Small comfort in scale of S&P ratings actions as Greek PSI talks run into more trouble
The reality of S&P’s ratings action against various Eurozone sovereigns on Friday was less bad than the threats made by S&P back in early December. Yet any hopes this might engender a ‘buy the fact’ response were dashed, in part because France remains on negative ratings watch, and in part because of news that the discussions in Athens with the IIF over the Greek bond swap plans had once more broken down. IIF head Dallara sees a deadline of this week for agreement; talks are set to resume on Wednesday, but the prospect of an involuntary restructuring/default has clearly risen (disclosure: FX Strategy is on the public side of the Chinese Wall on Greek PSI discussions, to which BNP Paribas is a party). Some observers also highlighted the S&P comment accompanying its ratings action, noting that in its view, ‘a (eurozone) reform process based on a pillar of fiscal austerity alone risks becoming self-defeating’. The subtext is that without structural reforms aimed at boosting trend growth rates, ongoing fiscal dynamics in a weak/negative growth environment will risk further ratings action. The IMF’s Lipton has echoed the same debt-deflation warning this morning.
Greek bond swap worry warts to keep EURUSD under short term pressure
If comparisons with S&P’s 2011 ratings actions against the United States bear any relation to latest EZ ratings events then it is worth noting that EURUSD rallied both after S&P initially put the US on negative ratings watch, and again after the downgrade (see chart). EURUSD has traded south ever since S&P’s December 5 negative ratings watch announcement, and we suspect will remain subject to further downward pressure in the coming week. This may have less to do with the fact that the EFSF is now threatened with the loss of its AAA status (lukewarm demand for some of its recent bond issues indicates that many investors have not taken the AAA status at face value) than worries over the fate of the Greek bond swap talks. While we have some sympathy for the view that an involuntary restructuring that includes a CDS trigger could be viewed positively in so far as it restores credibility to the EZ sovereign CDS market, for real money investors CDS is a little-issued instrument. We rather suspect that failure to reach a voluntary PSI deal will be perceived as raising risk of Greek euro exit this year, and that this will weigh negatively on the euro. This is notwithstanding news Friday that net short EURUSD speculative positioning on the IMM extended the prior week’s record.
US shut for MLK Day holiday; key China data due tomorrow
Friday’s better than expected University of Michigan Consumer Sentiment Index (74.0 from 69.9) provided a palliative after Thursday’s disappointing retail sales release, but BNP economists remain on guard for signs that H2 2011 US growth momentum is waning into 2012. Thursday’s Philly Fed survey and housing starts data will both be important in this regard. But as for Monday, with US markets closed for the MLK Day holiday and very little of note globally on the data or events calendar – Draghi at the European Parliament is probably the highlight – it will be the ongoing reverberations from Friday’s S&P actions and headlines surrounding the Greek PSI talks that dominate speculative flows and sentiment. Tuesday morning in Asia will bring latest China production, investment, retail sales and, most important, Q4 GDP data. These will be important for commodity currencies in a week that also sees the BoC’s latest rate decision and MPS and in Australia, labour market data as we head towards the Feb RBA rates decision.
BNP PARIBAS