Will Greeks accept austerity?
July 14, 2015
So much for the voice of the people — and the nerves of investors. Just a week after Greek voters loudly rejected an austerity plan at the urging of their prime minister, the very same man, Alex Tsipras, submitted a proposal.
This proposal was almost identical to that of his creditors, seemingly motivated by doomsday scenarios for his nation. As a result, stock indexes in the U.S. and Europe soared on Friday. At the same time, the yield on the 10-year Treasury finished the week with its biggest two-day drop since July 2013, up 21 basis points, as relieved investors shifted back into equities.
However, there was, yet again, a glitch, when the eurozone's finance ministers didn't accept the proposal, with some countries, notably — but not only — Germany, saying that Greece had to do more upfront to prove it would follow through on its pledges. As Germany's Finance Minister Wolfgang Schäuble put it, "We won't be able to rely on promises." It wasn't until Monday morning that an accord was finally reached, one that, as Donald Tusk, the president of the Euro Council, tweeted, involves "serious reforms" and "financial support."
As part of the deal, the International Monetary Fund (IMF) will monitor Greece's compliance, and Greece will sell off national assets to create a fund to pay down debt. Germany's Chancellor Angela Merkel said an agreement was reached because Greece showed "a willingness and a readiness to reform," adding, the "advantages far outweigh the disadvantages."
As the eurozone turns
Last week began with the Greeks having said a defiant and decisive "no" to the latest austerity offer in the national referendum, after which the lightning rod Finance Minister Yanis Varoufakis unexpectedly resigned because, as he pointedly said, "I was made aware of a certain preference by some European participants and assorted 'partners' for my 'absence.'" He was replaced by Euclid Tsakalotos, who had stepped in as chief negotiator back in April. In the wake of the vote, investors braced for Monday, but as The New York Times put it on Tuesday morning, "Markets Shudder Across the Globe, but Don't Collapse."
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Despite the vote, eurozone leaders were unmoved. France's Finance Minister Michel Sapin said it "resolves nothing" — giving Greece until the end of the week to come up with an offer, while Greek banks remained shuttered amid tales of economic and social collapse. On Thursday, Tsipras unveiled a proposal, prepared with the help of France, which included higher taxes that could add 1 percent to GDP, as well as an overhaul of the pension system. As part of the plan, he requested a new loan of €53.5 billion on top of the €240 billion borrowed since 2010. Greece's parliament subsequently endorsed the offer, though not without some defections from Tsipras' fellow party members, and France's President Francois Hollande described it as "serious and credible."
Greece did not formally ask for debt relief in the proposal, but it's expected to push for either a reduced interest rate or an extension on its debt payments, not a lower principal, and here even Schäuble gave ground, saying, "Debt sustainability is not feasible without a haircut."
The Federal Reserve released the minutes of its meeting of June 17 and 18, which indicated that the committee still expected to begin raising its benchmark rate later this year, although it "expressed a willingness to wait another meeting or two for additional data before raising the target rate." This stance was affirmed by the Fed's Chairwoman, Janet Yellen, in a speech in Cleveland on Friday, although she added, "Unanticipated developments could delay or accelerate this first step," perhaps referring to the state of Greece and China's roiling stock markets.
In the meeting minutes, the committee noted improvement in job creation and "a firming of wage increases." In addition, the committee said that "real activity" in the first quarter probably exceeded the government's estimate of negative 0.2 percent (the office of the San Francisco Federal Reserve calculated growth at 1.5 percent). The Fed's next meeting is on July 28 and 29.
IMF lowers forecast
Speaking of raising rates, the International Monetary Fund continues to prod the Fed to hold off until 2016 because of its concern about a global slowdown. Last week it lowered its estimate for 2015 to 3.3 percent from 3.5 percent, which would be the weakest rate since the contraction of 2009.
Trade gap widens
Though U.S. gross domestic product is expected to bounce back into the black for the second quarter, trade will continue to slow growth, largely because the stronger dollar hurt exports. The gap expanded 2.9 percent in May to $41.87 billion as imports fell 0.1 percent to $230.5 billion, while exports were off 0.8 percent to $188.6 billion. Even so, the deficit for April and May was below the first quarter's pace when trade shaved two percentage points off GDP growth.
In other economic news, the Fed said that consumer borrowing hit a new high in May, climbing $16.1 billion to $3.4 trillion, mostly because of student and auto loans, which were up $14.5 billion. The federal budget deficit shrank 14 percent or $52 billion through the first nine months of the fiscal year as individual income taxes increased $153 billion from a year earlier. First-time jobless claims rose 15,000 to 297,000, the highest total since the end of February, though the figure could have been affected by the Fourth of July holiday and summer closures by car makers. Also, wholesale inventories gained 0.8 percent in May after having risen 0.4 percent in April.
A look ahead
This week's slew of updates will include the latest on personal income and consumption expenditures, construction spending, pending home sales, the S&P/Case-Shiller Home Price Index, Markit's manufacturing PMI, vehicle sales, the trade balance and factory orders. On Friday, the Labor Department will release its unemployment report for March.
This commentary was prepared specifically for local wealth management advisors by Northwestern Mutual Wealth Management Company.
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