MacroScope

Putin – is he ready to deal?

Russian President Vladimir Putin and Ukrainian President Poroshenko are due to meet on the sidelines of the EU/Asia summit in Milan today to try to find a way out of the Ukraine crisis.

Germany’s Angela Merkel and French President Hollande will also meet the pair as part of a four-way contact group. The Kremlin has just said Putin and Merkel have “serious differences”.

Although Putin announced this week that Russian forces near the border with Ukraine would be pulled back, Western officials want to see clear evidence that Moscow is withdrawing troops and military equipment from east Ukraine. The Ukrainian and Russian presidents spoke by telephone on Tuesday and discussed measures to restore peace.

The other big question is whether gas supplies to western Europe from Russia, via Ukraine, will continue unchecked through the winter. Any interruption would deal another blow to already struggling EU economies. On Thursday, Putin threatened to cut gas supplies to Europe if Ukraine steals from the transit pipeline to cover its own needs.

Russia cut off supply to Ukraine in June over what gas exporter Gazprom said were billions of euros in unpaid bills. There is concern Ukraine might have to siphon off gas from flows crossing the country en route to Europe this winter. EU stress tests published on Thursday showed the European Union could intervene to prevent gas shortages in the event of disruption to flows from Russia.

Battle lines drawn

Germany's Minister of Finance Wolfgang Schauble speaks during a discussion during the World Bank/IMF annual meetings in Washington

The predictable battle lines were drawn at the G20/IMF meetings in Washington – most of the world urged Europe to do more to foster growth while Germany warned against letting up on austerity. The argument will doubtless be reprised today when euro zone finance ministers meet in Luxembourg.

Given a ghastly run of German data last week and sharp cuts to its growth forecasts by the IMF and Germany’s economic institutes, Berlin’s stance looks increasingly odd but Finance Minister Wolfgang Schaeuble continued to make it abundantly clear he will not countenance any more public spending in the one European country that could really afford it.

Writing cheques won’t fix Europe, he stated bluntly.

If there was anything new it appeared to be the intensity of the response. This from European Central Bank chief Mario Draghi: “For governments that have fiscal space it makes sense to use it. You decide to which countries this sentence applies.”

Europe looks again to Draghi

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Surprisingly low take-up at last week’s first round of cheap four-year loans by the European Central Bank begs a number of questions – How low is demand for credit and what does that say about the state of the economy? Are banks cowed by the upcoming stress tests? Does this make an eventual leap to QE more likely?

The ECB is playing up the prospects of a second round in December after the stress tests are finished. But having pledged to add the best part of 1 trillion euros to its balance sheet to rev up the euro zone economy, it can’t have been happy to see only 83 billion euros of loans taken. ECB President Mario Draghi testifies at the European Parliament today.

After narrowly winning a confidence vote in the National Assembly in a manner that doesn’t exactly give him momentum, French Prime Minister Manuel Valls travels to Germany to compare notes on economic reform.

Swedish shift

Opposition leader Stefan Lofven speaks at the election night party of the Social Democrats in Stockholm

Sweden’s centre-left Social Democrats topped the poll in Sunday’s election but fell well short of an overall majority to the extent that it will struggle to form a strong coalition.

The Social Democrats and the Greens and hard Left, who would be natural coalition allies, garnered 43.7 percent of the vote. The anti-immigrant far right emerged as the third biggest party to hold the balance of power with nearly 13 percent.

It looks like there will be plenty of time for market jitters before a government is formed.
What looks more certain is the ousting of the centre-right means years of falling taxes and liberal economic reforms may come to a juddering halt.

An almighty gamble

Britain's Prime Minister David Cameron leaves Downing Street in London

Having woken up to the very real possibility of Scotland going it alone, the leaders of Britain’s main parties have scrapped their parliamentary business and headed north to campaign in what amounts to a huge gamble.

The “No” campaign has been criticized for many things – being too negative (though no is negative by definition), being too aloof, failing to address the hole’s in Alex Salmond’s manifesto. The question is whether it is too late to do anything about it. It is risky to deploy Prime Minister David Cameron who, by his own admission, is not catnip to the Scots.

