EU ponders new response to Russia

January 27, 2015

A Ukrainian serviceman stands guard at his position in the village of Luhanska, Luhansk region

EU finance ministers meet in Brussels with Ukraine likely to be the centre of attention despite the electoral shockwaves emanating from Athens.

Russian-backed rebels advanced to encircle a Ukrainian army garrison town on Monday in a new offensive that has again unleashed all-out war after a five-month ceasefire and brought threats of new Western sanctions against Moscow.

The United States and the European Union are considering new measures after accusing Russia of openly supporting the latest rebel advance with money, arms and troops on the ground.

Ukraine is close to bankruptcy and awaiting a $4 billion-plus tranche of money from the IMF which has a team in Kiev that is due to complete its review this week. Christine Lagarde said Ukraine had asked for more funding via a multi-year agreement and said it would have to make deep economic reforms in return for any deal.

The EU ministers will consider offering additional money to help save Ukraine from default, potentially increasing its original plan to as much as 2.5 billion euros, diplomats told Reuters last week. That would be in addition to the 1.4 billion euros that Brussels handed over last year.

The EU will also summon foreign ministers of its 28 member states for an emergency meeting on Thursday. Barack Obama said Washington was considering all options short of military action to isolate Russia.

The rouble dropped more than six percent on Monday after ratings agency S&P cut Russia’s sovereign credit into junk territory, robbing it of investment grade for the first time in a decade. The currency has bounced a little this morning.

Alexis Tsipras gets down to work as Greece’s new prime minister with his pick as coalition partner suggesting he is not going to cave in on his demands to end austerity and renegotiate the country’s debt pile, most of which is held by euro zone institutions and governments.

His left-wing Syriza and the hard right Independent Greeks appear to be united only in their hatred of the EU/IMF bailout.

Tsipras is expected to unveil his cabinet today with Yanis Varoufakis, an economist and outspoken blogger crusading against austerity, expected to become finance minister.

Markets have reacted in muted fashion so far and there are good reasons to think Greece can no longer imperil the euro zone as a whole, but if this confrontation gets nastier that could change.

Euro zone finance ministers meeting in Brussels said they were willing to give Athens more time to pay its debts, but said they would not yield to the new Greek government’s demands for debt forgiveness. There is a deal to be done but Tsipras will have to soften.

Could Syriza’s victory tip the austerity versus growth debate? German Finance Minister Wolfgang Schaeuble and Italy’s Pier Carlo Padoan, who it is fair to say take different views on this, testify to a European Parliament committee today.

The central bank world has been upended over the past two weeks by a combination of ever cheaper oil and the prospect of the European Central Bank unleashing a flood of euros. The Swiss National Bank abruptly ended its currency cap which weakened the euro, causing the Danes to cut rates twice to defend their peg to the common currency and giving a real headache to central and eastern European countries awash with Swiss franc mortgages.

India produced a surprise interest rate cut and Canada eased out of the blue, both in response to the plunge in oil. The Federal Reserve meets this week with investors alert to any signs that the odds on a mid-year U.S. interest rate rise are lengthening.

Hungary’s central bank meets today and is seen on hold, in its case at a record low 2.1 percent having dodged a bullet by forcibly converting its glut of Swiss franc loans into forints late last year. Turkey’s central bank issues its quarterly inflation report having cut interest rates last week only to be attacked by the government for not doing enough.

It’s a big data with week with today’s highlight being the fourth quarter GDP report from Britain, which is as politically loaded as it is economic with elections only 100 days away. Quarterly growth of 0.6 percent is forecast which represents something of a slowdown but looks very healthy compared to anything going on elsewhere in western Europe.

Heads of state will gather at the site of the Auschwitz camp in southern Poland to commemorate the 70th anniversary of its liberation and to remember the estimated 1.5 million people, most of them Jews, who perished there during World War Two.

Russia’s Vladimir Putin will not attend. Poland, which has sharply criticised Moscow over its role in the Ukraine crisis, did not send a full diplomatic invitation to Putin, who will be represented by his chief of staff.  The presidents of Poland, Germany, France and Ukraine will be there.

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