Recap 2-13-12

Main Items:

  • The Greek parliament passed the austerity measures by a 2/3rds majority, although Samaras, the (extremely self serving) New Democracy leader, said that the package needs to be renegotiated following the elections. Multiple members voted against party directives, which caused the Socialist PASOK to expel 20 MPs and New Democracy expel 21.
  • Barron’s cover story this weekend was ‘Dow 15,000’

Overseas:

  • Japanese GDP declined -0.6% in 4Q vs 00.3% exp, although the 3Q print was revised better by 20bps.
  • Swiss Producer & import Prices declined

Upcoming Data:

  • BoJ, UK CPI, GE Zew Survey, US Retail Sales

Commentary:

A Greek exit is now looking quite likely this year. This is because it is now increasing apparent to EU leaders that Greece is more or less ‘firewalled’ off from the rest of the EU financial system. As a result, EU leaders have been increasingly adamant about Greek conformity to austerity goals. For example, there has been talk of setting up an escrow account to prioritize bond holders before approving the 2nd bailout package, as well as talk that the money should be released in tranches, contingent upon Greek completion of austerity goals. This represents a shift in tone by EU leaders – which likely represents increased confidence that the rest of the EU can withstand a Greek exit as well as initial steps toward eventually withholding bailout money and forcing a Greek exit from the EU area. It is also possible that they are doing this in response to Samaras’ talk of renegotiation.

Such an event is of course very risk negative, but the actually economic ramifications may be broadly contained outside of Greece, although the uncertainty around that is of course very large. Paradoxically, this may actually be a good environment to be short volatility. The analogy here is insurance company profits around hurricane season. Historically, insurance companies were able to jack up insurance rates following hurricanes, and as a result end up making substantial profits in the following years, despite losses from hurricane damage. Similarly, the prospect of a Greek exit is likely to keep risk asset implied volatility high for an extended period, which suggests a higher expected value for providing that insurance. This is likely to remain the case until global growth expectations falter.

Separately, I found this NYT article highlighting generational rifts in Japan interesting.

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