Greek Bailout Deal Fails to Bring Fireworks - What Gives?

2012-02-21 07:25:00 Ilya Spivak, Head Strategist, APAC

Talking Points

Eurozone Finance Ministers Announce Deal on Second Greek Bailout
Australian Dollar Sold as RBA Minutes Restate Rate Cut Possibilities
US Dollar Likely to Rise as Spotlight Shifts to Global Slowdown Fears

Overnight news flow was dominated by the emergence of an agreement on the second Greek bailout package following an intense Eurozone finance ministers’ summit in Brussels. As expected, policymakers pledged to offer Athens €130 billion in funding through 2014 and outlined an accord on private-sector involvement in reducing Greece’s debt burden that would avoid outright default and aims to bring the country’s debt-to-GDP ratio to the threshold of sustainability at 120.5 percent by 2020.

While the Euro jumped higher in the immediate aftermath of the announcement, bullish momentum quickly ran dry and the single currency is set to enter European trade virtually flat against the US Dollar. Meanwhile, the sentiment-sensitive Australian and New Zealand Dollar slumped along with a drop in Asian share prices. The Aussie underperformed after minutes from February’s RBA policy meeting showed the central bank saw scope for additional rate cuts and reckoned that a mild inflation outlook gives scope for future easing if demand growth proves weaker than expected.

At first glance, this seems counterintuitive considering the degree to which Greek bailout negotiations preoccupied risk appetite trends over recent weeks. Indeed, one might expect that the final emergence of a deal would boost risk-taking and the Euro alike. However, as we argued two weeks ago and on numerous occasions since, a Greek default has not presented a significant danger to global markets since December. At that time, the ECB pumped enough cash into EU banks through its 3-year LTRO facility to effectively prevent a credit squeeze. This meant that worries about the looming March 20 deadline when Greece would run out of cash to pay for maturing debt obligations were reflexive rather than rational.

With that in mind, we suggested that a bailout announcement would not generate a lasting boost to risk appetite, with the spotlight quickly shifting to the dismal outlook for global economic growth. Economists’ median world GDP expectations for 2012 have been sinking precipitously since early August, with global output expected to a meager 2.13 percent to yield the weakest performance since the end of the Great Recession three years ago. Against this backdrop, renewed risk aversion appears to be the path of least resistance. Needless to say such an outcome bodes well for haven currencies, with the US Dollar expected to fare particularly well considering it is the only major safety-linked unit in the FX space (the others being the Japanese Yen and the Swiss Franc) unburdened by intervention from domestic authorities.

Asia Session: What Happened

GMT	CCY	EVENT	ACT	EXP	PREV
0:30	AUD	Reserve Bank Board February Minutes	-	-	-
2:00	NZD	RBNZ 2-Year Inflation Expectation (1Q)	2.5%	-	2.8%
4:30	JPY	All Industry Activity Index (MoM) (DEC)	1.3%	1.5%	-1.0% (R+)

Euro Session: What to Expect

GMT	CCY	EVENT	EXP	PREV	IMPACT
7:00	CHF	Trade Balance (CHF) (JAN)	2.5B	2.01B	Low
7:00	CHF	Exports (MoM) (JAN)	-	6.1%	Low
7:00	CHF	Imports (MoM) (JAN)	-	7.6%	Low
8:00	CHF	Money Supply M3 (YoY) (JAN)	-	7.7%	Low
9:30	GBP	Public Finances (PSNCR) (£) (JAN)	-24.7B	22.9B	Low
9:30	GBP	Public Sector Net Borrowing (£) (JAN)	-9.1B	10.8B	Low
9:30	GBP	PSNB ex Interventions (£) (JAN)	-6.3B	13.7B	Low