Greece is creeping back into the news again as slowly as it is creeping AWAY from its necessary financial reforms. Greece’s third bailout program ends this August, and the Eurogroup have demanded a ‘growth strategy’ by April and set 88 legislative tasks for them to complete by the 21st June to qualify for the final round of the €86 billion bailout package. Furthermore Eurozone finance ministers have yet to agree on any sort of medium-term debt relief to help keep Greece ticking over after August – let alone any contentious long-term relief measures. Continued uncertainty over these will make repeating last year’s successful and oversubscribed bond sale increasingly challenging and expensive.
Yesterday the euro rocketed past the 1.200 mark against the dollar; today it failed to maintain its recent momentum sliding back to around 1.195. Still that’s quite some gain year to date from the 1.05 level it begun the year on, and even further from the warnings of parity that were then forecast for 2017. Much of those previous expectations were based on hopes that Trump’s reforms would boost growth in America and at least one more political domino would fall in the Eurozone during the election season. It’s largely due to the failed-realisation of both of these that the dollar has weakened and the euro strengthened.
‘Whatever it takes’ - Three words that may have saved the Eurozone… for at least 5 years.
‘All the leaders of the 27 countries of Europe… said that the only way out of this present crisis is to have more Europe, not less Europe. A Europe that is founded on four building blocks: a fiscal union, a financial union, an economic union and a political union… there is more progress than it has been acknowledged… [people] underestimate the amount of political capital that is being invested in the euro… we think the euro is irreversible… Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.’
In a report today on the public finances of EU members, the European Commission (EC) has warned Italy to tighten fiscal policy by at least 0.2% of GDP or face sanctions. This target is what Rome had promised the EC earlier this month, but obviously the Commission have yet to see enough progress. An EU official commented, ‘Unless Italy specifies its commitments properly, next week will show that they are not compliant with the debt rule.’ Given that Italy ‘should’ be reducing its deficit by 0.5% of GDP and its debt by 3.6% of GDP per annum this warning already accommodates a fair amount of leniency.
Greek 2 year bonds touched yields of 9.5% yesterday on the back of a disenchanting report from the IMF which has revived a dispute between the IMF and EU creditors. Europe and markets generally have continued to assume that the IMF would eventually join the third bailout programme for Greece which for the last three years has fallen solely to the European Stability Mechanism (ESM). The IMF was meant to have decided on their participation by end 2016 but continue to abstain whilst arguing for a 1.5% primary surplus – rather than an “unrealistic” 3.5% target by 2018 as demanded by the European Commission – which would necessitate significant debt relief from other Eurozone countries.
All Hallows’ Eve beckons; traditionally a night to remember past loved ones but now mostly a chance for children, and also celebrities it seems, to dress up, party and frighten their neighbours, armed with toilet paper and extorting for sweets (bad news for florists but good business for costume retailers, confectionists, dentists and perhaps those needing toilet paper on the walk home from a few too many drinks).
For many of us, today also marks something more worrying than Halloween - the end of another terrible month for the British pound. Sterling weakened a further 6.2% in October making it the worst performing currency; this after already falling 8.6% in June and further in July, August and September. In fact unless one is planning to travel to Angola, Nigeria, Venezuela, Mozambique or Suriname (and not use dollars) a Brit will find themselves worse off anywhere in the world compared to the end of 2015.
Markets are relatively quiet in anticipation of the main event of the next 24 hours – tomorrow’s Governing Council Meeting of the ECB in Frankfurt (or perhaps for some it is the new iPhone release and Apple keynote presentation later today). However, happenings on the other side of Germany are worth watching too, namely the state legislature win of the anti-establishment Alternative for Germany Party (AfD) in Mecklenburg, home state of ‘Mutti’ Merkel, pushing her Christian Democrat Party (CDU) down to third place. This could turn out to be a significant antecedent to a further rise in the populist anti-immigration AfD Party and even lead to a swing in federal elections in 2017. Current opinion polls put the AfD in the mid-teens which if held or increased would give them enough seats in parliament to encumber the usual grand coalition between the CDU and the Social Democrats (SPD). An even a small interloper in the Bundestag could obstruct political decision making at the heart and industrial engine of the Eurozone, just at a time when reforms and decisiveness may be needed across Germany and the Eurozone.
In what could be the most market disruptive intervention to date, today the European Central Bank (ECB) begins their Corporate Sector Purchase Programme (CSPP); meanwhile German 10-year bund yields touched new record lows of 0.034% (though have “nearly doubled” since) and around 15% of euro corporate investment grade debt is already in negative yield territory. The ECB first announced it would include corporate sector purchases to the Asset Purchase Programme (APP) on March 10 and details of the CSPP were released at the end of April, but markets have yet to find consensus as to how large and how effective this extreme measure will be in pushing inflation closer to the target of “below but close to 2%”.
Greece is officially back in recession after announcing its second consecutive quarter of negative growth; Q4’15 growth fell 0.6% qoq and growth for Q3 was revised down to -1.4% qoq from -0.9%. As the assessment of Greece’s compliance with the latest 2015 bailout package reforms takes place (to release further funds) this raises a number of issues.