Latest on PSI

According to Greek websites, the latest on PSI take-up currently stands between 77% and 79%, with rumors of a take-up as high as 90%. The deadline for Greek bondholders to accept the PSI offer on Greek law bonds is Thursday 8pm GMT. Results are due on Friday at 6am GMT.

Volatility seen surging after PSI deadline (near US close)
Since the deadline for accepting the PSI offer is at 8pm GMT, (3pm EST) we should expect a barrage of rumours from Greek and other European websites announcing their estimate/predictions of the final results. This would be the equivalent to exit polls in the US presidential elections, when market reaction will always escalate despite at an early stage.

But market players will not forget two other developments later on Friday:
i) Likely RRR cut from China on Friday morning, which does make sense after this week’s lower than usual GDP outlook.
ii) US jobs report, which could serve as a game changer as far as ending hopes of an outright QE3.

Note: any sterilized form of QE3 will be no different from Operation Twist, hence will not be welcomed by he markets as did QE1 & QE2. 

Don’t Forget the Rating Agencies
If we have learned anything over the last six months, it is that credit rating agencies usually disappear from the headlines during important news-days (such as run-up to important EU summits), before striking back with a downgrade or a warning. If the pattern holds, then we can expect one of the major agencies (most likely S&P or Fitch) to dampen any optimism from a sufficient take-up in the PSI deal.

Reminder: All these PSI acrobatics are aimed at enabling Greece to receive its second bailout and meet its March 20th payment. There are no guarantees that Greece will not need a third bailout as the nation enters its sixth year of recession as well as prolonged policy following the outcome of the April elections.

ECB lowers growth, cautions on Inflation as euro faces “another D-day” The ECB lowered its 2013 GDP outlook range to 0.0% to 2.2%, compared to 0.3%-2.2% issued previously. But the bank also paid lip service to inflation, saying CPI could stand a little above its preferred target of 2% later this year. We say “lip service” because the Frankfurt-based central bank is aware of Germany’s opposition to the potentially inflationary LTROs. As long as these funds are not lent out (especially considering tightened lending standards), the risk of inflation may be limited to exogenous factors (rising energy prices, weak currency) rather than a demand-lend overheating in prices.