The US markets remain closed today as the country celebrates the President’s day. Meanwhile, the negotiations between Athens and the European Finance Ministers over the second bailout package continue in Brussels today. Members of the so-called Eurogroup, made up of 17 members that use the common currency, are discussing whether Greece has done enough to qualify for another round of bailout money.
Latest measures taken by Athens may not be sufficient to bring down the country’s debt-to-GDP ratio to 120 percent by 2020 from the ruinous 160 percent now, a latest IMF/ECB/EC report accessed by Reuters suggest. The baseline scenario predicts the country’s debts to fall to 129 percent of GDP by 2020, well above the targeted and ‘sustainable’ 120 percent mandated by the EU.
Additional debt relief from official and private sectors are required, the 9-page report observed. Internal devaluation of the euro is required to restore Athens’ competitiveness, inevitably driving the county’s debt-to-GDP ratio up, the report says. Thus the Greek program will remain accident-prone with the debt level remaining at 160 percent by 2020 if the country fails to follow through structural reforms and keeps delaying implementation of tighter fiscal policies, raising questions over its sustainability.
The recapitalization needs of Greek banks have also increased than previously estimated, the report warned.
Meanwhile, the latest rounds of savage spending cuts announced by Athens were considered inadequate by some of the strongest economies in the region. Germany, Austria, Finland and the Netherlands wanted assurances that Athens will not renege over the austerity commitments after general elections are held this spring.
Fortunately for Greece, a longstanding sticking point was resolved over the weekend when negotiators for private holders of Greek debt agreed to accept massive losses to help the country tide over its debt mountain.
A report by Paris based think-tank the Organization for Economic Co-operation & Development estimated the GDP growth in the world’s leading economies to fall to just 0.1 percent in the last quarter of 2011. The UK and Germany were among a clutch of economies that shrunk in the final three months of last year. Italy witnessed the biggest fall as its economy declined by 0.7 percent while Japan contracted by 0.6 percent.
Meanwhile bullion prices witnessed an upswing on Monday though movements may remain range-bound this year as appeal of other investments increase. Gold prices surged 0.6 percent on Monday as hopes of an early Greek debt settlement started crystallizing. Gold is already up by 11 percent this year, benefitting from a rebound in the single currency and hopes of a loose monetary policy in the US.
The Chinese central bank announced lowering of bank reserve requirements today that are expected to release hundreds of billions in the banking system, thus enabling banks to make more advances and stimulate consumption.
The Euro rose 0.5 percent on Monday as European equities rallied to their highest levels in seven months. As risk appetite of investors improved due to the latest developments across Europe and Asia, oil prices climbed to their highest in more than eight months with Brent Crude breaching the $120-a-barrel barrier as Iran cut oil supplies to Britain and France. Regulatory data suggested an increase in bullish bets on oil by hedge funds also played a role in the recent rally.
In the end, any Greek deal with soothe the markets and subsequent euphoria may push the S&P 500 past its 1,370 resistance level. How much higher is anyone’s guess; however, I have to question the staying power given that Greece’s problems have not been solved but merely postponed.