Good morning. Here’s what you need to know. 

• Asian markets traded sharply higher overnight as China’s Shanghai SE Composite gained 2.4 percent. European shares are modestly higher and U.S. futures point to a slightly positive open. 
• The European Central Bank has agreed to Greek concessions in a bid to move debt restructuring talks along, the Wall Street Journal’s Stephen Fidler, Matthew Dalton, and Alkman Granitsas report. The ECB will exchange sovereign debt below par value, however it will not take a loss on the move. If advanced, it will mark a key milestone in Greece’s ability to secure its second bailout of €130 billion. Here’s who gets hurt if Greece goes bust.
• German exports declined in December at their fastest clip in almost three years, down 4.3 percent month-on-month to €86.7 billion. Imports also fell unexpectedly to €72.8 billion, down 3.9 percent. Economists polled by Bloomberg expected an increase of 0.8 percent. However, the largest euro zone economy still posted its largest year of exports in 2011, at €1.06 trillion. 
• Rick Santorum rallied in the western United States as he picked up 28 delegates with wins in both Minnesota and Colorado caucuses, as well as the primary in Missouri. Santorum won 44.8 percent of the vote in Minnesota, followed by Ron Paul with 27.2 percent and Mitt Romney at 16.9 percent. In Colorado, Santorum took 40.2 percent of votes. The Missouri primary does not impact delegate selection. These are the 13 elections investors will be watching this year >
• Yahoo announced that four of its board members were stepping down, as the company reshuffles management further. Chairman Roy Bostock, as well as Vyomesh Joshi, Gary Wilson, and Arthur Kern will depart the struggling tech giant. Replacements include former Rovi CEO Fred Amoroso and LiveOps Chairman Maynard Webb. Click here to see the strangest thing about Yahoo’s announcement >
  
• Walt Disney announced that profits rose 12 percent during the first quarter, topping analyst expectations at $0.80 per share. Revenue in the division including ESPN and ABC rose three percent to $4.8 billion. However the company’s film unit was impacted by fewer releases and saw a revenue shortfall.
• Earnings season continues in earnest today, with Time Warner, Visa, and Groupon reporting quarterly results. Already this morning, Time Warner announced earnings per share of $0.94, above expectations, as revenues surged to $8.2 billion during the fourth quarter. Analysts polled by Bloomberg forecast earnings per share of $1.45, and $0.03 for Visa and Groupon, respectively. Here’s everything we’ve already learned from the biggest reporters during earnings season.
• Nokia will cut some 4,000 jobs as it shifts its production to producers closer to its Asian supply chains. Factories in Komarom, Hungary, Reynosa, Mexico and Salo, Finland will be impacted. Last year, sales at the company fell 25 percent to 77.3 million units. Nokia is banking part of its resurgence on its new Lumia line.
• Airlines will be forced to conduct greater inspections of their fleets of Airbus SAS A380s after cracks were found in some planes, the European Aviation Safety Agency says. The aircraft manufacturer has responded that there is a two step solution to address the problem.
• The Mortgage Bankers Association announced mortgage volume surged 7.5 percent during the week ending February 3. That’s a reversal from last week when mortgage applications fell by 2.9 percent. Refinancing activity gained 9.4% during the week. There are no other major economic announcements scheduled in the U.S. 

Bonus: Megan Fox is the new face of Armani’s beauty collection.

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Greece wants to have a deal on debt restructuring done by tonight, though technically it won’t go into a real chaotic default until March.

Here’s the problem though, it’s not just about getting its creditors to agree to take a given haircut on their holdings.

Reuters:

Euro zone finance ministers told Greece it could not go ahead with an agreed deal to restructure privately held debt until it guaranteed to implement reforms to secure a second financing package from the euro zone and the IMF.

Euro zone ministers had hoped to meet on Monday to finalize the second Greek bailout, which has to be in place by mid-March if Athens is to avoid a chaotic default, but the meeting was postponed because of Greek reluctance to commit to reforms.

This isn’t new, but it’s worth repeating… The problem isn’t just restructuring, but getting more aid, which will be on the condition of more reforms, which are already tearing apart society.

