MacroScope

Game of chicken in Kiev

By Mike Peacock
December 4, 2013

No sign of tensions calming on the streets of Kiev, in fact today we could have a new flashpoint.

Prime Minister Mykola Azarov’s cabinet is holding its weekly meeting in the government building which protesters have blockaded since Monday, paving the way for a possible showdown.

Popular pressure, following President Viktor Yanukovich’s decision to reject an EU trade deal and turn back to Russia, is being matched by the markets, and it is from there that the potential tipping point could come.

The cost of insuring Ukrainian debt against default has been driven up to a level not seen since January 2010. Ukraine faces gas bills and debt repayments next year of more than $17 billion. Investors fear that the country could run out of cash to repay maturing debt and central bank calls on depositors to avoid a bank run suggests it fears just that.

Yanukovich is in China but Beijing tends to be longer on promises of help than hard cash in these situations. That leaves Moscow since it’s virtually impossible to imagine Kiev acceding to the sort of conditions the IMF would demand in return for help, with elections looming in 2015.

Portugal took a significant step towards following Ireland through the bailout exit yesterday, successfully swapping 6.6 billion euros of bonds maturing in the next two years for longer-dated paper which will cut its redemption bill as it tries to return to market financing in the middle of next year.

It will now aim to launch new bond issues in early 2014. Bond yields on the secondary market fell sharply yesterday after the successful swap, which attracted significant foreign investor interest – another positive sign. Today, the country’s EU/IMF lenders begin the third to last quarterly review of the 78-billion euro bailout which averted default in 2011. In the last review, the lenders rejected Portugal’s request to ease debt-cutting goals.

European Commission President Jose Manuel Barroso is in Lisbon to meet Portuguese Prime Minister Pedro Passos Coelho. Both will speak at a conference. There are still some potential roadblocks, notably the constitutional court which has thrown out a number of government austerity measures. It could shoot down salary and pension cuts included in the 2014 budget to meet EU/IMF debt targets.

Italian Prime Minister Enrico Letta, who has called a second vote of confidence in his coalition government for next week, is promising a limited programme of institutional and economic reforms. I wonder what limited means. The likely election of rising star Matteo Renzi to head the centre-left PD could cause problems if he pushes for more dramatic policies that enrage the centre-right part of the coalition.

Today, Letta meets European Council President Herman Van Rompuy. Earlier in the week, EU economics chief Olli Rehn said Italy was not doing enough to reduce its huge public debt, which is set to top 133 percent of GDP. Letta retorted that it was not Rehn’s place to express scepticism and that it was vital not to stifle early signs of growth with too much austerity.

Euro zone service sector PMIs will dribble out through the 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 and Spanish 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. Today’s PMI is forecast broadly 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 is also true.

The government has already moved to counter Labour’s plan to freeze high energy bills and last night pulled another rabbit out of the hat, announcing that the government would sells its remaining stake in the Eurostar cross-channel rail link.

The government also said the six big UK insurers have agreed to invest 25 billion pounds in transport and energy projects over the next five years. That will keep those projects off the national balance sheet but the question is what return those companies have demanded, i.e. is this short-term gain for long-term pain. Britain has been here before.

Poland’s central bank has a policy meeting. No interest rate change is expected with an anticipated gradual economic improvement not demanding a rise until late 2014. The central bank has already said it would keep rates on hold at least until end-June next year to support the nascent recovery.

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