Greek debt concerns intensified over the past month, leaving the euro with a heightened risk premium. While an unsustainable Greek fiscal policy should not be a major concern for the eurozone as a whole (Greece only constitutes some 2-3% of total eurozone GDP) the situation has escalated to a point where it has become at least partly systemic. Market focus has turned to the other PIIGS countries (Portugal, Ireland, Italy, Greece and Spain), which have seen government bond spreads widen alongside already elevated Greek spreads. The result has been a broad-based euro sell-off leaving the single currency with a risk premium in excess of 4% (as estimated by our short-term financial model). EUR/USD has temporarily traded below 1.36 and the euro ended the week lower against all G10 currencies, but the Japanese yen (see the table to the right).
[I]Sverre Holbek & Kasper Kirkegaard, Senior Analyst’s, Danske Bank[/I]
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Economics: The Return of Debtflation?[/B]
[I]Spyros Andreopoulos, Global Economics Team, Morgan Stanley[/I]
US public debt as a share of GDP is now higher than at any other time in history except after World War 2 - and rising: our US colleagues expect public debt to GDP to increase to 87% by 2020 (see US Budget Forecast Update: The Song Remains the Same, January 29). How policymakers will deal with this fact will likely be one of the main drivers across markets going forward. So what are the implications of high public sector debt for fiscal sustainability and inflation? To answer this question, we look at how the US economy escaped high debt following World War 2. We then quantify the inflation risks inherent in today’s US fiscal position by asking what would happen if policymakers were to deal with the current debt overhang in the same way.
Full Story[B]
FX: Intentions Are Good; Details Better[/B]
[I]
Sverre Holbek & Kasper Kirkegaard, Senior Analyst’s, Danske Bank[/I]
Greek debt concerns intensified over the past month, leaving the euro with a heightened risk premium. While an unsustainable Greek fiscal policy should not be a major concern for the eurozone as a whole (Greece only constitutes some 2-3% of total eurozone GDP) the situation has escalated to a point where it has become at least partly systemic. Market focus has turned to the other PIIGS countries (Portugal, Ireland, Italy, Greece and Spain), which have seen government bond spreads widen alongside already elevated Greek spreads. The result has been a broad-based euro sell-off leaving the single currency with a risk premium in excess of 4% (as estimated by our short-term financial model). EUR/USD has temporarily traded below 1.36 and the euro ended the week lower against all G10 currencies, but the Japanese yen (see the table to the right).
[B]
Euro-zone Economy Barely Growing at Present[/B]
[I]John E. Silvia, Ph.D. Chief Economist, Wachovia[/I]
Data released this morning showed that real GDP in the Euro-zone edged up 0.1 percent (0.4 percent at an annualized rate) in the fourth quarter. Over the past two quarters, real GDP has grown only 0.5 percent, hardly a dent in the 5 percent peak-to-trough decline it recorded during the recession. Moreover, the fourth quarter ended on a weak note as industrial production fell 1.7 percent in December, more than erasing the 1.4 percent increase registered in November.
[B]
United States - Exit Strategy In Place, Timing Still Unclear
[/B]
[I]Dina Cover, Senior Economist, TD Bank Financial Group[/I]
Week after week, we continue to see evidence that the recovery in the U.S. economy is underway. Indeed, this morning’s advanced retail sales report showed that consumer
appetite for spending is on the mend, rising 0.5% in January. Compared to year-ago levels, sales were up 4.7% on the month. Although the rebound has not been as great as in some other areas, consumer spending should remain supportive for growth going forward as other sectors of the economy, including the labor market, begin to gain traction.
[B]Recovery in UK Exports Holds Key to Future Growth[/B]
[I]Trevor Williams, Chief Economist at Lloyds TSB Corporate Markets[/I]
The sharp fall in sterling over the past three years and the nascent signs of recovery in the global economy provide an opportunity for growth that the UK cannot afford to miss. With the household and corporate sectors weighed down by high levels of indebtedness, and the public sector about to embark on a substantial fiscal squeeze, the prospect of a meaningful recovery in domestic demand over the coming years is, we believe, limited. Instead, to achieve a reasonably strong and sustained rate of growth means it is not only desirable, but essential, that the UK rebalances away from debtdriven domestic demand towards net exports. The competitive boost provided by the fall in sterling, and the steady recovery in global demand, provide this opportunity.
[B]
Other Pre-screened Independent Contributors[/B]
[I]J-Chart[/I]
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[I][B]Compiled By: Michael Wright, Daily FX Research
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