Can Draghi do more?

November 6, 2014


It’s ECB day. While the Federal Reserve has called time on its bond-buying and the Bank of Japan decided to create money at a more furious rate, the euro zone central bank will plot the middle course – waiting to gauge the impact of its recent efforts to pump more money into the currency bloc’s economy before entertaining further action.

Doubtless ECB President Mario Draghi will be quizzed about our exclusive report that some national central bankers in the euro area are challenging him over what they see as his secretive management style and patchy communication. They are particularly concerned that Draghi effectively set a target for how far the ECB would inflate its balance sheet after the governing council agreed not to make any figure public.

Draghi will need to build alliances and mend fences if he feels the need to take the final leap into quantitative easing. Those in the know told us that somewhere between seven and 10 of the 24-strong Governing Council currently oppose such a move.

The bank has now completed two weeks of covered bond purchases (with underwhelming results so far) and plans to start buying asset-backed securities – or bundled loans – later this month. In December, it will offer banks a second bite at cheap, long-term loans. Most hope is pinned on a bumper take up of that money by banks after EU stress tests largely gave them a clean bill of health.

ECB sources have told Reuters that the bank’s plan may fall short of its goal and pressure is likely to build for bolder action early next year, firstly moving into the corporate bond market and then maybe taking the ultimate step of government bond purchases with new money. But that is a decision for 2015.

Euro zone finance ministers meet in Brussels after the European Commission forecast the euro zone’s economy would expand 1.1 percent next year and by 1.7 percent in 2016 – a level the executive said six months ago would be achieved next year. The delay in the upturn was largely ascribed to a drag on the economy from France and Italy.

Paris and Rome have been pressing the EU to focus more on measures to boost growth rather than cut debt in order to prevent a slide back into recession and to buy them time to push through structural economic reforms. Even the ECB has started calling for fiscal stimulus where it can be afforded.

Greater government spending is more likely to have a direct economic impact in this sort of depressed environment but the country with the current account surplus to spend more – Germany – will not yet buy into that argument.

German Finance Minister Wolfgang Schaeuble will release government tax estimates for 2014-2018. Next year’s numbers will take the spotlight with Berlin aiming to balance the budget for the first time since 1969 even though its economy is struggling.

German industrial orders, just out, jumped 0.8 percent in September but that was after a precipitous 4.2 percent fall in August. The economy ministry said orders rose just 0.1 percent over the third quarter, adding to evidence that the economy barely grew over that period having shrunk in Q2.

The main business for the Eurogroup will be Greece’s desire to end its IMF bailout early in an attempt to revive the fortunes of its ruling coalition which could face early elections next year and trails left-wing, anti-bailout Syriza in the polls.

Greek Finance Minister Gikas Hardouvelis told Reuters yesterday that he wanted a 6-12 months period after exiting the bailout at year-end where the EU and IMF (mostly the EU) would keep tabs on Greece via a handful of agreed reform targets but end its micromanagement. A credit line could be made available using 11 billion euros left in Greece’s bank bailout fund and debt relief talks will start soon, he said.

The signs are that the euro zone may agree to something along those lines but officials told us there may be a rethink of whether Greece still needs further debt relief that was sort of promised back in 2012, given its improved economic figures. Athens says that would be punishing it for keeping its part of the bargain. All that will only come onto the table after the post-bailout mechanisms have been agreed.

The Bank of England also looks set to keep interest rates at record low levels on Thursday after three of its most senior officials expressed staunch opposition to hiking rates in the last two weeks given an almost total absence of wage pressure. Economists are unanimous in expecting no rise in the 0.5 percent rate today and the latest Reuters poll found an almost even split between those expecting a move in the first quarter of  2015 and those who think it will come later.

Kiev is to halt payment of state funds in areas controlled by pro-Moscow rebels, after they held inauguration ceremonies for their leaders, in what is rapidly becoming a long-term stalemate that the West believes is Russia’s aim. Will Russia, at a time when it is lurching towards recession, have to bankroll eastern Ukraine as well as Crimea?

After whacking up interest rates last week, Russia’s central bank has effectively allowed the rouble to float – it instantly plunged. The central bank blew almost $30 billion of its reserves trying and largely failing to defend it in October. It will now limit the size of its interventions to $350 million a day, having recently spent around $2.5 billion daily.

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