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Prospects Daily: Greece secures second bailout, while Japan’s trade deficit reaches record high

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Important developments today:

1. Greece secures second bailout, but concerns remain

2. Japan’s trade deficit reaches record high in January


Greece secures second bailout, but concerns remain. European finance ministers approved a €130 billion ($172 billion) aid package for Greece on Tuesday that the country needs to avoid disorderly bankruptcy next month. According to the terms of the Greek bailout, Greece needs to take immediate step to put a program of austerity and economic reforms into effect—structural reforms aimed at reducing Athens’ debt to 120.5% of gross domestic product by 2020 from about 160% in 2011. The Greek government must also persuade its private creditors to take bigger losses than they had previously agreed on. Private second bond holders will have to write-down 53.5% on the nominal value of their holdings, which equate to more than 70% loss on the net present value of the debt, to cut Greek debt stocks by the targeted amount of about €100 billion. Following the announcement of the Greek aid deal, European stocks and the euro slumped, signaling that investors remain doubtful over Greece’s ability to repay its staggering debts in the longer-term.

Japan’s trade deficit reaches record high in January. Rising fuel imports and a slowdown in global demand pushed Japan’s trade balance to a seasonally adjusted record high monthly deficit of Y613 billion in January. Imports rose by 9.8% (y/y) and exports were down by 9.3% (y/y). Since the Fukushima crisis last year, there has been a structural shift to increase imports of coal and liquefied natural gas to substitute for the shutdown of nuclear power plants in Japan.  The decline in exports was mostly due to the decline of its exports to China, its largest trading partner, which fell by a sharp 20%. In part, this is because the Chinese New Year holidays fell in January rather than February. Japan’s exports to crisis hit Europe was down by 7.7% (y/y). In 2011, Japan’s economy posted an annual trade deficit for the first time since 1980.    

Among Emerging Markets

In East Asia and the Pacific, China’s central bank announced that it would cut the reserve requirement ratio (RRR), the proportion of cash that banks must set aside, by 50 basis points to 20.5% from February 24. This second cut in three months is expected to release 400 billion yuan (US$64 billion) of liquidity into the financial system in a bid to bolster slowing economic growth.    

In Europe and Central Asia, Turkey’s central bank cut the maximum rate on overnight loans to 11.5% from 12.5%, in step with monetary easing in a host of countries worldwide. This rate cut supports efforts to keep the economy growing amid the slowdown in Europe, Turkey’s largest export market, even though inflation accelerated to 10.6% year-on-year (y/y) in January.

In Sub-Saharan Africa, Rwanda’s consumer price inflation decelerated to 7.8% (y/y) in January from 8.3% in December, mainly because of seasonal and one-off factors contributing to flat food prices and a drop in transport and utility prices over the previous month. 

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