Here's my 90 seconds at 9 am summary of overnight financial news in association with Bank of New Zealand, including news European Union (EU) finance ministers have rejected a debt restructuring deal for Greece.
The ministers rejected a plan that would have seen private holders of Greek bonds take a 60%-plus haircut and accept new bonds in exchange for the toxic old ones that pay coupons (interest payments) of 4% per annum.
Instead Greece's European donors want the private creditors to accept interest payments of just 3.5% in an attempt to reduce the burden of Greece's debt load to below 120% of debt.
However, Greece's problem, and the problem for much of Southern Europe, is its government is slashing government spending, which is contracting its economy. That is increasing the relative burden of debt in an austerity-driven spiral that many believe will only end with the break up of the Euro zone.
The deadline for a possible Greek default is approaching. Greece's government needs another bailout payment from the European Union, the International Monetary Fund (IMF) and the European Central Bank (ECB) before it can repay €14.5 billion worth of government bonds maturing on March 20. See more here at Reuters.
Yet markets were remarkably relaxed this morning about the stalemate in the Greek debt restructuring talks.
European stocks fell just 0.7% and the Dow is down just 0.4% in late trade. See more here at Bloomberg.
That meant the New Zealand dollar, which often rises and falls with appetites for risk on global stock markets, was reasonably stable and strong around 81 USc, 62 Euro cents and 51.9 British pence. See more here from the BNZ's Mike Jones in his currency report on our site.
Markets are less worried about the European debt crisis at the moment because they believe the European Central Bank will do enough to stop a European banking collapse. Just before Christmas, the ECB lent €489 billion to European banks for three year terms against relatively weak collateral at an interest rate of 1%. This is called the ECB's Long Term Refinancing Operation (LTRO)
Those banks then turned around and lent that money to struggling Southern European governments at interest rates of 3% or more, helping to stabilise bond markets and give themselves a nice little profit boost along the way that they hope will help rebuild their battered balance sheets. It's called the LTRO carry trade or the 'Sarko' trade, named after French President Nicholas Sarkozy who called on French banks to use the LTRO funds to buy French bonds.
The ECB is now expected to print another €500 billion of three year money to lend it to the banks on February 29.
However, this money printing doesn't solve the European problem of too much debt and contracting economies.
The IMF's boss Christine Lagarde said as much last night when she warned of a "1930s moment" unless European leaders acted in unison to boost their economies and turn around the austerity debt spiral.
The IMF cut its forecast for global growth in 2012 to 3.3% from 4% previously. It also warned of a worse case scenario where Europe's economy contracted 4% a year for two years in a row unless it could solve its debt problems. That is a depression-type drop in output.
Such a slump would cut global growth by around 2 percentage points to around 1.3%, the IMF warned. See more here at Reuters.
Financial markets will also be focused tomorrow morning on central banks, both here in New Zealand and in the United States.
Our Reserve Bank is expected to hold its Official Cash Rate (OCR) at 2.5% when it releases its decision at 9 am on Thursday morning. Economists expect it to hold it there until late this year, possibly into 2013, because of weak inflation and slow economic growth.
A worsening of the European crisis could even prompt a cut later this year, some economists say. The Reserve Bank's comments in its short statement at 9 am will be closely watched. See my 'Crystal Ball' summary of interest rate views, house price expectations and fixed vs floating thinking here.
Meanwhile, the US Federal Reserve is expected to release the results of its regular monetary policy meeting earlier on Thursday morning. Reuters reported the Fed is expected to signal it will leave its rates on hold near 0% until 2014.
5 Comments
Hey Bernard , re the risk of a depression , did you read my open letter toJohn Key ?
It seems to me that the ECB and the banks in the EU are set to own the EU debt farce for an eternity. The ECB using the banks as proxy buyers of Bonds to drive down rates for states.
Ok..so what....well it leaves the pollies that make the fiscal moves inside each state to their liking, intent on doing exactly what happened in the first place...promising they will abide by a 3% deficit rule only to proceed to twist and worm their way to splurge again...why should they not do this...what pressure is there to stop them repeating the dirty games?
The ECB will therefore become the pawn of the pollies...the cash cow to ensure bonds are sold...cash is harvested and spent on vote buying splurges to stay in power.
Or are we to believe the 25% unemployment rates etc will be a thing of the past in no time at all.....hands up the fools who believe that one.
Keep your arm up if you think the private mountains of debt...hundreds of billions of Dollars...will also be swept away by a vibrant economic European surge and a charge of the productive juices that generates oodles of export income .............harrrrrrrrrrhahahahaaaa
200x-2008: Banks (Unwittingly - thanks to Rating Agencies) lent money to people who could not afford to pay it back.
2012: Banks knowingly lend money to countries who cannot afford to pay it back.
Is there a difference or does the unpayable debt just get higher and higher and end up with a bigger disaster at the end for the public taxprayers?
Of course the Banks can claim they have become more profitable and pay huge bonuses still ;)
"This week we look at a report called “Working Out of Debt,” about debt and deleveraging, from the McKinsey Global Institute. This is a well-done summary of their longer paper, which has been updated, called “Debt and deleveraging: Uneven progress on the path to growth.” I discussed the original paper both in my regular letter and in Endgame. It is one of the best, most definitive pieces on the topic I have read"
http://www.marketoracle.co.uk/Article32776.html
A very good guide it is too,,,helps you see through the political lies and fluff doing the rounds. Leaves the question on NZ to be sorted...where are we in the deleveraging process?....my bet is it has only just started but is already under threat from the property bubble being blown on the line of cheap covered bond backed credit creation and slack LVR rules...This is a must read article...any flat earthers out there will be shocked to learn the 'new normal' is here for the duration.
So the Australian dollar falls on lower than expected inflation.
Lower RBA interest rate???
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