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Prospects Daily: Greece's debt situation grows more difficult

Global Macroeconomics Team's picture

Important developments today:

Greece's debt situation grows more difficult.

U.S. Treasuries fall ahead of auction.

Mexico and Thailand report fourth quarter real GDP growth.

Treasuries lower ahead of debt auctions. U.S. Treasury debt prices are lower in early Monday trading, with longer-dated securities falling ahead of an auction of $8 billion in 30-year Treasury Inflation-Protected Securities (TIPS) scheduled for later in the day. Today’s debt sale is the first portion of a record $126 billion of U.S. government debt auctions this week: $44 billion in 2-year notes on Tuesday, a $42 billion offering of 5-year notes on Wednesday, and a $32 billion auction of 7-year notes on Thursday. Yields on 30-year notes, which move inversely with prices, increased 2 basis points (bps) to 4.73%, while 10-year bond yields widened 1 bp to 3.78% this morning, according to BGCantor Market Data. In contrast, short-dated Treasuries posted small gains on Monday, following last week’s sell-off, as investors pared back bets that the Fed-Funds target rate will stay near zero for the time being to support the economy. In broader terms, government bonds have been struggling, as signs that the global economic recovery is building momentum has reduced demand for safe-haven assets.

Greece’s debt situation grows more difficult. In a number of stories featured in the financial press today, tensions surrounding the sovereign debt situation in Greece, where the fiscal deficit- currently 12.5% of GDP, is to be reduced (by Government austerity programs under pressure from the EU) to 3% by 2012, is facing additional headwinds. Among these pressures are prospects that, in reversion to “pre-crisis” rules as of January 2011, the ECB would no longer be able to use Greek government bonds as collateral, should Moody’s Investor Services join the other major credit rating agencies in marking down Greek sovereign debt credit ratings to the equivalent of Baa1. That would render Greek bonds ineligible at the ECB, and raise the cost of external financing for the Government by several notches.

Moreover, EU finance ministers had turned up the heat on Greece a bit more last week. The country might be asked to raise value-added taxes, introduce a levy on luxury goods and cut capital spending more sharply, if Greece fails to show progress on its present deficit reduction plan by March, with the EEC is due to review the situation.

And currency analysts have turned decidedly bearish on the euro, with foreign exchange options and futures pointing to continued substantial declines for the currency against the dollar, even if the EU manages to assist Greece out of its immediate difficulties. This is tied to a view that the ECB will need to keep policy rates low to stem negative growth spillovers for the Euro Area of contractionary fiscal measures likely to occur not only in Greece, but also in Portugal and Spain. According to David Woo of Barclays plc in London, “Aggressive fiscal tightening by Greece, Spain and Portugal are likely to plunge their economies back into recession. All else equal, this calls for a looser monetary policy.”

Bank of Japan under more pressure to combat deflation. A row has apparently developed between the new Administration of Prime Minister Yukio Hatoyama and the Bank of Japan (BOJ) under Governor Masaaki Shirakawa, over how to spur prices and move against deflation. Finance Minister Naoto Kan told Parliament today that the BOJ should “make more efforts” to beat deflation. Mr. Shirakawa had last week shrugged off Mr. Kan’s calls for an inflation target, and rather urged the Finance Minister to tackle the fiscal deficit. Mr. Shirakawa has repeatedly stated that the Bank would continue to provide “ample liquidity” to work against deflation.

Among emerging markets:

In East Asia and the Pacific, real GDP in Thailand grew 3.6% (q/q) in the fourth quarter of 2009, for a 5.8% expansion compared to the fourth quarter of 2008. Growth was led by a 10% (q/q) surge in industrial output and a 4.2% increase in exports.

In Latin America and the Caribbean, Mexico’s economy gained 2.03% (q/q, sa) in the fourth quarter of 2009, as industrial production led the way towards growth. Final data reveals that the economy contracted 6.5% in 2009.

In Central and Eastern Europe, Hungary’s central bank cut its key interest rate to 5.75% from 6%, bringing it to the lowest level since the fall of communism two decades ago. Lithuania’s industrial production remained weak, declining 0.6% (m/m) for a 6.8% decline in year-over-year terms. Latvia’s unemployment rate rose to 19.7% in the fourth quarter of 2009, marking the highest rate in at least seven years, up from 18.4% in the third quarter, as the economy contracted by almost a fifth in 2009.

In Sub-Saharan Africa, Kenya’s overall fiscal deficit increased to 1.8% of GDP in the first half of fiscal year 2009/10. The government is targeting a deficit of 4% of GDP for the year, excluding any grants or official development assistance.

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