Greece announced the details of the largest sovereign debt restructuring in history this morning, with private sector bond-holders finally recognising that the deal on the table was probably a much better one than they were likely to get by holding out. According to a statement from the Greek government, the participation rate of investors in the debt swap was extremely high at 95.7%, no doubt encouraged by the threat of collective action clauses being imposed. Some EUR 152bln of Greek-law bonds were tendered, together with EUR 20bn of foreign-law bonds. Athens ought to be very pleased with this outcome. The aim of the restructuring exercise was to reduce the EUR 206bln of Greek debt held by the private sector by 53.5%, in order to put Greece onto a more sustainable debt footing. Importantly, high participation is a key condition for the EU to approve the EUR 130bln bailout. ISDA is set to meet later today to discuss this ‘potential credit event’. Although the take-up has been well above expectations, the single currency has actually softened slightly, with some traders taking profits on long positions accumulated over the last couple of days. Apart from the way that the euro responds to this Greek debt-restructuring, observing how the bond markets of Europe’s other fiscal miscreants perform over coming days will also be instructive. Despite some real concerns in recent weeks over the extent of private sector participation, in the end this outcome surpassed even the most optimistic expectations.
Yen on the back foot once more. News that Japan recorded a record current account deficit in January weighed heavily on the yen yesterday. Apart from the JPY’s over-valuation, the deterioration of Japan’s trade dynamics in large part is a reflection of the increased reliance on imported goods in the wake of last year’s earthquake and tsunami. Following the meltdown at the Fukushima nuclear plant, 52 of 54 nuclear reactors in Japan are currently shut. High and rising energy prices have also been problematic. After attempting to penetrate 80.50 mid-week, USD/JPY rose to 81.90 overnight, a ten-month high. Against other major currencies such as the euro and the pound, the yen’s recent losses have been even more pronounced. For instance, both EUR/JPY and GBP/JPY are up 10% since mid-January. Most pleasing for Tokyo will be the yen’s losses against major Asian competitors – the KRW, SGD and THB have also risen 10% against the Japanese currency in 2012. With investors slowly shedding their excessive avoidance of risk, and with currency fundamentals weakening, it would be remarkable if the yen did not decline still further in the short term. It is entirely possible that both investors and traders will start to focus more closely on the worsening state of Japan’s external accounts over coming months, to the detriment of the yen.
Brazil backs more sober global outlook. The turn-around on the Brazilian real, which started towards the end of last week, continued Thursday after a greater than expected cut of 75bp in the main policy rate from the central bank, taking rates below the 10% level for the first time in nearly two years. The real is down 4% from its peak seen at the end of February and, whilst it has lost its place as the best performer on the majors in terms of spot returns, on a total return basis, the real is still ahead of the pack given the interest rate return available. Still, as we mentioned previously this week, the correction we’ve seen in risk assets in general, vs. the gains of the first two months of the year, has been prompted in part by domestic considerations in some of the emerging nations. The impact of China’s cut in its growth target has probably been overdone, but also in the frame have been developments in Brazil (the taxing of foreign loans, soft GDP data earlier in the week and the latest rate cut), as well as the slump in sentiment seen towards Russia in the wake of Putin’s victory in the Presidential race. But there is also a wider theme at play - one which we’ve alluded to before - of markets’ propensity to start the year in bullish mood and then slump back into reality. Taking the MSCI World stock market index as a proxy, there was a rally in the early part of 2010, peaking in April and it took until October to recover from the slump. Last year, there was an 8% rally, with stocks still yet to reach the late April peak. This year has panned out in a similar vein although, if this week’s correction in risk assets is sustained, then the peak has arrived a lot earlier than in previous years.
SNB faces a tougher year ahead.Rummaging through the SNB annual report feels more like crunching the numbers of a hedge fund rather than a central bank. Even though the central bank returned to profit in 2011 (CHF 13.5bln), exchange rate effects were actually minimal in accounting for this outcome, at least on the SNB’s measure. What was more noticeable is that the buying up of foreign currencies (especially since the cap was imposed in September 2011) has allowed the SNB to accrue substantial interest on its holdings, together with the capital appreciation of the underlying assets. These combined effects amounted to just over half of the profit figure. Gains on gold accounted for most of the remainder. In terms of the FX-intervention side of things, it’s interesting to note that the SNB has been successful in keeping its euro holdings fairly balanced. During the last period of intervention, between March 2009 and the summer of 2010, the euro accounted for over 70% of FX reserves at their peak. This time around, the SNB has been successful in maintaining euro holding below their longer-term average. In Q4 the EUR accounted for 52% of reserves, from 55% at the end of Q3. This is a far more comfortable position from which the SNB can operate, leaving it less exposed to any single currency and having to work to re-balance its portfolio at a later date. The SNB has stated that CHF 17.8bln was spent on FX intervention in 2011. The results, both on the balance sheet and in the markets, show the SNB to have been relatively successful in its aim of capping CHF strength, but 2012 is likely to prove a lot tougher, both in term of successfully defending the franc and also maintaining such returns on its non-CHF assets.