1. Greece – Cassandra’s and Pollyanna’s In mythology, Cassandra was referred to someone who could see the future but no-one believed her because she was so pessimistic. By contrast, Pollyanna is used to describe someone who is hopelessly optimistic about the future……
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Tanguy Le Saout, Head of European Fixed Income, Pioneer Investments
This week’s deal by Eurozone lenders and the IMF that unlocked €10.3bn of ESM monies had both the Cassandra’s and Pollyanna’s arguing as to what the deal actually delivered. On the positive side, the agreement and consequent disbursement of €10.3bn will not only cover Greek financing needs and maturities through to the end of 2016, but importantly will also be used to clear government arrears to both public and private sector companies. That, even on its own, should be positive for economic growth. The Pollyanna’s were further encouraged by the news that the IMF participated in the deal, with Euroland lenders agreeing to roll some of their shorter-dated debt into longer-dated bonds, and an agreement that in 2018 the cost of Greek debt will be capped and in some cases will be deferred. However, the Cassandra’s will point to the fact that longer-term debt sustainability issues were, yet again, not fixed by last week’s agreement. It seems that in a game of poker between the IMF and German Finance Minister Schauble regarding debt write-off, the IMF blinked first and backed down on their demand for immediate debt relief. Remember, according to the IMF’s own Debt Sustainability Analysis, without any debt relief Greece’s debt/GDP ratio could be c.300% of GDP by 2060. But outright debt write-off is a thorny subject for Germany, who sold the idea of a third bail-out package to its parliament based on the view that Greece was solvent. In soccer terms, we can call this deal a draw – positive in the short-term (especially given news that the ECB will consider allowing Greek bonds as collateral, which would be very beneficial to the Greek banks) but kicking the longer-term concerns down the road, to be addressed later.
2. ECB – Every Cloud has a Silver Lining
Economic theory suggests that a falling oil price should be good for an economy – because the cost of filling a car with diesel or heating your home costs less, it puts more money in the consumers’ pockets, which they will hopefully then spend, boosting consumption. So you might think the ECB would be a little concerned about the recent bounce in the oil price from US$28 per barrel to this week’s US$50 per barrel. But there may just be a silver lining in this particular cloud. At this week’s meeting, the ECB will present their latest staff economic forecasts. At the time of their last forecasts in March 2016, ECB economists were assuming an average oil price of US$35 per barrel, so they will most likely bring this close to the current US$50 per barrel price. And as past declines in the oil price begin to drop out of the inflation index, it should allow the ECB to keep its core inflation forecasts unchanged from the March forecast. But the bigger surprise could come with the monthly headline inflation prints over the next 12 months. If the oil price remains at current levels, the current Euro-area inflation rate of -0.2% could accelerate to 1.4% by year-end 2016 and even get to the ECB’s target of 2% by spring 2017. That could present two difficult questions – how would the ECB react at a time when their Quantitative Easing programme is due to expire and how would bond markets react to considerably higher headline inflation? Euro breakeven inflation rates have ever so slowly been creeping higher in the past couple of weeks and we believe they continue to offer good value.
3. G7 Meeting – When is a Statement not a Statement?
Answer – when it’s the communique issued after the G7 meeting. If, like us, you thought the statement issued after G7 meetings was a brief, succinct page or two, think again. The official communique issued after this week’s G7 meeting in Ise-Shima, Japan ran to 32 pages, but still managed to say very little of interest to financial markets. There were commitments to take action on migration (“a global challenge which requires a global response”), trade (“keep our markets open and fight all forms of protectionism”), infrastructure (“endorse the G7 Ise-Shima Principles for Promoting Quality Infrastructure”), health (“commit to take concrete actions for advancing global health”), women (“commit to create a society where all women and girls are empowered”) etc etc. Other topics that got mentioned included cyber, anti-corruption, climate and energy. Finally, the communique then got around to discussing the global economy. A U.K. exit from the E.U. was cited as a major risk for global trade and investment (even though the issue hadn’t been discussed, according to German Chancellor Merkel), as well as geopolitical conflicts, terrorism and refugee flows. Japanese Prime Minister Abe failed to convince other G7 leaders to support coordinated fiscal expansion, as we mentioned in last week’s blog. All in all, a bit of a non-event of a meeting and the communique could probably have been 30 pages shorter.
Quelle: BONDWorld.ch
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