further LTRO’s (however, clearly likely if there’s a crisis, I must admit), personally, I would not be surprised if the take up at the next ECB’s LTRO is higher than current forecasts;

Whilst US economic data continues to be better, I’m getting (much) more cautious, in spite of today’s “deal” – indeed, I suspect, bearish and more so as every day goes by. Any rally today, I suspect, will be short lived. Will continue to reduce my long positions whilst increasing, indeed adding to my shorts – may wait for a major change in position till after the next ECB’s LTRO though.

The Euro has risen on the Greek news – currently US$1.3280 – complete madness. I’m short the Euro (my max amount) against the US$ – may well look at a CHF short against the US$.

Spent too much time listening to the EZ press conference – time to be sensible and head for the beach, me thinks.



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