ANZ Morning Brief: Back to the fiscal front

BACK TO THE FISCAL FRONT.  With the dust settling after the FOMC tweaks, market attention invariably returns to budget negotiations.  For an understanding as to how negotiations might pan out we need to look beyond macroeconomics (which tells us to simply get a deal done: sooner as opposed to later) and into game theory. “Games” like the Prisoner’s Dilemma are examples of self interest prevailing over group interest which leaves players worse off.  And so negotiations continue with little sign of substantive progress.  In many ways we should not be surprised.  With the bond market giving the politicians an armchair ride, supported by aggressive Fed action, the “game” lacks enforcement mechanisms though firming political support for President Obama is possibly an instrument to eye.

EURO CRUTCHES.  The growth backdrop remains poor but developments continue to buy time across Europe .  Eurozone finance ministers agreed on a Single Supervisory Mechanism for Banks.  Spain had a successful bond auction.   Greece received rescue funds.  The leader of the Democratic Party and head of the centre-left coalition in Italy (polling 30 percent), says he is committed to outgoing PM Monti’s fiscal rigour and is open to greater mutual budget checks in Europe, a key element of deeper euro zone integration.  These dynamics are far short of a panacea – and we note some sovereign spreads were marginally wider – but they still make the glass half full (incremental structural progress) as opposed to half empty (huge debt and no growth).