This week's thought-provokers for investors || N° 80
A total of 85.5% of investors holding Greek private debt have agreed to a debt restructuring. If Greece activates the collective action clauses (CAC), the participation rate will rise to 95.7%, paving the way for the largest ever sovereign debt default. Athens' debt burden of EUR350bn will be reduced by EUR100bn. The ECB, meanwhile, has restarted accepting Greek bonds as collateral.
The risk of a costly, disorderly default has been mitigated for now, but the activation of the CAC will almost certainly trigger payouts under credit default swap insurance. The International Swaps and Derivatives Association will today consider a "potential credit event" relating to Greece.
The ECB kept interest rates unchanged at 1% on Thursday.
The USD1trn in three-year loans issued under the Long-Term Refi nancing Operation (LTRO) appears to have reduced shortterm risks of a crisis, according to the ECB. Going forward, policymakers will assess the impact of the measures already taken before announcing any new steps. The infl ation target remains at or below 2%. The ECB expects a gradual economic recovery with growth in a range between -0.5% and 0.3% for 2012. The growth sources will be external demand, the low-interest-rate environment and the upcoming structural reforms. The reforms not only have a long-term eff ect. The Weekly Economic Wrap-up 9 March 2012 signal they send and the impact they have on confi dence also infl uences the short term.
The measures of the ECB have given politicians time by averting a tail event. Now politicians have to deliver on the eurozone's "fi scal compact" treaty. This will not be easy, though, as each country will have to relinquish some of its sovereignty on fi scal policy. Nevertheless, one must acknowledge that progress has been made in Europe.
Contraction is becoming visible in the euro-area economies, with fourth quarter GDP shrinking by 0.3%. Household spending declined by 0.4%, investments contracted by 0.7% and government spending eased by 0.2%. Exports fell also, driven by declining external demand.
This drop does not come as a surprise. After all, the current fi scal tightening and high unemployment are reducing local domestic spending. It will be crucial that structural reforms are put in place in a timely manner and the measures taken by the ECB (LTRO) benefi t small and mediumsized enterprises, which account for 80% of employment.
The US ISM non-manufacturing index reached a 12-month high of 57.3 in February. The declines in supplier deliveries and employment were mainly off set by improving new orders and an uptick in business activity. The real estate sector was a major driver of the ISM growth.
If the reported data trend in real estate continues, the signs of stabilisation will feed investor and consumer confi dence and continue to support the positive momentum.
US jobless claims rose by 8,000 to 362,000 in the latest week under review. This was ahead of the median estimate of 352,000. The reported increase ended the downtrend seen in the last few weeks.
Despite the latest uptick, the number of jobless claims has reverted back to levels seen in early 2008, which shows how labour market conditions are continuing to improve in the US. This further accentuates the divergence between European economies and the rest of the world.
US consumer confi dence reached a four-year high in February, according to the Bloomberg Consumer Comfort Index based on weekly surveys. The survey showed that half of the participants rate their personal fi nances as positive. The major factor here is an improvement in the personal balance sheet, driven by higher stock market prices, tangible job growth and rising wages.
Consumer confi dence is obviously improving, but the higher oil prices are a threat. If this threat does not materialise, however, the question is only how rapidly the improvement in confi dence will lead to an increase in consumption.
On the opening day of China's National People's Congress, Premier Wen Jiabao announced a lower GDP growth target of 7.5%. Since 2005 the target had always been 8%. The target was lowered to bring it in line with the current fi ve-year plan in China. The infl ation target was kept unchanged at 4%. Regarding the closely watched property market, China's government hinted that it may take further policy measures to discourage speculative housing demand.
The lower growth target is another sign that China is approaching a more sustainable growth path, one driven less by investment but more by consumer demand. This will make the economy more resilient to external shocks.
Stefan Angele, Head Investment Management & Member of the Executive Board
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