Greece pressing ahead with reforms
22/Jun/2011 • Currency Updates•
After Greek PM George Papenrendou won his key confidence vote yesterday, it appears the British Chancellor George Osborne and other fellow heavyweights are still very pessimistic about the outlook for Greece. We could very well have a doomsday scenario upon us where by we are damned if we help and damned if we do not and whether we choose to bail out Greece or not we are going to be hit.
Would throwing billions of the taxpayer’s hard earned money at a situation, wherever you rest your head, avoid the contagious spread, possible collapse or domino effect of the EU set of cards and potential double dip recession realistically make the problem go away.
The simple fact is that Greece has a debt to GDP ratio of 140%. Lombard Street research has quite rightly pointed out that its interest payment alone will be well over 10% of GDP. Maastricht has set a 3% deficit limit to which the belt tightening and austerity alone seems an unrealistic objective to meet. The Greek government would have to run a surplus of 7-10% of GDP against a deficit of 4-5 (based on last year’s figures), this would exclude interest payments and all have the all have to be completed of course, in the face of a shrinking economy. Same might say that despite any measure put in place this is quite literally an impossible feat to accomplish.
We could be looking at a situation where we either choose contagious default where other EU members follow a similar demise or a structured default where rules are set out for other possible countries. An Argentinian style implosion involving hyperinflation in Greece and chaos around Europe cannot be rules out.
George Osborne stated yesterday the situation is now “Very serious” at the cabinet meeting and also the fact that we would not participate in a Greek bailout. Fitch also spelled out prior to the confidence vote that if commercial lenders roll over their loans to Greece it will deem the country to be in default.
Yesterday saw the Euro rally to €1.4435 on the back of the vote whereby the markets widely anticipated a success, this was relatively short lived and began to lose ground after. The Greek parliament must now spend the week deciding how to pass on additional €28bn of cuts by the 30th of June in order to obtain further aid from the IMF and EU. If this aid is not received the sovereign will be declared bankrupt in July. With such issues coming to a head there is a possibility we could see the US Dollar and other safe haven commodities heavily bid as investors and speculators flock to the safe haven currencies, this would include the Japanese Yen and Swiss Franc.
Yesterday German ZEW confidence fell for a fourth successive month. This soft patch in German confidence could be short lived as we see a high backlog of factory orders and therefore a safety net in production.
The MPC will vote today on whether to hike rates and the minutes will be released from earlier in the month. We are widely expected to keep rates on hold but the minutes will be well scrutinised, to give an overall opinion as to well normality in interest rates is likely to start. With this date being ever more pushed back and a distinct lack of data for the UK we are somewhat vulnerable to sell off. Particularly with the geopolitical events happening around the globe, we could well see the US Dollar gaining strength in the near term.
Today sees the Fed’s US interest rate decision expected to remain unchanged at 0.25%. Much more closely watched will be the accompanying FOMC (Federal Open Market Committee) statement and the following Press Conference with the markets listening for clues as to future policy direction, ahead of US GDP and Core durable goods figures to be released on Friday.