Daily market report and rates page from Piagi

Rates Page 29.08.2012

Piagi reports on the currency markets

EUR/GBP traded higher with EUR/USD yesterday and traded briefly through the 0.7950 level. EUR strength also dragged GBP/USD higher. With no UK data out today there is little reason to see independent GBP moves. With EUR/USD likely to be limited on the upside, we would expect this to also be the case for EUR/GBP, and the August high of 0.7963 should provide some resistance.

Meanwhile, preliminary German HICP – the first August inflation reading for the euro area – is expected to have increased by 0.1% m/m, after rising 0.4% in the previous month. This will take the annual rate back to 2% to match the ECB’s target. Although indirect tax increases and a recovery in oil prices could see inflation across the region back edge above 2% in the coming months we do not see this as a barrier to further easing by the ECB. Ahead of next week’s monetary policy meeting, ECB President Draghi yesterday announced that he will not be attending the Jackson Hole symposium.

It was revealed yesterday that the recession in Spain was deeper than first thought in the second quarter, with concerns intensifying after reports that the regional government of Catalonia would be requesting around €5bn from Spain’s liquidity fund. “Catalonia also seems stubborn on political conditions relating to the emergency funds, causing some anxiety for potential future lenders to Spain as a whole. This is pretty big news for the Eurozone as any seemed resistance to conditions relating to any emergency funds could cause a pretty big headache down the line,” said trader Simon Furlong from Spreadex.

Spain has suffered the worst haemorrhaging of bank deposits since the launch of the euro, losing funds equal to 7% of GDP in a single month. Data from the European Central Bank shows that outflows from Spanish commercial banks reached €74bn (£59bn) in July, twice the previous monthly record. This brings the total deposit loss over the past year to 10.9%, replicating the pattern seen in Greece as the crisis spread. The Bank of Spain said the fall is distorted by the July effect of tax payments and by the expiry of securitised funds. On the other hand, Julian Callow from Barclays Capital said the deposit loss is €65bn even when adjusted for the season: “This is highly significant. Deposit outflows are clearly picking up and the balance sheet of the Spanish banking system is contracting,” The Telegraph reports.

EUR/USD moved higher on the back of the well-received auctions and expectations that the ECB will announce a bond purchase strategy next week but has moved moderately lower since market close in Europe yesterday. Both SEK and NOK have weakened against EUR overnight.

Although Lloyds TSB do not expect today’s data to significantly add to the debate on the need for further monetary stimulus in the US, it will provide some colour around growth prospects. Lloyds TSB look for Q2 GDP to be revised up from a preliminary estimate of 1.5% saar to 1.8% reflecting better than expected trade figures for June. Notwithstanding, yesterday’s surprise fall in consumer confidence, lower gasoline prices and a recent improvement in labour market conditions should see household spending remain a key driver of GDP growth in H2. Lloyds TSB also expect housing investment to be supportive. Today’s pending home sales for July are expected to provide further evidence of improving sentiment.

Piagi reports on the greek Crisis

Rates Page 25.06.2012

 

Piagi reports today as Greece may have to wait at least another five years before it can sell bonds to investors, according to financial institutions that trade debt with European governments.

A new administration in Athens and signs that European Union leaders are willing to loosen Greek austerity measures failed to convince primary dealers that the country will be able to return to the market before its second bailout ends in the next three years.

Three companies surveyed said that deal directly with sovereign bond issuers expect it to take at least a decade before Greece issues debt again. Ten say investors would lend money to the country no sooner than 2017, while five predict 2015 at the earliest. The median forecast was a minimum of five years.

“The challenges facing Greece remain extremely large,” said Jamie Searle, a fixed-income strategist at Citigroup Inc. in London. “It will be a long while before they can get back to the market.”

Greece last sold bonds in March 2010 before the extra yield that investors demand for holding its 10-year securities instead of German bunds ballooned the next month to 443 basis points, then a euro-era record. That forced the country, facing 8.5 billion euros ($10.7 billion) of bond repayments, to start bailout talks with the EU, the European Central Bank and International Monetary Fund.

Ten-year Greek debt yielded 25.68 percentage points more than German bunds as of 9:10 a.m. London time today.

Possible Exit from the single currency

Analysts at New York-based Citigroup said there’s a 50 percent to 75 percent chance that the nation will exit the euro region in the next 12 to 18 months. Their view hasn’t changed since before the June 17 election.

Antonis Samaras was sworn in last week as prime minister, Greece’s fourth since November, after his New Democracy party won the vote. He is under pressure to tackle the nation’s debt crisis with the economy in a fifth year of recession and unemployment at 21 percent.

Greece won a second bailout this year from the EU and the IMF, taking the total rescue package to 240 billion euros. Under the country’s bailout program, Greece has to reduce its budget deficit to 7.3 percent of gross domestic product this year from 9.3 percent in 2011, and cut its primary deficit, which excludes interest payments, to 1 percent from 2.4 percent.

Fiscal Union

It may need a third bailout or another round of bond writedowns, or both, to get debt to a manageable level, said officials from the primary dealers, who asked that they not be identified. Some said policy makers must signal their willingness to share the burden by issuing common bonds before investors are confident enough to buy Greek securities.

