G8 — plenty to worry about

June 17, 2013

The week kicks off with a G8 leaders’ summit in Northern Ireland. Syria will dominate the gathering and the British agenda on tax avoidance is likely to be long on rhetoric, short on binding specifics.

But for the economics file, this meeting could still yield big news. For a start, Japanese prime minister Abe is there – the man who has launched one of the most aggressive stimulus drives in history yet has already seen the yen climb back to the level it held before he started.

The financial backdrop could hardly be more volatile with emerging markets selling off dramatically since the Federal Reserve warned the pace of its dollar creation could be slowed.

Berlin has said the G8 leaders are likely to discuss the role of central banks and monetary policy, and Angela Merkel will hold bilateral talks with Abe during the summit. President Barack Obama travels to Berlin after the summit for talks with Merkel.

We’ve seen an early version of the draft communiqué which talked of more reforms being needed and welcoming Japan’s efforts to galvanise its economy while warning it to keep an eye on medium-term stability – all fairly predictable stuff. But that was put together by the British hosts before the latest bout of turmoil so it will be interesting to see whether a greater sense of urgency has been injected into proceedings.

Separately, three key members of the European Central Bank – Jens Weidmann, Joerg Asmussen and Yves Mersch – are delivering speeches today.

If the market volatility prompted by the Fed’s intervention, which has caused a more modest rise in peripheral euro zone borrowing costs than the carnage seen in emerging markets, does not calm soon investors may well start looking askance at the currency bloc’s high debtors again.

Things will have to get much worse than they are now but Greek coalition parties are at each other’s throats, the IMF has just proclaimed that Portugal’s public debt position remains very fragile and Italy has declared it will make no more cuts although its deeper-than-expected recession is pushing its deficit up.

Not for the first time, Greece is the most dangerous potential flashpoint. With its stock market downgraded to emerging status by equity index provider MSCI, Prime Minister Antonis Samaras faces a potentially serious revolt within his coalition government over the abrupt shuttering of the state TV broadcaster.

Samaras is seeking to resolve the row but the coalition is the guarantor of Greece’s second bailout and if it fell, the country would be thrown back into crisis (and that’s aside from its relentless recession, 27 percent unemployment rate and faltering privatization drive, all of which point to a further debt restructuring in the future).

Samaras is due to meet coalition partners today to try and find a way forward. Over the weekend, both junior coalition partners rejected a compromise whereby a smaller number of staff would be rehired to resume news broadcasts and Samaras dismissed talk of early elections.

Spain also remains deep in recession with staggering rates of unemployment. The International Monetary Fund will publish its latest review of the Spanish economy later today.

Turkey’s two main labour unions have called a one-day strike against the forced eviction of anti-government protesters from an Istanbul park, a move which triggered one of the worst nights of violence so far. While the protests pose no immediate threat to prime minister Erdogan’s government, they have tarnished Turkey’s image as a haven of stability in a turbulent Middle East. Expect more market gyrations.

Safe haven German bund futures have dropped at the open with all eyes already on the Tuesday/Wednesday policy meeting of the Federal Reserve. European stock futures are pointing modestly upwards.

Bernanke will not be at the G8 summit. We will find out this week whether his May 22 intervention that the Fed might “take a step down” in the pace of bond purchases was a deliberate gambit aimed at taking the froth of stock markets that had soared in the early part of the year. Two weeks prior to that he had warned about concerns that investors were “reaching for yield”. If that was the intention, it’s certainly worked, so it’s possible this week’s message will be a softer one.


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