It’s no surprise to see the overnight markets trading a mixed, somewhat illiquid session ahead of today’s EU summit and partial US holiday. Weeks ago, investor expectation was that Greece's problems would have been taken care. It was expected that a passage of reforms would suffice to help the release of the delayed +EUR31b in aid. However, the day has finally arrived and as the Eurocrats gather, this meeting is not expected to yield a positive Greek announcement as the IMF/EU remain poles apart on debt sustainability. Even Spain has shown no indication to seek aid. It’s now anticipated that this meeting may lack the market movement that is expected. However, as an investor we should never mention ‘never.’
The ECB apparently is willing to tighten the screws by ‘not’ providing a lifeline in the form of ‘allowing Greece to maintain a +EUR17b ceiling on T-bill issuance. This would have allowed the Greeks to manage the bill maturity this Friday, and even with a bill sale tomorrow, supposedly would leave the country short of around +EUR1.5b. It seems that the Central bank is confident that the country would tap into other reserves to cover the short fall rather than face a default.
The IMF insists that OSI is required if Greece is to remain on course to reduce its debt to GDP ratio to +120% within seven-years. The EU is opposed to this, they want to reschedule the debt and not apply haircuts. Cynics believe that the Central Bankers prefer to see the debt to GDP ratio drift to +125% by 2022 to make "their sums work.” Obviously, one of the main political arguments has revolved around the acceptance of Official Sector Involvement-accepting it in Europe seems political suicide. However, all the routes seem to lead down the OSI path.
So, what are we left with? Again, it’s a lack of clarity that Greece will be dealt with and ‘solved.’ The timetable of agenda looks confusing. It could be this month or late December. One thing that the market is assured of is a lack of market guidance. Even with the ECB and IMF unwilling to take losses and the EU opposed to OSI, it’s expected that the debt sustainability math is able to work for ‘a few more months’ at the most. By then, one will have to choose the best amongst a pair of bad options; OSI or a Greek default!
This confusing policy response by all interested parties is one reason why the Chinese sovereign wealth fund wants to stay underweight bonds and stocks in the region. Supposedly, the +USD500b of Chinese assets under management is looking towards Asia in a bid to beat a rise in ‘protectionism’ in the West. They prefer to boost their exposure to ‘rapid regional growth.’ The risk and return of European assets are determined by politics, something that does not fit the Chinese profile.
For the EUR outright, the scope is for further losses, a big figure lower (1.2607) in the coming sessions, especially now that the 1.2741 (38%) was taken out late last week. The daily momentum remains negative, adding to the overall bearish market theme. With North America partially on holiday, a lack of any momentum could end up dominating today’s session as the EU meeting is 'not' expected to provide any further clarity.
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