Clock ticking

June 30, 2014

Amid all the furore over David Cameron’s failure to block Jean-Claude Juncker for the top EU job at a summit last week, the bloc’s leaders signed a free-trade pact with Ukraine and said they could impose more sanctions on Russia unless rebels de-escalate in the east of the country by Monday.

In turn, Ukraine president Poroshenko extended a ceasefire by government forces until 10 p.m. local time today.

The Russian economy would contract should the West introduce wide-ranging sectoral sanctions but that would not be a “dramatic” situation, Economy Minister Alexei Ulyukayev said over the weekend.

Conversely, with the hunt for yield still well and truly on, last week’s bond issue by Russia’s biggest lender Sberbank could unleash more pent-up Russian issuance despite the threat of tougher sanctions.

The EU leaders said they were ready to meet again at any time to adopt new sanctions against Russia and could target new people and companies with asset freezes as early as this week. But, given its energy reliance on Russia, the EU is much more hesitant than Washington about deploying the sweeping trade embargoes that would really hurt.

Angela Merkel and Francois Hollande spoke with Vladimir Putin and Poroshenko by phone for more than two hours on Sunday and “stressed the importance of further concrete progress towards the stabilisation of security on the ground, the extension of the ceasefire and the implementation of the peace plan presented by the Ukrainian authorities”.

Euro zone inflation data for June kick off the economic week and will cue up the European Central Bank’s policy meeting on Thursday.

The ECB has made clear that its flurry of policy gambits last time will not be measurable in terms of impact until late in the year – a tacit message that the nuclear option of printing money will not be unleashed until that point and only then if inflation has failed to come to life.

Nonetheless, if the euro inflation rate comes in as forecast, unchanged at just 0.5 percent, it will not give the ECB much cause for comfort. One of the central bank’s problems is that with banks facing stress tests later in the year and being told to tackle bad assets they are in no mood to increase lending so its attempts to increase economic activity are a bit like pushing on a piece of string.

Separate euro zone M3 money supply data are likely to show a further contraction in bank lending to the private sector as they have for as long as I can remember. We are still waiting for details of the ECB’s new long-term lending programme which is supposed to be contingent on the banks lending the money on to households and business.

The Bank for International Settlements – the central bankers’ club – gave plenty of food for thought for its members on Sunday, warning that they should not dismiss early signs of unsustainable property price and credit growth, which could leave borrowers vulnerable to interest rate rises.

That will be particularly pertinent for the Bank of England as will the BIS assessment that markets have got way ahead of real economic recoveries and central banks should not fall into the trap of raising rates “too slowly and too late”.

The other news from the EU summit was an acceptance of the need to allow member states extra time to consolidate their budgets as long as they pressed ahead with economic reforms. Under pressure from Italian Prime Minister Matteo Renzi, the leaders adopted a text which pledged to make “best use” of the flexibility built into the bloc’s fiscal rule book.

German Finance Minister Wolfgang Schaeuble, who has insisted that austerity in the euro zone warded off disasters, speaks in Madrid today with his Spanish counterpart Luis de Guindos. They could well be worth listening to given this new approach. Is it a new approach?

The leaders also tried to accommodate Cameron, saying Britain’s concerns about the EU’s future “will need to be addressed” and that the treaty principle of “ever closer union” – a red rag to British Eurosceptics – allowed for different paths of integration. Nonetheless, the UK premier said Juncker’s appointment had made his job of keeping Britain in the bloc harder.

Cameron will make a statement to parliament this afternoon on the EU summit, having talked to Juncker yesterday, and will doubtless stick to his line that his stand was brave and principled.

But the feeling of events spiraling out of his control is growing. The first opinion poll conducted since Juncker’s anointment showed  a growing number of Britons – 47 percent – would vote to leave the bloc if there was a referendum, with 39 percent saying they would back staying in.

Iraqi party leaders are scrambling to agree cabinet nominations before parliament meets on Tuesday to try to keep Iraq together as one state. The talks could end Prime Minister Nouri al-Maliki’s rule after a top Shi’ite cleric shook things up by calling for a new premier to be chosen without delay.

Major powers are pushing for a new inclusive government to be formed fast to counter the insurrection that has spilled across the border with Syria and could menace the wider Middle East. The Iraqi army has sent tanks into Saddam Hussein’s home city of Tikrit as part of a major pushback against the Sunni militant takeover of large stretches of Iraq in the north and west.

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