A question of gas

A Ukrainian soldier sits on top of an APC at a checkpoint outside the city of Slaviansk

German Chancellor Angela Merkel is in Washington for talks with Barack Obama after Europe and the United States imposed wider sanctions on Russia.

Obama is already looking ahead to a third round of measures and has hinted at impatience with Europe, saying there had to be a united front if future sanctions on sectors of the Russian economy were to have real bite. At home, the Republicans are accusing him of weakness so will he put pressure on Merkel to move ahead in a way that the European Union has shown it is entirely unready to, at least yet?

The east of Ukraine remains in turmoil with pro-Russian separatists, who have seized civic buildings and police stations in a number of cities and towns, saying Ukrainian forces had launched a big operation to retake the eastern town of Slaviansk. That would mark the first significant military response from the government in Kiev.

The interior minister said a pilot has been killed and others wounded by anti-aircraft missiles used by the rebels. Separatists said at least one helicopter had been shot down.

In the city of Donetsk, capital of a province of about 4 million people, rebels have called a referendum on secession for May 11. The IMF has warned it would have to redesign its $17 bailout for Ukraine if it lost territory in the east.

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.

A glimmer of hope in Kiev

A glimmer of hope in Ukraine?

Let’s not count our chickens after 75 people were killed over the past two days but President Viktor Yanukovich’s people are saying an agreement on resolving the crisis has been reached at all-night talks involving the president, opposition leaders and three visiting European Union ministers.
A deal is due to be signed at 1000 GMT apparently although no details are as yet forthcoming. There has been no word from the EU ministers or the opposition so far.

Even if the violence subsides and some sort of political agreement is reached (a huge if), there is potential financial chaos to deal with despite Russia’s only partially delivered pledge of $15 billion to bail its neighbour out.

Standard & Poor’s has cut Ukraine’s sovereign rating for the second time in three weeks, saying the political situation has deteriorated substantially, posing an increased risk of default. The rating is now deep in junk territory at ‘CCC’ and with a negative outlook, meaning further cuts are likely.

Oh Silvio

Even before the vote on his political future, Silvio Berlusconi ordered his five ministers to quit Italy’s teetering coalition government over the weekend in an attempt to force fresh elections.

With markets already alarmed at the prospect of another self-inflicted political wound – the U.S. government budget shutdown – Italian assets could take a hammering today with investors finally waking up to the potential chaos looming.

Bond yields did climb a little last week but not to the extent that suggests the worst-case scenario is anything like priced in. Italian BTP futures have plunged by well over a full point at the open and the euro is on the skids. Let’s hope everyone still believes in the European Central Bank’s euro zone backstop.

Abe’s European spring break: Japan stimulus sends euro zone yields to record lows

It wasn’t just the Nikkei. Euro zone government bonds rallied following Japan’s announcement of a massive new monetary stimulus. That sent yields on the debt of several euro zone countries to record lows on bets that Japanese investors might be switching out of Japanese government bonds into euro zone paper, or might soon do so.

The Bank of Japan on Thursday announced extraordinary stimulus steps to revive the world’s third-largest economy, vowing to inject about $1.4 trillion into the financial system in less than two years in a dose of shock therapy to end two decades of deflation.

Austrian, Dutch, French and Belgian borrowing costs over ten years fell to record lows as investors piled into euro zone debt offering a pick-up over Germany. The bond rally was led by 10- and 30-year maturities after the BOJ said it would double its holdings of long-term government bonds.

Austro-Hungarian troubles

Concerns about Austrian banks’ exposure to Hungary have continued to put pressure on Austrian bonds in recent days, driving 10-year Austrian government bond yields to their highest in over a month on Friday.

In focus is Hungary’s dispute with the IMF and the EU over its financial aid package. Hungarian Prime Minister Viktor Orban’s government has been chided over its stance on a law its lenders view as infringing central bank independence. That has jeopardised negotiations for a much-needed loan deal.

The concerns have led to a sell-off in Austrian government bonds, leaving the spread between their yields and those on Germany bunds within sight of a euro lifetime high hit in November. Richard McGuire, senior fixed income strategist at Rabobank explains the linkage:

A little Schadenfreude after IMF slip-up


The International Monetary Fund’s bumbled calculations on the financing needs of some eastern European countries revealed last week were met in Austria with disbelief, ridicule but also a quiet smile.


The IMF said it had overstated external financing needs of some countries in its Global Financial Stability Report, released on April 21, largely because of double-counting errors. The corrections have trickled in.


Worrying reports earlier this year indicating west European banks had lent $1.7 trillion to IMF-bailed-out states like Ukraine and Hungary worsened a steep selloff in the region’s assets. Policymakers lashed back at the time, saying the fear was blown out of proportion.

Here, there and everywhere with ECB’s Nowotny

Austria’s Ewald Nowotny is a very busy man. Apart from running the Austrian Central Bank and sitting on the board of the European Central Bank, he has given at least 32 interviews since taking office last September, to publications as diverse as Japan’s Nikkei newspaper and Austrian alternative weekly Falter as well as the usual financial papers.

And his fondness to talk at length on ECB rate policy, the euro, emerging Europe, recession, inflation, deflation, growth forecasts and bank rescues has in turn set tongues wagging. He’s even done an internet chat with readers of Austria’s Der Standard.

“Ewald Nowotny is almost omnipresent. Barely a day goes by without (him) popping up in one of Austria’s publications airing statements about the current economic situation,” German
financial daily Handelsblatt wrote in a recent article, which only appears in its paper version.