ECB cacophony

November 21, 2013

A round of European Central Bank policymakers speeches this week can be boiled down to this. All options, including money-printing, are on the table but it will be incredibly hard to get it past ECB hardliners and neither camp sees a real threat of deflation yet.

Reports that the ECB could push deposit rates marginally into negative territory in an attempt to force banks to lend have been played down by our sources, not least because it would distort the working of the money market.

Today, ECB chief Mario Draghi speaks at a Berlin conference. Bundesbank head Jens Weidmann, who opposed this month’s cut in the main interest rate along with about a quarter of the Governing Council, will also be there as will Angela Merkel.

The markets are all a-jitter after minutes of the Federal Reserve’s last meeting appeared to put tapering back on the table in the not too distant future. Interestingly, the Fed did talk about cutting the interest paid to banks on excess reserves.

The leaders of France and Italy called last night for a full-time chair of the Eurogroup of euro zone finance ministers and again pressed for agreement on a mechanism to wind up or rescue failing banks by year-end with the euro zone’s ESM rescue allowed to recapitalize banks directly. Berlin continues to chafe against proposals that smack of mutual liability, given it fears its taxpayers will end up footing the bill.

The ECB nominated a Frenchwoman, Daniele Nouy, to chair its new banking supervisory arm which will monitor about 130 of the currency bloc’s largest banks from late next year. 

South Africa’s central bank delivers a monetary policy decision today and has made it clear that it can’t do much about global investment flows governed by U.S. policy. The rand has weakened about 22 percent against the dollar this year. With growth too low to bring unemployment down from around 25 percent, economists don’t expect any rate move before the second quarter of next year.

Greek Finance Minister Yannis Stournaras will submit the government’s 2014 budget plan to parliament. It will predict an end to a crippling six-year recession and a primary budget surplus in the hope that is can secure further debt relief by its international creditors. The latest plan may tweak projections in a draft plan released in October, which forecast growth of 0.6 percent and a primary surplus of 1.6 percent of GDP next year.

Talks with EU/IMF/ECB lenders over how to fill what they see as a 2 billion euros hole in next year’s budget have faltered and the troika said late yesterday they would leave Athens today and not return until early December.

Stournaras says a deal will be done in time for a Dec. 9 meeting of euro zone finance ministers but that must now be in doubt. The odds are the gap will be bridged and bailout money will continue to flow at some point. Greece looks like it can survive without another tranche of loans until early next year.

Flash PMIs for the euro zone, Germany and France will add flesh to the fourth quarter’s bones. Q3 GDP figures last week showed recovery slowing in the euro zone with France contracting again but Spain just pulling clear.

The last three months of the year promises somewhat better numbers but no one should be calling this a durable recovery with unemployment so high.

There is no tension in the euro zone government bond market. Spanish and French auctions are likely to sail away. Italy has virtually met its 2013 funding needs courtesy of a bumper retail bond earlier this month, and will cancel some of its scheduled bond auctions over the rest of the year.

Today, Spain will sell up to 3.5 billion euros of a new three-year bond. France will offer up to 8 billion euros of five-year and inflation-linked bonds.
Prime Minister Mariano Rajoy will appear on a radio interview earlier in the morning following our interview with Treasury Minister Cristobal Montoro who said the economy was on a strong enough recovery path to achieve three more years of deficit reduction without further spending cuts or tax hikes, and that growth next year would total at least 0.7 percent.

France is contracting, has had its credit rating further downgraded and faces criticism for being timid with labour and pension reforms.
President Francois Hollande has promised to overhaul the tax base to make it fairer though not lower but that is cutting little ice with the electorate who are delivering him record low poll ratings. Today, French farmers are believed to be planning road blocks around Paris in an anti-tax protest.

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