Tick… tick… tick…

UPDATE: Kathemirini reports on a Jean-Claude Juncker interview in Der Spiegel wherein he apparently says the same thing, that Greece’s choice is basically: Default or reform. The key thing here is that Euro leaders just don’t seem scared of default anymore. In this post LTRO world, Greece has lost its leverage.

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• GREECE: Debt Deal Talks Will Continue Through Monday
• Emergency Meeting Called In Greece, New Sign Bailout May Be In Trouble
• REPORT: ECB Involvement Is Now Make Or Break Condition Of Greece Debt Deal

Just like old times: Will they get a deal done before the Asian markets open?

REUTERS:

Greece has just one day left to strike a deal with impatient lenders and reluctant political party leaders on a 130 billion rescue plan before the country is pushed towards a chaotic default, its finance minister warned on Saturday.

…

In an apparent warning to Greek political leaders opposing key reforms, Finance Minister Evangelos Venizelos said the patience of European partners and the International Monetary Fund footing the bill for Greece’s bailout was wearing thin.

“There is great impatience and great pressure not only from the three institutions that make up the troika but also from euro zone member states,” Venizelos said after what he called a “very difficult” conference call with euro zone counterparts.

The most remarkable thing about this is the the indifference of the market to all this. We keep trying to imagine what the market would be doing if these headlines had come from last November.

(Via @alea_)

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• Emergency Meeting Called In Greece, New Sign Bailout May Be In Trouble
• REPORT: Papademos Is Considering Resigning If He Can’t Get Support For New Austerity Measures
• Why The Core Is Also To Blame For The Euro Crisis

This post originally appeared at GlobalPost.

Unemployment is up, the economy contracted in the last quarter, so austerity cuts are biting, right?

That has been the tone of not only my reporting in the last year but all reporting about the British economy. It has been the framework for political criticism by the opposition Labour party.  Its mantra has been “too far, too fast.”

A report released yesterday by the Institute for Fiscal Studies  puts all that in a different light. The IFS is the most respected independent economics think tank in Britain, its pronouncements frame the debate. This is what it found:

Just 2.3 percent of the austerity cuts have been carried out. That means, according to the IFS director Paul Johnson, “More than £9in every £10 of planned public service spending cuts is still to come.”

In some ways that is not a surprise. Not since World War 2 has there been such a sustained period of cuts put in place. Just planning for them must take an enormous amount of time. But what is shocking about the IFS report is this: with so few cuts put in place the British economy is already tanking.

Here’s the money quote from the report, as far as I’m concerned.

“The austerity program has been a significant drag on growth in recent quarters … The austerity program has also dampened net job creation.”

I think that is stating the bleeding obvious, but the fact that it comes from the IFS gives it weight.

Throw in the fact that the euro zone crisis has slowed economic activity throughout the EU and you get a situation where growth through trade will be anemic at best in the next couple of years.

The IFS suggests that Chancellor of the Exchequer George Osborne come up with a £10 billion ($15.7 billion) stimulus in his budget to be presented next month to help Britain out of recession. This could be achieved through tax cuts or increased spending.

The IFS has been hawkish about deficit reductions in recent years. This suggestion represents a serious change of position.

The government says it will not ease up. If you consider that the economy has contracted with so few of the cuts actually made you wonder what will happen when the other 90 percent of austerity cuts to state spending are put in place.

And even if the de-leveraging program is completed as planned by 2016, it will only reduce the size of government spending back to what it was in 2005.

Lots of pain, for not much gain.

Why?

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No, I’m not talking about the fact that Germany and Holland want to take over as the de facto government in Greece, as Noah Barkin writes for Reuters (that they want to do it through Brussels is a mere technicality).

Germany wants Greece to give up budget control

Germany is pushing for Greece to relinquish control over its budget policy to European institutions as part of discussions over a second rescue package, a European source told Reuters on Friday.

“Given the disappointing compliance so far, Greece has to accept shifting budgetary sovereignty to the European level for a certain period of time,” the document said. Under the German plan, Athens would only be allowed to carry out normal state spending after servicing its debt, the FT said.

