MacroScope

Euro chat resumes

By Mike Peacock
September 13, 2013

After the summer lull, euro zone and EU finance ministers meet in Lithuania. The “informal Ecofin” can often be quite a big deal but with German elections only nine days away, it’s hard to see that being the case this time.

During the election campaign German Finance Minister Wolfgang Schaeuble let slip that Greece would need more outside help which would not include a haircut on Greek bonds held by euro zone governments and the ECB.

Since then, European Central Bank policymaker Luc Coene has said Athens might need two bouts of further assistance and Estonia’s prime minister told us yesterday the popular bailout fatigue he flagged as a danger last year had now faded and he was open to aiding Greece with a third bailout and helping other troubled euro zone nations too.

Italy’s political soap opera is the flashpoint of the moment but Greece, Cyprus, Portugal and Slovenia are in a much more fragile state economically and progress on banking union has slowed to a crawl although the European Parliament has voted through the ECB’s powers to take over a regulatory role in a year’s time.

With the ECB effectively underwriting the bloc’s governments with its bond-buying pledge, a cross-border body to restructure or wind up failing banks would do the same for the financial sector. Without it, the seeds of the next crisis could have been sown.

The trouble is, not unreasonably, Germany does not want to fall liable for the failure of a bank in a weaker country but while only national backstops are in place, the “doom loop” of weak banks and sovereigns weighing on each other will be unbroken.

The big question is whether things loosen up after Germany’s Sept. 22 election and that partly depends on what make-up of coalition is presiding in Berlin but probably, in the long-term, far more on what Angela Merkel wants historians to write about her legacy as she approaches what is likely to be her last term as chancellor.

After the European Parliament voted on Thursday, European Commission President Jose Manuel Barroso pointedly said: “Now our attention must turn urgently to the single resolution mechanism.” That is the body which will be responsible for restructuring or winding up failing banks and is likely to be discussed in Vilnius. Don’t expect a leap forward.

Officials have already described the meeting to us as a ‘let’s get up to speed on what we have ahead of us’ gathering but it’s the first time they’ve got together for some while so some news is likely to result.

We’ve heard hints of discontent at the pace of reform in France, particularly since the anaemic pension reform that was produced recently. The EU/ECB/IMF troika is about to return to Portugal for its latest review of the country’s bailout and Greece is an ever-present.

The ministers will also discuss more direct ways to boost lending to companies, spelled out by the Commission and the European Investment Bank in June, which could generate between 55 and 100 billion euros of new loans – nice to have but not an economic game-changer.

Barring a flurry surrounding reports that Larry Summers will be Obama’s pick to succeed Ben Bernanke, markets seem to have hunkered down before the Federal Reserve’s big decision on the future of QE next Wednesday. Some tapering is priced in but if there is any surprise it will be emerging markets – which have seen varying degrees of investment outflows from modest to mass exodus — that will react most violently.

Russia’s central bank holds a policy meeting at which it may cut interest rate by a quarter point. It is under pressure from the Kremlin to do so but a source with a good claim to know has told us that it may instead introduce new medium-term lending auctions in an effort to boost credit flows to an economy that is growing at its slowest pace since 2009.

New central bank head Elvira Nabiullina, who was a Putin acolyte but seems to be demonstrating a strong streak of independence, has even warned that monetary policy would have to be tightened if the government lets up on inflation in 2014.
Having said that, a decision by the Russian president on Thursday to freeze utility prices in 2014 – with the downward pressure that will put on inflation – is a late fillip to chances of a rate cut.

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