The first test will be how Tsipras intends to cover financial requirements for 2015-16. FOMC on stand-by…….
Intesa Sanpaolo – Research Department – For professional investors and advisers only
The record-breaking speed with which a new government led by SYRIZA has been formed in Greece is at the same time good and bad news. Bad because this was made possible by the strange alliance with a nationalist right-wing party, Anel, which may prove unsustainable over time. Good, because it means negotiations with international creditors will start promptly, and no time will be lost in taking on the country’s deteriorating financial situation. On Friday, an initial meeting is scheduled with Eurogroup President Djisselbloem. Despite all the talk of the need to restructure the country’s debt, this is almost irrelevant in the immediate term. Greece will not have to repay any debt at all to the European Union until 2020, and also benefits from a lengthening of interest payments. Also, the ECB reinvests in the programme the gains generated by its portfolio of Greek securities. On the whole, gross of ECB repayments, Greece only pays interests amounting to 4.9% of GDP (less than Italy) on a debt in excess of 170%.
The truly crucial issue in the next few months will be the budget choices made by the government, as implementation of the electoral manifesto risks proving incompatible with the sustainability of any level of debt and with recourse to the market at a reasonable cost. Some undersecretaries immediately rushed to announce the cancellation of privatisations (such as the Piraeus Port operation) and the reinstatement of laid-off public sector employees. After taking office, Tsipras declared he will pursue a “balanced” budget, rather than “unrealistic surpluses” – and if he was referring to the primary balance, as seems to be the case, there will be a long distance to go in the next few weeks.
The FOMC meeting brought only a few changes, most of which expected. The statement expresses a brighter view on the real economy and on the labour market, asserting that activity has grown at a “solid” pace, and that the employment trend is strong. As regards prices, the further decline of inflation is acknowledged, largely due to the contraction of energy prices; it is also pointed out that inflation expectations based on survey data are stable, whereas those implied by market prices have decreased “substantially”. Risks to the growth and labour market scenarios remain “nearly balanced”, as was the case in previous statements. Compared to the December statement, an addition is that inflation is expected to drop further “in the short term”, although expectations are still in place for a subsequent gradual reacceleration of the price trend towards 2% in the medium term, and “the Committee continues to monitor inflation developments closely”.
In the statement, without dissenters, guidance indicates that “the Committee judges that it can be patient in beginning to normalize the stance of monetary policy”. We have known since the December meeting that this sentence indicates stable rates for “at least two meetings”: at least until June, rates will stay put. The January statement reasserts that the decision on reversing rates will be taken considering the progress made in approaching the full employment and price stability goals, with an assessment of the evolution of many macroeconomic indicators, in addition to the financial and (a January addition) international indicators. The Fed is playing for time to assess the risks to its goals: waiting too long to hike rates could result in a overheating of the labour market, now on the verge of full employment; on the other hand, hiking too soon, with inflation actually in negative territory, may trigger a disinflation spiral. This is probably the debate around which the meeting revolved, and the details of which will be provided by the minutes, due out on 18 February.
The strengthening of the dollar, also tied to the accommodative moves of many central banks (with the ECB at the fore, but not only), and the failure of oil prices to perk back up, are the main risks weighing on a rate lift-off in June, hitherto agreed upon by a large number of FOMC meeting participants (and included in our forecasts): in the weeks ahead, further information will emerge on any shift in consensus within the Committee. Developments on the global financial and commodity markets risk pushing further out the first rate hike.
Quelle: BONDWorld.ch
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