“The only thing that will get investors’ trust back is to get something that looks like a fiscal union because Greece isn’t going to grow out of the problem,” said John Wraith, a fixed-income strategist at Bank of America Merrill Lynch in London. “Investors have given up on the concept of a union that doesn’t have a fiscal transfer, but does have the interest rate and currency locked together.”

The country sparked Europe’s sovereign-debt crisis in 2009 after saying its deficit was bigger than previously thought, reaching a euro-region record of 15.8 percent of GDP that year.

European leaders will hold a two-day summit on June 28 to seek a way out of the debt turmoil. Billionaire investor George Soros warned that failure by leaders meeting this week to produce drastic measures could spell the demise of the currency.

Tough Times

Yields on Greek 10-year bonds dropped to 27.21 percent today from a record high of 44 percent in March. The rate is at least 20 percentage points above the level at which Greece could fund itself, as the country along with Ireland and Portugal all sought aid when 10-year yields surpassed 7 percent.

The nation’s ratio of debt to GDP is projected to rise to 168 percent next year from 161 percent, according to the European Commission’s report of May 11. The economy will contract 4.7 percent this year and show zero growth in 2013, the commission said.

“The country is still insolvent and there is little progress in the way of fiscal adjustment and growth,” said Piero Ghezzi, the head of global economics at Barclays Capital in London. “Investors will need to see what the end game for Greece is before they buy its bonds again. A country can borrow in the market only if there is demand for its debt. For Greece, that can be easily five years away.”

Primary Dealers

Companies participating in the Bloomberg survey were Bank of America Merrill Lynch, Bayerische Landesbank, BNP Paribas SA, Citigroup, Commerzbank AG, Credit Agricole SA, Danske Bank SA, Deutsche Bank AG, DZ Bank AG, HSBC Holdings Plc, ING Bank NV, Jefferies International, Landesbank Baden-Wuerttermberg, Lloyds TSB Bank Plc, Nomura International, Rabobank International, Royal Bank of Canada, Royal Bank of Scotland Group Plc, Barclays Plc and UniCredit SpA. They provided their forecasts on June 21 and June 22 on a non-attributable basis.

Petros Christodoulou, former head of the Greek debt office, said June 19 that his nation isn’t close to selling bonds and there may be common euro debt issuance by the time it returns to the markets. He also said Greece will remain a member of the 17- nation euro area.

The IMF recommended issuing common debt on June 21 after warning that the euro-area crisis has reached a “critical” stage.

“Greece could return to the market quickly if leaders take the right policy decisions,” said Padhraic Garvey, head of developed market debt at ING in Amsterdam. “But the risk that things could go in a very wrong direction, taking Greece much longer to return to the market, is greater than the other way around.”

Piagi reports on the greek Crisis

Rates Page 25.06.2012

 

Piagi reports today as Greece may have to wait at least another five years before it can sell bonds to investors, according to financial institutions that trade debt with European governments.

A new administration in Athens and signs that European Union leaders are willing to loosen Greek austerity measures failed to convince primary dealers that the country will be able to return to the market before its second bailout ends in the next three years.

Three companies surveyed said that deal directly with sovereign bond issuers expect it to take at least a decade before Greece issues debt again. Ten say investors would lend money to the country no sooner than 2017, while five predict 2015 at the earliest. The median forecast was a minimum of five years.

“The challenges facing Greece remain extremely large,” said Jamie Searle, a fixed-income strategist at Citigroup Inc. in London. “It will be a long while before they can get back to the market.”

Greece last sold bonds in March 2010 before the extra yield that investors demand for holding its 10-year securities instead of German bunds ballooned the next month to 443 basis points, then a euro-era record. That forced the country, facing 8.5 billion euros ($10.7 billion) of bond repayments, to start bailout talks with the EU, the European Central Bank and International Monetary Fund.

Ten-year Greek debt yielded 25.68 percentage points more than German bunds as of 9:10 a.m. London time today.

Possible Exit from the single currency

Analysts at New York-based Citigroup said there’s a 50 percent to 75 percent chance that the nation will exit the euro region in the next 12 to 18 months. Their view hasn’t changed since before the June 17 election.

Antonis Samaras was sworn in last week as prime minister, Greece’s fourth since November, after his New Democracy party won the vote. He is under pressure to tackle the nation’s debt crisis with the economy in a fifth year of recession and unemployment at 21 percent.

Greece won a second bailout this year from the EU and the IMF, taking the total rescue package to 240 billion euros. Under the country’s bailout program, Greece has to reduce its budget deficit to 7.3 percent of gross domestic product this year from 9.3 percent in 2011, and cut its primary deficit, which excludes interest payments, to 1 percent from 2.4 percent.

Fiscal Union

It may need a third bailout or another round of bond writedowns, or both, to get debt to a manageable level, said officials from the primary dealers, who asked that they not be identified. Some said policy makers must signal their willingness to share the burden by issuing common bonds before investors are confident enough to buy Greek securities.

