I am afraid of writing anything more on the Greek situation, since, as you have surely noticed, all the shouting renders any predictive analysis nearly impossible, with each side falling back on their own ideological positions.
Anything is possible once European construction become a hot domestic political issue.
Check out the Bloomberg dispatch, sent out earlier this morning, to those who are in constant contact with me. It is highly revealing of the prevailing confusion:
Here is the morning's riddle: how can we reconcile these three proposals?
· “The euro area should take full responsibility for Greece if it needs help. We at the ECB think this is an important point, that the euro region assumes its full responsibility' in aiding Greece, should the country require it.”
· “There shouldn't be any subsidy element, no concessionary element in a potential loan to Greece, rejecting Papandreou's call for help in reducing borrowing costs, saying 'a level of spreads' is not part of the precondition for any loan.”
· “The idea that states could be thrown out of the EMU seems not to be in accordance with the ideas of the founding fathers of monetary union. I believe the idea of kicking countries out of the EMU is absurd.”
These words come straight from the lips of Mr T himself, on German channel ZDF.
He went on to explain that Europe must help Greece, if need be, BUT that it must not loan it money and that the fact that the country is paying a yield of 6.30% on its 10-year bonds is NOT an indicator of need for help. HOWEVER, it is ABSURD that it leave the eurozone of its own volition or be forced out!
Given such incoherency, I am surprised that the euro continues to trade above $1.30...
As we await more news on this front, and there is plenty by the hour, I would like to share with you some comments by central bank officials, which give an overview of the probable direction (stability) of monetary policy at the Fed, SNB and BoJ.
Chicago Fed President Charles Evans in Shanghai
The Fed will keep accommodative policies until employment is coming down or rising inflation pressures emerge.
There will likely be unacceptable unemployment rate levels in the U.S. for a period of time.
For me, ‘extended period’ is a conditional statement. But I would expect it means that it will hold for the next three or four meetings -- that’s about six months.
Frankly, I think conditions will continue towards substantial accommodation, certainly through the end of this year. I wouldn’t be surprised if that’s carried into 2011.
Our policy stance will continue to be accommodative even after the size of our balance sheet begins to decline, even after the short-term interest rates begin to rise.
Atlanta Fed President Dennis P. Lockhart: “The U.S. Economy and Emerging Risks”
By contrast, the second scenario is a relatively modest recovery, with slow reduction of unemployment. Various headwinds hold back GDP growth. They include (1) a weak banking sector that is slow to expand credit in part because of weak loan demand and commercial real estate problems, (2) subdued consumer activity reflecting a more frugal consumer mindset as well as restricted consumer credit, and (3) extremely cautious business investment in both inventory and capital goods.
Most forecasters see a future resembling the second narrative. My forecast—and that of my staff at the Atlanta Fed—is close to the second narrative. The recovery under way seems at this juncture to betentative and fragile.
I see three ways the Greek crisis might directly affect the U.S. economy. First, adjustment across the EU to fiscal problems could dampen euro area growth and constrain U.S. exports to that region. The European Union as a whole is this nation's largest export market. Second, related to this, safe haven currency flows from the euro into dollar assets could cause appreciation of the dollar and hurt U.S. export competitiveness. Third is the possibility that the Greek fiscal crisis could lead to a broad shock to financial markets. This could play out in the banking system or in the form of a general retreat from sovereign debt.
At this point, these possibilities are not factored into my outlook in any way. But developments around the Greek situation deserve rapt attention.
BoJ Council minutes of 17-18 February:
Many members referred to the fact that the year-on-year decline in the CPI for all items less energy and food accelerated in December 2009
A few of these members, noting an increase in the number of items for which prices had declines, said it was possible that price declines were becoming widespread.
A few members said that recent movements in the CPI were slightly weaker than expected in the interim assessment of January 2010. As factors behind this, one member cited the possibility that the impact of the output gap's narrowing on prices was smaller than expected and that medium- to long-term inflation expectations had declined as a result of increased media report about deflation.
Mr Hildebrand of the Swiss National Bank:
While "the worst lies behind us," remaining downside risks are nonetheless keeping policy makers alert.
In the event of fresh shocks, deflation dangers cannot be entirely excluded.
One such shock for instance would be an excessive appreciation of the Swiss franc vis-à-vis the euro. The national bank will not allow deflation risks to materialize in Switzerland because of such an appreciation. This is why we will act decisively to counter an excessive appreciation of the franc. (à The Ultimate QE!)
The analysis of the dynamics and mechanisms of credit markets, the monetary aggregates and the financial system must generally be deepened. In addition, central banks must consider whether they should intervene when strong credit growth and easy credit condition raise risks in the financial system. Developments of credit aggregates could offer important clues in this respect. (àMinsky conversion!)
Have a good day.
Asset allocation biases:
- Interest rates: The Greek torment is bolster the Schatz, which is hurting the bets on this part of the yield curve. But we continue to consider that history is on the side of flattening, and our choices in maturities and structures, below, brings an added measure of protection.
- Equities: Stock markets remain generally murky, which, on the other hand, can be seen in the very low implied volatility levels of Eurostoxx options. We are beginning to see some opportunist switches (long or short) vs long option positions (calls or puts).
Disclosure: : Long 20 years OAT and 30 years BTP Zero Coupons, EDF Corp 5 Years 4.5%, Grece 2 Y and 10 Y bonds