Thread: Greek Government Debt Equals 50% Haircut

Daily Market Commentary for October 27, 2011

European leaders finally announced a deal early today in which private investors in Greek government debt will take a 50% haircut on the value of their holdings as part of a wide-ranging package of measures designed to stem the euro-zone debt crisis.
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Labor Department reported that the number of people who applied for unemployment benefits fell slightly in latest week which is an encouraging trend of stable readings, however, official said that no special factors impacted the latest claims data. Initial jobless claims in the week ended October 22 decreased by 2,000 to a seasonally adjusted 402,000. Since the end of July, initial jobless claims have held in a range from 395,000 to 432,000. New claims average over the last four weeks which is viewed as a more accurate gauge of employment trends, moved higher by 1,750 to 405,500. Just one month ago, the four-week moving average was at 418,000. At the current stage of recovery hiring by historical standards remains very slow. Just to keep up with the growth of the labor force the U.S. needs to add at least 125,000 jobs a month and double that to drive down the nation’s unemployment rate which stood in the range of 9% since April 2009. In the week of October 15, the Labor Department reported that the number of people who continued to receive state unemployment checks decreased by 96,000, to 3.65 million striking lowest level since late September 2008 - with continuing claims reported with a one-week lag. The four-week moving average of insured employment fell 26,750 to 3.70 million which is lowest level seen in three years. For week ended October 8, a total of 6.68 million people received some type of government benefit which is down more than 14,000 from previous week.

Gross domestic product during the July-through-September period expanded at a 2.5% annual rate as reported by the government. During Q3, U.S. growth sharply accelerated as consumers and businesses ramped up spending, a report from the government that shows the economy remained resilient in the face of strong headwinds. The rate is nearly double the 1.3% rate of growth in Q2 and much faster than ttepid increase of 0.4% in Q1. Even though the expansion in GDP did not meet market expectations, Wall Street took the data in stride posting nice gains as a result of European leaders’ deal to address the euro zone’s sovereign-debt crisis. Only a few months ago the U.S. recovery appeared to be screeching to a halt, with some economists warning of a “double-dip” recession. A tense budget standoff in Washington and Europe’s worsening debt crisis contributed to the darker mood as many indicators of economic activity fell. According to surveys of consumers and executives, even though people said they felt worse about the economy they did not allow it to affect their spending. During Q3, consumer spending rose 2.4% to mark the biggest increase since Q4 2010 with the ales of durable goods such as autos rising by 4.1%. Consumer spending typically accounts for two-third of U.S. economic growth. Businesses ratcheted up investment by 16.3% to the highest level in more than a year and purchases of software and equipment surged higher by 17.4%. Exports rose 4.0% compared to 3.6% in Q2 with domestic manufacturers leading the U.S. recovery since the end of the 2007-2009 recession in large part by boosting exports. Imports rose 1.9% from 1.4% in Q2 and excluding imports, final sales of goods and services purchased in the U.S. jumped 3.6% in the three months through September. U.S. growth would have been even faster if imports, which subtract from GDP, had not increased sharply. Inflation fell after a big run-up during the first half of the year. The price index for domestic purchases fell to 2.0% in Q3 from 3.3% in Q2. Excluding food and energy, the index declined to 1.8% from 2.7%. While the economy showed marked improvement in Q3, the U.S. continues to face plenty of obstacles such as but not limited to worker wages remaining flat, hiring remains slow and the nation’s unemployment rate remains stubbornly high at 9.1%, among other things.

During October, manufacturing activity in the Kansas City Federal Reserve Bank's district edged higher. The Kansas City Fed's manufacturing composite index increased to 8 during October from 6 in September which is the second straight slight monthly gain after the index dropped to 3 in July. The increase was concentrated on non-durable goods plants, and in particular, food and chemicals. Expectations of future activity rebounded during the month of October after easing over the past few months. Despite the gains, the index remains well below its average of 13.7 in the first six months of 2011. The index is not as soft as a similar indicator in the New York region, which remained in negative territory during the month of October.

A federal judge in North Carolina denied a handful of motions seeking to dismiss the criminal case against former U.S. Senator and presidential candidate John Edwards. Attorneys for Edwards argued that six felony and misdemeanor counts should be thrown out, claiming the case was brought for political purposes. The defense team on Wednesday said the indictment did not define the type of election law crime that was committed. Edwards is currently charged with using $1 million in undisclosed campaign funds to cover up an affair he had during a 2008 run for the White House.


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The UK, despite an almost equal budget deficit percentage, has its own currency and won't be directly affected by the bail out (the Euro-sceptics will all too easily allude to this at the pub), whilst the fifteen other Eurozone economies will be picking up the tab. The problems for the rest of Europe will not just be helping out this repayment, but the markets could feel something of a domino effect, thus hurting struggling economies like Portugal and Spain. Investments dry up for these nations because the risk is so great and this leads to interest rate hikes making it impossible for nations in trouble to borrow. The spiral continues.

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