“The only thing that will get investors’ trust back is to get something that looks like a fiscal union because Greece isn’t going to grow out of the problem,” said John Wraith, a fixed-income strategist at Bank of America Merrill Lynch in London. “Investors have given up on the concept of a union that doesn’t have a fiscal transfer, but does have the interest rate and currency locked together.”

The country sparked Europe’s sovereign-debt crisis in 2009 after saying its deficit was bigger than previously thought, reaching a euro-region record of 15.8 percent of GDP that year.

European leaders will hold a two-day summit on June 28 to seek a way out of the debt turmoil. Billionaire investor George Soros warned that failure by leaders meeting this week to produce drastic measures could spell the demise of the currency.

Tough Times

Yields on Greek 10-year bonds dropped to 27.21 percent today from a record high of 44 percent in March. The rate is at least 20 percentage points above the level at which Greece could fund itself, as the country along with Ireland and Portugal all sought aid when 10-year yields surpassed 7 percent.

The nation’s ratio of debt to GDP is projected to rise to 168 percent next year from 161 percent, according to the European Commission’s report of May 11. The economy will contract 4.7 percent this year and show zero growth in 2013, the commission said.

“The country is still insolvent and there is little progress in the way of fiscal adjustment and growth,” said Piero Ghezzi, the head of global economics at Barclays Capital in London. “Investors will need to see what the end game for Greece is before they buy its bonds again. A country can borrow in the market only if there is demand for its debt. For Greece, that can be easily five years away.”

Primary Dealers

Companies participating in the Bloomberg survey were Bank of America Merrill Lynch, Bayerische Landesbank, BNP Paribas SA, Citigroup, Commerzbank AG, Credit Agricole SA, Danske Bank SA, Deutsche Bank AG, DZ Bank AG, HSBC Holdings Plc, ING Bank NV, Jefferies International, Landesbank Baden-Wuerttermberg, Lloyds TSB Bank Plc, Nomura International, Rabobank International, Royal Bank of Canada, Royal Bank of Scotland Group Plc, Barclays Plc and UniCredit SpA. They provided their forecasts on June 21 and June 22 on a non-attributable basis.

Petros Christodoulou, former head of the Greek debt office, said June 19 that his nation isn’t close to selling bonds and there may be common euro debt issuance by the time it returns to the markets. He also said Greece will remain a member of the 17- nation euro area.

The IMF recommended issuing common debt on June 21 after warning that the euro-area crisis has reached a “critical” stage.

“Greece could return to the market quickly if leaders take the right policy decisions,” said Padhraic Garvey, head of developed market debt at ING in Amsterdam. “But the risk that things could go in a very wrong direction, taking Greece much longer to return to the market, is greater than the other way around.”

Piagi reports on uk Homebuilding and the Euro crisis

Rates Page 22.06.2012

 

Piagi reports today as London Homebuilding Slows on Weakening Economy.

Construction starts on London residential developments fell by more than half as the U.K. economy fell into its second recession since 2009 and demand waned, consulting firm Drivers Jonas Deloitte said today.

Thirty-five new projects were started in the U.K. capital in the six months through March, the London-based firm’s biannual Residential Crane Survey showed. That compares with 81 developments commenced a year earlier.

“While it is too early to call this slowdown in new activity a clear trend, it does reflect the unease in the wider London residential market,” Anthony Duggan, head of research, at Drivers Jonas Deloitte, said in a statement.

U.K. homebuilders such as Berkeley Group Holdings Plc (BKG) and Barratt Developments Plc (BDEV) have focused on London and southeast England, where house prices have been the most resilient. The U.K. entered a recession in the first quarter as construction output fell 4.8 percent, the most in three years.

 

Euro Chiefs Spar on Greek, Spanish Aid

European finance ministers battled over the strategy to contain the debt crisis, with creditor countries resisting leniency for Greece and playing down market concerns about the bailout of Spanish banks.

Lenders of 240 billion euros ($301 billion) to Greece offered no sign of granting extra time for the newly installed Athens government to meet deficit-cut targets. With Spain set to request as much as 100 billion euros to rescue its teetering banks, the officials quarreled over how to design a recapitalization program that doesn’t scare investors away from Spanish government bonds.

“We still need progress on this issue,” French Finance Minister Pierre Moscovici told reporters late yesterday after a meeting of euro-area finance ministers in Luxembourg. The setup of the Spanish package is so politically sensitive that it will be decided by government leaders at a June 28-29 summit.

That summit, the 19th since Greece’s financial meltdown rattled the euro, will try to resolve competing visions over how to reshape the 17-nation economy, with Germany and its fiscally disciplined neighbors unwilling to foist additional burdens on their taxpayers.

Rome Meeting

A foretaste of that confrontation will come later today, when German Chancellor Angela Merkel travels to Rome for crisis talks with Italian Prime Minister Mario Monti, Spanish Prime Minister Mariano Rajoy and French President Francois Hollande. The configuration reflects the shifting alliances that have left Merkel fighting increasingly on her own as concerns about Europe’s economic health migrate from small countries on the periphery to larger ones in the core.

