MacroScope

Ukraine inching back to the brink

Pro-Moscow protesters in eastern Ukraine took up arms in one city and declared a separatist republic in another yesterday and the new build-up of tensions continues this morning.

The Kiev government has launched what it calls “anti-terrorist” operations in the eastern city of Kharkiv and arrested about 70 separatists. Moscow has responded by demanding Kiev stop massing military forces in the south-east of the country.

Russia’s own forces remain massed just over the border and Ukrainian President Oleksander Turchinov said Moscow was attempting to repeat “the Crimea scenario”.

Washington has warned Vladimir Putin against moving “overtly or covertly” into eastern Ukraine and said there was strong evidence that pro-Russian demonstrators in the region were being paid.

There is also a standoff over gas. Kiev appears to have made no payments to Gazprom, missing a deadline last night to reduce its $2.2 billion debt. Gazprom has not said what action it may take. In previous years, gas disputes between Moscow and Kiev have hurt supplies to Europe.

To QE or not to QE?

ECB Vice-President Vitor Constancio testifies to the European Parliament prior to attending the IMF Spring meeting in Washington at the back end of the week along with Mario Draghi and other colleagues. Jens Weidmann, Yves Mersch and Ewald Nowotny also speak today.

There has undoubtedly been a change in tone from the ECB, which is now openly talking about printing money if inflation stays too low for too long (no mention of deflation being the required trigger any more). Even Bundesbank chief Weidmann has done so.

Last week, Draghi made it sound as if really serious thought was being given to how to do it. He raised the prospect of buying private sector assets, rather than government bonds as other central banks have. The question is whether he is trying to talk the euro down or whether the central bank is now more alarmed, and therefore deadly serious.

Good news for Greece?

Unemployment is sky high, national debt is not far short of double the size of an economy which is still shrinking and its ruling coalition has a wafer-thin majority, yet there are glimmers of hope in Greece.

Having finally struck a deal with the EU and IMF to keep bailout loans flowing, Athens is preparing to dip its toe back into the bond market with a five-year bond for up to 2 billion euros.

The government has not said when the syndicated issue might be launched but having mandated banks for the sale the likelihood is sooner rather than later. It’s a remarkably quick return two years after a debt restructuring which was essentially a default.

Reasons to do nothing

It’s ECB day and the general belief is that it won’t do anything despite inflation dropping to 0.5 percent in March, chalking up its sixth successive month in the European Central Bank’s “danger zone” below 1 percent.

The reasons? Policymakers expect inflation to rise in April for a variety of reasons, one being that this year’s late Easter has delayed the impact of rising travel and hotel prices at a time when many Europeans take a holiday. Depressed food prices might also start to rise before long.

More fundamentally, they do not see any signs of deflation psychology taking hold, whereby businesses and consumers defer spending plans in the expectation that prices will cheapen.

Weidmann back in the spotlight

Euro zone finance ministers in Athens are joined by their EU counterparts outside the single currency area with work to be done on signing off on the final details of banking union and preparing a common line for the upcoming G20/IMF meeting in Washington. The elephant in the room will be the threat of deflation.

European Central Bank number two Vitor Constancio said yesterday that low euro zone inflation was a concern but predicted it would rise in April, having dropped to just 0.5 percent in March. There are good reasons to think so but either way it suggests the ECB – which has its monthly policy meeting tomorrow – is in no hurry to act.

As EU economics chief Olli Rehn pointed out, it’s not all bad. Low prices will increase disposable incomes so could help a demand-led recovery. But they won’t help rebalance the currency area’s economy and will certainly make still-high national debts harder to pay off.

Hollande’s search for an elusive winning formula

After a local election drubbing, French President Francois Hollande duly sacked his prime minister last night and tempered his economic reform drive, vowing to focus more on growth and “social justice”. A fuller cabinet reshuffle is expected today.

Interior minister Manuel Valls, anything but a left-wing firebrand whose appointment could stir unrest on the left of the ruling Socialist party, takes the premiership with a mandate to pursue cuts in labour charges for business but also tax cuts to boost consumer spending and employment.

Hollande said France would still cut public spending to pay for a 30 billion euro reduction in labour charges on business, part of a “responsibility pact” with employers he launched in January. But he said Sunday’s elections also showed the need for a “solidarity pact” offering workers tax cuts and assurances on welfare, youth training and education.

Is it time for the ECB to do more?

From financial forecasters to the International Monetary Fund, calls for the European Central Bank to do more to support the euro zone recovery are growing louder.

With inflation well below the ECB’s 2 percent target ceiling and continuing to fall, 20 of 53 economists in a Reuters Poll conducted last week said the bank was wrong to leave policy unchanged at recent meetings and should do more when it meets on Thursday.

And the pressure on the ECB to do more has mounted after the preliminary inflation estimate for March was published on Monday. The data showed inflation cooling down further to 0.5 percent, its lowest since November 2009.

Erdogan unfettered

Investors have spent months looking askance at Turkey’s corruption scandal and Prime Minister Tayyip Erdogan’s response to it – purging the police and judiciary of people he believes are acolytes of his enemy, U.S.-based cleric Fethullah Gulen. But it appears to have made little difference to his electorate.

Erdogan declared victory after Sunday’s local elections and told his enemies they would now pay the price. His AK Party was well ahead overall but the opposition Republican People’s Party (CHP) appeared close to seizing the capital Ankara. 

Turkey’s lira has climbed in early trade to its strongest level in two months on the basis that at least there is political continuity. But any rally could prove short-lived with the battle between Erdogan and Gulen likely to deepen and a gaping current account gap already making the economy vulnerable to any financial market turmoil, of which there has been plenty.

ECB uncertainty

For European markets, Germany’s March inflation figure is likely to dominate today. It is forecast to hold at just 1.0 percent. The European Central Bank insists there is no threat of deflation in the currency area although the euro zone number has been in its “danger zone” below 1 percent for five months now.

Having appeared to set a rather high bar to policy action at its last meeting, this week the tone changed. Most notable was Bundesbank chief Jens Weidmann, normally a hardliner, who said printing money was not out of the question although he would prefer negative deposit rates as the means to tackle an overly strong euro.

That looked like a significant shift although he did stress there was no need for imminent action.

IMF stumps up for Ukraine

The International Monetary Fund has announced a $14-18 billion bailout of Ukraine with the aim of luring in a total of $27 billion from the international community over the next two years.

Ukrainian officials say they need money to start flowing in April. The U.S., EU and others in the G7 would row in behind an IMF package, helping Ukraine meet its debt obligations and begin the process of rebuilding. In total, Kiev has talked about needing $35 billion over two years so they are pretty close.

A comprehensive slate of economic, energy and financial reforms have been attached and the Fund appears to be content that whatever hue of government is in charge after May elections will adhere to the programme.