Long night of talks in Brussels and Minsk

February 12, 2015

Eurogroup President Dijsselbloem greets Greek Finance Minister Varoufakis during an extraordinary euro zone Finance Ministers meeting in Brussels

A long night of talks in Brussels and Minsk.

Despite going into the early hours of the morning, euro zone finance ministers failed to reach agreement on a way forward with their Greek counterpart and will try again on Monday.

It doesn’t look like any meaningful progress was made. Greece’s Yanis Varoufakis would not sign up to a planned joint statement on extending the present loan programme, something the new Greek government has consistently rejected.

He left saying there would be no further contact with the European Commission, the International Monetary Fund and the European Central Bank before Monday.  That was the opposite of how other ministers understood they had left matters.

Today, it’s the turn of EU leaders to impress upon Greek Prime Minister Alexis Tsipras that he cannot simply abandon the country’s bailout programme and demand a debt restructuring.

Having toured EU capitals last week he must surely know, regardless of what is said for domestic consumption, that his plan to renegotiate Greece’s debt pile and end debt-cutting will not fly given the amount of money he owes to European institutions and governments.

There is economic logic in easing up on austerity to galvanise growth and thereby increase the tax take but there is no question of writing off Greece’s debts.

Greece is not without leverage since no one wants to set the precedent that monetary union can go into reverse. But the euro zone holds most of the big sticks, not least because it believes it is no longer vulnerable to contagion from a Greek collapse.

ECB President Mario Draghi was at last night’s talks and could, with a two-thirds majority on the ECB Governing Council, pull the plug on emergency support for Greek banks, without which they would collapse. A trio of euro zone central bankers – Jens Weidman, Peter Praet and Vitor Constancio – will speak in Britain today.

The smart money is on some sort of extension to the bailout, even if it is called something else to soothe Greek pride, to allow more time for substantive negotiations. But it could go horribly wrong and the fog probably won’t clear at all until the further meeting of the Eurogroup on Monday.

As Germany’s Wolfgang Schaeuble said: If Greece will not extend its bailout programme “then that’s it”.

Economists polled by Reuters estimated a one-in-four chance of Greece leaving the 19-nation single currency area this year – the highest reading since the start of the Greek debt crisis in late 2009.

The EU summit will also debate the way forward for euro zone integration, agreeing on guidelines for four top EU officials to prepare a roadmap of reforms that the 19-nation currency bloc needs. It’s not hard to see that the bloc can’t keep carry on this way, lurching from crisis to crisis.

But the meeting will devote most of its time to Ukraine after talks between the leaders of Russia, Ukraine, Germany and France in Minsk which are only now breaking up after going through the night. There are signs that they may resume shortly.

A document seen by Reuters suggested the sides may agree to end fighting in eastern Ukraine under a ceasefire starting on Feb. 14, the withdrawal of heavy weapons and the creation of a security zone. It has to be said that we’ve been here before only for a truce quickly to break down.

We’ve just reported Ukraine President Petro Poroshenko saying Russia’s position remains unacceptable to Kiev.

The EU summit, to which Merkel and Hollande will dash, was due to ask the European Commission to prepare new sanctions against Russia with a final decision on whether to take them earmarked for a further summit in March. But the Minsk talks will dictate what happens now. Barack Obama has said he will decide soon whether to send weaponry to Ukraine’s armed forces.

Sweden’s central bank delivers a policy decision and has said it could take new steps as early as its next meeting on Thursday. These could include adopting negative rates, offering cheap loans to banks and buying bonds although the consensus is that things would have to get worse for that to happen.

Ten of 14 analysts expect the Riksbank to keep rates at zero, the other four predict a cut of between 10 and 25 basis points. Some of the no change camp forecast negative interest rates in the next few months.

Could Denmark cut rates further into negative territory? Thursday tends to be the central bank’s day of choice. Norway’s central bank governor delivers his annual address, his most important policy speech of the year.

The Bank of England’s quarterly inflation report will sharply downgrade its inflation forecasts into negative territory thereby pushing back the timing of a first UK interest rate rise. The Bank will also publish public letter from Mark Carney to finance minister Osborne explaining a fall in inflation way below target in December.

South African President Jacob Zuma will deliver his state of the nation address, which investors hope will tackle domestic economic problems including electricity shortages.

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