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WEEK IN FOCUS: 05/09/11 - 09/09/11



This may be another crucial week for the Eurozone as an ongoing debt and contagion fear in the region fail to dissipate. Last week the Troika Commission cut short its technical visit to Greece, which prompted concerns about the willingness by the Greek government to implement austerity measures. The Commission has provided 10-days to the Greek authorities before it resumes its visit, and when it does markets will nervously watch the outcome of its inspection. Meanwhile, finance ministers of Finland, Netherlands and Germany are due to meet in Berlin on Tuesday in an effort to resolve the collateral issue associated with the Greek bailout. However, in an interview to Helsingin Sanomat during the weekend, the Finnish finance minister said that she does not expect the dispute to be resolved on Tuesday. In other news, Greece is working to implement a voluntary swap of government bonds with longer maturity paper, aiming to set out the terms of the transactions in early September. However, Greece warned that it may call off the debt swap if fewer than 90% of private investors sign up for the deal. Market participants will keep a close eye on further details on the Greek debt swap this week. In other news, Greek central bank’s governor confirmed during the weekend that the country’s central bank provided emergency lending to Greek banks and is ready to facilitate further liquidity if required. The need for this measure reflects that Greek banks are unable to borrow from the ECB directly as they may not have suitable collateral that can be accepted by the ECB. The latest confirmation may further weigh on investors’ sentiment and strengthens the case for the activation of credit lines from the EFSF to these banks.


The topic of Eurobonds has gained traction in the past few weeks, with countries such as Italy strongly in favour. The idea received a setback during the weekend after S&P said that a joint bond issue by Eurozone countries would get the weakest member's rating if the issue was jointly guaranteed. This would result in a CC rated bond, which is currently the sovereign rating of Greece given by S&P, and is unlikely to appeal to investors. To circumvent the issue it needs to be guaranteed by either a AAA-rated Eurozone country or a AAA-rated fund in order to retain a top-notch rating, which is likely to result in further controversy. Elsewhere, the German state of Mecklenburg-Vorpommern had its regional election on Sunday in which German Chancellor Merkel’s ruling coalition suffered a heavy defeat. This is likely to weaken further Merkel’s position as a Chancellor and promote fears of political uncertainty in the near future. Also, the US FHFA sued 17 financial institutions last Friday, for allegedly misrepresenting material information when selling mortgage-backed securities. Deutsche Bank, Societe Generale and Credit Suisse are among the heavy-weights, which may result in further weakness in financials and may potentially lead to a drop in interbank lending. Overall, this week may see negative sentiment dominating the European market, which is likely to weigh on EUR and equities, whereas Bunds may receive support with a general widening of the Eurozone 10-year government bond yield spreads with respect to Bunds.


In terms of the economic calendar, the ECB is due to announce its benchmark interest rate on Thursday, where the consensus remains for a no change at 1.50%.The focus will shift to Trichet’s press-conference following the rate-decision, where markets may get a glimpse of the ECB’s future policy direction. EUR may come under pressure if Trichet signals no interest-rate hikes in the next few months; however the currency may receive support if the central banks opts to continue its liquidity facilities. Services PMI data from the Eurozone countries are also due this week, and following a lack-luster manufacturing PMI figures last week, these releases will be closely watched. The Bank of England is also due to announce its interest rate and asset purchase target on Thursday, where the consensus remains for a no change at 0.50% and GBP 200bln respectively. In other important events, on Wednesday, Germany’s Federal Constitutional court will deliver its ruling on suits claiming Berlin is breaking German law and European treaties by contributing to the Eurozone bailout. Legal experts think the court is highly unlikely to block the contributions altogether, but it is expected to give the Parliament a bigger say in approving them. If this be the case, Berlin’s response to the debt crisis is likely to become slower and complicated. Elsewhere, in the US, President Obama will address a joint session of Congress on Thursday to lay out plans to create jobs, boost economic growth and lower the deficit. Following a dismal Nonfarm Payrolls report last Friday, markets will focus on Obama’s speech for concrete measures towards supporting a faltering US economy, together with government’s expectations from the Fed to rejuvenate the economy. In terms of fixed income, approximately EUR 13bn worth of supply is due from the Eurozone this week, which includes Greek T-Bills and Austrian bonds on Tuesday, together with Portuguese T-Bills on Wednesday. Once again markets will watch closely investors’ appetite for the Eurozone paper despite the ECB’s active involvement via its SMP bond-buying facility.