Asian markets rallied yesterday after EU leaders stayed up late in Brussels on Wednesday to coerce banks into taking a “voluntary” 50% haircut on Greek government debt.
That has reduced the likelihood of Greece incurring a default on its debt, for now, but many details still need to be agreed between politicians, bankers and regulators. This is a crisis that isn’t going away. That, at least, was the general view coming from research desks yesterday.
In addition to the writedown on Greek debt, aimed at bringing the country’s debt-to-GDP ratio down to 120%, the deal includes a €130 billion injection into the Greek economy by the EU and IMF, €106 billion in additional eurozone bank capital and a commitment to support senior unsecured term funding markets, and a plan to raise the leverage of European Financial Stability Facility (EFSF) by four to five times.
China, which is a significant holder of European debt, gave its backing to the deal yesterday, saying that it is willing to “make joint efforts” to promote global economic growth, including cooperation with the EU over investment, trade and finance, according to a foreign ministry press briefing.
State news agency Xinhua was also supportive, but saved room for its customary criticism. “This summit shows that the countries of the EU, especially its main economies, have the resolve to overcome difficulties and create an effective 'rescue umbrella' for the euro,” it said yesterday, before adding: “At the same time, it shows the systemic and structural problems the EU has when it comes to dealing with the crisis that demand improvement.”
For once, Xinhua was mild compared to what strategists and traders were saying. “The current eurozone talks will not solve this crisis and it will get worse — much worse,” said Albert Edwards, a famously gloomy strategist at Societe Generale, in a note sent out yesterday. “The increasingly frenzied attempts of eurozone governments to persuade financial markets that they can draw a line under this crisis will ultimately fail — even if this week’s measures bring some short-term relief. I have minimal confidence that governments can turn this around within the confines of the eurozone project.”
It is no longer just the perma-bears who are talking in such bleak terms. Paul Robinson, head of global FX research at Barclays Capital, was recommending buying the euro in the wake of the last last-ditch Greek accord in July. But he is not so confident this time.
“Even if confidence increases as a result of the agreements already announced, and the information that we will presumably get over the next few weeks, euro area growth looks likely to be extremely weak,” he wrote in a note to clients yesterday. “The weaker it is, the harder it will be to sort the problems out, and the looser ECB [European Central Bank] policy is likely to be.”
He recommends getting out of euros and into just about anything else; US dollars for the cautious, Asian currencies as a more bullish trade. Forex markets did just that yesterday, helping riskier Asian currencies to outperform the euro despite the supposedly good news emanating from Brussels — the Bloomberg-J.P. Morgan Asia Dollar Index, which comprises Asia ex-Japan’s 10 most-liquid currencies, rose 0.5% to a six-week high.
Meanwhile, the strength in other assets was described as a relief rally, driven by investors who had been preparing for a worse outcome. Asian investment-grade credits tightened by 15bp to 184bp, according to Nomura, while stock markets across the region enjoyed steady gains throughout the day. The Hang Seng index in Hong Kong closed up 3.3%, while Singapore’s Straits Times index finished 2.8% higher.
Relief will give way to realism in the end, according to Edwards at SocGen, as the crisis in Europe worsens. “The ECB will have to choose between its two most cherished ideals: the euro or its hard money principles,” he said. “Notwithstanding some legal issues to get around and Germany being outvoted, we think the impending threat of a euro break-up will force the ECB to begin printing money, very reluctantly joining in the global QE party.”
That is not a solution, said Edwards, but it is a necessary evil at this point if the euro is to survive. “The question for me is not if the ECB will print, but rather will Germany leave the eurozone after being over-ruled on the ECB (again!) and in the face of such monetary debauchery?”