Ukrainian tipping point

February 19, 2014

Violence in Ukraine has escalated to a whole new level. The health ministry says 25 people have been killed in fighting between anti-government protesters and police who tried to clear a central square in  Kiev. The crackdown, it seems, has been launched.

President Viktor Yanukovich met opposition leaders for talks last night but his opponents, Vitaly Klitschko and Arseny Yatsenyuk, quit the talks without reaching any agreement on how to end the violence and said they would not return while blood is being shed.

The opposition are pressing for changes to the constitution which would curb the powers of Yanukovich and allow for the appointment of a technical government. Yanukovich is yet to name a new prime minister. If he names a hardliner, that could prove incendiary.

Russia again attacked western meddling and has reaffirmed its commitment to stand behind Yanukovich with a $2 billion down payment on the $15 billion it has promised to bail its neighbour out. The United States and European Union look rather impotent.

Italy’s new man, Matteo Renzi, will continue working to put together a coalition cabinet, aiming to do so by the weekend. The key post is finance minister and the indication the appointee will send about the level of commitment to meaningful economic reforms.

Renzi will conclude consultations with parliamentary groups this morning after which the parties planning to support the government will hold a meeting in the afternoon to see if their visions for economic reforms are compatible.

The markets are resolutely unfreaked. The gap between Italian and German 10-year government bond yields fell to its lowest level since July 2011 yesterday and Italian bond futures have climbed again at the open.

Angela Merkel will take her cabinet to Paris for a meeting with their French counterparts. Among other things they will try to launch a face-saving bid to revive a financial transactions tax in 11 euro zone countries which had all but bitten the dust.

The tax is expected to be scaled back from an original plan to introduce it from January to raise 35 billion euros annually to make banks pay back some of the money received in the 2007-09 financial crisis – another victory for the bank lobby.

The idea fizzled out globally due to U.S. opposition, and a pan-EU tax or even one covering all 18 euro zone countries also found no support in Britain, Ireland, the Netherlands and Sweden among others.

The original proposal to tax stocks, bonds and derivatives hit the rocks after it was deemed illegal in parts by lawyers for the member states collectively. Exemptions to the tax are already under discussion, including some categories of derivatives.

German Finance Minister Wolfgang Schaeuble said a phased introduction would be better than abandoning the tax, suggesting it could apply to shares first and derivatives later.

European Commission President José Manuel Barroso will be in Paris for talks with Merkel and French President Hollande.

The fall of a conservative minister has poisoned the atmosphere in Germany’s new left-right coalition, but party leaders insist it will not derail the government at a sensitive moment for its reform programme.

Agriculture Minister Hans-Peter Friedrich’s resignation prompted tit-for-tat calls for the Social Democrats, who share power in Merkel’s “grand coalition”, to offer up a scalp of their own.

Portugal will hold a regular treasury bill auction a day before the EU/IMF troika inspectors return for a final bailout review prior to its likely bailout exit in May. The big question is whether Lisbon will take a precautionary credit line. Ireland, which preceded it out of the bailout door in December, did not.

In Frankfurt, the European Central Bank will hold a public hearing on its planned framework for regulating all the euro zone’s major banks. Daniele Nouy, head of the regulatory arm, and ECB Executive Board member Sabine Lautenschlaeger will speak.

Euro zone finance ministers discussed yesterday how to ensure a future euro zone fund to finance bank closures will always have enough cash, including the option of halving the time in which the fund would reach its full size to five years.

Minutes of the Bank of England’s last policy meeting together with fresh UK unemployment data would have made for a heady mix until recently. But with the Bank’s forward guidance on interest rates now shifted away from a jobless target much of the sting has been removed.

Inflation fell below the Bank’s target for the first time in over four years in January so there is no imminent pressure to raise interest rates despite signs of a durable economic recovery.

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