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Prospects Daily: Fallout from Greek debt situation continues to trouble financial markets

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Important developments today:

Political and economic spillovers from Greece's budget and debt plight have intensified.

China remains a net-seller of U.S. Treasuries for a second straight month

New York's Emmpire survey shows strong gains in manufacturing.


Fallout from Greek debt situation continues. Political and economic spillovers stemming from Greece’s budget and debt plight have intensified in the last weeks. The euro has been a major “casualty”, falling some 5% against the dollar over the year to date, currently standing at $1.36 per euro. And equity markets in the Euro Area, as well as in the United States and Emerging Markets have been hard hit by the perception that Greece could default on its sovereign debt. The country must issue some €53 billion ($72 billion) in bonds during 2010, the equivalent of 20 percent of its GDP, and faces bond redemptions of about €8 billion on both April 20 and May 19.

Today, Euro-Area Finance Ministers suggested that it was “absurd” to suggest that Greece would seek financial support from the IMF. Rather, according to Jean-Claude Juncker, heading the FM group, “The IMF will not design the Greek budgetary planning…it is technical assistance that we are speaking of here”. The finance ministers yesterday told Greek authorities to ready more deficit reduction plans by March 16, in case the government fails to show sufficient progress on its budget goals. Greece has pledged to reduce its public sector deficit from 12.7 percent of GDP in2009 to 8.7 percent by end-2010.

China is net-seller of U.S. Treasuries for second month running. Treasury Department data for December covering capital flows for the United States highlighted an easing of demand for longer-term Treasury notes, a modest pickup in net foreign purchases (NFP) of equities and continued net sales of U.S. corporate bonds. Total NFP of U.S. long-term securities amounted to $63.3 billion in the month, a halving from $126.4 billion in November, largely as China was turned net seller of Treasuries in the month, with sales of $34.2 billion, cutting its exposure to U.S. debt to the lowest level since February 2009.

“Clearly the Chinese are looking elsewhere at the margins for investments,” notes Dan Greenhaus of Miller-Tabak in New York. “Central banks in general have been scaling back their exposure to Treasuries, no doubt related to the reversal of the ‘flight to quality’ trade from late 2008 through early 2009.”

NY-Fed February Survey: strong gains in manufacturing. The so-called “Empire State” survey of factory purchasing managers in the metropolitan New York area offers a first glimpse of manufacturing activity for February—and the results are quite favorable. The headline index of activity implies the fastest growth pace in four months, increasing from a reading of 15.9 in January to 24.9 this month (readings above zero signal growth). Manufacturers are boosting output to replenish depleted inventories, and beginning to augment payrolls in anticipation of further acceleration in orders and sales.

German business confidence falls on stagnant 4th quarter growth. The authoritative ZEW survey of German investor and business confidence dropped for a 5th month in February, as the German economy produced “zero” growth in the final quarter of 2009, and the Greek fiscal crisis was perceived as a threat to spillover to other more-vulnerable euro area economies. ZEW said its index of investor and analyst expectations dropped sharply to 44.1 in February from 47.2 in the month preceding.

Among emerging markets:

In South Asia, Sri Lanka’s central bank kept its key interest rate unchanged at 9.75%, a five-year low, in a bid to support economic growth. The repurchase rate was also left untouched at 7.5%.

In Central and Eastern Europe, the number of employed in Poland fell 1.4% in January (y/y) at companies employing more than 9 people; this marking an improvement after dropping 1.8% in December. Average corporate wages increased 0.5% (y/y) after growing 6.5% in December.

In the Middle East and North Africa [geographic region], Israel’s economic growth accelerated to 4.4% in the fourth quarter, the fastest pace in more than a year and a half, and up from 3% in the previous quarter (y/y). The main driver for growth was exports, which increased 33% in the quarter. The central bank expects the economy to expand 3.5% in 2010.

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