Will Tsipras spring something in Riga?

May 21, 2015

Greece's PM Tsipras, Malta's PM Muscat, EU Commission President Juncker and France's President Hollande attend an EU leaders summit in BrusselsGreek premier Alexis Tsipras is pinning his hopes on using an EU leaders summit in Riga with eastern European partners from Ukraine, Georgia, Azerbaijan and others to strike the broad outline of a cash-for-reforms deal to stave off default.

He is likely to be frustrated. The leaders of Germany and France said on Tuesday that talks must be accelerated to free up further loans to Athens and that they would meet the Greek prime minister in Riga.

But Angela Merkel, after talks with Francois Hollande, added that Athens must strike an agreement with officials from its EU/IMF creditors and then the Eurogroup of euro zone finance ministers. There is no appetite for heads of government to take the reins.

Having said that, if Tsipras decided now was the moment to make major concessions, that would break the logjam.

A senior Syriza lawmaker said on Wednesday that Greece could not make an upcoming payment to the International Monetary Fund on June 5 unless foreign lenders disburse more aid.

Tsipras’s government hopes to reach a deal in days but its lenders are more pessimistic and say talks are moving too slowly for that. Talks have foundered on Athens’ demand to roll back labour and pension reforms.

The world’s central banking elite descends on the picturesque Portuguese town of Sintra from today with some serious developments to ponder.

A dramatic sell-off in government bonds globally – despite some soft data in the United States and China – has everyone scratching their heads. It may have something to do with the fact that oil has now recouped nearly half its dramatic fall in the second half of last year, banishing thoughts of deflation.

European Central Bank President Mario Draghi and a number of his colleagues will speak at the three-day event as will Bank of Japan Governor Haruhiko Kuroda, Federal Reserve President Stanley Fischer, Bank of England Governor Mark Carney and Zhou Xiaochuan, head of the People’s Bank of China. Some line-up!

One of the themes of the year so far has been the euro zone beginning to pick up while the United States and China have faltered. But there are reasons to think that might not continue.

ECB money printing will continue but the backing up of government borrowing costs, a significant bounce by the euro and the climbing oil price could all curb the recovery in Europe and elsewhere. That could push back the timing of first interest rate rises in the United States and Britain, maybe into next year.

Flash May PMI surveys for the euro zone, Germany and France will give the latest data evidence this morning. An equivalent report showed manufacturing activity in China contracted for the third month running, suggesting more stimulus will be forthcoming there.

The ECB also has a bit of egg on its face. An ostensibly technical announcement about front-loading its bond-buying over the next two months in anticipation of thin liquidity over the summer was delivered to a closed-door meeting on Monday evening and only made public on Tuesday. Those present got ahead of the sharp market reaction that followed.

Greece is also likely to figure in Sintra. Athens wants the ECB to allow it to issue more short-term debt, which it won’t, at least until a political deal is done.

South Africa’s central bank meets today having said it would not consider raising rates – held at 5.75 percent since last July – unless inflation rises markedly. It is running at 4.5 percent, well within the bank’s 3-6 percent target range. Our polling of economists points to no rate rise until at least November.

Britain’s David Cameron will make a speech outlining what aides call a “far-reaching” immigration crackdown before travelling to the Riga summit.

Some of what he is demanding from the EU prior to an “in-out” referendum by 2017 is already in train. The European Commission agreed a plan on Tuesday to streamline how EU law is made so that it does not intrude in every corner of life and will ease the burden of red tape on business.

But any curbs on immigration would be much trickier and could require treaty change which his EU peers say is neither advisable nor possible by 2017.

Cameron has already ditched plans to restrict freedom of movement which is integral to the EU’s rules. But even curbing rights to welfare payments is not straightforward. Rules that discriminate against EU workers compared to UK citizens risk being challenged in EU courts and eastern European states will resist anything that discriminates against their populations.

Ukraine’s foreign minister said his country wanted assurances at the Riga summit that it is a suitable candidate for EU membership and its citizens will gain visa-free travel to the bloc next year.

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