A failure next week to craft a blueprint for a tighter fiscal and banking union would trigger “progressively greater speculative attacks” on Europe’s “weaker” economies, Monti said in a joint interview with newspapers including Spain’s El Pais and France’s Le Monde.

The risks for Germany, the fastest-growing of the bloc’s larger economies, were conveyed by a report that business confidence fell to the lowest level in more than two years in June. A separate report put Italy’s consumer confidence at the lowest since at least 1996.

Pressuring Merkel

Divisions over the debt-crisis response and the weaker- than-forecast economic readouts weighed on European markets. The Stoxx Europe 600 Index fell 0.7 percent at 9:05 a.m. in London.

Monti, Hollande and Rajoy, custodians of 49 percent of the 9.8 trillion-euro single-currency-region economy, have criticized Merkel’s emphasis on budget cutting and coolness toward proposals to pool European government borrowing or bank- deposit insurance.

Moody’s yesterday downgraded Morgan Stanley, Credit Suisse Group AG and 13 other international banks, citing “risk of outsized losses inherent to capital market activities.”

Spain is on the front lines after the government released auditors’ estimates yesterday that its banks, reeling from the aftereffects of the real-estate bubble, would need as much as 62 billion euros to withstand a worst-case economic scenario.

With a formal aid request due by June 25, a Spanish bid for a higher sum may run into opposition from creditor countries, since the extra money would amount to backdoor financing for the government itself, an official involved in the talks said.

Bank Capital

No one expects an “instantaneous process” to sort Spain’s banking needs, Spanish Economy Minister Luis de Guindos told reporters as all 27 EU finance chiefs prepared to meet today. “We have to establish a road map and the capital needs will be analyzed in the coming days.”

Euro governments on June 9 budgeted as much as 100 billion euros for a Spanish bank rescue, seeking to impress markets that have doubted the piecemeal crisis-fighting approach. Spanish bonds fell anyway amid investor concern that they would be outranked by official loans in the event of default. Ten-year Spanish yields have risen 45 basis points to 6.67 percent since then.

The question of who has the right to be paid back first -- the International Monetary Fund, European governments or private bondholders -- has provoked controversy throughout the crisis. A year ago, euro leaders ditched original plans to grant the permanent bailout fund seniority on any loans to Greece, Ireland and Portugal, the three countries then drawing on official aid.

Shift to ESM

Loans to Spain will start from the temporary rescue fund, the European Financial Stability Facility, before being “transferred” to the permanent fund once it is set up, Luxembourg Prime Minister Jean-Claude Juncker said. EFSF loans have not enjoyed seniority.

Spain’s package will be finalized on July 9, the same date that the permanent fund, the European Stability Mechanism, is scheduled to go into operation. Its bond-seniority clause is open to interpretation, based on a declaration by euro leaders “that the ESM loans will enjoy preferred creditor status” without a binding rule.

“This is not as important a question as it may seem,” Juncker said. The temporary fund’s manager, Klaus Regling, said the loans would increase Spain’s debt by only 10 percent of gross domestic product, making the question of preferred status “not quite as important as one gets the idea reading it every day.”

The ministers’ message to Greece’s freshly minted government was equally ambiguous. Juncker, the meeting’s chairman, summed up the discussions without repeating the indications of extended deadlines that he gave on the way in.

Respecting Targets

“There was no such message approved within the euro group, that there should be any relaxing, rather that the present targets should stay,” Estonian Finance Minister Juergen Ligi said.

Greece went seven months without a fully empowered government, enduring two elections and dodging threats of euro expulsion or departure until Antonis Samaras was sworn in as prime minister on June 20. Yesterday’s cabinet appointments came too late for new Finance Minister Vassilios Rapanos to fly to the Luxembourg meeting. A caretaker minister, Giorgios Zanias, attended instead.

Reforms stalled and the Greek privatization program was put on hold. As a result, the country needs to make up for lost time, and it would be “delusional” to bind Greece to the current conditions, a European official told reporters in Brussels this week.

The next step is for the European Commission, European Central Bank and IMF to review the terms with the Greek government. Representatives of that “troika” will return to Athens on June 25.

Greece’s three-party coalition will seek to roll back plans to cut 150,000 public sector workers and reduce the minimum wage by 22 percent, an official from one of the parties, the Democratic Left, said yesterday in Athens.

Piagi reports Greek Euro-Exit May Threaten Drachma Choice

Rates Page 06.06.2012

 

Business in Greece can hardly get worse for Pavlos Tziorkas’s technology-consulting firm as it battles a credit freeze in the fifth year of recession. That is, he says, unless his country were to leave the euro.

“If we go out of the euro, we will have an unstable environment in Greece, I am sure of that,” Tziorkas said by phone from Intelli Solutions SA’s office in Athens, near the city center, where public protests and clashes with police have been commonplace since the debt crisis erupted two years ago. Dropping the euro might prompt the company to relocate from Greece, he said.

As Greece gears up for its second election in as many months, companies and citizens are grappling with the possibility the nation will be forced to return to the drachma, 11 years after swapping it for a German-designed single currency meant to be an irrevocable step in European economic integration.

