MacroScope

Marathon banking union talks

Shots were fired at an international team of monitors in Crimea over the weekend, violence flared in Sevastopol as thousands staged rallies and Angela Merkel, who perhaps has the most receptive western ear to Vladimir Putin, rebuked him for supporting a referendum on Ukraine’s southern region joining Russia. But in truth we’re not much further forward or backwards in this crisis.

The West from Barack Obama on down has said the referendum vote next Sunday is illegal under international law but it’s hard to put the genie back in the bottle if Ukraine’s southern region chooses to break away. The best guess – but it is only a guess – is that barring an accidental sparking of hostilities, there is not much percentage in Russia putting its forces in Crimea onto a more aggressive footing in advance of the vote.

Euro zone finance ministers meet and are joined by their non-euro counterparts for an Ecofin on Tuesday. They have the mammoth task of finalizing everything on banking union that was set out in principle by their leaders at a December summit, since when not much has happened.

Intractable issues such as who decides when a bank is failing, how a decision is taken to wind down a failing bank and how long it will take to build up a fund from bank levies to pay for failing lenders all have to be sorted out, as does who picks up the bill in the meantime. Plan A was for the fund to be built up over 10 years and then be pooled but critics say that leaves the bloc’s governments exposed for far too long.

Policymakers agreed last year that the ECB will be the single supervisor for all euro zone banks from November. But talks on a single European agency to wind up or close failing banks, and on a single fund to back it up, are ongoing and the EU finance ministers and European Parliament must reach a deal this week or run out of time before May elections and then face months of delay. Sounds like it could be a marathon couple of days.

Unsterilised ECB?

Foreign ministerial talks in Paris yesterday made little progress on Ukraine. Russia rejected Western demands that its forces in Crimea should return to their bases and its foreign minister refused to recognise his Ukrainian counterpart. Moscow continues to assert that the troops that have seized control of the Black Sea peninsula are not under its command. The West is pushing for international monitors to go in.

Today, at least some of the focus switches to Brussels where EU leaders will hold an emergency summit with a twin agenda of how to help the new government in Kiev and possible sanctions against Russia. On the latter, Europe has appeared more reticent than Washington not least because of its deep financial and energy ties, none more so than Germany and Britain.

The bloc yesterday offered Ukraine’s new government 11 billion euros in financial aid over the next two years, contingent on it reaching a deal with the IMF. It will also freeze the assets of ousted president Viktor Yanukovich and 17 others seen as culpable for violation of human rights – around 80 people were killed in the capital last month as they protested against Yanukovich’s rule. Kiev caused some market wobbles by saying it would look at restructuring its foreign currency debt.

Jaw jaw not war war, hopefully

The end of Russian military exercises near the Ukrainian border and Vladimir Putin’s statement that force would only be used as a very last resort seemed to have taken some of the tension out of this crisis but the situation remains on a knife edge.

Moscow chose to test fire an intercontinental ballistic missile though Washington said it had been notified of plans to do so before the standoff in Crimea blew up. And there is always the possibility of conflict being triggered inadvertently.

Yesterday, a Russian soldier fired three volleys of shots over the heads of unarmed Ukrainian servicemen who marched towards their aircraft at a military airfield surrounded by Russian troops near Sevastopol.

A small step back?

A reported 0300 GMT deadline, which Russian forces denied had been issued, for Ukraine’s troops to disarm in Crimea or face the consequences has passed without incident and in the last hour President Vladimir Putin has ordered troops that took part in military exercises in western Russia to return to base.

That has helped lift the euro but the situation remains incredibly tense. Russia’s stock market is up a little over two percent and the rouble has found a footing but they are nowhere near clawing back Monday’s precipitous losses.

The West may have no military card to play – and its ability to impose meaningful sanctions is untested as yet – but the markets reminded Putin in no uncertain terms yesterday that there is a price to pay for war mongering.

Renzi’s moment

Italy’s president will meet centre-left leader Matteo Renzi today and is likely to ask him to form a government following the ousting of Enrico Letta as prime minister.