Ilargi: Nor do I mean the report from the Kiel Institute for the World Economy that Ambrose Evans-Pritchard cites for the Telegraph, and which implies a second bailout for Portugal is looming near:

Investors fear mounting losses in Portugal as second rescue looms

Portugal is fighting a losing battle to contain its public debt and may be forced to impose haircuts of up to 50pc on private creditors, according to a top German institute.

Yields on Portugal’s five-year bonds surged on Thursday to a record 18.9pc, reflecting fears that the country will need a second rescue from the EU-ECB-IMF Troika. Three-year yields hit 21pc.

Ilargi: Or even the true meaning behind the steep drop in the Baltic Dry Index, on which Sebastian Walsh reports for Financial News:

Chart of the Day: The Baltic Dry Index

Statistics from the Office of National Statistics this morning showed that the UK went into reverse in the last quarter of 2011, when the economy shrank by 0.2% – but as the Baltic Dry Index shows, the global economy is looking even more worrying.

Nick Bullman, managing partner at risk consultant Check Risks, said the index is a good way of looking at the risks to the global economy, “as it tends to be where they hit first”.

According to Bullman, its initial collapse in October was driven primarily by a fall-off in demand from China, where declining housing prices pushed purchasing managers to cut back on orders for the raw materials whose transport the Baltic Dry Index reflects.

“What this is signalling is that the world economy is slowing down much more quickly than people have been thinking.“

Ilargi: The report I refer to in the title requires a little background info:

In Holland, where I’ll be for a few more days, there’s a “rogue” right-wing party named PVV (Party for Freedom). It has no cabinet ministers, but the minority moderate right-wing government needs its support to stay in the saddle. The PVV, like other European right-wingers, is, among many other things, against much of what the European Union stands for. It’s certainly against the Euro, and the bailouts with Dutch taxpayer money of countries like Greece and Portugal.

A few months ago, the PVV announced they had commissioned a report from British financial consultancy firm Lombard Street Research on the economic consequences of staying in the Eurozone versus returning to the guilder.

That report is about to be published “within days”. It will prove to be highly explosive material. And the PVV will do all it possibly can to make sure it receives a lot of media attention. It may tear down the incumbent government, which is a heavy advocate of all things Europe, and which will have to quit once the PVV support dies, but for that party that’s not the no. 1 concern.

And if and when Holland has a large scale discussion on the report and the issues it raises, Germany won’t be able to ignore it and stay behind. And then, neither will France.

Max Julius of Citywire.uk did a piece on the report, without mentioning it directly, 10 days ago:

Why Germans and Dutch will exit ‘suicide pact’ eurozone

Germany and the Netherlands are likely to quit the eurozone rather than swallow an indefinite number of ‘unrequited transfers’ to the union’s crisis-stricken nations, according to Charles Dumas, chief economist at Lombard Street Research.

This would amount to €150 billion a year, of which Germany would have to stump up just over €60 billion, France a little under €50 billion and €15 billion from the Netherlands, he said. And this would be on top of the shortfall in consumer spending, in addition to the fact that wages and consumption may have to be held down in the future, Dumas warned.

Ilargi: This morning, Dutch daily Algemeen Dagblad cited Dumas as saying these numbers are “cautious estimates”. They are valid only if Greece and Portugal would leave the Eurozone in 2012 – which Dumas expects will happen -. If they don’t, the payments will be even higher.

He predicts the costs of a return to the guilder will be much less than for instance the Dutch government’s Central Planning Bureau claims, which warns of huge losses if Holland were to leave the Euro.

Dumas: “It’s just like in a religion: first they promise you heaven, and if that doesn’t work out, they threaten you with hell.”

The economist dismissed the notion that the region would be able to turn itself around so as to make such support from its ‘core’ unnecessary. Citing the example of the persisting transfers from west to east Germany, he pointed out: ‘The ones that need the money to flow in carry on needing the money to flow in, or just stay poor.’

Calling the one-off damage of splitting up the eurozone ‘seriously exaggerated’, Dumas warned that as the crisis deepens, he believes ‘Germany and the Netherlands will actually realise that they had better call it a day and jump out.’