A post-euro Greece, a country whose economy is about the size of the U.S. state of Maryland, may face defunct banks, collapsing businesses, skyrocketing import prices, soaring national debt, food rationing and even violent demonstrations, according to a dozen economists, analysts and professors.

Even the normal reward of a currency devaluation, cheaper exports, would help little in a country where manufacturing accounts for only 10 percent of gross domestic product.

No Other Option?

“A moonscape scenario, one where everything that is mobile leaves, is certainly one you can anticipate,” Michael Spence, a Nobel laureate in economics and professor at New York University’s Stern School of Business, said in an interview in Milan. “The short-term scenario is one of chaos.”

The June 17 Greek vote follows an inconclusive May 6 election that catapulted Syriza, a party that favors reneging on budget-cutting accords tied to 240 billion euros ($299 billion) in international aid, into second place. A Greek government that won’t stick to the bailout terms may fail to qualify for quarterly emergency loans from the euro area and the International Monetary Fund and run out of cash, leaving no option except to introduce its own currency.

The risks have prompted Intelli, whose clients include Greek units of French bank Societe Generale SA (GLE) and of Dutch financial- services company ING Groep NV (INGA), to consider moving its headquarters to another country in the 17-nation euro. Possibilities include Luxembourg or Cyprus, said Tziorkas, the 43-year-old general manager.

Not Argentina

While a reborn drachma probably would boost the export and tourism industries, Greece may not be in a position to follow Argentina’s example a decade ago of defaulting and devaluing its way back to growth. Even after completing the world’s biggest writedown of privately held debt as part of an extension of European and IMF aid through 2014, Greece may fail to make future payments without outside help.

What’s certain, say bankers, economists and analysts, is that any exit from the single European currency would create a major financial disruption.

“There would be a run on deposits and banks would only be left with transactional money,” Guillermo Nielsen, who became finance secretary in 2002, months after Argentina defaulted on $95 billion of debt, said by phone from Buenos Aires. “The result would be more income disparity, between those who have access to cash and those who don’t. It would become a third- world country.”

A euro-area exit without the support of fellow euro countries and the European Central Bank would force Greece to take direct charge of the nation’s lenders, Credit Suisse Group AG analysts say.

Depleting Deposits

A 75 billion-euro, or 30 percent, deposit depletion over the past two-and-a-half years and writedowns on Greece’s debt have left domestic banks needing 50 billion euros in capital.

Greek banks would lose access to ECB funds in the event of an exit, bringing economic activity to a standstill, Credit Suisse said in a May 11 note. Companies, the government and individuals may have to resort to bartering goods and services while a new currency is printed.

The country’s four biggest lenders -- National Bank of Greece SA, EFG Eurobank Ergasias SA (EUROB), Alpha Bank SA (ALPHA) and Piraeus Bank SA (TPEIR) -- got a first injection of capital from the euro area’s rescue fund in late May, letting them return to ECB financing, ECB President Mario Draghi said on May 31. Earlier, the lenders were forced to rely on the Greek central bank’s emergency assistance after being suspended from direct ECB funding.

Denominating Debt

Beyond the cash crunch, Greek authorities would need to decide which euro-denominated debt to foreign creditors should be honored by the state and banks. The rest would be redenominated into the new currency, a process that could lead to years of legal battles.

Seven-year-old Intelli Solutions would find its debt to foreign software suppliers “multiplied” with the re- introduction of the drachma, Tziorkas said.

Economically, a recession more severe than the 13 percent shrinkage over the past three years could envelop the country, where unemployment is at a record of almost 22 percent.

A Greek exit would shrink GDP by as many as 10 percentage points more than if Greece were to remain in the euro, making the slump comparable to the Great Depression in the U.S., David Mackie, London-based chief European economist at JPMorgan Chase & Co., wrote in a May 18 note to clients. In a May 29 report, National Bank of Greece said an exit would deepen the recession by about 22 percent in a year at stable prices.

‘Larger Community’

“Greeks are preparing for the worst,” Elpida Hatzitheodorou, an antique dealer several hundred yards from the ancient Acropolis in Athens, said in an interview. “We have to stay in the euro. I feel safer as part of a larger community.”

The 50-year-old Hatzitheodorou, whose shop is bursting with silver knickknacks, lace trimmings and traditional Greek cabinets, said she bought gold jewelry to diversify savings after sales plummeted as much as 80 percent from their peak.

Because a devalued currency makes imports more expensive, industries including tourism, energy and health care would struggle initially to acquire goods from abroad, said Costas Lapavitsas, a London-based economics professor and author of a book called “Crisis in the Eurozone.” He recommends a euro exit and debt default to revive Greek industrial production.

Energy Imports

“There would be problems in buying oil, pharmaceuticals and certain food,” Lapavitsas said by phone. “The government would have to administer what’s imported and manage the distribution of supplies to where they’re needed most.”

With fewer resources, tourism, Greece’s biggest industry at around 16 percent of GDP, would risk reverting to a “rooms-to- let” strategy focused on low-cost travelers rather than building on the past decade’s improvement in infrastructure and services, said Aggelos Tsakanikas, head of research at the Foundation for Economic and Industrial Research in Athens.

