Tags: greece | europe | japan | federal reserve | janet yellen

While I Ponder a 'Good' Solution To Greece's Social, Economic and Financial Drama

Tuesday, 24 February 2015 08:14 AM Current | Bio | Archive

We face two major events that could impact financial markets in a serious way and in one way or another.

Fed Chair Yellen will give her semi-annual testimony before the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday and if Ms. Yellen sticks to the recent script employed by a majority of the members of the FOMC, then the dollar might yet enjoy a new lease of life and possibly with wider repercussions (the price of oil, and collapse which contributed to a whole new pricing dynamic since last summer).

If Yellen should lack clarity in her comments, as well as in her wording of the forward guidance on Fed policy, reporters will have another opportunity to question her during the press conference she will give on March 18 that will conclude the March 17-18 FOMC meeting.

I wouldn’t be surprised if Mrs. Yellen hints the Fed could start preparing itself for a lift-off earlier than many expect and by doing so avoiding the risk of getting behind the curve. Anyway, we’ll have to wait and see, as always.

Secondly, we have after Greece did finally send its reform list to the Eurozone Ministers of Finance, Eurogroup will have a teleconference among all the concerned Ministries of Finance and that should be the first step on the road to agreeing of Greece’s four-month bailout extension. By the way, the original official deadline for Greece to extend its current bailout is still February 28.

Of course, if that happens and I seriously think it could happen, what happens after that four-month extension, remains an open question.

Anyway, the only thing we know so far is that Eurogroup Chairman Dijsselbloem has said he agrees with ECB President Mr. Draghi and the President of the European Commission Mr. Juncker that Grexit, which stands for a Greek withdrawal from the Eurozone, is not on the table. I’d like to add “Grexit not on the table, at least not for now.”

To everybody it should be clear that we aren’t talking of a definitive, let alone “good” solution for Greece’s social, economic and financial drama, but also for the Eurozone’s endless series of problems.

Investors should take notice that the Greek government’s request for a “bridging loan” to help keep the country afloat cannot and will not be considered under the present bailout program that could be extended, but not changed, so the question remains “Where is the money in the end going to come from,” and who is going to pay for it?

Also, don’t overlook the fact that earlier this month, the ECB has withdrawn its ordinary lending facility that allowed Greek banks to use Greek government debt as collateral for loans. This decision has forced them now to rely on emergency funding provided by the Greek Central Bank that borrows funds from the ECB through the Emergency Liquidity Assistance program (ELA).

We hopefully we will be able to learn if Brussels has good reasons to trust the Greek promises notwithstanding that, so far at least, Greece hasn’t put in any form trustworthy numbers on paper and has limited its reform list to a “words” only list.

Of course I could be wrong, but I’m afraid the EU could once again “kick the can” or better said bend to pure political considerations and maintain, as it has been so far most of the time “smudging and fudging” behavior.

Anyway, so far, markets seem to be hopeful with what they think they know… I personally would prefer to remain cautious and stick with “seeing for believing.”

Besides all that and certainly not headline news in our part of the world, but certainly important enough to pay attention too, in Japan, the once rock-solid relationship between Prime Minister Shinzo Abe and Bank of Japan Governor Haruhiko Kuroda is apparently starting to crack. During a meeting of the Council on Economic and Fiscal Policy on February 12, Bank of Japan Governor Kuroda requested permission to speak and offered straightforward advice for the Prime Minister stressing that interest rates could soar in the future if the fiscal credibility of the government is called into doubt (Sounds to a certain, but surely to a lesser degree, somewhat familiar to what James Bullard, President of the Federal Reserve Bank of St. Louis said last week when he warned the Fed could be at risk of getting behind the curve if Fed policy doesn’t change from where it stands today and maintains interest rates too low for too long).

Interestingly, and in a demonstration of complete lack of transparency, the minutes of the meeting reportedly neglected to include BOJ’s Governor Kuroda’s statement.

The convivial relationship between Prime Minister Shinzo Abe and Bank of Japan Governor Haruhiko Kuroda has come into a state of flux, no doubt about that.

In early February, Prime Minister Abe informed the Diet, which is Japan's bicameral legislature that is composed of a lower house, which is called the House of Representatives, and an upper house, which is called the House of Councilors, that “a revision of the law guaranteeing Bank of Japan (BOJ) independence was a possible future option.”

I don’t think it’s an overstatement to say Prime Minister Abe faces a new challenge. If he feels that there is scope for further Japanese yen weakness on account and thanks to more accommodating oil prices, then it would remain to be seen just how obliging the Bank of Japan would be without further concrete measures to shore up Japan’s finances, which are purportedly the basis for the deteriorating relations between him and his Governor of the Bank of Japan.

Now, to threaten seriously the BOJ's independence is without any doubt a road Prime Minister Abe would prefer to avoid going down at this particularly fragile juncture in his Abenomics project, which stands for a program “mix of reflation, government spending and a growth strategy designed to jolt the economy out of suspended animation that has gripped it for more than two decades.”

If a revision of the law guaranteeing Bank of Japan (BOJ) independence comes to the Diet than we could have an important distortion and a spike in volatility in the Japanese markets as well as in the value of the Japanese yen, which could in turn distort most if not all important markets and currency exchange rates everywhere.

Of course, we aren’t there yet…

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We face two major events that could impact financial markets in a serious way and in one way or another.
greece, europe, japan, federal reserve, janet yellen
Tuesday, 24 February 2015 08:14 AM
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