Ilargi: Sure, the Dutch government, and certainly the EU and the banking system, have formidable PR machineries at their disposal. We’ll see a lot of numbers being floated that contradict Lombard’s report. And we’ll have to wait a few days to see exactly what numbers Dumas et al. come up with.

But the people of Germany and Holland are already very nervous about the fact that they face austerity and budget cuts while billions of euros are transferred to southern Europe. Up until now, the fear of economic disaster predicted in unison by government leaders have kept them quiet. Now that a reputable economic research firm flatly contradicts these predictions, and states that, instead, it’s staying within the Eurozone that will be the far more costly option, the people will grow increasingly restless.

Charles Dumas again, from Algemeen Dagblad:

“The Dutch people have lost thousands of euros in purchasing power per year since the currency was introduced.”

Governments in Berlin and The Hague will have a lot of explaining to do. They have to do so against a backdrop of (near-)failing Greek debt swap talks, which will at the very least force them to admit that they have a lost tens of billions in taxpayer money to Club Med countries already.

With a second Portugal bailout waiting in the wings. And lots of negative news on Italy and Spain. And more domestic budget cuts.

They’ll realize that their governments have painted far too rosy pictures about the issues so far. And they’ll expect them to deliver more of the same. This is what we call a receding trust horizon.

It’s not the report alone, it’s the entire combination of factors. The report will “merely” serve as the catalyst that blows up the powder keg. It may take a few months, but it will happen. The publicity hungry rogue PVV party that commissioned it, followed by anti-Eurozone voices elsewhere, will make sure of that.

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This post originally appeared at GlobalPost

BRUSSELS, Belgium — Portugal’s protesting pensioners were determined that the president won’t go hungry, but police prevented them from leaving their charitable donation of rice, bread and a collection of loose change at his riverside palace.

The irony was evident as President Anibal Cavaco Silva has ignited a wave of protests with comments that he won’t be able to make ends meet on his pension when he retires from the county’s highest office.

“I’m pretty sure it won’t be enough to cover my costs,” Cavaco Silva, told reporters last week, referring to the 1,300 euro monthly pension he expects to receive from his time as a researcher and university professor.

The 71-year-old head of state was attempting to tell citizens that he shares their pain as they struggle with the euro zone’s second worst recession (after Greece), and they face pay and pension cuts as part of a 78 billion euro international bailout deal.

More from GlobalPost: Greece: Debt deal done? Falling apart?

The interest rate Portugal is paying on its debt is soaring, and the price investors pay for insuring its government bonds now rivals that of Greece last April, according to Dow Jones Newswire.

One recent reform, signed into law by the president, effectively shaved 14 percent of all pensions over 600 euros a month.

The president waived his salary as president after being elected for a second term a year ago, but on tax returns he has declared income of around 10,000 euro a month. Portugal’s average monthly wage is around 1,000 euros and shrinking.

More from GlobalPost: Portugal downgrade cause euro and stocks to decline

Cavaco Silva’s comments did not go down well.

By early morning Wednesday 28,370 people had signed an online petition calling for the center-right president to resign. The protesters outside the 18th century presidential palace in Lisbon held out hats to collect coins under the slogan: “A penny for Cavaco.”

The president released a statement admitting he “had not been sufficiently clear” in expressing himself in his pension comments, which came on the day that central bank figures showed that last month’s Christmas consumer spending fell a record 4.5 percent compared to December 2010. The economy is expected to shrink at least 3 percent this year.

Cavaco Silva has been a leading figure in Portuguese politics since serving as prime minister from 1985 to 1995, before being elected to the largely-symbolic role of president in 2006. But commentators said Cavaco Silva is comments showed a level of insensitivity that would not be easily forgotten by citizens.

“The country lost its president at a time when it needs him the most,” Joao Marcelino, director of the Diario de Noticias newspaper told RTP television.

More from GlobalPost: Is New Europe out-gunning the Old?

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The 2012 Barrons Roundtable came out this morning and the discussion is always interesting.

I have tended to veer towards the comments of Felix Zulauf since he’s the global macro master at the table. That said, here are some of his macro thoughts.

