What Next For Europe?


‘When in doubt, take more time.’ – John Zimmerman

The successful, if fractious, passage of the austerity bill through the Greek Parliament on Sunday gave rise to a modest and fading rally in risk assets yesterday:

Modest, because we are not quite at the finishing line and it is clear that while politicians may well see the austerity plan as a means of portraying commitment and more importantly credibility to the markets, the harsh reality of the social impact on the nation was apparent on the streets as the vote passed in Parliament.

Fading, because there are now a number of further important dates for investors to angst over. Indeed overnight the decision by Moody’s to downgrade Italy, Portugal, Slovakia, Slovenia and Malta by one notch and Spain by two notches, turned a fade into something a little more sinister.

The timetable for Europe is effectively (though arguably vulnerable to amends) as follows:

  • The Greek government must first persuade its international investors that it has detailed the EUR325 million of additional cuts and that there is cross party political accord to carry out the austerity. This must be done in time for the Eurogroup meeting tomorrow to agree the loan deal ‘in principle’ ahead of the finalisation of the debt swap talks.
  • The deadline of February 17 for the private sector bond holder talks is the next stress point where the much discussed 70 percent haircut will need to be formally agreed by both sides.
  • Next, Troika must determine whether the overall debt deal combined with austerity measures put Greece on a sustainable footing.
  • The German Bundestag is then due to discuss the plan on February 27 – continued support from the Eurozone’s most (perhaps even only) credible creditor is key.

It is then on to the EU summit on March 1 and 2 where the final arrangement must be agreed and signed off by all parties less than three weeks before perhaps the most threatening and certainly the most immovable date of all March 20, when EUR14.5 billion of bond redemption payments are due by the Sovereign.

While the timetable can be viewed as ominous, my view remains that the most likely scenario is that a second Greek bailout package will be attained and the ‘tail risk’ event removed. The last few months has seen a notable turnaround in risk appetite sponsored not in small part by the improvement in the macro economic backdrop in the US (and to a lesser degree the UK) from the manufacturing and services survey and high frequency data.

In the UK the recent data points to a reversal of the Q4 decline for the start of 2012 (however I would suggest that there is a reasonable chance that the Q4 negative gets revised away anyhow – UK GDP estimates have a historic tendency to be revised higher) and an accelerating growth backdrop as we move into the second half of this year. In the US the backdrop of faster than expected employment growth, despite the fact that Federal Reserve Chairman Ben Bernanke was quick to suggest that the data ‘overstates’ the health of the jobs market, and improving business activity has lead the risk rally in US (and global) risk assets.

It is perhaps ironic in its timing therefore that Moody’s should choose this point to place the UK sovereign rating on credit watch negative, citing ‘the increased uncertainty regarding the pace of fiscal consolidation in the UK’ due to ‘materially weaker growth prospects’ – overall I still see the dips in GBP in general as bullish opportunities, at the current juncture particularly against EUR.


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