Another week comes and goes with no final deal in place to secure Greece’s next round of bailout funds. EU officials’ comments continue to suggest that a deal is nearly complete, with the final sticking point being the amount of public sector participation in debt losses, meaning how much of a loss national governments and the ECB will have to swallow. Assuming a satisfactory deal is reached on the Greek debt swap, what then?
We would expect a final flurry of risk-positive movement as fears of an imminent Greek default are quashed, but we think such a moment may also represent a near-term peak in the current risk rally. For if a deal is reached, we think it will likely be the highpoint in terms of good news in the Eurozone debt crisis. Markets are likely to conclude that even with a Greek debt deal, Greek debt levels are still unsustainable in the long-run. And this also assumes there is no messy rebellion by some Greek debt holders and CDS are not triggered. Moreover, despite better than expected Jan. Eurozone PMI’s, the outlook is still for further weakness in Eurozone growth in the months ahead, which will likely come back to undermine European debt markets yet again.
While there has been some marked improvement in Italian, Spanish and Portuguese bonds in the last week, we’ll be looking to how much of the decline in yields was due to ECB purchases. The ECB will announce the total amount of bond buys made in the last week on Monday at 0930ET/1430GMT. If they were forced to step up purchases significantly over recent weeks, the nascent calm in European debt markets may not last.
In EUR/USD, we continue to watch the recent 1.3000/1.3250 area as a consolidation range, with a break signaling the next directional move.
Next page: Central banks decisions on tap