Greece on the brink (but of what?)

The sad and rather inevitable scenes from Athens yesterday have only served to emphasise the problem with the notion of further austerity in Greece. The latest round of cuts were passed by politicians in a vote yesterday evening, but the enforcement and implementation of these measures are where the pain lies. In the meantime what it has done is ensure that one further box has been ticked to allow the EU/ECB/IMF troika complete the next payment of aid money to Greece and prevent a calamitous default. A default is still likely, indeed probable, however.

The focus now switches back to Brussels and the labyrinthine of discussions surrounding the haircuts that will be imposed on private sector holders of Greek debt. The EU this week must also approve the measures voted on by the Greeks and will be looking for an explanation as to how the EUR300m hole in the budget will be filled if it is not to come from public sector pensions.

Despite the scenes of unrest Asian markets are higher this morning following slips on Friday. GBPEUR is once again testing the lows of the range it’s sat in over through the past month. The risk is definitely that the euro strength continues if the policy timetable of securing the possibility of default is adhered to in the coming weeks. We would likely need some poor data from the UK as a catalyst as well, UK CPI coming in weaker than expected tomorrow for example. This may be unlikely given Friday’s surprise jump in PPI.

Another major economy saw its Q4 GDP number crash into the negative overnight as Japan reported a shrinkage of 0.6%. While there has been one-off factors (floods in Thailand affecting the supply chain) the strength of the yen has hammered the export community and, as we highlighted in last week’s weekly update, the pressure to intervene to weaken the currency must have reached fever pitch. The longer term picture is ok and a lot of the drop can be attributed to a fall in government spending following the huge expansion following the tsunami 11 months ago. The Japanese economy is expected to grow by around 1.7% in 2012.

The most important market news today will be an Italian bond auction at 10am. This follows S&P’s decision (remember them?) to downgrade 34 Italian banks on Friday evening citing funding issues, a strange decision 2 weeks before the next leg of the LTRO.

Indicative Rates Sell Buy
GBPEUR 1.1900 1.1929
GBPUSD 1.5806 1.5830
EURUSD 1.3263 1.3286
GBPJPY 122.75 123.01
GBPAUD 1.4678 1.4704
GBPNZD 1.8884 1.8911
GBPCAD 1.5769 1.5799
NZDUSD 0.8360 0.8380
GBPZAR 12.08 12.13
USDZAR 7.6415 7.6734
GBPPLN 4.9768 5.0053
EURJPY 102.96 103.26

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