Recap 5-14-12

Main Items:

· Jean-Claude Juncker, who leads the group of eurozone finance ministers, said Europe should reconsider its timetable for financial aid; Juncker says he sees no problem if Greece gets one more year to implement budget consolidation measures. Meanwhile, Bundesbank head Weidmann said Greece could be eligible for more financial aid if it sticks to its promises

· China lowered the reserve requirement ratio (RRR) on Saturday. This has been anticipated for several weeks, so the action comes as more of a relief at this point. They cut rates by 50bps, effective May 18th. JPMP estimates it will release about 400bn yuan from the banking system.

· Fitch warned that it is likely to downgrade China in the next 12-18 months as the central government takes over bad debt from banks and local governments.

· Analysts estimated that Greece has about 2 billion euros in cash left, which should allow the government to function until late July or August. – NYT

· A recent Greek poll showed that 78% supported doing whatever possible for Greece to stay in the Euro, and 72% want concessions from the Troika. Syrzia’s support has increased to 20.5% from 18% previously.


  • Head of the BOJ Shirakawa warned against recklessly buying JGBs, stating that aggressive expansion of the program risks disrupting financial markets. This is consistent with recent statements from the government signaling a pause in policy.
  • Japan’s PM said the country could take unilateral action to stem the yen’s rally

Upcoming Data:

  • Mon: Swiss Producer & Import Prices, RBA Minutes,
  • Tues: French CPI, German 1Q GDP, French Payrolls, German Zew, US CPI, Empire Manufacturing, Retail Sales, NAHB Housing Market Index
  • Wed: UK Claimant Count Rate, EU CPI, Swiss ZEW survey, EU Trade Balance, BoE Inflation Report


China’s bank reserve requirement cut appears to be widely interpreted as a measure to prevent monetary tightening as a result of portfolio outflows rather than a new round of easing. This appears to be broadly accurate given that M2 money growth remains near target, and policy easing measures have been infrequent despite the weak data domestically and abroad. This suggests weakness in commodity prices can continue, especially for copper, which has so far lagged weakness in crude oil.

With respect to Greece, several commentators have questioned whether Greek voters understand that continued EMU membership is contingent upon further austerity measures. In this respect, Greek voters and politicians may be more crafty than they initial appear. Clearly, additional austerity measures are contingent upon a government with popular support. To the extent that a government can not be formed, austerity measures can be credibly delayed. The troika will almost certainly not cease funding as a democratic election process is taking place. As a result, it behooves the Greeks to delay forming a government at this juncture.

The bigger concern, of course, is whether the new Greek government is willing to continue austerity measures at a pace acceptable to the troika. As others have noted, both sides would prefer that Greece does not default and by extension stay in the Eurozone. (whether they should or not is of course a separate matter) This suggests a good chance of an eventual agreement. Unfortunately, Greece won’t see a new government until mid June at the earliest. This means that until then, market participants will remain worried about the implications of a Greek exit. This suggests that it could be difficult to get a substantial pro risk move until then.