Overnight sentiment is significantly negative, with stocks, bond yields, risk currencies lower after G-20 over the weekend refused to increase IMF funding. The result is an end to the buoyant market sentiment of recent days which has seen the Dax down 1.2%, bund, UST yields lower, and US futures lower. As many had expected, the G-20 has rebuffed EU leaders' request for more assistance, which in turn has placed the onus on Germany to find a way to resolve its internal conflict vis-a-vis a Greek bailout, ironically as many believe that it is Germany who more than anyone wants Greece out. This happens as the Bundestag votes today on second aid package today; Merkel’s government must decide whether to back plans at this week’s summit to combine EFSF and ESM. In other news, tomorrow the ECB will call for bids for the second 3 Year LTRO tomorrow, with results announced on February 29. And with the ECB's deposit facility at €477 billion, it is rather clear that the banks will park the bulk of new proceeds with the ECB once again, where it will continue to be a negative carry trade, earning 0.25% at a cost of 1.00%. And somehow this is favorable for the European sovereign bond market, which continues to ignore the various layers of subordination it is now working under. We expect the market revulsion to this flaw to be violent when it comes, and will result in a rapid and sudden divergence between the various subordinated tranches of sovereign bonds.
Here are some of the comments from the G20 participants following the summit, who tried to wrap the failure of the G20 meeting in a pretty package:
U.S. TREASURY SECRETARY TIMOTHY GEITHNER
ON EURO ZONE CRISIS
"The most important thing we've seen is the progress in Europe towards laying out a more credible foundation for stability."
"I'm very encouraged by the impact so far of the combined actions of new governments in Italy and Spain doing a very good job of laying out reforms to meet their very formidable economic challenges."
ON IMF RESOURCES
"I think you're seeing a very welcome indication from the major shareholders of the IMF that they'll do what is necessary to make sure the IMF continues to have the resources it needs to deal with the pressures emanating from Europe,"
"We will not go to Congress to seek the authority necessary for a contribution from the United States. We don't think that's necessary or desirable."
ON EUROPEAN FIREWALL
"To be credible and to serve its intended purpose, a firewall has to be large relative to the plausible claims on those resources."
CANADIAN FINANCE MINISTER JIM FLAHERTY, AFTER THE G20
MEETING:
"I'm a little bit more confident, modestly more confident, but there are still a lot of obstacles."
GERMAN CENTRAL BANK PRESIDENT JENS WEIDMANN ON THE G20
MEETING AND RESULTS:
"We have made some progress in the different issues."
"The conference was a typical working meeting to prepare the G20 summit in Los Cabos."
BRAZILIAN CENTRAL BANK GOVERNOR ALEXANDRE TOMBINI
"The central bank has signalled recently of the high probability that the monetary policy rate in Brazil will be in single digits in the future. That strategy has not changed until today."
"(The price of) oil is a worry for all central banks at this moment."
GERMAN FINANCE MINISTER WOLFGANG SCHAEUBLE
"There is no diverging view that we're on the right path with our stability measures."
"I assume we'll get the necessary approval for it (the Greek rescue package) on Monday in the Bundestag. We know that we still need the decision of the IMF board for this on the IMF's contribution for a second programme for Greece. We appreciate the IMF's contribution and I assume that we will also get the necessary support for it within the IMF."
"As the heads of government have agreed, we will make our decision in Europe in the course of the month of March. But the month of March goes from March 1 to March 31. It will be reviewed again, also in the light of the developments that have since occurred, whether the stated dimension of the mechanism is enough or not. And it's going to be in time for the IMF to be able to make a corresponding decision at the spring meeting in Washington on the firewall - not on the participation on the second Greece package."
"For all of the decisions the German government has made in this context, it's got the necessary approval in the German Bundestag. And so you can definitely assume that if the German government makes these decisions, it will get the necessary approval for them in the German Bundestag."
BRITISH FINANCE MINISTER GEORGE OSBORNE
"We are prepared to consider IMF resources but only once we see the colour of the euro zone money and we have not seen the colour of the euro zone money," Osborne told Sky TV. "I think that quid pro quo will be clearly established here in Mexico City."
GERMAN CENTRAL BANK PRESIDENT JENS WEIDMANN
"The G20 meeting takes place in an economic environment in which, after a weak phase for the global economy, the indicators are improving again. In view of this, there is a chance that the relatively pessimistic IMF forecasts could be surpassed. This economic situation is true of the global economy as a whole but there are quite stark differences between individual countries, including within the euro zone."
And below are some of the key excerpts from the G-20 communique (source [19])
ON THE EURO ZONE FIREWALL:
"G20 members have been actively engaged in taking the steps needed to safeguard the global financial system and to avoid adverse scenarios. At Cannes, our leaders asked us to review the adequacy of IMF resources. This review is particularly important against the backdrop of continued downside risks. Euro area countries will reassess the strength of their support facilities in March. This will provide an essential input in our ongoing considerations to mobilize resources to the IMF." ON MORE FUNDS FOR THE IMF:
"We are reviewing options, as requested by leaders, to ensure resources for the IMF could be mobilized in a timely manner. We reaffirmed our commitment that the IMF should remain a quota-based institution and agreed that a feasible way to increase IMF resources in the short-run is through bilateral borrowing and note purchase agreements with a broad range of IMF members. These resources will be available for the whole membership of the IMF, and not earmarked for any particular region. Adequate risk mitigation features and conditionality would apply, as approved by the IMF Board. Progress on this strategy will be reviewed at the next ministerial meeting in April. Other options mentioned by leaders in Cannes such as SDRs are under review."
ON WORLD ECONOMY
"Substantial policy actions have taken place since our last meeting, and recent economic developments point to the continuation of a modest global recovery and an easing in global financial market stress. We welcome the important progress made by Europe in recent months to strengthen their fiscal positions, adopt measures to reduce financial stress, build stronger institutions, implement growth enhancing structural reforms and to put Greece on a sustainable path."
"We also welcome the market improvement associated with the actions undertaken by the ECB. Nevertheless, growth expectations for 2012 are moderate and downside risks continue to be high. The international economic environment has continued to be characterized by an uneven performance, with weak growth in advanced economies and a stronger, albeit slowing, expansion in emerging markets."
"Structural problems, insufficient global rebalancing, a persistent development gap and high levels of public and private indebtedness and uncertainty continue weighing on medium-term global growth prospects. While volatility in international financial markets has declined, it generally remains high and we are committed to further reduce downside risks. We are alert to the risks of higher oil prices and welcome the commitment by producing countries to continue to ensure adequate supply. With unemployment still too high in many countries, we are firmly committed to supporting growth and job creation."
ON IMF REFORM
"We will continue working towards the reform of the quota and governance of the IMF, in line with the commitments made in Seoul and Cannes. To this end, the G-20 members reaffirmed their commitment to implement in full the 2010 Governance and Quota Reform by the agreed date of the 2012 IMF/World Bank Annual Meeting, and to a comprehensive review of the quota formula to better reflect economic weights by January 2013 and the completion of the next general review of quotas by January 2014. Also, the G-20 will contribute to the ongoing process to strenghten the surveillance framework of the IMF, providing its input into considering proposals for a new surveillance decision that includes more effective integration of bilateral and multilateral surveillance."