Europe, Japan, UK Developments

Eurostat says that Greece’s deficit last year is at least 13.6% and not the 12.9% the government estimated on April 9th. It notes that the deficit may be 0.3-0.5% higher if the off-market swaps, classification of some public entities and social security funds are taken into account.

Eurostat also noted that the Irish deficit was 14.3%, giving it the dubious honor of the largest deficit in the euro zone. Meanwhile, civil servants in Greece have taken to the streets again, in their fourth strike of the year.

BBK President and a leading candidate to replace Trichet at the helm of the ECB noted earlier this week that the street protests show that parts of the Greek public fail to appreciate the situation. This is a self serving explanation. It may sound cynical but Greece’s credibility was lost several months ago. What has been lost more recently is the Europe’s credibility. From 12 April, when details of euro zone/IMF backstop facility were announced though yesterday, the 10-year Greek bond yield rose139 bp. Rather than the Greek public not appreciating the dire straits, it seems that it is the European elite that don’t get it.

A poll in Greece found 90% expect the IMF to demand more belt tightening and there are beginning to be signs that public opinion is turning against the Greek government. As Keynes warned 90 years ago, about the “bleeding of Germany”, as justified as it may be, the “bleeding of Greece” cannot amount to much good.

Fitch warned that Japan’s credit rating is at risk due to its rising debt levels. At the same time, the IMF indicated that Japan may need more stimulus. The fact that the vast majority of Japanese government bonds are owned domestically, by the BOJ, life insurers, pension funds and banks offers little comfort.

Many observers see the low nominal yield in Japan (~1.3% on the 10-year bond) and might not appreciate that because of the deflationary conditions, Japanese real interest rates are above the US. Fro the sake of this exercise, consider that US headline CPI in Feb was 2.3% and in Japan it was -1.1%. When the US CPI is subtracted from the nominal 10-year yield of 3.74%, it suggests a real yield of about 1.4%. When Japan’s 1.1% deflation is added to its nominal bond yield the real rate is closer to 2.4%.

Separately, Japan reported a somewhat smaller than expected merchandise trade surplus in March of JPY948.9 bln instead of JPY1.02 trillion. Both imports and exports were weaker. Exports were flat on the month and the year-over-year pace slipped to 43.5% from 45.3%. Imports fell about 3.2% on the month and the year-over-year rate eased to 20.7% from 29.5%. In the breakdown the importance of Asia as an export market is underscored by the 52.9% year-over-year increase. Exports to China were up 47.7%. Exports to the US slowed to 29.5% year-over-year form 50.4% in Feb. The dollar found support just above the JPY92.70 area; below which stops are thought to be stacked. Since Tuesday, the dollar has been capped around JPY93.40.

Germany warned yesterday that its economy may have stagnated in Q1, but the PMI data suggest the economy picked up as the quarter progressed and carried into Q2. Germany’s flash manufacturing PMI rose to an all-time high of 61.3, while services edged fractionally higher. This reinforces ideas that domestic demand remains weak but exports, as traditionally the case, are leading the economy. In contrast France’s manufacturing PMI was little changed at 56.7 from 56.5, but the service PMI jumped to 57.8 from 53.8. Overall the euro zone PMI for manufacturing rose to 57.5 from 56.6 and the service PMI rose to 55.3 from 54.1. The debt/deficit and credibility issues are outweighing this positive economic news.

Turning to the UK, retail sales were a bit disappointing, rising 0.4% instead of the 0.6% the consensus expected. The UK reported a smaller budget deficit than expected for March and revised lower Feb figures. The CBI monthly trend survey was soft, but the forward looking expectations component increased. The focus in the UK is on the televised debate tonight as numerous polls show a virtual dead heat, which still appears to give Labour a small plurality of seats.