Greek Default Concerns

September 12, 2011

European and Asian markets experienced another extremely difficult session overnight, the focus of which was mounting speculation that aid to Greece will be halted and that Greece will then default and leave the euro zone, if not the EU. 

The euro got whacked, falling to its lowest yen value (JPY 103.89) since June 14, 2001 and its lowest dollar value since February 16 of this year ($1.3495).  But the euro is presently trading above those lows.

Contagion fears are rampant.  Share prices fell by 2.9% in Singapore, 2.6% in Indonesia, 3.7% in Australia, 4.2% in Hong Kong, 2.0% in Thailand and 2.3% in Japan.  The Chinese, Taiwanese, and South Korean markets were closed for holiday.  In Europe, banking shares in France slumped some 10%, and the Paris Cac has fallen by 3.9%.  The German Dax and British Ftse areo off by 2.8% and 2.0%.

The Swiss franc’s euro cross rate of CHF 1.2040 is closer to the Swiss National Bank’s pegged ceiling of 1.2000.

The dollar now shows gains from Friday’s close of 1.3% versus the Aussie dollar, 0.5% against the loonie and euro, 0.4% relative to the Swiss franc and kiwi, and 0.2% against sterling.  The yuan is steady, and the yen has risen 0.6% against its counterpart. 

Minutes from the Bank of Japan’s August 4 meeting revealed mounting anxiety and a unanimous decision to boost asset purchases.  Verbal protests against yen strength by Japanese officials continue, but traders are not expecting drastic steps such as their Swiss counterparts have undertaken.  Japan’s trade minister Hachiro resigned after a verbal gaffe.

While British 10-year gilt yields have dropped by six basis points, 10-year German bunds and Japanese JGBs are steady.  The ten-year futures Treasury yield is at 1.91%.

Oil and gold prices have slumped 1.6% and 0.9% to $85.81 per barrel and $1843.20 per ounce.

Markets have had to absorb plenty of dismal European developments.

  • G7 finance ministers in Marseille were clueless in devising steps to stop the euro debt crisis.
  • Juergen Stark, the German member of the ECB Executive Board, resigned, implying deepening disagreement over the ECB’s unconventional monetary measures.
  • Moody’s may downgrade French banks.  Moody’s also directed criticism at Spain.
  • Press chatter over the weekend cited an IMF study that suggested European bank capital is over EUR 200 billion lower than needed.  IMF Director Lagarde called such speculation incomplete and misleading.
  • German officials are said to be making contingency plans for a Greek default and return to the drachma. 
  • A British agency has put the cost of recapitalizing U.K. banks at GBP 7 billion.
  • Greek import prices jumped 1.2% in July and accelerated to a 12-month rise of 8.7% from 6.7%.
  • The Greek prime minister okayed a fresh package of emergency austerity including reduced salaries and higher taxes.  Greek growth this year will contract at least 5%, a greater amount than predicted a couple of months ago.

Japan’s tertiary index, a barometer of service-sector activity, unexpectedly dipped 0.1% in July and was also 0.2% lower than a year earlier.  The tertiary index had been unchanged in 2Q11 after tumbling 1.4% in the first quarter, but managed to exceed the 2Q level by 1.3% in July.  Japanese domestic corporate goods prices slipped 0.2% on month but rose 2.6% on year in August.  Export and import prices fell by 1.8% and 2.4% between July and August.

There have been signs of slower growth in key emerging markets.

  • Indian industrial output was just 3.3% higher than a year earlier in July, its smallest 12-month rate of increase this year and just half of what analysts were anticipating.
  • Chinese M2 growth of 13.5% in the year to August was down from 14.6% in July and 15.9% in June and the smallest increase of 2011.
  • Chinese bank lending of 549 billion yuan was less than the 668 billion yuan average in the first seven months of 2011 and the 665 billion yuan mean in all of 2010.  Central bank officials reaffirmed the current tighter policy and called the slower rate of credit growth appropriate.

Australian exports and imports each fell 0.9% on month during July, and the trade surplus of AUD 1.826 billion was very similar to July’s AUD 1.817 billion.

Italian industrial production fell 0.7% in July and by 1.6% from a year earlier after adjusting for variations in the number of working days.

The Czech current account deficit widened over 50% in July to CZK 12.8 billion.  Romanian CPI inflation eased to 4.3% in August from 4.9% in July.  Portuguese CPI inflation also slowed to 2.9% from 3.2%.  So did Danish inflation to 2.6% from 2.9%.

Two bright spots came from Finland and Turkey.  The on-year rise in Finnish retail sales in July was revised upward to 5.7% from 3.7% reported before, and Turkish GDP in 2Q (up 1.3% from 1Q and +8.8%) exceeded expectations significantly.  Nonetheless, Turkish on-year growth was slower than in the first quarter, and that country also reported a $5.3 current account deficit in July.

There are no meaningful U.S. or Canadian data releases today.  German Chancellor Merkel and Dallas Fed President Fisher — both hawks — have speaking engagements.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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