The Greeks said yes

illustration: numbers

(30.06.2011) The Greek parliament yesterday supported new, tough austerity measures for the Greek economy. The market reactions were positive. Stock markets rose, Treasury yields climbed and the euro strengthened yesterday.

By Camilla Viland, Analyst at DNB Markets

The Greek Prime Minister, Papandreou, yesterday got the needed support for new, tough austerity measures for the Greek economy. Papandreou will cut spending with about 28.6 billion euro, or about 12 per cent of Greek GDP. The measures include tax rises, lay offs in public sector and wage cuts.

Today the parliament faces a further vote to secure fast-track implementation of the measures. If the Greeks also say yes to this, Greece can probably receive further payments under a 110 billion euro bail out put in place last year. The EU finance ministers will discuss this on Sunday. However, it does also seem clear that Greece needs another bail out to deal with its debt burden.

EU wants private investors to participate in a possible new emergency loan. Yesterday positive signals in this respect were given when Deutsche Bank's CEO Josef Ackermann said the financial industry would offer European politicians a solution on Greece because a Greek default would be more dramatic than even the Lehman crisis. A new bail out agreement is expected to be agreed upon within mid-July.

Even if Greece gets the needed help to avoid a default now, we still believe a Greek default is unavoidable in the long run. The market reactions to yesterday's Greek news were positive. International stock markets rose, Treasury yields climbed and the euro strengthened. Increased market optimism and a higher oil price seem to have been positive for the Norwegian krone which has strengthened on a broad basis over the past 24 hours. 
 
Britain's pound has weakened lately. The development is a consequence of poor key figures for the British economy. Yesterday's figures were no exception. UK services output dropped by 1.2 per cent in April and mortgage lending figures confirmed that housing activity remains very weak. Earlier this week several members from Bank of England's monetary policy committee have raised concerns regarding the growth outlook. As a result there are now speculations about whether the central bank will do more quantitative easing to support the economy. These speculations are negative for the GBP.
 
The key figures released from the euro area yesterday were also poor. The sentiment index fell from 105.5 in May to 105.1 in June. The outcome was however in line with expectations. It is in particular industrial sentiment that pulls the index down, while there were small gains in service sector and consumer confidence this month. The sentiment index is still at fairly good levels, indicating GDP growth of about 2.5 per cent q/q.
 
The Norwegian credit indicator C2 was 6.5 per cent (y/y) in May, up from 6.4 per cent in April. Consensus forecast was 6.5 per cent. Historically C2 changes quite slowly, so the last month’s increase from 5.9 in February can be characterized as large. Companies’ credit growth declined while households’ credit growth increased and is now at 7.0 per cent y/y. This is the highest debt growth for households since January 2010. Households’ debt burdens remain elevated, with the prospect of a further rise ahead. Strong growth in housing prices and substantial debt may pose a challenge to financial stability. Hence, yesterday's figures could be a concern for Norges Bank.
 
Today, Norwegian retail sales figures are released. So far in 2011 consumption has been very weak, a development that seem mainly related to high electricity bills in the beginning of the year. Given relatively strong income growth and still low interest rates we expect the weak trend to turn, but not already this month. We believe retail sales dropped by 0.4 per cent in May. Consensus is more optimistic and expects a retail sales growth rate of 0.5 per cent m/m.