After a period of relative calm, its back to business as usual in Greece, with growing concern that bailout terms will need to be renegotiated again. The trigger was a recent report by Moody’s that suggested Greece will have trouble making its next round of payments, amidst mounting tensions in Athens between the left-wing government and the International Monetary Fund (IMF). In a year where political risks in Europe are already elevated (elections in France and Germany), the Greek debt saga is a reminder that there are plenty of dangers lurking in capital markets that can unhinge the current risk-on mood.

Elections or payment?

The question that faces creditors is whether Greece will make their debt payments or renegotiate them. Greece will have to service a €1.4 billion payment to the European Central Bank in February, and then write a €7 billion check to creditors in July. Alternatively, the Greek government could choose early elections in order to negotiate a better position for itself. Moody’s has suggested that Greece will be “highly challenged” to make these payments, but the ratings agency feels that some sort of compromise can be worked out that resembles the 2015 resolution.

Only sustainable and consistent growth will be able to provide a long-lasting solution to the debt crisis, not only in Greece, but in other indebted European countries (such as Italy). Given that growth has been elusive for Greece, even as it has struggled to reform its economy, structural changes probably need to be implemented over time. However, a successful short-term solution to Greek debt is also essential. In the current period
of rising nationalism, an amicable resolution to the current payment would be a welcome relief to the global economy.

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In a meeting yesterday, ECB President Mario Draghi emphasised that it will respond vehemently to the collapse in oil prices that is decelerating Eurozone inflation when the ECB governing council meets again in March.

Principal Global Investors have released their latest economic insights paper by Managing Director of Global Research and Strategy Indraneel Karlekar, looking into the inflationary conditions and slowed market growth that has activated the ECB’s next steps.

Key insights include:

The dropping of crude oil prices by almost 40%, coupled with Eurozone inflation of only 0.2% in December has resulted in a global oversupply of oil, indicating that the price of Brent in 2016 is likely to stay significantly below 2015 levels

Given current weaker Eurozone inflation dynamics and heightened uncertainty about China, along with significant market volatility, President Draghi has acknowledged the increased downside risk. Stating that key ECB interest rates and asset purchase policies will remain in place, or even be lowered and expanded for a substantial period of time

The ECB has signaled the likelihood of additional policy steps in March, signaling the lowering of the bank deposit rate to -.40% from -.30%, and raising its monthly asset purchases, potentially by euro 20 billion to euro 80 billion as the most likely steps

Despite the gloomy state of the global economy, the U.S. labor market has continued to stand firm, with further tightening in the labor market having the potential to push on wages and start to show in measures of inflation

To read the full report, click here.

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US Fed tapering will benefit most asset classes: Principal Global Investors.

The delay in the US Fed tapering will likely benefit most asset classes, according to the latest Inside Real Estate report from Principal Global Investors.

The extension of the accommodative monetary policy has assisted the US REITs sector with recovering their losses, driven by Japan and the UK, despite investors shying away from the sector and increasing their exposure to cyclical stocks.

The report provides an analysis of the four quadrants from the US perspective, highlighting that even though capital market tailwinds have been given an extension in shelf life, the long term trend in Treasury rates is still upwards as monetary policy gradually returns to neutral.

Indraneel Karlekar, Head of Global Research at Principal Global Investors, is available to comment on the impacts that the US monetary policy will have on global real estate.

To read the entire report, please click here.

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