Greek Bailout Agreed as EU and UK Economies Shrink

The Greek bond swap will be a topic of discussion at this weekend’s G20 meeting in Mexico City. OECD Chairman Gurria has stated that “Private sector creditors would face a worse outcome if they declined to participate in the bond exchange.” The goal of the bond exchange program is to shave EUR100 billion off soverign Greek debt.

United Kingdom’s GDP shrank by 0.2 percent in the fourth quarter which prompted the Bank of England Governor Mervyn King to qualify the recovery of the U.K. economy as “slow and uncertain.” King is trying to calm more optimistic views that see England avoiding two consecutive losing quarters as the outlook for the first quarter of 2012 is positive.

Adam Posen and David Miles from the BoE stood on the wrong side of a 7-2 Bank of England vote to raise stimulus by 75 billion pounds. The 275 billion pound target will get raised by 50 billion to 325 billion pounds.  The reasons given for the lower figure were a more positive outlook on Europe than that at the end of 2011. Not the strongest endorsement after David Cameron’s comments during Davos.

Oil prices have reached an all time high in Europe and the U.K. (EUR 92.75 and GBP 78.53) due to supply concerns and a steady demand. US Dollar weakness has further propped up the price of oil as its the currency of denomination and countries where their local currencies have appreciated will feel a double pain as exports and energy costs both rise.

The European Union Economic and Monetary Commission released their 2012 forecasts for the 17-nation currency. The expectation is for the Eurozone to contract 0.3 percent. This is a revised forecast from their November figures of 0.5 percent growth for 2012

Greece has the difficult task of cutting its deficit from 160 percent of GDP down to 120 percent while in the midst of a recession. It is clear what the EU got out of this deal. Greece is likely to default as the social pressure will be too intense and the proposed tax increases and wage cuts will bring protest to the streets.

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