Such a shift would mean a “significant decrease” in overall spending by tourists in Greece, even if their numbers rose, he said.

And while a return to the drachma might make Greek real estate and other asset prices more attractive to foreign investors, they, like holiday travelers, would be deterred by any public disorder, Tsakanikas said.

Unrest Forecast

“The main question is whether tourists and investors would be willing to visit and invest in a country if there is social unrest of any kind,” he said. “It would be a long period before stability is restored to the country.”

Three people were killed in Athens after being trapped in a burning bank during riots in May 2010 when the euro area and IMF were wrapping up an initial bailout. This past February, as Greece was pushing through extra budget cuts for a second aid package, rioters in the capital set fire to as many as 45 buildings and attacked 170 businesses.

Economists including Kai Carstensen at Germany’s Ifo institute are more sanguine about a Greek exit from the euro. In a study in April, they concluded that this route -- coupled with a devaluation of any new currency -- would be a feasible alternative to the current strategy of fiscal austerity and internal devaluation through wage and price cuts.

“Experience suggests that, after external devaluations, countries have recovered much faster,” wrote Carstensen and six of his colleagues at the Munich-based Ifo. They cited as evidence Argentina’s debt and currency crisis in 2002, Thailand’s devaluation of the baht in 1997 and Italy’s temporary exit in 1992 from a European exchange-rate system that led to the euro’s creation in 1999.

Slimming Deficit

Greece has narrowed its budget deficit from more than 15 percent of GDP in 2009 -- more than five times the European Union limit -- to 9.1 percent last year. The country cut the minimum wage 22 percent this year.

The hardship has helped Syriza challenge four decades of Greek political dominance by New Democracy and the socialist Pasok. Both those parties, whose support collapsed on May 6 after they united six months earlier to back further fiscal tightening, pursued high-spending policies for decades after the end of a Greek military dictatorship in 1974.

Recent polls show Syriza running neck-and-neck with New Democracy before the parliamentary elections, with Pasok third.

Jumping Backward

Guy Verhofstadt, who was Belgian prime minister when Greece joined the euro in 2001, said staying a member would encourage the overhaul of a system characterized by corruption, closed markets and a bloated state that employs almost one in five workers. A return to the drachma would reinforce political traditions, he said.

“You jump backwards in time,” Verhofstadt, now leader of the pro-business Liberal group in the European Parliament, said by phone in Brussels.

Intelli’s Tziorkas, while calling the business mood in Greece “bad” after two years of austerity, said the nation needs to pursue budget cuts agreed to with euro countries and the IMF because doing so would keep aid flowing and ultimately strengthen the Greek economy.

Intelli, with about 120 employees and 6 million euros in revenue, has offset some of the impact through growth abroad in such countries as Cyprus, Romania, Turkey and Egypt.

Anticipating the possibility of a return to the drachma, the company hasn’t only conducted preliminary inquiries into what it would take to transfer the headquarters abroad but also looked into keeping cash reserves outside Greece, he said.

“We are living a situation in which we can’t predict the future,” Tziorkas said. “The only thing to do is a Plan B.”

 

Piagi reports ECB Working On Greek Exit Plans

The European Commission and the European Central Bank are drawing up plans in case Greece abandons the euro, Trade Commissioner Karel De Gucht said in an interview published Friday, the first time a senior official within the EU executive has acknowledged such preparations.

A commission spokeswoman denied that contingency plans for a Greek exit were under way.

Such plans have long been speculated, but they remain a taboo subject in Brussels, where EU officials have long said a Greek withdrawal is out of the question. Similarly, they avoided talking about a Greek restructuring in the early days of the country's debt crisis. The country recently completed the biggest debt writedown in history.

In an interview with the Flemish newspaper De Standaard, De Gucht said the European Central Bank and the commission were "working on emergency scenarios in case Greece does not make it."

He refused to discuss details, but said Greeks should not assume the European Union will bend on the country's bailout if anti-austerity parties prevail in elections next month.

There was "no margin" left to offer Greece any concessions, De Gucht said.

Earlier this week, some EU finance ministers signalled there might be limited scope to relax some of the tough fiscal targets set by the ECB, the commission and the International Monetary Fund in return for financial assistance.

Commission spokeswoman Pia Ahrenkilde-Hansenthe dismissed De Gucht's comments. "This is not a scenario that we are working on," she said in response to questions from reporters.

Many experts say a Greek exit from the euro zone would spell the demise of the currency bloc.

But the EU trade chief played down the risk that other countries would pull out.

"The chaos in Greece would be so great, that other citizens will realize they don't want to leave. I am sure of that."

He said it was imperative that Greece to follow through on its economic overhaul and remain within the 17-nation currency union.

"There is no alternative. Greece must stick to the deals that have been agreed. That's the only rational option for the country," he said, according to the paper.

"Ultimately, I think Greece will stay in the monetary union," De Gucht said.

Yet he did not rule out a third round of elections or a referendum on euro-zone membership in which the Greeks would "perhaps vote differently."

Piagi reports on the Great British Pound

rates page 08.05.2012

Piagi reports today as the Great British Pound weakened from within two U.S. cents of an eight-month high against the dollar after an industry report showed a gauge of house prices fell in April.

