MacroScope

Italian shuffle

By Mike Peacock
November 18, 2013

The decision by one of Silvio Berlusconi’s key allies to break from his party and back Prime Minister Enrico Letta’s fragile coalition appears to have shored up the Italian government with a final vote on expelling the media magnate from public life looming large.

Berlusconi said on Saturday his rump centre-right party had split from the coalition but did not have the numbers to bring it down.
Angelino Alfano, interior minister and deputy premier, said all five of the centre-right ministers under his umbrella would stay in the government but there is still plenty of disagreement within the coalition about the 2014 budget and doubts about Letta’s ability to push through meaningful economic reforms.

Letta is speaking at a conference “Charting the Way Ahead” today. On Sunday, economy minister Fabrizio Saccomanni said he wanted to accelerate public spending cuts following Friday’s criticism of the draft budget by the European Commission, which it said could break the bloc’s debt rules.

The week boasts a seemingly endless list of central bankers breaking cover. It would be easier to list which of the ECB’s 23-man Governing Council is not speaking over the next few days so brace yourself for a cacophony.

Today, Euro Finance Week, a gathering of Europe’s banking and policymaking aristocracy, gets underway with ECB Executive Board member Yves Mersch featuring (Mario Draghi appears later in the week).

An Austrian National Bank conference boasts ECB policymakers Joerg Asmussen and Ewald Nowotny as well as central bankers from Poland, Slovenia, Croatia and Czech Republic, the ECB’s Luc Coene speaks on Belgium’s banking sector five years after Lehman and senior Bank of Italy official Fabio Panetta presents the central banks’ biannual Financial Stability Report.

The Bundesbank puts out its monthly report on the German economy. Board member Joachim Nagel said yesterday there was no asset price bubble building for the time being (despite a recent Buba warning about house price inflation in Germany’s big cities) but that investors must be made aware that current low interest rates will not last.

We know a quarter of the ECB Governing Council didn’t want to cut interest rates earlier this month and more glaring differences could be about to emerge. Chief economist Peter Praet has raised the prospect of the ECB starting outright asset purchases (QE by another name) if things got too bad while his colleague, Bundesbank chief Jens Weidmann, took the opposite tack, saying interest rates should not stay at record lows for too long.

If anything more is done, it is most likely to be a new round of long-term liquidity pumped into the banking system – a repeat of last year’s LTROs. And it won’t happen this year. A negative deposit rate to push banks to lend more is not impossible but the ECB has been reluctant so far and there are problems in terms of distorting the money market.

The euro zone has been somewhat stuck while German coalition talks continue, nearly two months after Angela Merkel won elections but fell tantalisingly short of an absolute majority.

Her CDU/CSU bloc and the centre-left SPD should be entering the final stretch now and over the weekend Merkel signalled her readiness to accept the Social Democrats’ demand for a legal minimum wage in order to secure their agreement to form a government.

Federal Reserve officials are generally talking dovish but U.S. data is starting to come in strong, leading investors to speculate that the Fed could start reducing its bond-buying programme early next year or maybe even before this year is over.
If that gains traction, the main action on our patch will be in the key emerging markets, particularly Turkey and South Africa. There have been no ructions yet similar to the summer “taper trantrum” but there are already signs in Asia with the Indian rupee and Indonesian rupiah coming under pressure.

Today, Federal Reserve Bank of Boston President Eric Rosengren speaks at an Abu Dhabi conference on strengthening financial sector oversight.

EU foreign ministers hold monthly discussions with Ukraine the focus. Ministers will discuss whether the EU should sign a landmark trade deal at a summit in Vilnius on Nov 28-29. They may delay taking a decision to a later date.

Moscow is not pleased and has threatened to interrupt gas supplies to its neighbour and demanded Kiev repay outstanding loans. We reported exclusively last month that the EU is in advanced discussions with the International Monetary Fund on providing standby financing to Ukraine if necessary.

In Berlin, Merkel will speak in the Bundestag about the upcoming EU “Eastern Partnership” summit in Vilnius. Austria’s Raiffeisen Bank voted with its feet on Sunday, saying it was in talks to sell its Ukrainian unit. Countries in central and southeastern Europe, including Italy, get virtually all of their Russian gas supplies via Ukraine.

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