BusinessDesk: Greek aid package agreement important to control European systemic risk of contagion

BusinessDesk: Greek aid package agreement important to control European systemic risk of contagion

By Margreet Dietz

The European Union's first summit of the year kicks off the week on Monday amid high hopes that Greece and its private creditors are about to agree on a debt swap that garners approval of the euro zone's leaders.

While talks between Greece and its private creditors about a debt swap plan needed to avoid the nation's bankruptcy were continuing, an agreement was forthcoming.

"We are very close," European Economic and Monetary Affairs Commissioner Olli Rehn told the World Economic Forum in Davos on Friday.

That sentiment was echoed on Saturday by the Institute of International Finance, negotiating on behalf of private creditors.

Creditors are prepared to accept an average coupon of as low as 3.6 percent on new 30-year bonds, Bloomberg News reported, citing a person familiar with the talks, who declined to be identified because a final deal hasn’t been struck yet.

Meanwhile, Germany might be asking the desperate country to hand over control of its budget policy to European institutions as part of a second rescue deal, according to Reuters.

A deal securing the second bailout is crucial.

"For me that aid package is what controls systemic risk," Mohit Kumar, head of Europe & UK rates strategy at Deutsche Bank, told Reuters. "What happens in Greece is important for Greek bondholders but what is more important as far as the rest of Europe is concerned is whether there is a systemic risk of contagion or not."

EU leaders were served a stark, though not unexpected, reminder by Fitch Ratings on Friday when it downgraded credit ratings of five euro-zone countries including Italy, which was slashed two levels to A- from A+. Fitch also cut its credit rating for Spain, lowering it two notches to A, and trimmed ratings on Belgium, Slovenia and Cyprus.

“This was in the pipeline,” Thomas Costerg, an economist at Standard Chartered Bank in London, told Bloomberg. “The important thing is that the ratings of Italy and Spain remain on par or above S&P’s, so this is catch-up. It’s definitely a wakeup call for European leaders ahead of the summit.”

This week brings another round of financing for several euro-zone countries. Portugal is set to auction about 1 billion euros of three-month Treasury bills, although these are expected to be taken up by domestic banks, according to Reuters, while Italy will auction as much as 8 billion euros of new 10-year bonds.

As the month of January is drawing to a close, equities have had a decent run.

The Standard & Poor's 500 Index and the Nasdaq Composite Index each posted their fourth week of gains, eking out a 0.1 percent advance and a 1.1 percent gain respectively for the past five days.

Even so, the Dow Jones Industrial Average declined 0.5 percent in the past five days and in Europe, a 1 percent decline on Friday in the Stoxx 600 Index wiped out its gains for the week, sending it to a 0.2 percent loss.

As the Federal Reserve promised to keep its key rate steady until at least late into 2014 and suggested it might buy more bonds to aid the world's largest economy, data on the latest quarter underpinned the need for stimulus.

American gross domestic product grew at a 2.8 percent annual pace in the fourth quarter, short of economists' expectations. Yet a separate report on Friday showed that consumer sentiment was better than expected and the best in 11 months in January.

A key indicator this week will be the US jobs report released on Friday, which is expected to show that employment grew by 150,000 in January after rising by 200,000 in December, according to the median forecast of 68 economists surveyed by Bloomberg. The jobless rate may have held at an almost three-year low of 8.5 percent.

Also, a report from the Institute for Supply Management on February 1 will show its factory index rose to 54.5 this month, the highest since June, from 53.9 in December, according to Bloomberg.

Two days later, a report from the Commerce Department may show factory orders increased 1.5 percent in December after a 1.8 percent gain the prior month, according to the estimates of economists surveyed by Bloomberg.

In the coming days, another slew of US corporate earnings are due including from Exxon Mobil, Amazon, UPS, Pfizer and MasterCard. In Europe, banks earnings are expected to dominate in the coming weeks. Thomson Reuters data showed that 59 percent of 184 S&P 500 companies reporting through Friday have topped analysts' estimates, below the beat rate of about 70 percent seen at this stage of earnings season in recent quarters.

On Friday, Ford and Chevron posted results that fell short of expectations, ending a week confirming that amid surprises of strength there are also plenty of companies that are struggling.

Meanwhile, Facebook is aiming to file for its initial public offering as early as this week, the Wall Street Journal has reported. The company is discussing a valuation of US$75 billion to US$100 billion.


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