The euro rose strongly yesterday at the start of the trading week despite evidence to the contrary. It touched a 3 week high against the pound and also went over the significant level of USD$1.30.
The talks in Greece continued all day yesterday. Greece is looking at a ‘haircut’ of up to 70% as part of a debt swap plan on new bonds issued with an interest rate of between 3% and 4%. Greece hopes to reduce its debt from its current level of 160% of GDP to 120% by 2020.
International banks and other private institutions represented by the Institute of International Finance (IIF) declared yesterday after unsuccessful talks over the weekend that they had already offered what they consider to be their “maximum offer that is consistent with the voluntary debt exchange”, but euro zone finance ministers did not sign off on the proposal.
Reports suggest that the major issue at the heart of the disagreement is the fact that the IIF insists on an average 4% interest rate being applied on the new bonds while Greece refuses to pay above 3.5%.
Meanwhile, euro zone finance ministers met yesterday in Brussels and decided to back the Greek government’s stance. The euro group president, Jean-Claude Juncker, agreed that the Greek coupons need to be below 3.5% for the debt to be paid up to 2020 and that it should be below 4% for the full 30 year life of the bonds.
Negotiations over private sector involvement and the “voluntary” 50% haircut have dragged on for months to no avail. Reaching an agreement is a prerequisite for Greece to receive a second financing package from the International Monetary Fund and the European Union. Athens faces up to €14.5 billion in maturing debt in March and without a deal could be forced to enter a disorderly default.
Data published yesterday showed that Spain’s gross domestic product (GDP) for the fourth quarter of 2011 contracted by 0.3% quarter-on-quarter. The Spanish economic expansion continues to slow down after a flat (0.0%) reading for the third quarter and just 0.2% growth in the second quarter.
“During 2011, the modest recovery on which the Spanish economy had embarked a year earlier lost momentum as the euro area sovereign debt crisis spread to a larger number of countries and strains on financial markets heightened,” reported the Bank of Spain.
“On the expenditure side, national demand is estimated to have fallen at a slightly higher rate than in the July-September period (0.5% quarter-on-quarter), while the positive contribution of external demand, at 0.3 pp, was somewhat lower than that in the previous quarter, reflecting the slowdown in export markets in the closing months of the year.”
The Bank of Spain expects a substantial economic contraction in 2012 (-1.5%) and a modest recovery in 2013 (0.2%).
Despite all the uncertainty with Greece and the poor economic data out of Span, the euro continues to rebound from its multi-month lows recently set against the pound and US dollar.
With the equity and commodity markets rebounding strongly worldwide, there is less demand for the US dollar’s safe haven status and consequently, the US dollar has fallen of late. The markets also marked the dollar down ahead of the latest two-day Federal Reserve Rate meeting which starts later on today. The markets will be keeping a close eye for fresh clues on when Fed officials expect interest rates in the world’s largest economies to start to rise. At the end of this week sees the publication of US fourth-quarter GDP data which will also show the strength or otherwise of the economic recovery in the US.
In a signal to the markets that suggests that a third round of the bond buying program known as Quantitative Easing (QE) may be on the cards next month, Bank of England Monetary Policy Committee (MPC) member Adam Posen suggested in a speech last night that the MPC will vote for further asset purchases if new forecasts for growth and inflation support that course of action.
Posen also suggested that should those parts of the economy which did not shed as many workers as would have been expected (such as the financial industry), during the downturn, do so now, then “inflation will be coming down in the next couple of years and unemployment will unfortunately likely rise some over the next couple of years, but not hugely.”
“If that is our forecast,” he added, “the MPC is right to have done quantitative easing to try to get us from having inflation be too low and employment too low in two to three years’ time, and the committee is right to consider, as we will be doing in a few weeks, whether we need to do more.”
