MacroScope

Super, or not so super, Thursday

By Mike Peacock
February 7, 2013

For those who thought the euro zone had lost the power to liven things up, today should make you think again.

ITEM 1. The European Central Bank meeting and Mario Draghi’s hour-long press conference to follow. Rarely has a meeting which will deliver no monetary policy change been so pregnant with possibilities.

Draghi, the man tasked with becoming the European bank regulator on top of all his other tasks, will face some searing questioning on his time as Bank of Italy chief and what he knew about the disaster that has befallen the country’s oldest bank, Monte dei Paschi.

Ireland has given the normally imperturbable Italian another headache. A Reuters scoop last night prompted Dublin to rush inton presenting emergency laws to liquidate failed Anglo Irish Bank as part of a deal with the ECB to relieve it of annual payments in excess of three billion euros on money it was given to prevent its banking sector collapsing. The ECB has already rejected one proposal from Dublin and will no doubt be aggrieved at being railroaded in this way but there is a genuine will to get this sorted. The euro zone still needs a success story and relieving this burden would all but seal Ireland’s ability to exit its bailout.

On top of those two potential bombshells, Draghi will doubtless be quizzed on the strengthening euro – too strong France and others say, though not Germany. It’s probably too early for him to bite but if he did indulge in a spot of verbal intervention it would have a seismic short-term effect on the forex market.
The world’s top central banks are expanding their balance sheets by printing money, or at least not reversing course, while the ECB’s balance sheet is tightening, partly due to banks paying back early cheap money the central bank doled out last year. Neither does the ECB’s statute allow it to  intervene directly to weaken the euro so it could well be the loser as others explicitly or implicitly follow policies that will drive their currencies lower.
But if it doesn’t act and the euro keeps going up, hard-won internal devaluations (that means savage wage and job cuts to you and me) in the likes of Spain and Portugal, and their ability to export more as a result, could be snuffed out by the foreign exchange market in no time at all.

ITEM 2. Carney and the Bank of England.
The Bank of England will do nothing at its policy meeting today, having created money equivalent to nearly a quarter of UK GDP, although it may say something about what it might do with the proceeds from some of the first gilts bought under QE which are now maturing.

But there is a highly significant debut by Bank of Canada chief Mark Carney, soon to take over the UK bank, testifying to a parliamentary committee for up to three hours. Carney has already ruffled feathers by suggesting inflation targeting (a sine qua non for British central bankers) might not be as efficacious as targeting nominal GDP. There’s very little chance of that sort of policy shift, and Carney has already backed off, but it’s clear that he is going to be very much a new broom who will look at alternative policy options, including maybe a more flexible inflation target and an indication of how long rates will stay at rock bottom. He certainly embarked on a root-and-branch organization revamp of the Bank of Canada when he took the helm in 2008.

As head of the Financial Stability Board – the global financial risk watchdog – Carney’s views on bank regulation, soon to be returned to the Bank of England, will also be interesting.

ITEM 3.
Had enough? Sorry. Spanish bond auctions have been going like hot cakes but today’s sale of up to 4.5 billion euros of debt could be different after the market woke up this week to the corruption scandal enveloping Prime Minister Mariano Rajoy’s party. Yields may rise for the first time in many weeks.

ITEM 4.
How often does a crunch two-day EU summit figure this low on the priority list? Sorting out the long-term budget is drier stuff but important nonetheless, not least to show the bloc is capable of acting in a coordinated fashion. After an abject failure in November, the signs are that a deal will be done this time which will, at least on the face of it, show some cuts (though there may well be some creative accountancy involved in demonstrating that). Expect a deal either in the small hours of tomorrow morning or maybe considerably later. It will be interesting to see how David Cameron acts. Having delivered his in-or-out referendum threat, he could grandstand again but this is the man who once told his party is had to “stop banging on about Europe”.

 

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