Greeks on tour

February 4, 2015

Greek Prime Minister Tsipras gestures during a news conference with his Italian counterpart Renzi at Chigi palace in Rome

The Greek roadshow continues with Prime Minister Alexis Tsipras in Brussels to meet European Commission President Jean-Claude Juncker. After that, he will head to Paris to see French President Francois Hollande.

Yesterday in Rome, Tsipras said he did not want to create division in Europe with his call for a new debt accord and said he was open to alternative proposals, adding to the impression that his position is fungible.

Already officials have appeared to drop calls for a write-off of Greece’s foreign debt and instead talked of switching into perpetual bonds or debt linked to economic growth levels.

Indications from EU officials suggest the new idea won’t fly with them either but the fact that the Greek government has moved suggests it  is actively seeking a compromise.

Markets, after being unnerved by initial noises from the Tsipras government, are certainly buying into a successful resolution. Greek 10-year bond yields plunged by more than 160 basis points on Tuesday and the Athens stock market shot up 11 percent.

The euro zone position hasn’t really shifted – Greece could be given more time to pay off its debt if it keeps its budget in balance and maintains promised reforms but the debt will not be written off.

Where there could more flexibility is on austerity. Both France and Italy could be allies on the need to end, or at least curb, debt-cutting and focus on ways to galvanise growth. Greece is tasked with running a hefty primary budget surplus and could be allowed to eat into that a little.

The most vital meeting today may be in Frankfurt where the European Central Bank holds a mid-month meeting where it will discuss continuing emergency funding for Greek banks, which they are already having to make use off as deposits leach out.

In theory, the ECB could pull the plug and prompt the probable collapse of the Greek banking system. In reality, while the euro zone thinks there is a deal to be done “emergency lending assistance” will continue although it could well be granted for only two weeks at a time – as it was initially – to focus minds in Athens, or wherever Greece’s top ministers happen to be today.

After taking the temperature in Paris, London and Rome, Greek Finance Minister Yanis Varoufakis has a meeting at the ECB today. Sources told us he would see Mario Draghi, the top man, and will then travel on to Berlin on Thursday for what will doubtless be a full and frank exchange of views. Angela Merkel may have more to say at a news conference with Malta’s prime minister this morning.

If an accord is sketched out in outline by the time Greece’s bailout expires at the end of the month, the euro zone and ECB would surely keep funding the government and its banks to buy time for a more comprehensive agreement.

The overwhelming majority of Greeks want to stay in the euro zone and while the currency bloc’s leaders think there are now strong defences in place to protect the rest of them from Greek chaos, allowing a member state to leave the euro, thus wrecking the concept of “irreversibility” in the monetary union, is too dangerous to contemplate.

Service sector PMI surveys for euro zone countries, Britain and others will provide the latest economic snapshot.

Central and Eastern Europe has a flurry of interest rate decisions.

The Polish central bank targets inflation at 2.5 percent and has left rates unchanged at a record low of 2.0 percent since October last year. With inflation running at just 0.5 percent there could be scope for looser policy though economists expect no move at this meeting. March is more likely when the central bank publishes its new inflation and growth forecasts.

Romania’s central bank is forecast to cut its benchmark interest rate by another quarter point to a record low 2.25 percent. Most analysts expect rates to bottom out at that level.

Both Romania and Croatia have problems with Swiss franc loans which have ballooned since the Swiss National Bank abandoned its currency cap. Croatia is considering turning Swiss franc-denominated home loans into long-term lease agreements to the roughly 60,000 Croatians hold loans in Swiss francs, mostly for housing. Its central bank also meets today.

Iceland’s central bank is also in action having lowered its key interest in both November and December, taking it to 5.25 percent from 6 percent.

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