2015.02.18 News


Once again we start with Greece where apparently the new government is ready to play ball – at least in the nearterm. Greece will be asking for a bridge loan as prescribed by the Eurogroup.

Why all of a sudden? It was the Austrian Finance Minister Hans-Joerg Schelling who, on behalf of the Eurogroup, drove the following point home.

It’s easy to see how taking this hardline makes political sense for many in the Eurozone. Some of this pushback on Greece is not originating from Germany. Instead it’s nations such as Slovenia who have been quite angry with Greece.

The Slovenia Times: – “Given such an exposure Slovenia has toward Greece and such solidarity we provided, Greece has said it plans to raise pensions, raise pay, make employments in the public sector and demand an extra cut in its liabilities to Slovenia, while in Slovenia we are slashing pay and economising in all areas,” [Slovenia’s Finance Minister Dušan] Mramor said.

Elsewhere in the Eurozone, the area’s economic sentiment indicator (ZEW) came in above expectations.

It’s interesting to see that the euro, helped by economic tailwinds, remains fairly resilient in the face of the Greece standoff.

In the UK producer prices are falling sharply. The massive declines in the wholesale input prices are feeding through to the output prices.

And this decrease in the PPI is flowing through to the consumer prices, as the nation’s CPI hit the lowest level on record.

The sad story of Ukraine’s collapsing economy continues to unfold. The GDP fell 15% on a year-over-year basis.

Now on to China where pressure is building on the yuan. Given the ongoing growth slowdown, the PBoC desperately wants to ease policy but is afraid that the credit bubble in the corporate sector (some of which was helped by the explosion of “wealth management products”) will worsen as a result of lower policy rates. Allowing the yuan to weaken may be a better option to help stimulate growth. After all, everyone else is doing it.

The yuan now trades at the weaker end of the permissible range.

One of the reasons for the downward pressure on the yuan is the short-term profile of China’s cross-border debt. We are seeing some capital outflows.

Investors remain uneasy with massive amounts of dollar denominated debt outside of the United States. As a number of currencies depreciate against the dollar (such as the Indonesia example above), these dollar liabilities will become increasingly more difficult to repay. Combine that with weak commodity prices (with many of these loans used to fund raw materials and energy projects) and we’ve got a series of defaults on the way.

The chart below is a bit dated but bloggers love to show it and discuss the sad state of the US economy. This is what I call “extrapolating the bubble”. Using the 2005-2007 range to project potential GDP is absolute nonsense. That growth trajectory was only possible with massive amounts of credit and those days are over. Get used to it – this is the new normal.


– Eurozone countries have given Athens a final deadline of Wednesday to extend its EUR172bn rescue programme, after talks in Brussels broke down in acrimonylast night. The Greek finance minister said he was confident an agreement could be reached based on earlier proposals for a four-month extension. Without a backstop, officials fear renewed market turmoil and a bank run in Greece. (FT)The irony is that the reforms in Greece – like those imposed on Portugal and Ireland, which have stood firm with their creditors – were beginning to bear fruit. Syriza may have “knocked over the apple cart when it was just about to reap the reward of its people’s sacrifices”.
– Ukraine ceasefire already crumbling Just 48 hours after the ceasefire took effect, the battle for Debaltseve intensified and Kiev refused to surrender a strategic railway hub where thousands of government troops were surrounded and faced attack by Russia-backed separatists. (FT)
– US spyware spotted Kaspersky Labs, the Moscow based cyber security company, said it had uncovered sophisticated hacking tools in personal computers in 30 countries including Iran, Pakistan, Russia and China. It suggested they were devised by the US. (FT)
– Transocean’s dividend slash One of the world’s largest offshore drilling contractors is cutting its dividend 80 per cent – another sign of oil prices battering the industry. The company said the reduced payout would help it retain an investment grade credit rating. (FT)


– Fed’s Plosser joins criticism of “audit” calls
– Bank of Japan maintains policy; no surprises
– UK unemployment falls, wages grow healthily
– S&P 500 hits new record high
– Nikkei 225 rises to new 7 1/2 year high
– Aussie stocks on path for 6 1/2 year high
– Aussie, Japanese, Indonesian shares all jump
– Greek bonds trade calmly amid debt talk hopes
– European stockmarkets rise on Greek bailout hopes
– Sterling strengthens on strong UK employment data



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