Abe Makes a Case Against Austerity as USDJPY Remains Bid

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Market Drivers Nov. 27, 2012
Greek deal done, but euro falls on news
LDP Platform emphasizes monetary, fiscal stimulus
Nikkei 0.37% Europe 0.57%
Oil $88/bbl
Gold $1750/oz.

Europe and Asia:
CHF UBS Consumption Indicator
GBP Total Business Investment

North America:
USD Durable Goods 8:30
USD Consumer Confidence 10:00
USD House Price Index 10:00

The EcoFin finally agreed to another rescue deal for Greece, but the news had only fleeting positive impact on the EURUSD as the unit ran into massive selling at the 1.3000 level and has since traded down to 1.2950 in morning European dealing. Overall Greece will receive 43.7 Billion euro in a series of stages from the Troika. The IMF share will be paid out all at once, once a buy back of Greek debt has occurred in the coming weeks. The ECB will hand back 11 Billion in profits it made on its sovereign debt holdings of Greek bonds and the EU will provide additional financing with the goal of reducing Greek debt to GDP ratio to 124% by 2020.

The lenders also sought to cut interest rates for Greece and extend the maturity by 15 years to 30 years overall granting Athens 10 years of interest deferral. The parties also agreed to cut rates on the already extended bilateral loans from 150bps above cost to 50bps above cost once Greece achieves a 4.5% primary surplus.

In short the Greek deal offered nothing unexpected and perhaps the greatest positive was the fact that it was done at all given the last minute wrangling and delays that marked the negotiations. For now it provides a modicum of relief for the EZ sovereign debt crisis taking Greece off the radar for the time being. However, the just finished bailout talks did not offer any long term structural reform for reducing Greece’s massive debt burden and as many analysts have pointed out all of the parties will likely be back at the negotiating table 6-12 months from now looking for yet another rescue.

Elsewhere USDJPY rallied back to 82.30 after the LDP leader Shinzo Abe clarified some of his positions noting specifically that he did not ask the BOJ to underwrite bonds, but rather to purchase them in open market operations much like the Fed does with QE. He also stressed that fiscal stimulus must accompany monetary easing in order for government policy to be effective. Furthermore, Mr. Abe made a subtle but important point that Japan cannot restore fiscal health while deflation remains as tax revenues will not rise, this turning the austerity argument on its head as he seeks a much more aggressive stimulus program to take Japan out of its chronic deflation.

In North America today the eco calendar carries Durable Goods and Consumer Confidence data with market anticipating a decline in the former but a small uptick in the latter. Neither report is expected to be market moving, but may weigh on risk a bit if it prints below expectation. The EURUSD having sold off to 1.2950 may correct all the way to 1.2900 as the post Greek deal unwind continues. As we noted earlier, “Having solved the temporary financing issues the EZ won some short term relief, but the region’s sovereign debt crisis will likely dog the policymakers into the foreseeable future especially if the economic data from core of the EZ begins to disappoint, sparking fears amongst investors once again.”

Boris Schlossberg
Managing Director

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