An Italian in Greece

July 29, 2013

Italian Prime Minister Enrico Letta will be in Athens for talks with Greek premier Antonis Samaras today with (whisper it) the prospect of the euro zone enjoying its first summer lull for years, in fact all the way up to German elections on Sept. 22.

No major decisions are likely before that point and who knows what will come afterwards, though continuity is a better bet than a radical shift.

 The latest poll at the weekend showed Chancellor Angela Merkel’s centre-right coalition lost its lead over the three main opposition parties. Merkel’s conservatives held steady at 40 percent but her junior coalition partner, the Free Democrats, lost one point to 5 percent while support for the main opposition parties remained steady.

It is almost a given that Merkel will still be Chancellor come the autumn, not least because the centre-left SPD will not countenance a coalition with the far left, which commands eight percent of the vote. The crucial question is whether Merkel has to govern with the SPD or not in a grand coalition that could require some policy massaging.

For the euro zone’s major flashpoints – Portugal and Greece – things have calmed a little, for a while at least.
After a messy, self-inflicted political crisis, Portugal’s reshuffled coalition has formally stuck with the measures required by the EU and IMF in return for rescue loans and Greece has adopted the last piece of legislation needed to free the next tranche of its bailout loans today.

But this is crisis deferred not resolved. The troika of international lenders will return to Athens in the autumn to ascertain whether the government needs to find further savings to meet its 2015-2016 budget targets. Samaras and his only remaining coalition partner, Socialist leader Evangelos Venizelos, have ruled out any further austerity measures.

As for Portugal, most analysts now doubt it can exit its bailout next year, as planned, and will need further outside help.

Letta, meanwhile, is still trying to square the circle of demands within his coalition to scrap a housing tax and planned sales tax increase with a commitment to meet EU budget deficit rules. He will make a speech and hold a joint news conference with Samaras after talks.

Italy also tries to sell 8.5 billion euros of treasury bills, prior to a full bond auction on Tuesday. After the market wobble caused by the Federal Reserve’s QE exit strategy, normal service has so far been resumed. Two-year borrowing costs fell at an Italian auction last week with domestic investors continuing to buy heavily.

The bailout of Cyprus was dysfunctional even by EU standards. Yesterday, Nicosia and its lenders agreed to convert 47.5 percent of deposits exceeding 100,000 euros in Bank of Cyprus to equity to recapitalize it. Under the programme agreed in March, large depositors in the bank were targeted to help pay for its recapitalisation.

Latest data suggest the euro zone economy could start growing again in the second half of the year and prospects for Britain look rosier still, though with wages lagging well behind inflation most Britons would be hard pushed to feel it.
Consumer credit data and the Confederation of British Industry’s July retail sales survey will offer the latest guide to the extent the economy is starting to take off.

It might not be reaching the rest of the country but London appears to be in the grip of something of a housing market boom. 
Business minister Vince Cable broke cover on Sunday to say he feared finance minister George Osborne’s flagship scheme to help British housebuyers, by underwriting new mortgage borrowing, could fuel a new housing bubble.

With the Federal Reserve, European Central Bank and Bank of England all holding policy meetings later in the week, market action is likely to be wary for now. European stock futures are pointing to an incrementally higher open while German Bund futures have also edged up.

Today, the Bank of Israel has a policy meeting, the first without Stanley Fischer at the helm and with the nomination of Jacob Frenkel as his successor running into trouble. It is expected to keep rates at 1.25 percent as it did in June after successive rate cuts in May.

Other emerging market central banks have been tightening policy to shore up their currencies which sold off after the Federal Reserve announced its exit strategy, a fate pretty much avoided by the shekel so far.

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