A picture of what the negotiations around the Greek debt solution will look like is starting to come together. Yanis Varoufakis, the Greek Finance Minister, outlined plans for a swap of debt between Greece and its creditors. The new loans are indexed to growth and remind me a lot of the kind of debt that Germany issued after World War 2. Germany had to operate a current account surplus, i.e. exporting more than it imported, by around 3% for them to start paying off the loans.
This encouraged other countries to purchase German exports and allowed them to rebuild a manufacturing industry that was crippled as part of the conflict. The benefits are clear to see now. Germany also had around 50% of its outstanding debt written off, that looks unlikely to happen in this instance.
For the Syriza party, is this a climb down? One would have to say that it is a logical move having been presented with a united European front decrying the ability to offer haircuts on bond holdings. The FT is reporting this morning that Varoufakis’s plans has gone down well with investors so far. Private investors had to submit their debts for pay-out reductions back in 2012.
This is only the beginning of the solution however; nobody has accepted these plans as yet but there is a lot less within this plan to get overtly angry about. The euro moved slightly higher through the session yesterday after the announcement but euro bulls will wait for more details before pledging more funds to the single currency.
Movements in bond markets have been interesting overnight. The yield on German debt on a ten year term is now lower than the same debt of Japan. Why does this matter? The ‘Japanification’ of the eurozone is a fear that the deflationary impetus that the European economy is currently suffering will last long enough as to be dangerous to the economy as it has in Japan. Bond yields tend to move lower if deflation is feared; the fact that Germany’s is now below Japan’s is a shift in psyche that hints at further deflationary fears for Europe.
Overnight another central bank has taken some in the market by surprise. The Reserve Bank of Australia cut rates last night by 25bps. Rates had remained at 2.5% since August 2013 but the cuts made by other central banks that manage cyclical currencies were obviously too much. AUD has fallen on a trade weighted basis by 10% in the past three months but the RBA wants more.
In the accompanying policy statement they said that the “Australian dollar has declined noticeably against a rising US dollar over recent months, though less so against a basket of currencies; it remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices; a lower exchange rate is likely to be needed to achieve balanced growth in the economy.” AUD is down 2.3% against USD and 2.1% against sterling.
As we highlighted in yesterday’s weekly update, this week’s PMI announcements are the first real indicators of how well the UK economy has started 2015. Yesterday’s manufacturing industry release showed an expansionary reading for the sector with the index rising to 53.0 from 52.7 previously.
Similar news from the construction sector is due today and from the services sector tomorrow. If they hit their estimates – 57.0 for construction and 52.3 for the services sector, then a growth reading in the UK of around 0.6% will be floated around. Services is obviously the most important as it makes up anywhere between 70-85% of the UK economy depending on who you listen to.
Today’s data calendar is the quietest with US factory orders at 3pm the main mover.