Emerging wobbles

January 27, 2014

This week will go a long way to determining whether a violent emerging market shake-out turns into a prolonged panic or is limited to a flight of hot money that quickly fizzles out.

On our patch, Turkey is under searing pressure, largely of its own making and that is the theme here. Yes, the Federal Reserve’s slowing of money printing is the common factor, prompting funds to quit emerging markets, but it is those countries with acute problems of their own that are really under the cosh.

Prime Minister Tayyip Erdogan’s purging of the police and judiciary in response to a corruption inquiry that has got uncomfortably close to him has unnerved investors. The central bank, under political pressure, has not raised interest rates but is instead burning through its reserves to defend the lira with only limited success.

French President Francois Hollande will visit Ankara today for talks which are likely to shed fresh light on the impact on Turkey’s EU accession bid of the crackdown on the judiciary and police. The trip follows Erdogan’s first visit to Brussels in five years, where he faced sharp criticism.

Brazilian central bank governor Alexandre Tombini speaks at the London School of Economics. The Brazilian real shed 1 percent against the dollar at one point on Friday so was not at the sharp end of the sell-off.

After violence threatened to spiral out of control on the streets of Kiev, President Viktor Yanukovich offered two top government posts – prime minister and deputy premier – to opposition leaders Arseny Yatsenyuk and Vitaly Klitschko on Saturday.

But they didn’t bite and continued to press for further concessions, including early elections and the repeal of an anti-protest law.
That sets the stage for a potentially explosive special session of Ukraine’s parliament on Tuesday. In the meantime, protesters continued to clash with police in the centre of the capital and unrest has now spilled over to other regions of the country.

The EU’s machinery gets back into gear with a meeting of euro zone finance ministers and a parallel meeting of those ministers in the bloc’s centre-right political grouping. Neither look likely to cause fireworks. Much bigger will be the European Commission’s unveiling of its plan for “mega banks” later in the week.

Germany, France and Italy have attacked EU plans to curb banks’ ability to take market bets with their own money. Leaked plans show the Commission will propose banning proprietary trading at banks above a certain size, which already falls short of what the Volcker Rule is demanding in the United States.

The question is whether there will now be further dilution. All in all, it looks like another victory for the bank lobby.
Franco-German talks in Paris involving finance ministers Pierre Moscovici and Wolfgang Schaeuble, and central bankers Jens Weidmann and Christian Noyer, could shed further light here.

Spanish Prime Minister Rajoy meets Italian counterpart Enrico Letta in Rome with reform of Italy’s electoral law, in an attempt to deliver more stable governments in future, a growing focus.

Matteo Renzi’s anointment as the head of the largest party in Letta’s coalition has brought new momentum to the process and he says his plan, on which he has formed an unlikely alliance with Silvio Berlusconi, will be the prelude to broader economic reforms.
Schaeuble told the World Economic Forum in Davos that electoral changes were vital to solve the instability that has hampered reform.

Italian Agriculture Minister Nunzia De Girolamo resigned on Sunday, following heavy criticism after she was caught on tape discussing public contracts, putting further pressure on Letta’s fragile coalition.

Germany’s Ifo sentiment index and the Bundesbank’s monthly report will give the macro picture in Europe’s largest economy. Der Spiegel reported over the weekend that the German government is considering edging up its 2014 growth forecast to 1.8 percent.

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