Overnight Sentiment: Europe Stumbles Over Itself, Again
It wouldn't be the New Normal if the basket case that is Europe, and its amusingly named "Union", didn't somehow manage to trip over itself. This is precisely what happened last night at the European finance ministers meeting after IMF head Lagarde and pathological liar and chair of the Europe's mostly broke Finance Minister, Jean-Claude Juncker, openly disagreed with each other, an event even the FT called a "feud" after they proposed two alternative visions for Greece, one which envisioned the 120% debt/GDP debt target goal pushed forward to 2022 (for Juncker), and on the other hand, IMF, which has been humiliated enough with its horrible predictions, and which refuses to budge from its 2020 Greek target. Per the FT: "In a rare breach, Mr Juncker told a post-meeting press conference the target would be moved to 2022, prompting Ms Lagarde to insist the IMF was sticking to the original timeline. When Mr Juncker again insisted it would be moved – “I’m not joking,” he said – Ms Lagarde appeared exasperated, rolling her eyes and shaking her head. “In our view, the appropriate timetable is 120 per cent by 2020,” Ms Lagarde said. “We clearly have different views.” Officials will meet again November 20 in an effort to reach agreement, Mr Juncker said. Despite the delay, officials insisted Greece would not default on Thursday, when Athens must make a debt payment of about €5bn without the benefit of international aid." Nothing like total coordination and organization within a monetary union that may not exit if Greece does not make its November 16 bond payment, which it likely will, by issuing debt and forcing the ECB to accept it as eligible collateral so that Greece can roll the maturity. And concluding this hilarious incident was Juncker's statement this morning that there is "no real dispute" with the IMF. When it gets serious...
Of course, when this round of acrimony is finally resolved through various denials, the question remains where Greece will get the additional €32.6 billion in additional funding needed even with it getting an additional 2 year to build up 200%+ debt/GDP.
And confirming that there are few oxymorons more aptly named than "European Union", here is a smattering of the day's headlines:
- German Investor Confidence Unexpectedly Declined in Nov
- Germany’s Schaeuble Says France Isn’t “Sick Man of Europe”
- Europe Gives Greece Extra Time, Spars With IMF on Debt Plan
- De Guindos Says No-One Suggested Spain Needs More Aid
- Monti Says Germany Should Appreciate Gains From Euro: Le Figaro
- U.K. Inflation Quickens More Than Forecast on Tuition Fees
Stability all around, and getting better by the day.
What to expect, aside from more European headline terrors, via SocGen:
Greece will remain the centre of attention today. Greece must reimburse EUR5bn in T-Bills on Friday. Several solutions, including help from the ECB, are currently being considered; however, no decision has been officially announced. Prime Minister Samaras will meet President Barroso today, and Minister of Finance Stournaras will speak before the European Parliament. The Greek Parliament has adopted the austerity measures and 2013 budget requested by the Troika. Nevertheless, the EU has still not disbursed the EUR31bn tranche. This climate keeps the markets cautious: 2Y Bunds are in negative territory, EUR swap rates are close to 2012 lows, and the EUR is sliding. The issue of the eurogroup meeting was not enough clear to prompt risk-on? A concrete outcome surrounding the reimbursement of the EUR5bn by the end of this week will not make much difference in our view. And how long would the EUR31bn tranche (expected by the end of the month) reassure investors?
Apart from the purely political aspect, the interpretation of European indicators will require prudence: the German ZEW indicator is expected to be down today, eurozone industrial production will follow tomorrow and Q3 GDP data on Thursday. The eurozone is slipping into recession, justifying low interest rates, and is unlikely to prompt a long-lasting rebound in the euro.
