IMF and Eurogroup publicly disagree over Greece

Australian October business confidence declined to -1, from zero in September. The business conditions component, an indication of sales, profits and employment, declined to -5, from -3 previously. The capex component declined to the lowest since August 2009. The head of the Australian Industry Group warned that “Key employing sectors – manufacturing, construction and the broader services industry – are all in contraction and have been for most of this year”. Having said that the A$ rose to US$1.0419 today – amazing;

Press reports confirm that Mr Li Keqiang will indeed be confirmed as the next Chinese premier, taking over from Mr Wen Jiabao. He is considered to be a “good Party bureaucrat”, who will not take any radical decisions. Suggestions that he is a reformist are misplaced in my humble view – more of a “yes man” and placed there as he will be good for the vested interests in China

Chinese stocks fell to a 7 week low today as the government hinted that they may expand a property tax trial. The market does not seem to have been carried away by the better “official” economic data – I wonder why?. Retail sales are expected to slow somewhat, as well;

Russian GDP rose by +2.9% Y/Y last Q, slightly above the +2.8% forecast. Analysts expect the economy to slow further. The recent drought hurt the agricultural sector and mining also is being hit. Mr Putin has proposed to increase investment and create 25 mn new jobs, though with corruption a major issue, his targets look ambitious;

A material difference of opinion (basically a public row) over Greece between Mr Jean-Claude Juncker, the chairman of the Euro group and Mrs Largarde (head of the IMF) emerged at yesterdays press conference. (Remember, Mr Juncker has previously stated that it is OK for politicians to lie). Mr Juncker advised the press that the target (for Greece to reach the debt to GDP target of 120%) had been moved to 2022. Mrs Lagarde insisted that it remained at the original date of 2020, stating that a debt sustainability percentage for Greece “In, our view, the appropriate timetable is 120% by 2020. We clearly have different views”. The EU has been trying to fiddle the numbers to achieve the outcome they desire. Furthermore, the IMF believe that without any debt forgiveness on official sector loans already provided to Greece, debt to GDP will rise to 150% by 2020, rather than the 140% or so suggested by the EU. Without an agreement between the EU and the IMF, the EZ will find it more difficult to keep this charade going, but the odds are that they will go ahead – the politicians are committed to achieving some kind of “deal”. Sticking to 2020, will require the EZ to agree to a haircut on existing loans, something which is politically unacceptable;

The French have stepped in. The French Finance Minister states that they intend to reach an agreement on Greece with Germany by the 20th of this month, so as to disburse funds to Greece by the end of November. The bottom line is that the IMF, unfortunately, will be ignored and the EZ will press ahead with this nonsense. Mr Schaeuble suggests that interest rates on loans to Greece need to be cut, rather than go for haircuts. He adds that previous targets for Greece were not realistic. However, the general tone of his comments suggested that Germany remains committed to fixing a deal.

A leaked draft of the Troika’s report on Greece reveals that the country will need an aggregate of E32.6bn by the end of 2016. A 2 year extension to allow Greece to meet its budget deficit target (-3.0% of GDP) will require a further E15bn of additional bail out funds through to the end of 2014 and E17.6bn for 2015/16. In addition, it will force Greece to increase the amount it needs to raise through austerity measures to E20.5bn, rather than the E13.5bn which was approved by the Greek parliament last week. That is going to be simply impossible for the Greeks to deliver. The estimates are, as usual, likely to be a (significant?) underestimate of the funds required and/or the further savings needed, in any event. The draft report states that “risks to the programme remain very large”. Well no surprise there – its not credible in the slightest. Mr Weidmann’s call for an “unblemished and honest” report has fallen on deaf ears – the EZ have resorted to their usual practices.

The German finance minister states that the Bundestag will take time to consider the report, a view expressed by his Dutch counterpart. The draft report does not include proposals as to how to plug the financing gap and/or views on debt sustainability (reports suggest that the EU and IMF are 800bps apart), a key issue for the IMF, or the next steps to be taken to turn around Greece. Options that have been discussed include reducing interest rates, extending maturities, handing back “profits” made by the the ECB on previous purchases of Greek bonds and a debt buy back – debt forgiveness is off the table, as its politically unacceptable. The Troika have admitted that Greece’s debt to GDP will peak at over 190% in 2013.

Mrs Merkel is determined to keep Greece going – at least until her general election in September next year and she must not be underestimated. However, she has her Parliament (the Bundestag, who are increasingly disenchanted at the prospect of further bail outs) to deal with and countries such as Holland and Finland who remain, indeed are becoming increasingly sceptical. Having said that, some fudge remains the most likely conclusion.

Finally, Mr Juncker reported today that the EZ had no dispute with the IMF !!!! – that’s exactly why I continue to believe that the EU/EZ is a basket case;

The German November investor confidence index, the ZEW, came in at -15.7, much worse than the -10.0 expected and weaker than the -11.5 in October – the 1st decline since August. The current situations component declined to 5.4 as opposed to 8.0 expected and 10.0 in October. Mr Franz of the ZEW confirmed that Germany was slowing – well he’s really insightful !!!. He confirmed that Germany was not decoupled from the EZ – well, finally, I cant understand why the German’s had previously believed that they were. He added that Germany will not face a sharp recession, due to consumer demand holding up. Germany is likely to face a decline in GDP this Q, with Q3 GDP expected to be around +0.1% – Q3 data to be released on the 15th November;

France’s September current account deficit came in at -E3.3bn M/M, better than the revised deficit of -E3.6bn in August.

French Q3 non farm payrolls came in at -0.3% lower, worse than the -0.2% expected and -0.1% in Q2.

The data confirms the problems that France is facing;

UK October CPI came in at +2.7% Y/Y, higher than the +2.4% expected and up from a 3 year low of +2.2% in September. Whilst CPI was expected to rise, it rose to the highest since May this year and may rise further due to higher utility charges in coming months. Inflation in the UK has traditionally been “stickier” than in other developed economies. The BoE is to release its inflation report tomorrow;

UK October input prices rose by +0.4% M/M , much higher than the -0.2% expected and -0.2% in September.

UK October output prices rose by +0.1% M/M (+2.5% Y/Y), in line with expectations and +0.5% in September;


Asian markets closed sharply lower on a lack luster US last night and the continued saga in the EZ. European markets are over 1.0% lower at present, with US futures indicating that markets will open some -0.5% lower. Equity markets have been particularly weak in recent weeks, and look somewhat oversold – some kind of stabilisation/ bounce is likely.

Spanish 10 year yields crept up to 5.96% this morning A 6 week high), though Mr Rajoy, the Spanish PM continues to dither. As the budget deficit will come in higher than the ludicrous forecast of 6.3% predicted by Spain, have the Spanish raised the amount they need for the current year – don’t think so Mr Rajoy. Furthermore, pre this financial crisis, Spanish GDP was dependent on construction and consumption, though had double digit unemployment. Neither sectors look positive for years to come. As a result, where’s the future growth going to come from Mr Rajoy. I remain convinced that Spain will have to restructure its debts in due course.

Unconfirmed German press reports (Bilt) just out suggest that Greece will get E44bn in aid in 1 payment, basically bundling 3 (sort of) agreed payments to Greece – closed my Euro short for the time being – will reload in due course. The German ministry of finance has denied the report by Bilt, but…….

Happy Diwali by the way – its a fun Indian festival.

Kiron Sarkar

13th November 2012

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