The Papandreou government has pledged to cut Greece’s public deficit from 12.7 percent of GDP last year to 8.7 percent this year. Faced with growing resentment at home to a bailout of Greece, various finance ministers and other government officials across the EU are calling for Greece to impose stiffer measures to ensure that it meets its objectives. But the Greek government appears to be leery of pledging to do more than it already has.

 

The Greek Finance Minister George Papaconstantinou has argued that the country doesn’t need an EU bailout and that his government is “doing enough” on the deficit. He has resisted calls for deeper public sector spending cuts, using an ill-advised metaphor, saying his task was like “trying to change the course of the Titanic.” As we recall, the Titanic sunk.

 

This is a no-win situation for the healthier, more fiscally conservative members of the eurozone. Helping Greece will open the door to others seeking costly handouts. Not lending a hand and instead forcing Greece out of the monetary union, on the other hand, would likely result in a default on Greek’s sovereign debt, hurting the many European banks holding Greek paper.

 

On the other side of the globe, to story is quite different; rather than wrestling with a contracting economy, China’s concern is that growth is too strong. The central bank announced late last week that it is raising its reserve requirements by 50 basis points, its second increase this year in the amount banks must set aside. The move is meant to stem excessive bank lending and to help throttle back the red-hot Chinese economy.

 

The announcement, which is to take effect on February 25, after the nation returns from lunar New Year festivities, coincided with news that bank lending in January totaled 1.4 trillion yuan (approximately $200 billion), or nearly one-fifth of the government’s planned 2010 total lending of 7.5 trillion yuan. Also out last week was M2 money supply statistics which showed China’s broad money supply increased by 24 percent year over year in January, well ahead of the targeted 17 percent.

 

We think the Chinese will prevent their economy from overheating as they have a number of tools at their disposal to throttle back growth, such as letting the yuan rise in value or raising wages in the country, especially for rural workers. But stock and commodity markets in the U.S. are likely to key off of the news out of China, for better or worse, as that country’s growth remains an important engine of global growth.

 

Our stock market indicators remain bearish this week, suggesting the correction is not yet over. The economic data here remains decidedly mixed and judging by the light volume rallies and heavy volume when stocks are sliding, investors are becoming increasing fretful.

 

Perhaps the most interesting aspect of trading of late has been the decoupling of the U.S. dollar and gold. The greenback has gained at the euro’s expense in recent weeks, but increasing risk aversion has also helped push the price of gold back above $1,100 an ounce. A move back toward $1,200 appears to be in the making.