The full event recap from DB's Jim Reid:
Developments in Greece have dominated the news flow over the last 24 hours culminating in Monday’s late-night press conference where Eurozone finance ministers announced that they were giving Greece two more years to meet their budget deficit targets. The announcement came amidst a rare public display of disagreement between EU’s Juncker and the IMF’s Lagarde as both leaders openly offered contradictory assessments on Greece’s debt sustainability targets. Juncker told reporters that Greece’s should now be given until 2022 to cut debt to 120% of GDP (from 2020 previously) which was countered by an astonished Ms Lagarde who then promptly asserted that “In our view, the appropriate timetable is 120% by 2020” and “We clearly have different views.” Lagarde also said that additional work on the debt sustainability will be done in the coming days.
A draft Troika report noted that the two-year extension means Greece may need an extra EU32.6bn. There is no detail yet on how this additional financing requirement will be met although Juncker was quoted as having said that “We started to discuss a certain number of avenues” and “My personal feeling is that [official write downs] will not be the one that will be privileged”. The FT, quoting senior officials, noted that the IMF believes that without any relief, Greek debt will stand at nearly 150% of GDP by 2020 while the EC believes it will be just over 140%.
In terms of getting clarity on whether Greece will get its next disbursement from the bailout program, we’ll have to wait a few more days to find out. Juncker has convened a Eurogroup meeting for November 20th, after which the group expects to make a “definite decision” by November 26th. Juncker also said that the final troika report on Greece will be due by November 17th. With regards to Greece’s T-bill maturity of EU5bn this Friday, EU’s Rehn said that Greece will meet the redemption by using a combination of T-bill issuance and existing cash reserves.
With the Eurogroup meeting seemingly creating more questions than answers, markets overnight are predictably trading with a cautious tone with the Hang Seng (-0.8%), Nikkei (--0.2%) and the KOPSI (-0.6%) lower. The Shanghai Composite (-1.2%) is also down sharply on news that the Chinese government may expand a property tax trial. The risk-off tone is extending to currencies, where the EURUSD is trading at a 2-month low of 1.267. The Aussie dollar is 0.2% lower against the greenback (1.0414), not helped by the latest NAB business confidence index reading which printed at its lowest level since May 2009. In the credit space, the Asian and Australian IG indices are flat to marginally wider.
In the US, the fiscal cliff looks set to return to the headlines today as lawmakers return to DC for the first time post-election. The WSJ is reporting that Obama plans an aggressive public campaign to build broad support for his plan to tackle the fiscal cliff starting with a meeting with union leaders on Tuesday, and a number of business leaders on Wednesday. This is in an effort to solidify backing for his proposals ahead of meeting with congressional leaders on Friday. The rhetoric from Republican leaders has softened in recent days, with a number of Republicans conceding that increased tax revenues may be part of reducing the fiscal deficit.
More on Greece, the leaked draft troika report described the risks to Greece’s bailout program as “very large” driven by “overall policy implementation, given that the coalition supporting the government appears fragile and some components of the programme face political resistance, despite the determination of the government”. Nevertheless, Juncker described the report as “broadly positive” and said that he was “impressed by Greece’s recent performance”. In Spain, the Asociación Española de Banca (AEB banking association) has said that it will freeze for two years the eviction of people from foreclosed homes “due to extreme necessity”. Spanish equities underperformed yesterday (-0.90%) weighed by financials. Spain’s Finance Minister Luis de Guindos reiterated the Government’s official view that the country should be paying no more than 200bps over bunds for financing.
Staying on the peripherals and as an interesting anecdote, Lamborghini’s CEO told Bloomberg TV that the company has not sold any cars in Greece this year and has put plans for Greece on hold given the crisis. The company also remains very cautious on Europe next year. Overall he doesn’t expect industry ultra-luxury car sales to be higher in 2013 although he sees improvement in the US market while HK is still growing. On China he noted that sales have been affected by the slowdown.
Turning to the day ahead, Germany ZEW sentiment index and French employment data are the main economic releases. The EC’s Jose Barroso will meet the Greek PM today, while the Greek finance minister is due to speak at the European Parliaments Economic Affairs committee. Greece’s T-bill auction is scheduled for 10am London time where the government is expected to raise EU1bn in 3-month bills and EU2.125bn in 1-month bills.