I think he’s a bit dramatic, but given that he’s one of the few roundtable members who has been able to connect the dots (for the most part) his comments are always worth considering (see past performance from Roundtable members here):

Zulauf: Europe is going to be key this year for the markets and the economy. China is slowing; the emerging world is slowing, and the U.S. is barely above water, constrained by its structural problems. I have called the euro a misconstruction since its birth. The problem is a difference in competitiveness among European countries, and you can’t solve it by lending money to the less competitive countries. You have to deflate wages and prices in the south, and inflate the north. But given Germany’s history, it will never inflate.

The members of the euro zone agreed in December that each country could have a structural deficit of no more than half a percent of GDP. If a deficit goes above 3% of GDP, the country will be sanctioned. This agreement now has to be ratified in all countries. But when you agree to such a prescription and you are uncompetitive, your currency is overvalued by 30%, you can’t devalue, and your nominal interest rates are too high, that is a recipe for a depression. It is a death sentence. Several countries won’t ratify the contract, and the next day their markets will be repriced accordingly. They will exit the euro, and the turmoil will go to the next level. Greece is bust in either case. If you can devalue your currency by 40% or 50% in that situation, at least you will have the chance to see the sun again and recover.

…

Zulauf: The banking system goes bust. Assume Greece won’t repay anything, or at most 10% of its total debt. It is not just the government but the private sector that is bust. That means banks in other countries will be in trouble, which means they will be nationalized. Governments won’t have the money to pay for this, so they will assume even more debt. That is the chain of events I expect in 2012, and if you believe it won’t affect the U.S. you are dreaming. The estimated notional value of the over-the-counter fixed-income-derivatives market in Europe is estimated to be about 60 trillion euros. There are many links to the U.S. banking system, although we don’t yet know who is positioned how. If one country exits the euro, all hell will break loose.

…

Zulauf: Every European country will be in recession in 2012, and probably in 2013.

Source: Barrons

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The chatter on Friday’s downgrades of European sovereign ratings debt is all over the place – from those dismissing it as old news (especially given that S&P warned back on December 5th) to those viewing it as part of a larger and consequential transformation of the international monetary system.

What follows is an attempt to provide a guide to the multi-faceted implications.

It focuses on three types of consequences: (i) those that are unambiguous and already reflected, albeit not fully, in market valuations; (ii) those that are less well understood but will become clearer in the next few weeks; and (iii) those that are consequential but where the analytics are still largely unknown at present.

The sovereign debt of European sovereigns was already trading at yields consistent not only with what S&P announced today, but also with more draconian downgrades – thus the view that the impact on overall yields and spreads would be contained.

Yet there are some differences between signaling an action and actually taking it. First you remove residual uncertainty about the action, including timing and scale. Second, you encourage others to follow.

Third, you impact the pattern of investment flows, especially those subject to guidelines and restrictions defined in terms of ratings.

All three are relevant for Europe. The net result has both a quantity and price angle: a decline in future investment flows into the Euro-zone, and incremental market pressure that, other things being equal, would be more persistent than would have otherwise been the case.

This speaks to a weaker Euro and recurrent volatility in sovereign spreads.

In introducing a rating wedge at the very inner core of the Eurozone, the downgrade of France in particular impacts Pan-European vehicles.

This includes the ESFS  which the European Union uses to bailout countries and, in future, banks.

While there is some short-term uncertainty, the scope of these vehicles – and, therefore, their effectiveness in countering the region’s debt crisis – will be undermined. It also has implications for the ECB’s  continued willingness to contaminate its own balance sheet.

That takes us to known unknowns, and they are consequential.

It is unclear the extent to which the downgrades will alter the function of the international monetary system over time. It is also unclear how material the incremental headwinds blowing out of Europe will be for countries already facing internal fragilities.

It is unclear the extent to which the downgrades will materially impact the asset quality and capital adequacy of banks and other financial institutions. And there is little clarity on the range of reactions on the part of companies, depositors and households.

Over the next weeks, months and years, we will learn a lot more about the consequences of today’s historical downgrades in Europe. What is clear at this stage is that the balance of risks is to the downside, for Europe and for the global economy.

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Britain’s economy stagnated in the final quarter of 2011 and is “very likely” to contract in the first half of 2012 according to the British Chambers of Commerce (BCC).

