Good News on US Economy, Europe, and China

A tour bus passes the Wall Street bull in the financial district January 22, 2007 in New York City.
Getty Images
A tour bus passes the Wall Street bull in the financial district January 22, 2007 in New York City.

There is good news this morning for bulls trying to explain why global markets have been up this year.

The three pillars on which stocks have advanced this year are all finding statistical support this morning. They are:

1) U.S. economy gradually improving. Stock futures moved up a few points as February nonfarm payrolls, at 227,000, were slightly above expectations, but an equally important story is the January revision — to 284,000 from 243,000.

2) Europe in recession , but European Central Bank will keep providing liquidity, no euro zone breakup. The Greek private-sector deal coming to a conclusion will likely remove a significant systemic threat to the euro zone (more on this below).

3) China: soft landing. Word that China had reduced its 2012 growth rate to 7.5 percent sent the market into a tizzy earlier this week, but there is evidence they are underestimating. Today, factory data showed output growth was slightly lower than expected in the first two months of the year, but was still up 11.4 percent. Retail sales also slightly weaker than expected, but still impressive at 14.7 percent for the first two months. This is not a hard landing. Most importantly, consumer inflation is at a 20-month low of 3.2 percent, which means Chinese authorities will have leeway to reduce cash reserves banks must hold, allowing more loan growth.


1) Greece: The good and the bad news.

Here’s the good news, as I see it: Bondholders representing 83.5 percent of the 206 billion euros ($270 billion) of private Greek debt are participating in the agreement; now that the Collective Action Clauses are being activated, this will bring in about 95.7 percent.

Is the private debt deal a disaster for private debtholders? Loss of 75 percent is certainly terrible, but analyst estimates I have seen indicated Greek banks have already set aside provisions equivalent to 75 percent of the face value of the bonds.

Is the triggering of credit default swaps (CDS) a threat to the global banking system? Unlikely. Estimates of net CDS outstanding are around 3.2 billion euros ($4.2 billion), of which 1.6 billion euros ($2.1 billion) is estimated to be covered by CDS. This is not trivial, but it does not seem to be large enough to trigger a real threat to the global banking system.

Is Greece still a systemic threat to the euro zone? On the surface, tail risk seems to have been greatly reduced. The second bailout package will be approved. Debt interest payments will go into an escrow account, and the private sector bondholders will be paid off piecemeal over the years. Most of the debt, in fact, is in the public hands, not private.

Of course, Greece could fail to implement reforms, and the “troika” may refuse to continue to pay out into the escrow account unless they implement the reforms, so there is not zero risk.

Now the bad news: Greece gross domestic product dropped 7.5 percent in the fourth quarter, deeper than expected. Remember: There is a target of a debt-to-GDP ratio of 120 percent by 2020; lower-than-expected GDP growth — which we are again seeing today — will make that target harder (some would say already impossible) to achieve. Unemployment is already at an official 21 percent. Thirty percent of shop spaces are now empty in the center of Athens (!). Elections scheduled for late April will only make the outlook more cloudy.

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