Ministers Reject Tentative Bond Plan
Eurozone finance ministers concluded their regular monthly meeting overnight. Most notably, the ministers rejected the tentative deal already struck provisionally between Greece and the IIF on the terms of the upcoming bond swap. Eurogroup Chair Juncker said the proposed coupon of 4% on the new bonds was too high and asked Greece to return to the negotiating table to reach a “common understanding” on this with the IIF over the coming days. Although this is a setback, the news itself is not a major surprise given the Financial Times had already run the story on Friday night citing unnamed sources. There is no suggestion at this stage that the debt swap talks are about to collapse although, as a minimum, several days of tough bargaining lie ahead so headline risk will remain elevated. Dow Jones has already reported that Greece aims to make a formal offer on the bond swap by Feb. 13, and with expectations of a positive outcome already so high, any suggestion of irreconcilable differences between both camps could challenge the euro’s recent recovery. Indeed the euro fell slightly overnight in Asia in thin holiday trade allowing EURUSD to slip back below 1.30. The BoJ kept policy entirely unchanged – the policy rate stays in the 0-0.1% range, and no adjustment was made to the bank’s suite of unconventional policy programs. Today, dataflow out of Europe will start to pick up. German and pan-Eurozone PMI numbers are key ahead of the ECB’s upcoming macro assessments. Later on, attention will likely shift towards the FOMC decision due on Wednesday given investor interest in the new rate forecasts that are due to be released for the first time. Fed Chair Bernanke’s post-meeting press conference could also provide a surprise or two and we expect journalists to quiz him extensively on the possibility of further QE, perhaps even in combination with inflation targeting. We continue to view this rebound in risk appetite as a temporary respite in the middle of what is likely to be a prolonged Eurozone sovereign debt crisis. EURUSD traded 1.2988-1.3037 and USDJPY 76.96-77.04.
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UBS Investment Bank