The euro zone debt crisis caused the economy to stagnate in 2011 and it has failed to improve this year, with the survey suggesting that one or two quarters of negative growth are possible.

A recession is usually defined as a decline in GDP for two or more consecutive quarters, a situation which the BCC believes can be avoided if the Government takes action.

The squeeze on household incomes from the Government’s austerity measures, high unemployment and rising prices have caused consumers to curb their spending.

In this environment retailers are struggling to boost sales and the housing market is floundering.

Although retailers such as Marks & Spencer managed to increase sales in the Christmas trading period, this was only achieved through heavy discounting, which still failed to boost the sales of higher-priced items such as household goods.

BCC director general John Longworth urged the Government to quickly implement the measures outlined by the Chancellor in the Autumn Statement.

He said: “Measures to improve the flow of credit to businesses, reforms of our complex planning system, and investment in infrastructure projects are all needed now”.

A recent poll by Ipsos MORI suggests that most business leaders believe the eurozone crisis will cause the UK economic climate to worsen this year.

The ‘captains of industry’ survey found that found that fewer than 10 per cent of 100 company bosses questioned expected the economy to improve.

However, 84% support the current Government and said that they expect its policies to improve the British economy in the long-term.

[This post was published with permission from CNBC.]

The euro and the Swiss franc will be smart currency plays in 2012, Jim Rogers, the billionaire investor and author, told CNBC Tuesday.

Rogers, who recommended buying the euro (which has since fallen in value) in an appearance on CNBC in November, said that he was thinking about buying more euros after selling some in recent weeks, as hedge funds unwind their short positions in the currency. 

“I suspect [German Chancellor Angela Merkel] and that crowd will do something to make us feel better,” he added.

Rogers said calls for the European Central Bank to further monetize debt would be a “horrible mistake” and predicted that the markets will run out of patience later in 2012.

“The market will start saying: ‘Come on guys, we have had enough, this is shoddy and we’re not going to play any more,’ ” he predicted.

Asked how well his fund performed in 2011, Rogers said that he is “still able to pay his bills” and that the fund had fared better than it had the previous year.

Germany’s Merkel and French President Nicolas Sarkozy will meet next week to try and hone the details of the latest proposals for the euro zone.

Rogers hopes that Germany will have a “long-term aversion” to monetizing debt.

“Everybody in Northern Europe knows that they don’t want to bail out the Portuguese and the Greeks any more,” he said.

A host of European policymakers have warned that 2012 could be another difficult year for the region.

The Swiss franc will become the safest haven in the currency markets as the U.S. dollar and the yen’s status as safe havens looks shakier, Rogers believes.

He also thinks that the Swiss Central Bank’s attempts to keep the currency from strengthening above 1.20 against the euro — moves aimed at protecting Swiss exports — will ultimately fail.

“In my experience in currency markets, the markets have more money than any central bank,” he said.

Rogers believes that 2013-14 “will be a terrible hangover” for the market after a relatively upbeat 2012, as governments manipulate markets in an important year for elections. U.S. President Barack Obama and France’s Sarkozy are among the world leaders facing an election this year.

“We’re going to see a lot of distortions in the markets because a lot of governments are going to be finding a lot of money and printing a lot of money,” he said. “Can America continue to add staggering amounts of debt to the balance sheet and print staggering amounts of money? I don’t think so.”

In contrast, many economists believe that 2012 will be a bleak year for the global economy. 

Rogers says he should have bought U.S. government bonds two years ago and described the current high levels as a “bubble.” Other investors are worried that the price of U.S. Treasurys will fall whenever interest rates begin rising from their historically low levels.

He believes that the Canadian dollar is “one of the best currencies around.”

In Asia, Rogers’ largest positions are in the yen and renminbi — and he said that he will buy more renminbi any chance he gets.

Rogers, who is based in Singapore, predicted that Myanmar, the troubled state previously known as Burma, will be the best place to invest for the next 10 to 20 years — although American nationals cannot invest there.

The Myanmar government, perhaps best known internationally for imprisoning Nobel Peace Prize-winning dissident Aung San Suu Kyi, has recently reorganized its currency and become more open to foreign investment.

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