Gilts advanced as the Royal Institution of Chartered Surveyors said its index of house prices dropped to minus 19 from minus 11 in March. A reading below zero means more surveyors saw price declines than increases. Sterling held gains from the past two days versus the euro as Greek leaders meet in Athens after leaders failed to reach agreement yesterday, raising concern the nation will withdraw from the currency bloc.

The pound dropped 0.3 percent to $1.6143 at 9:23 a.m. London time after rising to $1.6302 on April 30, the highest level since Aug. 31. Sterling was little changed at 80.65 pence per euro. It climbed to 80.36 pence yesterday, the strongest since November 2008.

Greece’s New Democracy leader Antonis Samaras said he failed to reach agreement to form a government after weekend elections. The attempt will pass to Alexis Tsipras, the head of Syriza, the second biggest party, which has vowed to cancel bailout terms for the nation.

Sterling has appreciated 4.3 percent in the past three months, the best performer of the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar gained 1.9 percent and the euro fell 0.1 percent.

Gilts rose as trading resumed after being closed yesterday for a public holiday.

The 10-year yield dropped three basis points, or 0.03 percentage point, to 1.98 percent. The 4 percent bond due in March 2022 gained 0.29, or 2.90 pounds per 1,000-pound face amount to 118.005.

Gilts have handed investors a loss of 0.6 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. U.S. Treasuries returned 0.5 percent and German bunds gained 1.7 percent, the indexes show. 

Piagi reports today on Spain's economic Slump

Rates page 02.05.2012

Piagi reports today on Spain as it is at the front of Europe’s battle to contain its economic crisis, and that fight is going badly.

Spain’s economy is in a tailspin. Some forecasters say the unemployment rate, already a punishingly high 24.4 percent, could reach 30 percent. The government’s credit rating has just been downgraded, and its cost of borrowing -- close to 6 percent -- is putting its solvency in question. Investors are watching the country’s banks with mounting concern.

Europe’s leaders cannot blame Madrid. Mariano Rajoy’s center-right government is making progress on reforms aimed at improving the country’s competitiveness and has tried -- to a fault -- to meet the European Union’s austerity demands. The resulting budget cuts are strangling the economy, squeezing the government’s revenue and increasing the likelihood that Spain will need still more austerity to meet the EU’s fiscal targets. The policy has become self-defeating.

The EU must come to the country’s assistance while it can still make a difference. If Europe’s leaders don’t move fast to help rescue Spain’s banks and at least mitigate its economic decline, the crisis will quickly become much harder to contain.

Spain is running out of options to shore up its banking system, laden with problem loans extended during the country’s record-breaking housing bubble. The government has reformed the sector and called for new capital and loan-loss provisions, but analysts increasingly doubt this will be enough.

Bad Assets

Rajoy is now considering a program to protect banks’ capital by getting bad assets off their balance sheets. To do this in a way that strengthens the banks, though, the government will need to put in money -- money it doesn’t have. If it taps funds set aside to guarantee deposits -- an approach that is being debated -- this would only increase financial risk with one hand while reducing it with the other.

Rajoy has also done plenty to reform Spain’s notoriously sclerotic labor market. The government has liberalized the dual- contract system that made many employees impossible to fire and forced all the stress of economic adjustment onto temporary workers. Although only a first step, it’s a radical move that took courage.

Persevering with these and other structural reforms, plus wage restraint, can improve the country’s long-term prospects but can’t provide short-term relief. Such relief can only come from the EU as a whole, partly through easier monetary policy and partly through backloading of the fiscal consolidation. Spain can’t loosen its fiscal policy on its own for fear of spooking investors. So any feasible solution will require some pooling of Europe-wide fiscal policy, with the European Central Bank acting as lender of last resort for distressed sovereigns or the issuance of euro-area bonds jointly backed by all the currency union’s members.

The ECB’s trillion-euro liquidity operation brought temporary relief, but only at the cost of increasing Spain’s financial fragility as its banks used the ECB’s loans to buy more of their government’s subsequently downgraded debt. The more investors understand this frailty, the greater the risk of financial meltdown becomes. Considering that Spain’s economy is far larger than those of Greece, Ireland and Portugal combined, the repercussions would put all of Europe at risk.

On this background, it’s absurd to assert -- as Germany has -- that Spain and other struggling economies can claw their way back to economic stability through fiscal austerity, despite slow or no growth. If Europe’s leaders are betting they’ll have time to act if the situation deteriorates, they’re wrong. The pressure on Spain is no longer productive. It’s undermining a government that is doing all it can. If the gamble fails, things will unravel quickly -- too quickly, maybe, for Plan B to take effect.

The time for Plan B is could well be now.

Today’s highlights: the View editors on the Osama bin Laden anniversary; Jeffrey Goldberg on the death of Benzion Netanyahu; Betsey Stevenson and Justin Wolfers on the benefits of work- sharing; Ramesh Ponnuru on fertility rates and foreign policy; and Peter Viktor Kunz on the benefits of Swiss banks. 