Labour leader Ed Miliband is anything but a clear vote-winner either. The years when the Labour party ruled Britain with a raft of Scots in senior positions is gone. The party front bench now looks very English.

Nearer the brink

A man walks past cutting boards, that have been painted with images of Russia's President Vladimir Putin, at a street store in the center of St. Petersburg

Ukraine is nearer the brink with Russian forces now pretty clearly operating over the border. The past week has seen Ukrainian forces flee in the path of a new rebel advance which Kiev and its western allies says has been directly aided by Moscow’s forces.

Russian President Vladimir Putin called on Sunday for immediate talks on “statehood” for southern and eastern Ukraine, though his spokesman tried to temper those remarks, that following an aggressive public showing in which Putin compared the Kiev government to Nazis and warned the West not to “mess with us”.

The deputy leader of the breakaway east Ukrainian region said he would take part in talks with representatives of Moscow and Kiev in Minsk today but did not expect a breakthrough. Russian foreign minister Lavrov is out saying the Minsk talks will aim for an immediate ceasefire without conditions although he also said Ukrainian troops must vacate positions from which they can hit civilian targets. Meanwhile, eight Ukrainian seamen have been rescued, two are still missing, after a patrol boat was sunk by artillery.

A turning point?

Emergencies Ministry members work at the site of a Malaysia Airlines Boeing 777 plane crash in the settlement of Grabovo in the Donetsk region

Could the shooting down of a Malaysia Airlines plane over Ukraine be a fundamental turning point in the crisis that has pitted Russia against the West? And if so which way – towards rapprochement or a further escalation?

Kiev accused militants fighting to unite eastern Ukraine with Russia of shooting down the Boeing 777 carrying nearly 300 people from Amsterdam to Kuala Lumpur with a Soviet-era ground-to-air missile. Leaders of rebels in the Donetsk People’s Republic denied any involvement, although around the same time their military commander said his forces had downed a smaller Ukrainian transport plane.

A Ukrainian Interior Ministry official took to Facebook shortly after the plane came down, saying that rebels had used a Buk anti-aircraft system given to them by Russia, and appealed to the West to act. That doesn’t make the situation much clearer since Russia, Ukraine and the separatists all probably have the missile in their arsenals.

Balance tilted in Ukraine?

slaviansk.jpgUkrainian forces pushed pro-Russian rebels out of their stronghold of Slaviansk on Saturday. Its re-capture represents Kiev’s most notable military victory in three months of fighting in which more than 200 Ukrainian troops have been killed as well as hundreds of civilians and rebels.

The regions of Donetsk and Luhansk are likely to be next in the government forces’ crosshairs.

Talks between Iran and the six world powers –  the United States, Britain, France, Germany, Russia and China – over its disputed nuclear programme stretch through the week, leading up to a July 20 deadline which has been set for a definitive deal.
Most diplomats involved in the talks expect that date to lapse though we reported exclusively that Iran has reduced demands for the size of its future nuclear enrichment programme.

The Mark and George show

The Mansion House dinner in the City of London is one of Britain’s big set-pieces of the year featuring speeches by Bank of England Governor Mark Carney and finance minister George Osborne.

Carney will be speaking a week before the Bank’s Financial Policy Committee meets and is expected to road test its new tools to calm the housing market. Among other measures, the BoE could recommend caps on the size of home loans granted in relation to a property’s value or a borrower’s salary.

There have been some signs of demand for mortgages slowing of late but London – the real hotspot – is being fuelled by an influx of foreign money which does not require a home loan to buy. The FPC could also suggest the government curbs its “Help to Buy” scheme which helps Britons get on the property ladder.

EU’s top two — oh to be a fly on the wall

Who are the two most important people in the EU? It’s hard to argue against Angela Merkel and Mario Draghi and they meet today in Berlin.

It’s supposed to be a private meeting but of course we’ll be digging, particularly for any signs that the German leader is for or against the European Central Bank printing money if it is required to beat back deflation.

The German media responded negatively to last week’s measures, defaulting to the country’s historic fear of inflation stretching all the way back to the 1920s Weimar Republic although there is virtually no inflation in Europe’s largest economy at the moment. Merkel has given Draghi a fair wind in the past to initiate “unorthodox” policy measures.