MacroScope

Will French numbers add up?

French President Francois Hollande’s cabinet meets to adopt a new debt reduction plan.

After outlining 50 billion euros of savings for 2015-2017 to help pay for consumer and business tax cuts, the government is due to sign off on already delayed deficit reductions to bring it, eventually, to three percent of output as demanded by Brussels.

The European Commission has taken a dim view of any further relaxation, having previously granted Paris two years extra leeway. The French government insists it will meet its targets but appears to be trying to deliver one message to Brussels and another to its electorate, with domestic politics likely to hold sway.

French media are reporting the government will raise the official deficit forecast for this year and next to 3.8 percent and 3.0 percent of GDP respectively, which leaves no room for manoeuvre. 

Overnight, there has been some heavily coded criticism from closer to home.

France’s High Council for Public Finances, an audit panel created to offer independent assessment of feasibility of the budget programmes, said the government would raise its growth forecasts to 1.0 percent this year and 1.7 percent in 2015 which it said was realistic for this year but maybe not thereafter. Growth of 2.25 percent is pencilled in for 2016.

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.

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.

IMF verdict on Ukraine due

G7 leaders didn’t move the dial far last night, telling Russia it faced more damaging sanctions if it took any further action to destabilize Ukraine.
They will also shun Russia’s G8 summit in June and meet ”à sept” in Brussels, marking the first time since Moscow joined the group in 1998 that it will have been shut out of the annual summit.

There were some other interesting pointers. For one, the G7 agreed their energy ministers would work together to reduce dependence on Russian oil and gas. Could this lead to the United States exporting shale gas to Europe? A committee of U.S. lawmakers will hear testimony on Tuesday from those who favour loosening restrictions on gas exports.

Sanctions imposed so far may be limited but they are hitting investment and Russia’s currency and stock market. The economy is barely growing and the government said yesterday it now expected net capital outflows of up to $70 billion in the first quarter of the year.

Putin unmoved by carrots or sticks

Vladimir Putin said this morning Russia and the United States are still far apart over Ukraine. Moscow, he said, could not ignore “illegitimate decisions” imposed on the east and south of the country and calls for help by ethnic Russians there but the two powers should not sacrifice relations over it.

In an hour-long telephone call last night Barack Obama urged Putin to accept the terms of a potential diplomatic solution to the crisis whereby Moscow would keep its military bases in Crimea while respecting Ukraine’s sovereignty. But he also ordered sanctions – including travel bans and freezing of assets in the U.S. – on people responsible for Moscow’s intervention in Ukraine though Putin himself is not on the list.

Obama also said a Crimean referendum on joining Russia, called for 9 days’ time, violated international law.
Meanwhile, Congress passed a $1 billion loan guarantees package for the new government in Kiev. The European Union has already promised some $15 billion over the next two years, contingent on a deal being signed with the IMF.

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.

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.

Escalation in Crimea

Worrying escalation in Crimea. Interfax reports Russian servicemen have take over a military airport in the Russian-speaking region of Ukraine and armed men are also patrolling the airport at Crimea’s regional centre of Simferopol.
Kiev has condemned the moves as an “armed invasion”.

There has been no bloodshed and there are more constructive noises from Moscow to weigh in the balance.

Russian President Vladimir Putin has ordered his government to continue talks with Ukraine on economic and trade relations and to consult foreign partners including the IMF and the G8 on financial aid.

Ireland: bailout poster child, but hardly textbook

Amid the euphoria surrounding Ireland’s removal from junk credit rating status, it’s easy to get swept along by the consensus tide of opinion that the Emerald Isle is the “poster child” for euro zone austerity.

But were another country to find itself in Ireland’s unfortunate financial predicament now, few would suggest it follow the path Dublin took.

The Irish government assumed the entire nation’s private banking sector debt in 2008 after then finance minister Brian Lenihan explicitly guaranteed all bank debt in the country. It was hailed as a masterstroke at the time, but in an instant Ireland’s hands were tied and its options all but evaporated. Even the stuff that posed no systemic risk was put on the government’s – the taxpayers’ – books. This prevented the collapse of the financial system, but at a price: the country’s sovereign debt load almost doubled to around 100% of annual economic output, and in order to do that it was forced to take an €85 billion bailout from international creditors two years later.

Hollande talks the talk

Francois Hollande managed to bat off questions about his private life (how successful he is in holding that line depends on the attitude of the French media which yesterday was nothing but respectful) and focus instead on a blizzard of economic reforms.

Skating past the French president’s call for an Airbus-style Franco-German energy company which left everyone including the Germans bemused, there was some real meat.

Hollande reaffirmed his “responsibility pact” to cut taxes and red tape for companies, saving them 30 billion euros, in return for a commitment to hire more people and increase training.
He also promised a further 50 billion euros in spending cuts in 2015-17 on top of a planned 15 billion this year, saying they could be achieved by making national and local government more efficient while preserving France’s generous social model.