Greece finally goes head to head with its creditors today in a renewed attempt to break the deadlock in the negotiations to slash the country’s debt and stave off default…
International private sector creditors, represented by the Institute of International Finance, are due to meet the government this afternoon. Talks broke down last Friday over the interest rate Greece will offer on new bonds and the plan to enforce investor losses. Investors want to reluctantly accept no more than 50% losses, Greece and the IMF suggest 70+ plus or the exercise is rendered pointless. Expect a compromise somewhere in between those two numbers to be reached as a little bit more of the can is kicked down the road, perhaps a combined 68% loss somehow ‘stretched out’ to lessen the pain and impact.
Putting the thumb screws on the hedge funds and other holders of Greek debt ahead of the talks, Prime Minister Lucas Papademos went on record as stating that he’ll consider legislation forcing creditors to take losses on their holdings if no agreement can be reached. Let’s not forget that this is an unofficial technocratic banker the elite bankers wanted shoe horning into the position to look after their interests..they did not expect him to go all ‘native’ on them. But having been battered, bruised and shoved from pillar to post, from a human perspective (in simplistic terms) it’s good to see Greece fighting back, someone actually fighting their corner. Bravo Mr. P?
Ordinary Greeks have been hit incredibly hard by the one off series of tax increases and severe spending cuts that were part of a first bailout agreed in 2010. More austerity and wage cuts with the second bailout could still prove to be a tipping point. Greece is now in its fifth consecutive year of an austerity-fuelled recession, official unemployment reached a record high of 17.7 percent in the third quarter of 2011.
Papademos has stated that if Greece does not receive 100 percent participation in its programme, in which bondholders would have to voluntarily write down $130 billion from Greece’s $450 billion debt, the country would consider passing a law to require the holdouts to take losses..
The Greek government wants to swap maturing debt due now or by March for lower-yielding bonds and a small cash payment. Hedge funds in London and New, who bought chunks of Greece’s next maturing bond, the March 2012 one for around 40 cents on the euro, are refusing to settle.
A team of European Union, International Monetary Fund and European Central Bank officials are already combing through Greece’s books as part of efforts to put together a 130-billion-euro rescue package the country needs to stay afloat. The debt swap deal would see creditors voluntarily giving up at least 50 percent of their promised returns. Without it, the EU and IMF have warned they will consider that Greek debt is not back on a sustainable track and will not release further aid.
Market Overview
European equities have fallen for the first time in three days, the euro climbed as Greece prepared to resume negotiations with private bondholders. Asian equities retraced their gains seen over the past few days due to the World Bank slashing its global growth forecast by the most in three years. The world economy will grow 2.5 percent this year, down from a June estimate of 3.6 percent, the Washington-based World Bank said. The euro area may contract 0.3 percent, compared with a previous estimate of a 1.8 percent gain, it predicted.
The Stoxx Europe 600 Index slid 0.3 percent as of 8:00 a.m. in London. The MSCI Asia Pacific Index rose 0.3 percent, after earlier jumping 0.7 percent. Standard & Poor’s 500 equity index future was little changed. The euro strengthened versus 14 of its 16 major peers. Greek government bonds fell, pushing the yield on the two year note up 6.95 percentage points to 171 percent. The Shanghai Composite Index sank 1.4 percent following the biggest gain since 2009 yesterday.
Citibank’s poor results yesterday caused the USA markets to retrace dramatically, Goldman Sachs, EBay and Charles Schwab are amongst the U.S. companies scheduled to report fourth quarter results today, irrespective of other economic data traders would be advised to keep a weather eye on these results. Data for the afternoon session may also reveal that output at U.S. factories, mines and utilities increased by 0.5 percent in December after a 0.2 percent drop in the prior month, according to the median estimate of economists in a Bloomberg survey.
Market snapshot at 10:30 am GMT ( UK time)
Asian/Pacific markets enjoyed mixed fortunes in the early morning session, the Nikkei closed up 0.99%, the Hang Seng closed up 0.30% and the CSI closed down 1.56% this drop on the CSI could be a technical retracement given the 4%+ rise the day previously. The ASX 200 closed up 0.05%. European markets have risen in morning trade, optimism was high with regards to a Greece solution and market rumours are suggesting that the IMF is close to securing/agreeing a one trillion euro dollar bailout fund for the eurozone. This later news causing spikes in most euro pairs. The STOXX 50 is up 0.9%, the FTSE is up 0.18%, the CAC is up 0.78% and the DAX is up 0.65%. Brent crude is up $0.26 a barrel and Comex gold up $1 an ounce. The SPX equity index futures is currently priced up by 0.5%
Economic calendar data releases that may affect the afternoon session
12:00 US – MBA Mortgage Applications W/e 13 Jan
13:30 US – PPI December
14:00 US – TIC Flows November
14:15 US – Industrial Production December
14:15 US – Capacity Utilisation December
15:00 US – NAHB Housing Market Index January
Industrial production is a monthly report that measures the volume of output of factories, mines and utilities in the US. As industrial production quantifies output volume as opposed to dollar value, the data is not distorted by inflation and is therefore deemed to be a ‘purer’ gauge of the industrial sector in the US. Figures from a Bloomberg survey of analysts predict a figure of +0.50% for December in comparison with the previous figure of -0.20%.
