What a spoilsport, just when the market had begun to buy the narrative from the Merkozy conjoinment along comes the chairman of euro zone finance ministers, Jean-Claude Juncker stating, (late in the evening during an Austrian television interview), that a compulsory write-down of 50 to 60 percent of Greek debt may be unavoidable.
I do not rule out a debt cut, but one should not think that simply a brutal debt cut would suffice in Greece. One has to take care that this does not lead to the danger of contagion elsewhere in the euro zone.
Damn him for doing some basic infant school mathematics. Normally that tacit admission would be enough to place the markets back to their position of mid last week, however, it takes more than his frankness and open honesty to derail a market that is utterly determined to leverage any good news to the maximum and ignore the very bad.
European Council President Herman Van Rompuy announced that the next regular summit of EU leaders has been postponed until October 23rd in order to allow time; “to finalise our comprehensive strategy on the euro area sovereign debt crisis. Further elements are needed to address the situation in Greece, the bank recapitalisation and the enhanced efficiency of stabilisation tools,” referring to the European Financial Stability Facility (EFSF) bailout fund, which European leaders agreed, as far back as July, to expand and give new powers but has to be put into effect.
In Athens, Finance Minister Evangelos Venizelos states Greece has concluded talks with European Union and International Monetary Fund officials and expects private bondholders to make the bigger contribution than originally envisaged in the second bailout deal agreed in July. Greece needs an 8 billion euro aid instalment in November to avoid running out of money to pay salaries and pensions. Its next bond redemption is due in December, Greece is now paying 150% to borrow on the bond market over twelve months.
Venizelos said Athens expects increases in the €109 billion rescue package agreed by euro zone leaders and hinted that banks will take heavier losses. “We expect an overall package better than the one initially drafted, because we have to take into consideration the new parameters,” suggesting a deeper recession that will further worsen Greece’s budget deficit. The EU, IMF and ECB mission chiefs, the troika, should conclude their visit with a joint statement today (Tuesday). They will prepare reports for euro zone finance ministers and the IMF board to decide on the aid tranche.
Business daily FT Deutschland, without naming the government officials, states that Germany is trying to persuade EU partners to accept the inevitable, that Greece is insolvent and has to default, but faces opposition from the European Commission, the European Central Bank, and several member states, including France. Merkel had apparently concluded that Greece was insolvent and is firm on her belief that a mandatory debt restructuring is the only realistic option. German Finance Minister Wolfgang Schaeuble states that private bondholders may have to contribute more than the 21 percent writedown agreed in July. Berlin now awaits the troika’s report.
The European Central Bank President, Jean-Claude Trichet, has stated that Europe’s debt crisis actually reaches so deep as to threaten the region’s systemic financial system. Trichet told lawmakers in Brussels today (Tuesday) in his capacity as head of the European Systemic Risk Board;
The crisis has reached a systemic dimension. Sovereign stress has moved from smaller economies to some of the larger countries. The crisis is systemic and must be tackled decisively
Whilst fiscal and monetary news and the ongoing crises continue to dominate the macro economic landscape insular domestic news can still affect sentiment change. The UK manufacturing figures have been released this morning. U.K. manufacturing fell more than economists forecast in August, adding to signs that the recovery continued to struggle in the third quarter. Factory output fell 0.3 percent according to data released by the Office for National Statistics. The median forecast of 24 economists (in a Bloomberg News survey) was for manufacturing to fall 0.2 percent. Overall industrial output, which includes mining and oil and gas, rose 0.2 percent on the month. This fall in manufacturing should be a cause for concern given the zirp policy and sterling’s lack of strength should have increased manufacturing output. The spectre of stagflation still stalks the UK economy.
Asian markets caught the general mood of market optimism in their overnight and early morning trading sessions. The Nikkei closed up 1.95% and the Hang Seng closed up 2.43%, the CSI closed down 0.2%. The Thai index, the SET, has had a significant bounce from its fifty two week low of last week and has recovered from 843 to 958 inside a week finishing the session up 2.77%. European markets have failed to maintain the momentum set yesterday, the STOXX index is currently down 0.89%, the FTSE is down 0.84%, the CAC is down 0.89% and the DAX down 0.86%. The mixed bag of rhetoric coming from various EU leaders and the UK’s poor manufacturing figures weighing heavily on the indices. The SPX equity index future is currently down 0.76%. Brent crude is down $354 a barrel and spot gold is off $16 an ounce.
According to Bloomberg the most accurate foreign-exchange forecasters say the dollar’s best quarterly rally since 2008 has no chance of continuing to year-end as the USA’s laggard economy will inevitably cause the Federal Reserve to flood the system with more U.S. currency. Led by JPMorgan Chase & Co., these strategists (as measured by Bloomberg), predict the currency averaging $1.34 per euro in the final three months of 2011, from $1.3387 on Sept. 30th. They estimate it will average 76.6 yen, from 77.06.
Economic releases to be aware of at or around NY opening include the USA budget statement. This monthly report, of the deficit or surplus held by the U.S. federal government, provides detailed information regarding federal receipts and outlays based on accounting reports of Federal entities, disbursing officers, and Federal Reserve Bank reports. The economists surveyed by Bloomberg predict a median expectation of -$64.9B, compared with last month’s figure of -$134.2B.