MacroScope

Banking union talks, storm allowing

The finance ministers of Germany, France, Italy and possibly Spain are expected to meet in Berlin to discuss banking union. Two sources told us Dutch Finance Minister Jeroen Dijsselbloem – who chairs the Eurogroup of euro zone finance ministers — should attend as will EU commissioner Michel Barnier and key European Central Bank policymaker Joerg Asmussen.

There is a possibility, however, that a violent storm that has hit Germany could prevent the participants reaching Berlin. If they make it, they will bid to come closer to a solution on a planned European resolution mechanism to deal with troubled banks ahead of a full meeting of euro zone finance ministers next week to help fashion a deal by the end of the year.

The last time the ministers met it didn’t go so well.  

Germany is cool to the original idea that the euro zone clubs together to tackle frail banks. Instead, Berlin wants losses imposed on bank creditors, including bondholders, once stress tests due next year expose any weak links.

The reluctance of Germany, which is worried that it will shoulder much of the burden if weaker countries turn to the bloc’s emergency fund, put it at odds with France, which wants a euro zone-wide safety net.

Thomas Weiser, the head of the band of experts who work behind the scenes for the Eurogroup, is speaking on the same subject in Dublin and Irish Finance Minister Michael Noonan is in London.

from Global Investing:

The hryvnia is all right

The fate of Ukraine's hryvnia currency hangs by a thread. Will that thread break?

The hryvnia's crawling peg has so far held as the central bank has dipped steadily into its reserves to support it. But the reserves are dwindling and political unrest is growing. Forwards markets are therefore betting on quite a sizeable depreciation  (See graphic below from brokerage Exotix).

 

The thing to remember is that the key to avoiding a messy devaluation lies not with the central bank but with a country's households. As countless emerging market crises over decades have shown, currency crises occur when people lose trust in their currency and leadership, withdraw their savings from banks and convert them into hard currency.  That is something no central bank can fight. Now Ukraine's households hold over $50 billion in bank deposits, according to calculations by Exotix. Of this a third is in hard currency (that's without counting deposits by companies).  But despite all the ruckus there is no sign of long queues outside banks or currency exchange points, scenes familiar to emerging market watchers.

ECB forecasts to contrast with Britain’s

The European Central Bank holds its last rates meeting of the year with some of the alarm about looming deflation pricked by a pick-up in euro zone inflation last week – though at 0.9 percent it remains way below the ECB’s target of close to two percent.

The spotlight, as always, will be on Mario Draghi but also on the latest staff forecasts. If they inflation staying well under target in 2015 (which is quite likely), expectations of more policy easing will gather steam again.

For today, another rate cut after last month’s surprise move would be a huge shock. Launching quantitative easing is anathema to much of the Governing Council unless it was clear a Japan-style downward price spiral was in the offing, which it isn’t. The bank’s vice-president, Vitor Constancio, has said the ECB would only cut the deposit rate it pays banks for holding their money overnight – now at zero – into negative territory in an extreme situation.

Game of chicken in Kiev

No sign of tensions calming on the streets of Kiev, in fact today we could have a new flashpoint.

Prime Minister Mykola Azarov’s cabinet is holding its weekly meeting in the government building which protesters have blockaded since Monday, paving the way for a possible showdown.

Popular pressure, following President Viktor Yanukovich’s decision to reject an EU trade deal and turn back to Russia, is being matched by the markets, and it is from there that the potential tipping point could come.

For the Fed, pros and cons of lowering yet another rate

photo

Now that the Federal Reserve is finally – we think for real this time – preparing to reduce its bond buying program, trading floors are abuzz with what it could do at the same time to offset such a move. Tapering its quantitative easing (QE) program would signal, after all, that the Fed thinks the U.S. economy is healing and that monetary policy needn’t be as accommodative as it has been. But since inflation is still too low and unemployment is still too high, the thinking goes, the central bank will want to do something that proves it is serious about keeping interest rates low for a while longer in order to make sure the economic recovery is durable.

There are a handful of ways the Fed could say it still cares when it trims QE, be it this month or some time in the first half of next year. But one that has traders’ tongues wagging is cutting the interest rate the Fed pays banks on excess reserves. The so-called IOER has been set at 0.25 percent since the central bank introduced it in 2008, when the economy was on edge. With every additional asset the Fed buys under QE it creates reserves that the private banks often end up parking at the Fed itself, given rates are so low across the board. As it stands, reserves are $2.5 trillion and counting.

