Weekend Economists Wild, Wild, World Roundup February 17-19, 2012

[girl gone mad]

64. Big weekend developments in China and Europe

Edward Harrison writes:

There are two sets of important developments over the weekend that will influence the global capital markets. The first is in China and the second in Europe.

China

China cut reserve requirements and Foxxconn, the Taiwan-based outsource company with extensive assembly work in China, announced an immediate 16%-25% wage increase. In Europe, Greece’s cabinet took the necessary steps that will likely pave the way for the Eurogroup of European finance ministers to press ahead with a second aid package.

Speculation about an easing of Chinese monetary conditions has ebbed and flowed since required reserves were cut at the end of last November, the first easing in three years. Nevertheless, the 50 bp cut in reserve requirements to 20.5% announced on February 18th will catch the market by surprise. This is especially true in the aftermath of the recent report that showed China’s increase in consumer prices rose a stronger than expected 4.5% in the year through January (vs 4.1% in December).

(snip)

Greece

The Greek cabinet approved the latest set of austerity measures. The game of brinkmanship now turns back to the European finance ministers. They are not done yet. The focus shifts from pledges to implementation and how enhanced surveillance can be established and the agreement enforced.

The bond swap with the private sector, the PSI, cannot go forward until the EFSF is authorized to payout 30 bln euros. The participation in the PSI is another hurdle that much be overcome. Even with the retro-fitting of collective action clauses, some participants are believed to have a blocking position in a number of particular issues, some of which may be under foreign law (which are believed to account for as much as 20% of the outstanding sovereign bonds in private hands). These bonds have outperformed recently.

read more: http://www.creditwritedowns.com/2012/02/big-weekend-developments-in-china-and-europe.html