Flows, Market Snapshot and Axes…
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Since Greece will have no chance to tap capital markets by March 2012, when the current rescue package runs out of funds, the alternative to a second rescue operation would be a default of the country. Many EMU member countries, above all Germany’s Finance Minister Schäuble, strongly suggested conditioning any further government support on participation of the private sector. Most forms of debt restructuring, however, would constitute a default. This in turn would force the ECB to reject Greek government bonds as collateral, potentially sending the Greek banking sector into default and EMU (or even global) financial markets into chaos. Hence, private-sector participation needs to be in a form that does not lead rating agencies to attach a default status to Greek bonds. A solution could be the rollover model. In this debt-restructuring model, private creditors promise to purchase longer-dated Greek government bonds once their GGB holdings mature. However, a preliminary assessment of this model by the rating agencies is still pending.
Furthermore, press reports are contradictory as to whether investors will be asked to exchange existing bonds with a maturity of less than one year or whether the rollover will take place only once the bonds have matured. Finally, taking market prices as a guide, the new bonds (talk is of a 7-year maturity) would have to carry a 15-16%-coupon – unbearable for Greece – any coupon should not sensibly exceed 5%. Hence, the new bonds need to carry credit enhancements worth about 10 coupon percentage points to convince investors. According to press reports, private investors will be asked to take over roughly EUR 30bn of any new rescue package. Talks will continue in the coming days with a decision likely at the Ecofin meeting on 20 June. For the records: Greece was downgraded three notches by Moody’s to Caa1. Elsewhere in the euro area, Cyprus was downgraded three notches by Fitch. In Portugal, the opposition Social Democrats have won the country’s parliamentary elections. And in Slovenia, the pension overhaul was rejected in a referendum. Until the crucial 20 June Ecofin meeting, the focus of investors will concentrate on the growth outlook for the US.
Economic data have almost all disappointed to say the least: The ISM index posted its strongest decline in 27 years (we would like to point out that this series posted a 27-year high only three months ago). The housing market is experiencingg a double-dip, particularly when one considers house price developments. May passenger car sales fell short of expectations. And last Friday’s labor market report with only 54k non-farm payrolls and an increase in the unemployment rate to 9.1% looked weak in almost all aspects. There are reasons to believe that the US economy isexperiencing a soft spot. You only have to take into account numerous natural disasters in the US and fallout from the Sendai quake in Japan.
One bright spot appears to be the lowest productivity gains in two years (1¼% yoy), which suggest that companies’ aggressive cost cutting measures are largely over so that increases in production will inevitably lead to increases in labor demand. – Next week will provide little information for both, pessimists and optimists, as the US data calendar is almost empty. Some information might be drawn from the Fed’s Beige Book report, the April trade balance and the weekly jobless claims series. In the euro area, German hard data (exports, industrial orders and production) stand out. With concerns about the Greek debt situation abating for the moment, focus will also be on the ECB press conference.
We expect Jean-Claude Trichet to switch to the “vigilant” language, thus effectively pre-announcing a rate hike for July. While this is fully contemplated in money market futures, investors appear to be ex-tremely conservative with respect to the possibility of more rate hikes further down the road. The ECB will lift its forecasts for GDP and HICP in the current year. Extraordinary liquidity measures will most probably be kept unchanged through the third quarter.
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