Greece Granted Two Year Extensions But Risk Aversion Continues

The yen and dollar strengthened broadly in Asian session today on risk aversion. Asian indicates opened mixed following a flat close in the Dow overnight, but quickly turned all red on another round of sell-offs. Greece was quoted as a reason for the weakness. But it should be noted that even though the release of next tranche of bailout funds was postponed to November 20, this should be well expected and priced in.

Meanwhile, the granting of a two year extension to for Greece's fiscal adjustment should actually be taken as a positive. So, it's believed that, on the other hand, the concern on US fiscal cliff is the major driving force behind the current sell-off. There are risks that unresolution of the fiscal cliff, which would then trigger a series of budget cuts and tax hikes, would drag US and then the world back into recession. This would remain at least a temporary negative factor to market sentiments.

After the meeting in Brussels yesterday, eurozone finance ministers agreed to Greece another two years, until 2016, to lower the deficit to 2% of GDP target. Also the debt level is targeted to be brought down to 120% of GDP until 2022. Luxembourg prime minister Juncker hailed that "Greece has done a big part of what it was supposed to do, adopted an ambitious reform program and a budget for 2013 that's impressive." However IMF managing director Lagarde openly said she has "different views" with EU finance chiefs and believed that "debt sustainability of Greece has to be measured in 2020."

Meanwhile, the decision of release of the next tranche of bailout fund hasn't be made, as expected. Juncker said that "a few more things have to be checked, because not everything that was promised to be done, has been done. But these are more minor things that can be tackled administratively and not legally." Juncker expected to have a "definite decision" at the November 20 meeting.

Also discussed would be the way to fill up the financing gaps opened by the two year extension. European Union Economic and Monetary Commissioner Rehn said that there is need of "significant reduction of the debt burden" of Greece but that "does not include of haircuts to principal of public loans."

In Spain, Finance Minister Luis de Guindos stated that the government would meet its 2012 deficit target and said that it's only acceptable for the country to pay no more than 200 bps over bund for financing instead of the current 450 bps. According to de Guindos, "at the moment, as in the past, the Spanish government is financed" and "Spain is doing what it has to do in terms of meeting its obligations, meeting the conditions arising from (its excessive deficit."

Concerning the banking bailout of up to EUR 100b, de Guindos said that the country would need about EUR 50b, with 90% of which would be used in the 4 banks being monitored by the bank restructuring fund FROB. He stressed that 70% of the Spanish financial sector remained healthy.

In China, new lending came in at RMB 505.2b in October, compared with consensus of 590.9b, as banks were not willing lend due to high funding costs and the risks of maturity mismatch. The figure suggested that the central bank's reverse repo liquidity injection might not be as effective as expected. In a broader estimate, the total social financing which includes corporate bond and equity issuance, and trust loans rose to RMB 1.29T, up from RMB 504T the same period last year. In the first 10 months of this year, total social financing has reached RMB 13T, up from RMB 2.4T in the same period last year.

On the data front, UK RICS house price balance improved to -7 in October. Japan industrial production was finalized at -4.1% mom in September. Swiss PPI, UK CPI and PPI as well as German ZEW will be released later today.