The vote that counts for markets
The American people have spoken but for the markets the votes of 300 Greeks could be of even more importance in the short-term. German Bund futures have opened flat, not really reacting to Obama’s victory, while European stocks have eked out some early gains.
We await a knife-edge parliamentary vote in Athens on labour reforms to cut wages and severance payments, which the EU and IMF insist are a key part of a new bailout deal, but which the smallest party in the coalition government has pledged to vote against. That leaves the two larger parties – New Democracy and PASOK – with a working majority of just nine lawmakers and on a less contentious vote on privatizations, a number of PASOK deputies rebelled. Ratcheting up the pressure is a second day of a general strike which will see thousands take to the streets.
We know that the troika has advised that another 30 billion euros needs to be found to keep Greece afloat. We also know that the IMF has been pressing for the ECB and euro zone governments to take a writedown on Greek bonds they hold, which Germany refuses to do so (which means it won’t happen, for now at least). The Eurogroup is awaiting the troika’s final report and it’s looking less likely that a definitive plan will be signed off at next Monday’s meeting of euro zone finance ministers.
Nonetheless, it’s in no one’s interests to let Greece crash at this point so the presumption is a deal will be done, probably featuring Greece getting two extra years to make the cuts demanded of it, extending maturities on its loans and cutting the interest rates. Talk of the ECB foregoing profits on the Greek bonds it holds (rather than taking a loss, since it bought them at a steep discount) continues to do the rounds. A further German condition is for a ring-fenced escrow account to hold some Greek tax revenues to ensure that it services its loans. Greece will probably also be allowed to issue more t-bills to tide it over though that requires the ECB’s acquiescence since Greek banks are entirely dependent on central bank liquidity and have been offering those t-bills up as collateral. Mario Draghi is speaking today.
El Pais scooped the most interesting part of the European Commission’s updated forecasts, reporting that Brussels expects a deeper Spanish recession which means it will miss its budget deficit targets for the next two years which raises the pressure on Rajoy to take a bailout. But the other figures will be of interest too. The Italian press has got an early leak of Italy’s numbers, which forecast a shallower recession in 2013 and a shrinking deficit, down to about 2 percent of GDP. Looks like Spain is in significantly worse shape.
The EU budget saga will heat up again when Angela Merkel meets David Cameron in London this evening. Cameron has called for a real-terms freeze in EU spending to reflect national austerity policies and has threatened to block a deal otherwise, potentially holding up an increase in funding for the poorest member states. In reality, he doesn’t expect to get a freeze and the German position is not that different to the Brits. Expect some accounting chicanery to satisfy all sides.