A call to arms

June 19, 2014

The prospect of U.S. and Iranian intervention in Iraq looms larger.

Baghdad has asked the United States for air support to counter Sunni militants who have seized major cities in a lightning advance that has routed the Shi’ite-led government army. And Iranian President Hassan Rouhani has signalled that Tehran was prepared to intervene to protect Iraq’s great Shi’ite shrines.

As of last night, ISIL fighters were in control of three-quarters of the territory of the Baiji refinery north of Baghdad and some international oil companies were pulling out workers.

Even if the two adversaries find common cause in Iraq, it doesn’t appear to have transferred to negotiations over Tehran’s nuclear programme, for which the West has imposed stiff sanctions.

Western and Iranian officials told us on Wednesday that Iran is refusing to significantly cut the number of centrifuges it intends to keep to produce nuclear fuel, putting a deal at this week’s talks with six powers and/or by a July 20 deadline far out of sight.

After touring the Gulf, U.S. Treasury Secretary Jack Lew winds up his trip with a visit to Berlin. It would be surprising if sanctions against Russia did not come up as well as the perennial U.S./German debate about growth versus austerity on which there are signs of Germany moving more into line with Washington.

Washington has accused Moscow of sending tanks, heavy weapons and rocket launchers to Ukraine in support of separatists which would pretty clearly cross one of the red lines set to trigger more wide-ranging sanctions against Russia. But as before the EU seems more reticent than the United States. There is little talk of full-on trade sanctions as things stand though the EU has pledged to make a judgment at its leaders’ summit next week.

After the Federal Reserve continued to wind up its bond-buying programme, expressed confidence in the U.S. recovery and hinted at a slightly more aggressive pace of interest rate rises from next year, the Swiss National Bank and Norwegian central bank have policy decisions to make today.

With the European Central Bank’s latest measures, and the lurking threat of QE, weakening the euro the SNB will keep its cap on the Swiss franc for as far as the eye can see – our polling of economists suggests until 2016 or later. All 32 economists polled expected the central bank to keep its target range for the benchmark interest rate at zero to 0.25 percent through 2014.

Norges Bank has said it expects its key rate to remain at 1.5 percent until the summer of 2015, then rise gradually. Relatively strong consumption in recent months and a mortgage rate cut by banks would support calls for earlier rate increases. But the oil sector’s slowdown is countering that. The central bank will put out fresh interest rate and growth forecasts which will set the policy tone for months to come.

Chinese premier Li Keqiang visits Greece after spending the first part of the week in Britain. China says it will encourage its companies to participate in the country’s privatization programme. The health warning is that Beijing has made similar noises in the past which have not been fulfilled.

Euro zone finance ministers meet in Luxembourg. The bailout programmes of Greece and Cyprus will be up for review but there may be more focus on Portugal which has officially exited its bailout but is yet to receive the final tranche of money.

The country’s constitutional court has rejected a series of austerity measures which puts that last payment at risk. Lisbon may have to do without the money and raise it instead from the bond market which currently seems to have an insatiable appetite for euro zone debt if Cyprus’s return to the market is anything to go by.

The IMF will deliver its annual health check of the euro zone economy to the meeting and sources told us that it will urge the European Central Bank to keep the option of printing money very much on the front burner to fight what the Fund sees as a profound risk of deflation.

That is in line with previous IMF calls but is the first time it has been repeated since the ECB took a range of measures to ease monetary policy and get credit flowing earlier this month. That suggests the Fund views those measures as insufficient.

The big story in the EU is the battle to anoint or block Jean-Claude Juncker as the next European Commission president.
Britain’s David Cameron has gone so public with his opposition to Juncker that if he fails to stop him it would amount to a humiliation which the eurosceptic majority of his Conservative party would leap upon, and call into question his ability to keep Britain in the EU having promised an “in-out” referendum in 2017.

It looks like he has failed to gain sufficient allies, or in fact many at all, and Germany’s Angela Merkel wants a decision made at next week’s leaders summit. Danish Prime Minister Helle Thorning-Schmidt, who was thought to be one of Cameron’s favoured options, will meet German Chancellor Angela Merkel in Berlin today.

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