Uprising in Greece
In other news on Friday, weak Chinese loan data and a somewhat dovish RBA monetary policy statement has dented interest in risk. With the prospect of a disorderly Greek default rising again, investors may start to pull back from the recent rally, though we acknowledge that growth continues to surprise to the upside in general, even if margin for error is somewhat tight.
There were rumblings and secrets in the board rooms of revenue-less dot com company's as the tech bubble screamed higher. Ditto the tech companies to the banks while markets pumped higher prior to the financial crisis. What is happening in the political underworld in Italy, Spain, Portugal, Ireland, right now? What are the risk's and where will the support come from? More to come! EUR/USD Below 1.200 in our view.
In December, the European Union announced a set of measures, known as the 'six-pack', to enforce much closer economic and fiscal integration, especially among Eurozone countries. The plan comprises six legislative initiatives that reinforce the Stability and Growth Pact, and add a range of criteria to identify, monitor and correct macroeconomic imbalances. For the six pack to show up, they will need a lean diet and probably some steroids (but don't tell anyone). The measures agreed are not only wide-ranging but also include a tough enforcement mechanism. While far from perfect, the plan is a step in the right direction and at its broadest level, is consistent with the long-held view that policymakers will respond to the crisis by driving closer integration and greater fiscal harmony (Hey Merkel, do you know anyone who can supply us with steroids? Don't worry, their will be no drug testing at the fiscal union meet,so anyone holding our debt can still have collateral to buy other crap).
Friday's session was dominated by negative headlines out of domestic Greek politics. As the three parties in the national unity government sought to agree on new cuts to satisfy the Eurogroup, the minor LAOS party appeared to be wavering in support. It announced that while it would continue to support the Papademos government, it would not vote for the austerity plans. This announcement led to the euro's slide.
Greek Prime Minister Papademos warned 'a disorderly default would throw the country into a disastrous adventure. An adventure, indeed, as a model would be created for other risky peripheral regions to do the same. It would create conditions of uncontrollable economic chaos and social eruption'. It appears that Greek parties are struggling to enforce whips as a PASOK deputy also resigned ahead of the vote. This came in the wake of the smaller LAOS party removing four ministers from the government as they would not support the new measures. The troika has previously demanded all Greek parties sign up to the plans, and their response would be keenly awaited to see if the support of two parties, albeit the two largest ones, is acceptable.
New Democracy Party leader Samaras called his party to support the proposals, but also demanded elections be held as soon as the debt swap is completed, which is currently scheduled for early March. The vote is due to be held midnight on Sunday local time.
S&P announced late on Friday that a 'Selective Default' rating would be applied to Greece if collective action clauses (CACs) would be implemented directly. However, the agency also warned that if parliament passed legislation to the same effect, an outright 'Default' rating would be applied.
IIF Chief Dallara has urged Greek lawmakers to back reforms. He called them to 'understand what is at stake' an also called on the ECB to accept a haircut, noting that 'it is important that everyone shares a fair part of the burden'. Nonetheless he acknowledged time is running out ahead of the March 20th major bond redemption.
The AUD took a knock overnight as the RBA's Statement on Monetary Policy was interpreted as dovish. UBS economists note the Central Bank warned the global outlook "remains clouded". A disorderly outcome to debt problems in Europe (and contagion to our trading partners) remains the major downside risk to the global economy. However, this risk has reduced "somewhat". Although risks around the US are more balanced. Asia and China are "skewed slightly to the downside". The RBA also noted uncertainty surrounding "significant structural change", with a "once-in-a-century investment boom in resources", but "high real exchange rate". We continue to look for 25bp in additional easing up ahead, somewhat more optimistic than market expectations. We anticipate AUD/USD below 1.00 before June.
Source: UBS, Reuters, Chris Lori - CTA