We are starting to see some progress out of Greece as we head into the weekend, and with it, some euro strength. Yesterday PM Tsipras met with the president of the European Parliament Martin Schulz and today will sit with Eurogroup Chair Jeroen Dijsselbloem. Everyone is waiting for everyone else to be the first to blink. The first negotiations are like the opening minutes of a boxing match; few killer blows and a lot of sizing up of one’s opponents.
The wider European economy now stands at a crossroads. The road that needs to be taken is the one that sees a compromise. The Syriza government deserves the respect of the wider EU; to not give any is to disrespect the Greek voters. Surely the accession of Tsipras is the first real chance that the eurozone has to change the fiscal standing of the continent. Previous bailouts for, and austerity imposed upon peripheral nations are the compromises that needed making at the time. Similar compromises are needed now. Greece will have to maintain a level of fiscal austerity moving forward and for that will receive some forgiveness on its restrictive debt pile.
Of course there is still the risk of a default. Any restructuring of debt is technically a default and should we see tenors extended or interest cuts on what is owed, then pedants will say that a default has occurred. In that case, Greece has defaulted already by getting debt forgiveness before and forcing haircuts on investors in the past. I do not think that they will say they have no cash to pay back bondholders. Nobody benefits from that, especially the EU. If they do then we might as well realize that all the austerity that has been imposed on Greece: all the joblessness, and social depression has been for nothing. Any chance of an anti-austerity political movement in Italy, Spain and France would be crushed as well.
In the short term the focus remains on the Greek banking system. With the speed of capital flight we are seeing some estimates put the amount at EUR 700m a day, and we will only see funding pressures increase on the sector.
In wider European news, inflation numbers are expected to show a further fall into deflation for the eurozone. January’s preliminary CPI number for the eurozone should show a decline of around 0.5% compared to this time last year. We have to be wary of just how much a poor figure will extend the fall of the single currency. Investors are likely to become less and less worried about near-term inflation numbers given the ECB's launching of a quantitative easing plan.
Ruble is once again in the spotlight this morning as a meeting of EU foreign ministers prepared further sanctions on the Russian economy in light of an increase in fighting in Ukraine. Ruble pairs have been losing ground through 2015 with further sanctions only expected to further diminish output numbers, increase inflation and further castrate the Russian Central Bank. Flights of Russian bombers over the English Channel are fairly overt signs of Russian belligerence.
Consumer confidence is the measure of the day with US consumer numbers due this afternoon. Last night a UK measure of consumer sentiment rebounded to a six month high following five months of decline. The obvious beneficial factor is the passing through of lower energy prices into people’s real income and the help that is having against a still rather stagnant wage picture. The US’s measure is expected to maintain a high level of consumer comfort when released at 15.00 GMT.
