Crisis in Kiev

December 2, 2013

Ukraine’s shock decision to turn its back on an EU trade deal continues to reverberate with mass rallies on the streets of Kiev in protest at President Viktor Yanukovich’s decision.

To try to defuse tensions, Yanukovich issued a statement saying he would do everything in his power to speed up Ukrainian moves toward the EU. Is this another U-turn or mere semantics? The answer is important.

Kiev must find more than $17 billion next year to meet gas bills and debt repayments. Another sovereign meltdown is far from impossible.
Yanukovich is due to embark on a trip to China. Dare he go? And is the opposition cogent enough to threaten him? The call for a national strike will be an acid test.

After a week off, I’m in recap mode and there’s plenty to chew on.

The ratings agencies gave some interesting food for thought. The Netherlands lost its AAA status, leaving only Germany, Finland and Luxembourg in that exalted club in Europe. Moody’s raised Greece by two notches and S&P upgraded Cyprus, though both are still firmly in junk territory. And S&P followed Fitch by raising its outlook on Spain’s rating.

With France further downgraded last month the picture of southern Europe’s high debtors starting to close the gap on their northern counterparts (Germany excepted) is slowly gaining momentum.

As always, there are caveats. EU/IMF inspectors have postponed a planned visit to Greece, a move that marks a new low in relations and could delay bailout payments to Athens as frustration grows over Greece’s failure to complete the reforms it has promised in return for aid.

The French government has been criticized for the timidity of its labour and pension reforms, although it has moved some way. Evidence of further liberalization may come today with a report on relaxing Sunday shopping restrictions to be presented to Prime Minister Jean-Marc Ayrault. It is expected to clarify which sectors should be allowed to do business.

Germany’s Angela Merkel finally struck a coalition deal with the centre-left SPD which the latter’s grassroots members are likely to support, allowing a government to be up and running before Christmas. At least that is what weekend polls suggested.

Structural economic reforms were notable by their absence in the agreement and Berlin’s position on how far banking union should go still requires clarification. As ING economist Carsten Brzeski put it: “The new German government’s message to Europe is: ‘muddle on folks’.”

At least a functioning government in Berlin will allow the euro zone’s policy wheels to start turning again. The administration in Rome looks a little stronger too.

Silvio Berlusconi was finally expelled from parliament for tax fraud but not before his centre-right party split with the breakaway faction remaining within Prime Minister Enrico Letta’s coalition. Letta comfortably won a confidence vote on the 2014 budget in parliament and said he would call a news vote in early December to confirm his majority.

So the euro zone appears to be ending its least eventful year of the last five with no imminent threat to its survival. It would do well, though, to cement banking union in 2014 in a way that convinces investors that its financial institutions are underpinned. ECB vice-president Constancio and Irish finance minister Noonan speak about banking union later today.

On the data front, euro zone inflation pushed up to 0.9 percent, having plunged to 0.7 the month before. That takes some of the pressure off the European Central Bank to act at its last policy meeting of the year on Thursday.

Countering that, the pace at which loans to households and companies is contracting accelerated in October, a mini-credit crunch that may persist until ECB-led bank health tests are published next year.

Another interest rate cut after last month’s surprise move would be a shock, launching quantitative easing (asset buying) has been given the “over my dead body treatment” by a number of policymakers and more LTRO low-interest long-term loans for banks are not likely until next year.

October manufacturing PMI surveys for euro zone countries are due this morning. We’ve already had flash numbers for the currency bloc as a whole, Germany and France, which did nothing to change the picture of Europe’s largest economy ticking over nicely while France flounders in its wake. Italian, Spanish and Greek readings – for which there have been no earlier estimates – are likely to provide a more interesting focus.

Britain’s economic survey evidence has been strong for several months – reflecting growth of 0.8 percent in the third quarter. Today’s PMI is forecast to show more of the same, a fillip for finance minister George Osborne has he prepares his autumn budget statement on Thursday.
That growth has returned is undeniable but the opposition Labour party’s charge that few people feel it with the cost of living far outstripping wage growth also has a ring of truth.

The government announced on Sunday that green levies would be altered to help bring down high energy bills (Labour is promising a freeze on domestic energy prices). Osborne also flagged more welfare cuts as part of an ongoing effort to drive down debt. With the next election now only 18 months away, some sweeteners are to be expected.

David Cameron is in Beijing banging the drum for UK business and an EU-China trade deal, interesting given he may be the man who inadvertently ushers Britain out of Europe.

The Bank of England will publish a breakdown of how much each bank/building society lent under its Funding for Lending Scheme in Q3. Osborne denies there is a housing market bubble but the Bank moved last week, stopping incentives for banks to ramp up mortgage lending via the FLS and refocusing the scheme on helping small firms to borrow.

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