On the other side of the Atlantic on Tuesday, we got an interesting statement by Greek Prime Minister George Papandreou that could easily reignite the European debt woes.
Papandreou is now granting pensioners a 300 euro (US$414 billion) bonus and rejecting calls by Brussels, and even his own central bank, for further belt-tightening.
“There will be no new measures on wage-earners or pensioners, they have paid enough,” he said.
His “politically motivated” change of attitude as far as Greek austerity measures is concerned comes surprisingly at a moment that Eurostat, which is the Directorate-General of the European Commission that is responsible for providing the European Union with statistical information at European level, is expected to raise Greece's budget deficit for 2009 to 15.1 percent of GDP, up from 13.3 percent. Greek public debt is expected to rise to 127 percent instead of 115 percent of GDP.
Standard & Poor's has already publicly contemplated a reduction to BBB, which would leave Greece level with Hungary, which was rescued by the IMF.
In my opinion, investors should start, yes once again, keeping a close eye on what’s going on in the southern countries of the eurozone.
I have no doubt global attention will switch back to Europe once the U.S. Fed has removed “uncertainties” on quantitative easing next week when it will unveil its new program of U.S. Treasury bond purchases worth a few hundred billion dollars over several months. The Fed’s easing could be more of a measured approach that probably will contrast its purchases of nearly $2 trillion unveiled during the financial crisis.
By the way, the Fed’s announcement will also come after the results are known of the U.S. midterm elections.
Back in Europe, S&P also warned that “blistering growth in Germany is aggravating the growing gap between the euro area's North and South and may force the European Central Bank (ECB) to tighten monetary policy long before the high-debt states are ready.”
ECB council members Axel Weber and Juergen Stark have already called openly for an immediate cessation of the ECB’s “special” measures.
We’ll have to wait and see when the ECB will finally take their side.
No doubt, tensions lie ahead…
In the meantime, Irish bond investors are once again losing faith in Ireland’s plan to lower the deficit as spending cuts threaten to undermine economic growth that would logically reduce Irish government revenues.
Irish 10-year bond yields climbed to above 7 percent and within 50 basis points of the 454 basis-point record spread over the German benchmark bund, that was set Sept. 29.
This morning, at the moment of this writing, the Greek 10-year bond also yielded 9.90 percent, while the German bund yielded 2.56 percent.
Investors will have to face an extensive list of uncertainties and dilemmas during the next few months.
In my opinion, that hardly points to a backdrop conducive to trends and stability in the market, which suggests to me that the recent easing in volatility in markets as a whole might well prove to be a temporary affair.
I have to repeat that more renewed European uncertainties could favor the dollar as risk aversion could come back once again.
Dollar up means practically everything else down, and vice versa, of course.
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