Piagi reports on Greece

A Greek Tragedy Playing Out

 

Piagi reports that over the last several months, the world has watched the EU play a very dangerous game. They are literally playing a game of chicken between the Greek debt problem and with Greek politicians and investors. They have repeatedly, during 2011, brought Greece to the brink of disaster, only to come and save the country at the last second. All of these times, they appeared to have a long term goal, but now, it appears that the direction of Greece's future could be on a new course. Could it be that Greece could be on course to exit the European Union?

Up until now, it has been considered a long shot if not improbable that any country, even Greece could or would leave the European Union. But, it would appear that this story is about to change. The wind is blowing in another direction.

Recently we have seen tensions increasing between EU members and Greek politicians. We have even seen some cracks in the very heart of the Euro zone core. We are seeing that they cannot seem to find an answer to the ever growing Greek debt woes. A fix is not coming easy.

Let us look at some recent facts. The ongoing Greek debt swap is still a major problem. We have been told countless times that we are within an hour of a solution, just for it to fall apart. Recent rhetoric is now pointing that a solution is no closer. We have heard public statements from the European Central Bank that it will not take a haircut on its debt from Greece. The Greek Prime Minister is threatening to quit over this issue. The EU Troika is threatening not to pay out on the next tranche and will withhold more funds. They are stating that if there is no deal on the debt swap, Greece will not receive more money. If more austerity measures are not implemented and a haircut deal on existing debt is not reached, no money. Further, German leaders have asked for direct control over Greek finances.

It is now safe to say this is a big mess. It is now looking likely that a Greek default could be imminent. Within a month and following that Greece could exit the European Union. The EU must be careful and diligent to prevent a further yield rise on PIIGS' bonds as the threat of contagion increases dramatically if Greece defaults and leaves the Union.

 

Piagi reports on the previous week

Currency rates and Greek bond negotiations matched by celebrity debt

Greek bond negotiations matched by celebrity debt

In Athens this week, it is reported that , "the finance ministry has revealed that  4,151 Greeks owe €14.9bn to the state – more than the €14.5bn bond repayment Athens has to make in March."

The reported list of tax-evaders includes a slew of Greek celebrities, fifteen of whom owe more than €100m each. Unfortunately there is little chance of the finance ministry collecting its €14.9bn in time for those bond repayments next month.

Greece will therefore have to satisfy the EU and the International Monetary Fund that its austerity measures are appropriately rigorous and that it has negotiated a restructuring of its existing debt. If it fails on either count it will not receive the bailout cash it needs to cover the repayments.

There is still a standoff between the IMF/EU faction, who want to pay 3.5% or less interest on the rescheduled debt, and the private sector bondholders who want a higher reward for their concessions. Investors who had been optimistic about a deal at the start of this week are now less confident.

Economic statistics to note this week include the Canadian leading indicator* (up 0.8% in December), the Euroland consumer confidence survey (less negative at -20.6) and Australia's leading indicator (turning negative at -0.3%). The Bank of Japan confirmed its benchmark interest rate would remain at 0.1%.

US Dollar Zone: US $1 buys (indicative rate and what you get):

Australian dollar (AUD)    0.9543      $ 0.95

Canadian dollar (CAD)    1.0100      $ 1.01

Swiss franc (CHF)    0.9259      Fr. 0.93

Danish krone (DKK)         5.7049      kr 5.70

Euro (EUR)      0.7671      € 0.77

Fiji dollar (FJD)         1.7743      $ 1.77

Pound sterling (GBP)       0.6431      £ 0.64

Hong Kong dollar (HKD) 7.7608      $ 7.76

Japanese yen (JPY)         77.2801    ¥ 77.28

Norwegian krone (NOK) 5.8646      kr 5.86

Polish zloty (PLN)    3.2910      zł 3.29

Swedish krona (SEK)       6.7490      kr 6.75

Singapore dollar (SGD)   1.2695      $ 1.27

Thai baht (THB)        31.4401    ฿ 31.44

US dollar (USD)       1.0000      $ 1.00

South African rand (ZAR)         8.0027      R 8.00

 

Euro Currency Zone: Euro €1 buys (indicative rate and what you get):

Australian dollar (AUD)    1.2436      $ 1.24

Canadian dollar (CAD)    1.3171      $ 1.32

Swiss franc (CHF)    1.2072      Fr. 1.21

Danish krone (DKK)         7.4382      kr 7.44

Euro (EUR)      1.0000      € 1.00

Fiji dollar (FJD)         2.3118      $ 2.31

Pound sterling (GBP)       0.8383      £ 0.84

Hong Kong dollar (HKD) 10.1120    $ 10.11

Japanese yen (JPY)         100.7710          ¥ 100.77

Norwegian krone (NOK) 7.6413      kr 7.64

Polish zloty (PLN)    4.2883      zł 4.29

Swedish krona (SEK)       8.7973      kr 8.80

Singapore dollar (SGD)   1.6555      $ 1.66

Thai baht (THB)        40.9521    ฿ 40.95

US dollar (USD)       1.3030      $ 1.30

South African rand (ZAR)         10.4290    R 10.43