FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
WORLD
After marathon talks that extended well into Tuesday morning, a new bailout deal totalling the targeted EUR130 bn for Greece was finalised. Most of the deal’s components had been well flagged to the market, but the mere fact that negotiations did not fall apart helped stabilise sentiment and allowed EURUSD to keep a steady footing above 1.32. Although a significant hurdle has been passed and a disorderly default on March 20 appears to have been avoided, several points remain unresolved. First, the terms on the PSI are slightly harsher than previously determined as private sector investors will need to accept higher nominal losses than previously agreed and at a lower coupon; it remains to be seen whether these terms alone would be enough to trigger CDS as the IIF appears to have stopped short of giving the deal its full endorsement. Second, the Greek government has reserved the right to enact collective action clauses as further measures will depend on private sector participation, though it is already clear that the Greek parliament will move towards relevant legislation in due course. Demands for a larger haircut on private sector holdings appeared to have held up the agreement on Monday, and Eurogroup chair Juncker stressed that a successful PSI is a ‘recondition’ for the successor aid programme.
The current calculations suggest that Greek debt will come down to 120.5% of GDP in 2020, broadly in line with the IMF’s definition of ‘sustainability’ but IMF chair Lagarde said that the board would need to decide on the new package and the Fund’s own contribution in the second week of March. In return, Greece has also won debt relief through a lowering the margin on the loans in the first bailout package to 150bp, while national central banks would also transfer profits to Greece, while Eurosystem holdings would not suffer any losses. A segregated account will be created for aid flows while the troika will enjoy a ‘permanent presence’ to oversee progress on the necessary reforms. Greek PM Papademos said he was ‘happy’ with the result and targeted restructuring to be completed by April. We note that the news overnight does remove short-term uncertainty and risk may find some support, but as has been the case so often with the Eurozone throughout the crisis, implementation has proven far harder and there will be new stumbling blocks ahead, not least the prospect of elections returning a government less in favour of today’s agreements. Overnight EURUSD traded 1.3186-1.3293 and USDJPY 79.55-79.81.
EUR
After long talks extending well into Tuesday, the Eurogroup meeting finally signed off the second bailout package for Greece. The key terms include (1) a larger nominal loss on holdings by private investors (2) a lower coupon on the new bonds – weighted average is 3.65% over 30 years (3) a lower margin on bilateral loans from the first bailout package (4) profit transfers by NCBs on their investment portfolio holdings.
Greece is set to launch the bond swap tomorrow but the IIF sounded somewhat more hesitant on the deal, calling upon members to consider it ‘carefully’. The IIF noted that the neal deal was ‘broadly consistent’ with earlier agreements, and bondholders will get a ‘cash sweetener’ in receiving 15% of bonds in the form of EFSF bills.
Depending on the take-up of the PSI, the Greek government will decide on imposing retroactive collective action clauses, though wires have already reported parliament will enact relevant legislation in any case. The new bonds will be governed by English law, which will be considered a form of protection against future unilateral legislation-induced restructuring by Greece.
Greece is expected to set up a ‘segregated account’ for the aid flows, and this account will be held under Greece‘s paying agent. Greece is also expected to ‘introduce into its law a provision ensuring priority is granted to debt servicing payments’, according to Reuters. Despite initial protests against the measure, a ‘permanent presence’ in Athens will be maintained by the troika.
IMF Managing Director Lagarde said that the board will deal with Greece in the ‘second week of March’ and did not guarantee commensurate participation upfront. She said that board discussion will be subject to “Greek prior actions” and the deal should also provide Greece with the space to restore competitiveness. The lack of growth measures and focus on austerity could derail the programme if growth continues to deteriorate at its current pace.
Eurogroup chair Juncker said the new deal will ‘secure Greece‘s future in the Eurozone’ and preserve Eurozone financial stability. However he warned that a ‘successful PSI’ is a precondition for the successor programme.
EFSF CEO Regling said the Facility will laregely fund the 2nd Greek bailout and it would also raise money in ‘a cashless way’, which is consistent with prior agreements reached in July. He also said the collateral enhancement component would be EUR35bn though usage has not been specified.
The ECB settled no purchases for the SMP last week as conditions remain stable for the sovereign bond market. However, this appears heavily dependent on stable outcomes out of Greece, which is far from guaranteed.
The EU offered some promising comments on Portugal, saying that the country is delivering and fiscal implementation has been satisfactory.
JPY
Regardless of the reasons behind the BoJ’s sudden switch in attitude, the quantities involved in their potential asset purchases are significant and we expect aggressive deployment of the balance sheet to meet their inflation mandate.
Japanese Finance Minister Azumi said overnight that new agreements had not been reached on IMF funding. This is consistent with Lagarde’s position during Eurogroup discussions on Tuesday as the IMF had not yet reached agreement upon its total exposure to the new Greek deal..
GBP
Public sector finances data is due on Tuesday, while MPC member Bean will later give a speech.
AUD
RBA Minutes released overnight noted that rate levels were ‘appropriate’ given the current economy outlook. In addition, inflation would ‘provide scope for easing’ if demand dropped materially. The RBA noted that Eurozone risks had diminished but remains concerned about developments in China.
Our economists note that overall the minutes showed a somewhat ‘more conditional/less explicit easing bias’. Overall, our economists expect the RBA to hold rates, unless there’s a renewed jump in unemployment (or developments in Europe deteriorate sharply). There is still a case for a further easing of policy modestly near term to offset higher bank lending rates and the tighter monetary conditions due to a higher AUD. But we are now less convinced the RBA agrees.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD NEUTRAL Key bull trigger is at 1.3322 and next resistance is at 1.3435. Support lies at 1.3115 ahead of 1.2974.
USDJPY BULLISH Resistance is at 79.89 and 80.24, the August 2011 high. Support lies at 78.80.
GBPUSD NEUTRAL Initial resistance is at 1.5886 ahead of key high at 1.5929. Supports are at 1.5790 and 1.5645.
USDCHF BULLISH Resistance is at 0.9207 ahead of 0.9300. Key downside trigger is at 0.9066.
AUDUSD BULLISH Focus is on 1.0845, a break above which would signal scope for gains towards 1.1081. Key support lies at 1.0629.
USDCAD BEARISH Key support is at 0.9892, the Oct. 27 low, a break here would open 0.9766. Resistance is at 0.9985.
EURCHF NEUTRAL Resistance is at 1.2116 ahead of key high of 1.2133. Support lies at 1.2063 ahead of 1.2032, the month-to-date low.
EURGBP BEARISH Near-term support is at 0.8307 ahead of 0.8278. Key resistance is at 0.8422.
EURJPY BULLISH Clearance of 105.70 has opened 106.04 ahead of 106.74. Support is at 104.42
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