It’s official: Greece defaults

12 March 2012  •  Source: Mark Deans, Moneycorp

With the Budget due next week, British political parties are jostling for position with headline-grabbing and populist taxes. Who could quibble with a mansion tax or a tycoon tax except mansion-owning tycoons? But perhaps more could be made of schemes that would improve quality of life instead of just hosing politically-expedient Aunt Sallys. What about taxes on BMI or botox or road closures or train cancellations? A tax on chewing gum, for example, would simultaneously make city streets cleaner and football managers more telegenic.

Maybe Greece could earn some much-needed revenue by road-testing innovative tax ideas for the EU’s other 26 members. Goodness knows, it needs the money and its current tax code is not doing the job particularly well. Moreover, at the end of last week Greece proved its mettle as a fiscal test-bed when it executed a government default and the sky didn’t fall. A committee in New York had decided that to repay only a quarter of one’s debts amounted to a “credit event” within the meaning of the act, triggering the settlement of about $3bn of credit default swap contracts.

Financial markets reacted with aplomb. After a two-year build-up there could not have been any pretence of surprise at the result. The euro fell on Friday but it was more with a sigh of resignation than with a shout of horror.

Sterling scratched higher against the euro, more by accident than by design. It certainly did not cover itself with glory during the morning when the UK economic data came out. A 0.3% monthly rise in manufacturing production was overshadowed by an unexpected -0.4% decline for broader industrial production (including mining and energy). The producer price index showed manufacturers being squeezed again, as their costs rose by an annual 7.3% while factory gate prices were up by only 4.1%.

The main statistical excitement came after lunch with the US employment report. Non-farm payrolls rose by 227k in February, 17k more than the market consensus. Amendments to the previous two months added a further 61k to the tally. Seventeen successive monthly additions have restored 2.8m of the 8.6m US jobs lost in 2008-09. In the last six months the average increase has been 201k. Things appear to be speeding up in the US employment market and investors see this as a good thing.

Unusually, they also saw it as a good thing for the US dollar. Perhaps because of an obligation to be negative about defaulting Greece and the euro, investors bought the dollar despite the positive US economic news, propelling it to the top of Friday’s class. It remains to be seen whether this amounts to a change of heart or a momentary quirk.

A very gentle post-default agenda today covers German wholesale prices and Italian fourth quarter gross domestic product, with Britain’s RICS house price balance and Australian business confidence tonight. Who knows, with a bit of luck, and for the first time in more than a year, there may be nothing to say about the euro tomorrow morning. Oh, hang on, EU finance ministers meet this evening: So much for that dream…

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