Renzi will need to reach an agreement with the small New Centre Right party to continue the current coalition and there is common ground. The 39-year-old has already said he backs lower taxes affecting employment, but they differ on issues such as immigration and laws allowing gay and lesbian civil partnerships.

A lot is at stake. Italy needs a strong government that can push through much-needed economic reforms but needs to pass a new electoral law first to allow for more durable administrations in future.

Banking union … timber not steel

A day after she was sworn in for a third term and a day before she attends an EU summit in Brussels, Chancellor Angela Merkel delivers a speech in the Bundestag lower house. She will then head to Paris in the evening for a meeting with French President Francois Hollande. That bilateral could be the moment that the seal is set on banking union, in time for the Thursday/Friday EU leaders summit.

In parallel, the bloc’s 28 finance ministers will meet in Brussels to try and finalise a common position on the detail. “For the acceptance of the euro on financial markets, the banking union is very important,” Merkel said on Tuesday.

For the markets, it will be impossible to look beyond today’s Federal Reserve policy decision which might, or might not, start the process of slowing the pace of money-printing which has been churning out $85 billion a month. But banking union is hugely important too.
Euro zone finance ministers made progress overnight, essentially agreeing the blueprint Reuters reported exclusively over the weekend.

Decision day for Kiev … and Moscow

Decision day for Ukrainian President Viktor Yanukovich as he heads to the Kremlin seeking a financial lifeline while demonstrators in Kiev gather again to demand he steps down.

Vladimir Putin seems set to agree a loan deal, and possibly offer Ukraine a discount on the Russian natural gas.
It seemed he was the only game in town after an EU commissioner said the bloc was suspending talks on a trade agreement with Kiev. But yesterday, European Union foreign ministers said the door remained open, which in a way makes Yanukovich’s predicament harder.

Does Russia really need this? Politically yes, but economically? Ukraine is seeking help to cover an external funding gap of $17 billion next year and is in no position to pay for its gas.

And more from the ECB…

The bombardment of European Central Bank interventions continues today. ECB chief Mario Draghi addresses the European Banking Congress in Frankfurt and any number of his colleagues break cover elsewhere.

Draghi shepherded a surprise interest rate cut earlier this month and consistently says that other options are on the table though yesterday he said that talk of cutting the deposit rate into negative territory to try and force banks to lend more was people “creating their own dreams”.

Having said that, the prospect of printing money has been raised, at least in principle, and the markets still expect a new round of long-term liquidity pumped into the banking system – a repeat of last year’s LTROs – early next year. Anything more would be hugely difficult for Germany and its fellow travellers to swallow.

ECB cacophony

A round of European Central Bank policymakers speeches this week can be boiled down to this. All options, including money-printing, are on the table but it will be incredibly hard to get it past ECB hardliners and neither camp sees a real threat of deflation yet.

Reports that the ECB could push deposit rates marginally into negative territory in an attempt to force banks to lend have been played down by our sources, not least because it would distort the working of the money market.

Today, ECB chief Mario Draghi speaks at a Berlin conference. Bundesbank head Jens Weidmann, who opposed this month’s cut in the main interest rate along with about a quarter of the Governing Council, will also be there as will Angela Merkel.

Italian shuffle

The decision by one of Silvio Berlusconi’s key allies to break from his party and back Prime Minister Enrico Letta’s fragile coalition appears to have shored up the Italian government with a final vote on expelling the media magnate from public life looming large.

Berlusconi said on Saturday his rump centre-right party had split from the coalition but did not have the numbers to bring it down.
Angelino Alfano, interior minister and deputy premier, said all five of the centre-right ministers under his umbrella would stay in the government but there is still plenty of disagreement within the coalition about the 2014 budget and doubts about Letta’s ability to push through meaningful economic reforms.

Letta is speaking at a conference “Charting the Way Ahead” today. On Sunday, economy minister Fabrizio Saccomanni said he wanted to accelerate public spending cuts following Friday’s criticism of the draft budget by the European Commission, which it said could break the bloc’s debt rules.