Asia Open: Athens May Lose Ultimate Control of its Own Budget

The fundamental story in Europe is looking shaky but markets are refusing to turn significantly bearish, suggesting that traders are optimistic about the ability of EU leaders to steer the region in the right direction. Our concern is that the recent risk rally is being fuelled by better than expected economic figures which don’t tell the full story.

The liquidity injection by the ECB may have succeeded in preventing, possibly only in the near-term, a stall of the European banking sector, yet the fiscal changes that need to be implemented are in the hands of politicians that do not appear to have the same sense of urgency that the markets and central banks share.

Themes:

• Greece is on the defensive after reports emerged outlining that the EU might have the power to veto and change future Greek budget proposals. Germany is leading the charge and is clearly concerned that Athens is not going to be able to bring its debt/GDP level to 120%. We are concerned about the associated surrender of sovereign for Greece which could be a deciding factor, and possibly derail, upcoming talks on funding for the next bail-out package.

• Fitch downgraded 5 European countries on Friday, including a two-notch downgrade for both Italy and Spain and a one-notch move lower for Belgium, Cyprus and Slovenia. At the same time, the ratings agency kept all of these countries and Ireland on negative watch.

• We expect a deal to be reached between Greece and its private sector creditors in the coming days, after bondholders indicated last week that they are willing to accept a lower coupon rate. This will allow discussions over the next bail-out package to progress.

• Australia’s debt management office announced plans to issue new bonds early in Feb, including AUD 700 million of 2022 bonds and AUD 700 million of 2018 paper. Given the offshore demand for Australian debt, we would not be surprised to see some AUD inflows on the back of this.