We still can't shake the admission from the Greek Prime Minister that there were holes in the budget and tax collection was in shambles. While markets have initially embraced the Greek announcement of a 3rd set of new austerity programs, we have a hard time believing that these optimistic goals are actually attainable. It's easy to austerity grandstand, the hard part is execution and we are uncertain Greece has the infrastructure and willpower to execute. Getting nearly no press was today's sit-in at the Finance Ministry by hundreds of communists from Greece's All-Workers Militant Front protesting new draconian measures, a trend we expect will accelerate (general strike scheduled for March 16th). When you cut through the hype, including speculation of hedge fund conspiracy to demolish the EUR, what the Greek government is proposing is a colossal task which few countries have achieved. First of all, historically European nations have had the advantage of a reduction in short term rates and significant currency devaluations, options which are off the table for Greece. And secondly, with roughly €21bn in fiscal tightening combined with general sluggishness in economic recovery any Greek growth projections have significant downside risks. And this doesn't even address the potential social response. We remain bearish on the EUR and see short term optimism due to progress in bailout discussions and austerity measures as opportunities to short the single currency. Today provisional estimates of Q4 GDP are expected and weaker figures will compound the Greek problem (as discussed above). Today, markets will be watching the BoE and ECB. The Bank of England is expected to keep rates on hold at 0.50% this month and to maintain its asset purchase target at GBP 200bn for the time being. The risks however, have been gradually shifting towards a possibility of the resumption of quantitative easing just a month after the MPC signaled a pause. Voting member David Miles asserted in a speech last week that there are still more risks of growth not recovering to more normal levels than of substantially exceeding it, and Governor Mervyn King also erred to the dovish side in his recent address to the Treasury. With the high level of uncertainty abound in Europe as a whole, the recent slump in GBPUSD is no doubt indicative of the market already starting to price in an increase to the asset purchase target in coming months. After last week's massively underwhelming Eurozone inflation print at -0.8% MoM, and the ongoing concern about the PIGS, it is unsurprising that analysts are universally predicting an unchanged decision from the ECB (rates currently 1.00%). The market will however want to hear from Trichet what the next steps will be in the gradual withdrawal of emergency lending measures. The ECB President is likely to affirm that rates remain 'appropriate', but given the dramatic slump in EURUSD of late, the more important details will be what Trichet's opinions are on the prospects for Greece and the proposed German-led bailout plan.
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