Ireland at the finishing line

December 13, 2013

Ireland will officially exit its bailout on Sunday. Not much will happen but symbolically it’s huge and will be used by the EU as evidence that its austere crisis-fighting approach can work. Today, the IMF will confirm Dublin passed the last review of its bailout programme – the final piece in the jigsaw. Finance Minister Michael Noonan is also expected to speak.

For Dublin, this is only the beginning.

Support for the coalition government has slumped with the minority Labour party suffering worst (‘twas ever thus in coalitions).
As a result, Labour is pressing for a loosening of the purse strings while the dominant Fine Gael under premier Enda Kenny seems prepared to bet on a return to growth delivering the votes they need to rule outright after the next election, due by early 2016.

There are already some signs of easing with the government opting for a smaller package of spending cuts and tax hikes in its 2014 budget and the IMF warning planned 2 billion budget cuts planned for 2015 year may not be sufficient. The main benefactor in the polls so far has been Sinn Fein. 

We will interview Slovenian central bank governor Bostjan Jazbec a day after the country said it had a 4.8 billion euro hole in its banking system that it can plug without turning to Europe for a bailout.

That has spared the European Union a politically fraught problem but the small euro zone country’s problems are far from over. A fire sale of state assets will now be triggered and the banks are so embedded into the Slovene economy that deleveraging will cause great damage.

We close the week with another pair of European Central Bank speakers. Chief economist Peter Praet is probably of most interest although Benoit Coeure always bears listening to.

With inflation forecast to remain well below target for the next two years, pressure is growing to act and the ECB has said a number of options were possible, and ready to be deployed.

But the most likely – a repeat of the splurge of cheap, long-term money thrown at banks last year – has been saddled with a new caveat.
Mario Draghi said last week the ECB would only sanction another “LTRO” if banks use it to lend into the real economy, which they didn’t last time, rather than using the cheap money for a carry trade into government bonds, which they did.

Praet floated a plan this week to make that work, saying the ECB may make euro zone banks hold capital against sovereign bonds on their books. He seemed to tie it, however, to bank health tests to be conducted by the ECB. They will only see the light of day in the second half of next year while the consensus is that another LTRO could come much sooner.

Praet said that if the bank tests had the unintended consequence of impeding lending even further then the ECB would provide more cheap long-term loans. This is complicated though. ECB vice president Constancio said this week that most of the weakness in bank lending was due to lack of demand, not lack of supply. So all this could be like pushing on a piece of string.

Despite a dramatic downgrading of government growth forecasts, Russia’s central bank will not ride to the rescue at its policy meeting today as inflation is running at 6.5 percent, above the 5-6 percent target range.

Neighbouring Ukraine continues to offer toil and trouble. For all the drama on the streets of Kiev, the money tells us that an end game must be approaching and the European Union could yet be Kiev’s partner of choice.

Ukraine’s first deputy prime minister Serhiy Arbuzov flew to Brussels seeking billions of euros of aid from the EU in return for signing a trade agreement, which President Viktor Yanukovich rejected last month.

Arbuzov said Ukraine would “soon sign” the accord, but declined to provide any date. In turn, EU enlargement chief Stefan Fuele pledged more aid to Kiev if it signed the agreement. Only a few hundred million euros of EU money is on the table so far but we know the IMF and the World Bank are quietly involved too.

The money tells us why this could yet come together. Kiev’s currency reserves are so depleted they won’t even cover three months of imports. The cost of insuring Ukraine’s debt against default has hit four-year highs. It is estimated to owe $7.5 billion to foreign creditors next year and while Russia could cut the cost of its gas and defer payments, it would probably have to do much more than that to keep its neighbour afloat.

Russia has big problems of its own having admitted its failure to diversify its economy will lead to a far lower level of growth than had been expected all the way out to 2030. If oil prices tumble, it could be in trouble.

Vladimir Putin conceded for the first time on Thursday that Russia’s problems were home-grown and vowed not to abandon the spending promises he made on returning to the Kremlin last year.

But for Ukraine, there is absolutely no certainty. Prime Minister Mykola Azarov was quoted as saying he had asked the EU for 20 billion euros in aid. That ain’t going to happen. Meanwhile, Yanukovich is due back at the Kremlin for further talks next week.

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