Cutting IOER from 0.25 percent could force more of those reserves into the broader financial system where they could act as loans that stimulate investment, hiring and economic growth. ”Most participants” at the Fed’s latest policy-setting meeting thought lowering the rate was “worth considering at some stage.” Yet concerns remain about tinkering with money markets at such a critical time, and policymakers are wary of trying to force banks’ hands in an untested way. For one, St. Louis Fed President James Bullard said last month he doubts the policy-setting Federal Open Market Committee (FOMC) would lower IOER unless a “sharp downturn” in the economy prompted such a move. Janet Yellen, who is set to become Fed chair next year, also appeared to downplay the option at a recent Senate confirmation hearing.

Corporate responsibility: it’s time to start investing those record profits and cash piles

Corporate profits and cash piles have never been higher. But it’s not just an economic imperative that firms get spending and investing, it’s their social and moral responsibility to do so.

Three of the four sectors that make up the economy got battered by the global financial crisis and Great Recession:

    - Households: millions of workers lost their jobs, households retrenched their finances and times got extremely tough - Governments: they rescued and guaranteed the global economy and financial system at a cost of trillions - Banks: often vilified for their role in causing the crisis and apparent lack of punishment or contrition, they’re being forced to undergo huge structural change that will cost them billions

The one sector that flourished – even more than banks (and bankers) – is the corporate sector. By some measures, it has never had it so good – profits, cash reserves and share prices have rarely been higher:

Putin’s Ukraine “victory” — pyrrhic?

Ukraine continues to top the European worry list.

Monday demonstrated how quickly the financial side of the equation can spiral out of control. The hryvnia currency slumped and the cost of insuring against Ukrainian default soared, forcing the central bank to intervene and urge its citizens not to spark a bank run.

Having turned its back on the EU, Kiev must find more than $17 billion next year to meet gas bills and debt repayments. Presumably Russia will have to help out if it is not to have a basket case on its doorstep.

Has Vladimir Putin factored that into his diplomacy? He is certainly concerned, describing the protestors who blockaded government buildings on Monday of pursuing pogrom – about as loaded a term as he could choose – engineered by “outsiders”, not revolution.

Crisis in Kiev

Ukraine’s shock decision to turn its back on an EU trade deal continues to reverberate with mass rallies on the streets of Kiev in protest at President Viktor Yanukovich’s decision.

To try to defuse tensions, Yanukovich issued a statement saying he would do everything in his power to speed up Ukrainian moves toward the EU. Is this another U-turn or mere semantics? The answer is important.

Kiev must find more than $17 billion next year to meet gas bills and debt repayments. Another sovereign meltdown is far from impossible.
Yanukovich is due to embark on a trip to China. Dare he go? And is the opposition cogent enough to threaten him? The call for a national strike will be an acid test.

Housing boom and bust lesson still not sinking in

Housing markets are booming again in parts of the U.S. and Britain and they haven’t stopped doing so in Canada for the better part of a generation.

What is most striking about the latest round, at least when you listen to those who ought to know, is how nothing much except the price has changed.

We were told a stern lesson in the months and years after the financial crisis, borne out of an over-inflated, over-leveraged U.S. housing market securitised up to the scalp by Wall Street and leaping ever higher up a steeper incline on a blind instinct never to look back.

The big questions on the UK housing market: what the analysts say

Although UK house prices will head steadily higher in the next two years, analysts polled by Reuters are divided over whether the Bank of England can restrain the market if it overheats. Here’s what they said in the latest Reuters poll, taken this week: How confident are you in the BoE’s ability to moderate the housing market if necessary?

PETER DIXON, COMMERZBANK: “Not very. A cynical interpretation would be that the government wants to see a decent rise in house prices over the next couple of years and would not be best pleased to see the BoE take the steam out of it. Nor is it clear that the BoE has the policy instruments to target the housing market without causing collateral damage elsewhere in the economy. Finally, it would call into question the thrust of policy if Help to Buy is giving to the housing market with one hand whilst the BoE is taking away with another.”

PHILIP LACHOWYCZ, FATHOM FINANCIAL CONSULTING: “Not at all. The Bank of England through the FPC does now have the instruments and mandate to take specific action in the housing market. However, we find it unlikely that it will take any action as it would mean directly working against government policy.”