Will ECB come to post-summit party?
Bit of a day coming up with the European Central Bank topping the bill. A quarter-point interest rate cut is widely priced in and the bank may also lower its deposit rate to try and encourage the banks that dump up to 800 billion euros back in its coffers every night to invest it in the real economy or even Italian and Spanish government bonds.
There is even some talk of a third round of three-year money printing but that looks premature. Yes, the ECB has acted in the past after euro zone politicians have shown some gumption (which last week’s summit still just about qualifies for) but the other part of that equation is that the currency bloc has had to be right on the brink. Spanish 10-year yields are back below 6.5 percent, still too high but not as acute as in recent weeks. There are not likely to be any hints that the ECB will revive its bond-buying programme, despite the urgings from Spain and Italy, nor is it likely to give any support to the idea of giving the ESM rescue fund a banking licence so it can borrow virtually unlimited funds from the ECB (a back door way of achieving the same result).
The risk for the markets is that the ECB does very little, which should not be discounted, and even if it does there’s a possibility of a “buy the rumour, sell the fact” scenario.
Where money printing is much more likely is Britain. The Bank of England is expected to create another 50 billion pounds just two months after calling a halt to its previous round of QE. The rate-setting committee voted 5-4 against such a move last month and a further round of poor economic data, and a fall in inflation, since is likely to have prompted at least one of the nay-sayers to jump camp. Governor Mervyn King was already one of the four.
On any other day a testing Spanish bond auction would be the focus. Not today, though if it went wrong it would move markets more than either of the big central banks. Madrid is offering a modest amount of up to 3 billion euros of 3-10 year bonds. Yields will remain high but for the three-year, for example, it is trading on the secondary market about 60 basis points less than the last time it was auctioned. The 10-year is trading higher than the last time it was sold in early June, however. Redemptions of around 20 billion euros of Spanish bonds at the end of the month should help.
France holds a much heftier auction of up to 8 billion euros of three different bonds but there is little market pressure on its borrowing costs at the moment with 10-year yields around 2.5 percent. Plans announced yesterday for over 7 billion euros of tax rises, much of it on the rich, will go some way to meeting the whopping deficit cuts of up to 43 billion euros which the state auditor says Is required over this year and next.
Perhaps more notably, Ireland returns to the debt market for the first time since September 2010 with 500 million euros of three-month treasury bills. Irish yields have fallen to the same levels as Spain’s since EU leaders said last week they would look at improving the terms of its bailout. Dublin wants to start issuing long-term debt again towards the end of the year even though its funding needs are covered by the bailout through the end of 2013. There is a lot hanging on this. The euro zone is desperate for a bailout success story to counter-balance the Greek debacle. Ireland, despite all the pain it has suffered, looks like it could provide it though the trick will be able to stay raising money in the market rather than doing it as a one-off.