MacroScope

As election passes, German election keeps on chugging

By Mike Peacock
September 24, 2013

Germany’s Ifo sentiment index is the big data release of the day and is forecast to continue its upward trajectory after the country’s PMI survey on Monday showed the private sector growing at its fastest rate since January.

Surveys have been strong through the last quarter, putting a question mark over the downbeat European Central Bank and German government forecasts for the second half of the year. The currency bloc as a whole looks set to pretty much replicate its 0.3 percent growth in the second quarter, nothing spectacular but a sign that recession is probably a thing of the past. The German economy rebounded strongly in the second quarter, growing by 0.7 percent. It might not quite match that in Q3 but it may not be far off.

After the Federal Reserve took its finger off the trigger, emerging markets have enjoyed some welcome respite. Hungary’s central bank meets today having cut interest rates by just 20 basis points in August, ending a run of successive quarter-point cuts stretching back into last year.

With no short-term pressure on the forint, central bankers have been talking about a further 10-20 bps cut and they have already announced that they will pump up to 2 trillion forints into the economy to provide cheap loans to businesses.

On the other side of the ledger, the government of Viktor Orban is intent on helping the many Hungarians with foreign currency mortgages with a relief scheme that will impose big losses on the banks. Deputy Economy Minister Gabor Orban, speaking at the Reuters Russia/CEE summit, could have some interesting things to say. We also interview the finance ministers of Russia, Bulgaria and Serbia.

Turkish Central Bank chief Erdem Basci is to speak on monetary policy at a regional university, his first appearance since the Fed surprised markets by sticking with its stimulus programme.

The lira was well and truly on the receiving end of the market turmoil sparked by Ben Bernanke’s announcement of the tapering plan in May. To some extent the pressure is off for now, good news for Basci who insisted he would not raise interest rates to support the currency and predicted it would rise of its own accord, that after burning through a big chunk of the central bank’s reserves by selling dollars.

But the Fed’s action has only been delayed, not scrapped. Finance minister Mehmet Simsek told us late last week that Turkey would get only brief relief from the surprise postponement of a reduction in U.S. monetary stimulus and must press ahead with plans to rebalance its economy.

With Germany’s elections out of the way, there will be a renewed focus on unfinished euro zone business. EU/IMF/ECB inspectors are poring over the books in Portugal and Greece. Both are likely to require further bailouts and the latter is refusing to enact any more austerity measures.

Greek public sector union ADEDY will stage a 48-hour strike against state worker firings  and transfers from today. Angela Merkel, in the ascendant, does not look likely to countenance a further writedown of Greek bonds, now mostly held by euro zone governments and the ECB. In fact, the smart money is that across the piece the gradualist approach to policymaking will continue.

After Mario Draghi told the European Parliament on Monday that the European Central Bank could offer banks more long-term loans to keep money-market interest rates from rising too far, we get a clutch of ECB speakers – Benoit Coeure, Ewald Nowotny and Yves Mersch – through the day.

This idea appears to be gaining credence, although the Fed’s no-show last week did what the ECB has failed to do and took some of the steam out of money market rates.

There could be another reason for another LTRO further out if the ECB’s bank “asset quality review” lays bare early next year more black holes in the financial system.
Klaus Regling, head of the euro zone’s rescue fund, testifies to European parliamentarians. A number of policymakers have suggested that the ESM could provide the backstop for restructuring or winding up failing banks under the bloc’s banking union until more permanent funds are in place.

German Finance Minister Wolfgang Schaeuble said earlier this year that the ESM should limit any recapitalisation of banks to well below 80 billion euros, if anything at all, and other European states are just as doubtful about using the fund for that purpose, not least because it could whittle away the resources needed to prop up a euro zone government.

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