The focus overnight was on the outcome of the EU Summit in Brussels. For the most part, markets initially greeted a statement of support for Greece issued by EU Heads of Government, even though the statement was short on detail regarding what form that support would take. The S&P 500 was up about 1% and the commodity complex is stronger across the board. A larger than expected decline in US initial jobless claims, taking the level down toward where it was around the turn of the year, also helped to lift sentiment. UK equities closed stronger but the major EU bourses closed uniformly weaker and the Euro has lost ground against the majors. Whilst some commentaries have attributed this to a lack of clarity in the EU’s statement, I’m inclined to think that this price action reflects investor contemplation of the implications should financial support of Greece actually be required. Greek bonds have rallied across the curve.
Today the market is having second thoughts about the EU’s ham fisted handling of the Greek situation and casting a worry eye eastwards as the PBOC hiked Chinese banks reserve requirements 0.5% in another small turn of the screw. Pan Eurozone GDP numbers (0.1% QoQ) also disappointed adding to the negative tone. There is notable weakness amongst euro car manufacturers today with Renault (OTC:RNSDF) and Peugeot (OTCPK:PEUGF) off 4-6%.
It’s All Greek To Me
The European Council yesterday provided an important political signal that the EU is ready to help members refinance their debt, subject to strict and as yet unspecified conditions. The details are to be worked out by EU finance ministers. Merkel compared the decision to her deposit insurance guarantee in 2008: not legally binding, but the political commitment is sufficiently strong and clear. The summit also decided to include the European Commission, the ECB as well as the IMF in the hands-on supervision of Greece’s deficit reduction efforts. But Greece shall not take IMF money. It is no doubt a historic agreement because it changes a fundamental principle on which EMU was built. But there were some divisions. Charlemagne of the Economist cites “a depressed looking diplomat” as saying the result was “catastrophic.” The Guardian quotes a senior diplomat as saying that “Germany is stepping totally on the brakes on financial assistance.”
So, pushing the Armageddon Clock back a little further from midnight, is my take on events! I’m reminded of that classic line from Yes Prime Minister, “yes we’re giving them every assistance, short of actual help”!
German Reaction Is Mixed
Holger Stelzner, the chief business editorialist of Frankfurter Allgemeine, stalwart of conservative Germany, interpreted the outcome of the summit as a victory for Germany and a defeat for the European Commission. He said the Commission had openly advocated a break of the law and that Merkel had withstood this pressure, agreeing only to unspecified solidarity with Greece to placate the capital markets. The decision to involve both the ECB and the IMF in determining whether Greece is making a sufficient consolidation effort amounted to a huge setback for the Commission. He concluded that the decision was sufficient to end the immediate pressure in the CDS markets, but that the blackmail about a spillover to the banking system would return at some point. (It is quite an extraordinary comment. Those whom the Gods wish to destroy the first make mad, or in this case paranoid).
But Mark Schieritz, writing in Die Zeit, welcomes the agreement as historic. The EU has accepted a new political dimension to the euro that was previous absent. He acknowledges that the decision amounts to a breach of the law, but one that was necessary from an economic point of view to prevent the eurozone from becoming subject to speculative attacks. The previous regime was based on the false premise that the financial markets would penalize high-deficit countries, but the opposite happened. By lending to them, the markets created bubbles and instability. A monetary union without political union has always been a feeble construct, but the decision gives the euro area the political support it needs to survive.
Financial Times Deutschland calls the decision a dangerous precedent for two reasons. The first is that it takes the pressure off Greece to reduce the debt. The second is that it will only placate the market participants in the very short term, as they harbor the illusion that the solvency of the weaker member states is thus assured. The worst case scenario is this: Spain, Italy and Portugal interpret the agreement as an unconditional bailout, while the markets do not agree, and resume speculation.
FT Deutschland has another very interesting snippet. Hypo Real Estate (OTC:HREHY), the German mortgage bank that had to be bailed out by the federal government, and which is now state-owned, has an exposure of €4 billion to Greek debt. If this exposure had to be written off, the bank, and thus the government, would need to strengthen the bank’s capital base by €100 billion. In other words, bailing out Greece is a really cheap alternative. Frankfurter Allgemeine has some useful statistics. The total debt by Greece, Spain and Portugal owed to foreign European banks is about €800 billion – with a particularly high proportion of French and German banks. The Netherlands has the biggest relative exposure of around €100 billion.
