06 February 2012 at 14:58 GMT
Will Greece choose the necessary reforms this time?
As we wrote in our Macro Update earlier Monday the Greek PSI negotiations are slowly moving forward but a final agreement is still not in sight. While the Greek people are suffering, it is mostly due to their own politicians' mismanagement of the economy and the lack of will to impose the necessary labour market reforms such as loosening the labour unions' grip and lowering the minimum wage.
In Greece's pre-Euro era the country would just devalue the currency whenever their competitiveness went down the drain, thus kicking the can down the road in terms of making the necessary structural reforms. In a free market economy real wages will automatically go down as a deterioration in competitiveness forces the unemployment rate up. Due to the labour unions' power and reluctance of wage declines currency devaluations have been the salvation for policy makers.
This time the rules are different as Greece is part of a monetary union and imposes a threat to the union's interest should they default. Greece has to deal with a pack of creditors that want order. The terms are not that harsh given that Greece is demanded to cut spending by another 1.5 percent of GDP (should not every country be able to cut that?) and lower minimum wages. Both demands will shrink the public sector (good) and increase the private sector's competitiveness (good). Besides, they are imposing a deep haircut to their creditors that provided them funds for their party and they need more bailout money to avoid a collapse in March.
If Greece folds and leaves the table (the Euro, red.) it will likely not solve anything for them as we described in analysis on Argentina's sovereign default in 2002.
German factory orders in December were better than expected
Meanwhile investors are taking a cautious positions in stocks with the Stoxx 50 index down 0.6 percent. Within European stocks the German DAX index is the best performing as better than expected factory orders from December helped erase some of the earlier losses.
US stocks have opened 0.5 percent down as investors here also await the results of the Greek PSI. In pre-market, Loews reported 4Q EPS of 0.77 missing estimates of 0.90, the shares are down 0.5 percent.