Global Daily – Greek bailout one of Europe’s many problems

by: Nick Kounis , Maritza Cabezas

Euro Macro: Greece concerns escalate – Over recent quarters, Greece has come off the back pages, but the challenges for the country remain acute. Investor concerns have recently returned because of disagreement within the Troika and between Greece and the Troika on the way forward. This has raised question marks about the sustainability of the current bailout programme and whether Greece will be able to meet a big payment to creditors due in July. In short, the IMF is more negative than the European authorities on (a) whether Greece can reach primary surpluses of 3.5% GDP and sustain them (b) on the view that Greece’s debt is strongly unsustainable rather than modestly so. Germany and the Netherlands want the IMF on board in the programme and if it does not join in the current ESM programme, these countries may find it difficult to provide continued support for the bail-out. Meanwhile, Greece also has disagreements with the IMF as it feels it is too negative on its progress with reform and also it resists the IMF’s insistence that it should pre-legislate austerity measures in case it fails to reach targets. At the same time, Greece is suffering austerity fatigue (to put it mildly). The Greek bailout remains very messy and chaotic. We suspect a way forward will be found at the last minute as usual, but in the meantime there will be continued uncertainty. In any case, Europe has arguably bigger problems, given rising political risk and concerns about the impact of an eventual end of QE on vulnerable countries. We are particularly concerned about poor fundamentals in Italy and Portugal. (Nick Kounis)

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US Macro: The trade deficit and President Trump’s proposals – President Trump has said that he wants to improve the trade balance to support economic growth, manufacturing activity and jobs in the US. As a result trade data will be acquiring a greater significance. According to the Commerce Department in a report released yesterday, the US trade deficit in 2016 was the widest since 2012 on a year basis. Still, the deficit narrowed in the latest month. December’s trade balance data showed that the trade deficit narrowed to USD 44.3bn from USD 45.7bn in November. The improvement was mainly driven by a solid growth in goods exports (2.7% mom up from -0.2%). Capital goods, industry supply and cars showed the strongest increase. Meanwhile imports grew by 1.5% mom in December, up from 1.2% the previous month. Trade was a significant drag to GDP growth in the fourth quarter (1.7ppts). However, December’s trade report should lift net exports a bit in the fourth quarter, pointing to somewhat less of a drag. We don’t expect a considerable narrowing of the trade deficit in the coming time. The Republican Party’s border tax adjustment proposal, which would  change the tax system to one where a destination principle is used to calculate the tax base by exempting exports and taxing imports by 20% could improve the trade balance at an early stage if adopted (please see US Watch – US border tax adjustment: a failed attempt?). However as the US dollar appreciates, the positive impact on the trade dynamics would dissipate. President Trump has also suggested that trade deals have been hurting corporate America and has already withdrawn from the Trans-Pacific Partnership. We think that President Trump will opt for new bilateral trade deals and perhaps tweak existing free trade agreements, but he will avoid following his full-fledged protectionist campaign rhetoric. (Maritza Cabezas)