A statement of non-intent

February 12, 2013

The flurry of activity about a G7 currency statement yesterday can now be put in perspective. It will almost certainly happen but it’s very much going through the motions.

We’ve been saying for a while that having urged it to reflate its economy for some time, Japan’s partners could hardly complain now that it is. Lael Brainard of the U.S. Treasury basically let that cat out of the bag last night, warning against competitive devaluations but saying that Washington supported Tokyo’s efforts to reinvigorate growth and end deflation.

What we’ll get is a bland recommitment to market-determined exchange rates and not much more.

So Japan is off the hook whatever the grumblings in Europe and will not face any serious brickbats at a meeting of G20 finance ministers and central bankers at the end of the week. France is grumbler in chief on this but has secured precious little support from its EU partners, most notably Germany which has already rejected President Francois Hollande’s call for a medium-term target to be set for the euro.

The European Central Bank is ill-equipped to weaken the euro even if it wanted to. The world’s top central banks are expanding their balance sheets, 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. And of course with the Federal Reserve printing money furiously, Washington is not in much of a position to criticize the Bank of Japan for doing the same.

Today, ECB chief Mario Draghi talks to the Spanish parliament, having done the same in the Bundestag late last year. This should be an easier crowd. Madrid seems nowhere near seeking outside help. Its yields are creeping up with a corruption scandal embroiling Prime Minister Mariano Rajoy’s party but it’s still shifted 19 percent of its annual issuance needs in the first six weeks of the year. However, if it becomes clear its debt-cutting drive is way off track and it will miss its deficit target badly, things could change. For his part, Draghi has said he is going in listening mode.

With Italian elections approaching, its borrowing costs have also started to creep up. It sells up to 8.5 billion euros of one-year bills today while Madrid will offer up to 5.5 billion euros of six- and 12-month bills. No such problems for Ireland which, having negotiated a deal on its bank debt last week that lifts much of the burden, now looks set to get out of its bailout programme this year. S&P upped Ireland’s rating outlook to stable late on Monday.

The political uncertainty in Spain and Italy which the markets have woken up to are keeping a bid in the market for safe haven German Bunds which are creeping up again. There’s been little market reaction to North Korea’s nuclear test. European stock futures are pointing down but only marginally.

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