FX research roundup: Greece still on the brink
It is pointless writing about much other than European sovereign debt and the euro this week. Though as the UK election looms next week, sterling does get a look-in again.
Social unrest continues in Greece: co-ordinated sickness by Greek airforce pilots (I overheard in a pub: “The military going on strike? Now that’s a dysfunctional country...”) on Monday and the strike of public transport workers on Tuesday are indicators that more austerity measures are unlikely to be tolerated by the Greek public. On Thursday, Reuters reported that an increase in VAT to 25% and a 10% (or more) tax increase on petrol, tobacco and alcohol was being discussed by the IMF and the Greek government. The public reaction to that could be savage – and it won’t do the Greek tourism a lot of good either.
After the Greek, Portuguese and Spanish downgrades at the start of the week and the ensuing higher yields, bid short-end (June/red June futures spreads in Euribor and short sterling narrowed by 20 basis points) and signs of a scramble for USD liquidity, things started to quieten down. On Thursday all €7.7 billion of the Italian (two-, seven- and 10-year) paper auction was taken up with bid/cover ratios of 1.39-1.80. Olli Rehn, the EU’s economic and monetary affairs commissioner said that talks regarding the financial aid package should be completed “within days”. It was only talk, yet again, but this time the market was listening.
Among the strategists, Lee Hardman at Bank of Tokyo-Mitsubishi suggested that the new aid package of up to €130 million “would mostly cover Greece’s financing requirements over the next two years.” But Hardman goes on to suggest, “the package may only serve to increase the market’s focus upon the next most vulnerable eurozone sovereign, which is Portugal.”
Commerz believes that Greek and, possibly, Portuguese bond yields are beyond the “point of no return” at which “higher yields lead to a deterioration of the fiscal situation to such an extent that risk premiums (i.e. yields) have to rise further.” Spain, however, “is in a relatively good position with a debt level of “only” 68%. The fact that Standard & Poor’s downgraded Spain’s rating... therefore rightly did not cause any concerns about the point of no return having been breached and therefore did not have a lasting effect on EUR-USD.” Commerz reckons it will take another country slipping into debt crisis to cause “further dramatic EUR/USD reaction”, reasoning that an end to “Europe’s willingness or ability to provide further bailouts... would put pressure on the European currency.”
Both views imply an even harder time for Portugal than Greece if the pressure on European sovereign debt continues. Commentators are fond of saying that Greece is the new Lehman’s, but it isn’t, it’s Bear Stearns. Portugal, or more likely Iberia, will be Lehman.
On the subject of last week’s note: cable is largely unmoved as yet, just a big figure lower, but there was more movement in analysts’ views, largely to a more bearish stance.
BNP Paribas published a market focus note on Wednesday the first sentence of which was a refreshingly direct: “Now is the time to sell sterling”. BNP discusses the political difficulties of coalition consensus and that “a minority government will not be in a strong position to deal with the challenge of a required budget consolidation of about 10% of GDP spread over three years” much as theweeklyFiX described last week – though less elegantly. BNP ends by suggesting that the new, presumably non-Labour, PM in a minority government would make it truly clear what a mess the country was in and ask for a new mandate. The dire reality of government finances would put pressure on sterling.
Credit Suisse, highlighted last week as bullish for cable, is bullish no longer: “We are exiting our long GBPUSD trade recommendation for a moderate loss. Our new EURUSD forecasts imply a broadly firmer USD relative to our previous expectations. EURUSD is now at risk of a further down-leg below 1.30 and EURGBP is already trading near our three-month target, so we see limited near-term scope for GBPUSD to rally.”
Neil Mellor at BNY Mellon, a self-declared founder-member of the Don’t-worry-about-a-hung-parliament club now has “just the slightest feelings of concern about the outlook for GBP.”
Mellor also provides a snippet that I hadn’t seen elsewhere that echoes a thought I’d had that winning this election would be a hospital pass: “US economist David Hale reveals on Australian TV comments made to him by Bank of England governor Mervyn King. Hale said: ‘I saw the governor of the Bank of England last week when I was in London and he told me whoever wins this election will be out of power for a whole generation because of how tough the fiscal austerity will have to be’.”