And The Euro Slips On The Greece
To put it euphemistically, investors will head into the weekend nursing a profound sense of disappointment over an unexpected lack of concrete proposals to secure Greece’s financial future. Indeed, the ostensible reluctance of the EUR’s guardians to offer more than rhetorical assurances means that the uncertainty that has helped to drive the single currency sharply lower against a wide range of currencies, is destined to linger into next week at the very least. However, the risks are that confidence in the single currency could continue to be undermined for a considerably longer period.
After all, the lack of an appropriate apparatus with which to deal with the Eurozone’s first major crisis has been starkly revealed, which means that, at the very least, longer-term investors will surely wish to see some evidence that a more credible alternative to the long-forgotten fiscal deficit criteria will soon be formulated. Of course, the one silver lining in this murky cloud is that the region’s exporters are now better placed to compete with their international peers, which will certainly come as some relief to the German government given that external trade was the sole barrier to the country’s renewed downturn in Q4 after two consecutive quarters of growth. However, given that the EUR is still some 15% above its long-term average and that competition may soon intensify as central banks and finance ministries globally look to recoup some stimulus, it remains to be seen just how long this window of opportunity remains open.
China Is Tightening Again
After the surprise 0.5% hike in bank’s “reserve requirements” by the People’s Bank of China ahead of the New Year’s holiday (it’s the year of the Tiger) Reuters reports today that China Construction Bank said it plans this year to raise the down payment requirement and interest rates for clients buying their second or subsequent homes. Such a move would bring the country’s biggest property lender in line with other major banks that are starting to implement tougher lending requirements for people purchasing homes for speculative purposes rather than for their own use. That also serves as further evidence of how a government clampdown on lending is rippling through the economy, potentially cooling a property sector that has been marked by explosive price rises in some cities. ”We must continue to treat financial services for housing as a strategic business, but must also be on guard against the risk of relatively big fluctuations in the real estate market,” CCB said in a summary of the conclusions of its annual work meeting. CCB did not give details on when it would implement such a change, or by how much the down payments or mortgage lending rates would go up, but said it would give preference to clients buying their first homes for their own use. Most banks require a 20% down payment for people buying their first home, and 40% for those buying subsequent homes. In response to regulators’ determination to prevent lending from flowing into property or stock speculation, Bank of China last week said it would roll back mortgage discounts.
- BT (NYSE:BT) is hoping a court ruling about its pension scheme could enable it to reduce large top-up payments into the UK’s biggest defined benefit retirement fund. Shares in the UK telecoms company dropped almost 9% on Thursday after it disclosed a £9 billion deficit in its pension scheme and said regulators had “substantial concerns” about an agreement with the retirement fund’s trustees, requiring annual top-up payments of at least £500 million for 17 years. The pension issues overshadowed BT’s Q3 results for 2009-10, which showed a big turnaround after a pre-tax loss in 2008-09.
- Motorola (MOT) will split in two next year, combining the mobile-phone and set-top box divisions into one publicly traded company and the enterprise mobility and networks units into a second business. Sanjay Jha, head of the handset business, becomes chief executive officer of the mobile phone and set-top box company, effective immediately. Greg Brown, co-CEO of Motorola, will lead the other business.
- Qatari Investment Authority is poised to sell its 26% stake in Sainsbury (OTCQX:JSAIY) with the likely buyer being a US private equity (PE) firm. Whilst PE is making some sort of comeback, a £10 billion acquisition is well, well beyond them. The £4.8 billion of pension liabilities and £900 million pension deficit would frighten any rational non investment grade buyer off (the pension trustees/regulator would discount at a more prudent rate thereby inflating liabilities and the deficit further), the long mooted property arbitrage – buy the company sell the property – is not achievable these days, and would be operational suicide (thereby undermining the property sale).
- US sales of Nintendo’s (OTCPK:NTDOY) Wii video-game console fell 31% in January, pulling industry sales down 13% for the month. Purchases of consoles, games and accessories fell to $1.17 billion. Sales of Sony’s (NYSE:SNE) PlayStation 3 increased 36% and Microsoft’s (NASDAQ:MSFT) Xbox 360 rose 7.7%.
- ThyssenKrupp (OTCPK:TYEKF), Germany’s largest steelmaker, reported first quarter adjusted earnings before tax of €237 million. Analysts surveyed by Bloomberg had expected €111.6 million.
- Private equity was dealt a heavy blow when Blackstone Group (NYSE:BX) postponed plans to float Merlin Entertainments, the operator of Madame Tussauds, underlining the severe difficulties facing buyout houses that want to tap the UK’s public markets. Merlin, which also owns Alton Towers, was the second initial public offering postponed by the buyout group in 24 hours, after it pulled the much more advanced flotation of Travelport, the American travel business.
And Finally… H-E-D-G-E