Investors agreed to a deal on Greek debt which allows the next bailout to go ahead. The deal is harsh; private investors swap existing bonds, for new ones worth less than 50% of the originals. But more importantly it means that Greece will avoid defaulting on bonds due for repayment next week. With the Greek problem out of the way for now, the euro ought to be able to look forward to a period of contemplative calm. The crisis is not over but, for the moment, it is not the foremost of investors’ considerations.
Elsewhere in the Eurozone more trouble brews. Italy is in recession. Data today confirmed Italy’s economy shrank 0.7 percent in the fourth quarter of 2011, following a 0.2 percent decline in gross domestic product in the third quarter. Despite a €33 billion austerity plan in December, Italy’s Prime Minister Mario Monti now needs to work on reforms to boost growth. Germany’s economy contracted by 0.2 percent in the fourth quarter, but analysts are expecting Europe’s largest economy get back on track this year.
Although at the time Sterling rose higher against the euro any gains were short lived due to an unexpected -0.4% decline for broader industrial production (including mining and energy). The producer price index showed manufacturers being squeezed again, as their costs rose by an annual 7.3% while factory gate prices were up by only 4.1%. The Monetary Policy Committee (MPC) voted to keep the UK policy at 0.5% in March, making it three whole years that the rate hasn’t moved. A rate increase is not expected until quarter four of 2014.
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