Ashburton insight : Greece passes austerity measures / Surprise Chinese inflation jump

Greece passes austerity measures

Early yesterday morning the Greek Parliament passed new austerity measures. This is likely to pave the way to another bail-out package when EU finance ministers meet on Wednesday. The decision on what haircut private sector holders of Greek bonds will have to take has been postponed until February 17, as we understand. An agreement on private sector involvement and the provision of a second bailout package would be a positive development from a global financial markets perspective and reduces the risk of a disorderly Greek default or euro-area exit on a very short-term horizon. That being said, even following a large debt write-down, Greek debt dynamics remain extremely vulnerable. Given the ongoing failure of the Greek authorities to meet fiscal targets since their first bailout, the odds remain against Greece in terms of avoiding a further debt write-down at some point (at least in present value terms) although much will depend on the future approach taken by the EU/IMF/ECB Troika. Unfortunately, it is too soon to remove Greece from the risk radar just yet.

Surprise Chinese inflation jump

After our disappointment that China didn’t cut the Reserve Requirement Ratio over the Chinese New Year we feared that the PBC knew something that we didn’t. The surprise came in the form of the CPI, which accelerated from 4.1% to 4.5% in January. The “whisper number” we had heard before the release was sub 4%. All Chinese data around the new year is volatile. This year the NBS (National Bureau of Statistics) measured prices both before and after the holiday, so ascertaining the exact impact is difficult. Weekly data produced by the Ministry of Commerce and Trade suggests food prices have started to fall back this month. Core inflation, excluding food and residence, decelerated marginally and are a tad below 2%. We still hold the view that when we start to see averaged data coming out in March, the environment in China will appear to be moderately disinflationary rather than inflationary, and that monetary policy can continue to ease.