MacroScope

Franco-German meeting

German Finance Minister Schaeuble and his French counterpart Sapin attend news briefing after talks in Berlin

The big question of the week is whether financial market gyrations continue, worsen or calm. European stocks are being called higher at the open.

Greece has been effectively shut out of the bond market. If it and others on the euro zone’s southern flank come under persistent market pressure, in a way that hasn’t happened for two years, the onus on the European Central Bank to act will grow and grow.

None of the countries likely to be in the firing line appear to qualify for the conditions attached to the ECB’s still-unused OMT bond-buying programme, the legality of which is under review by the European Court of Justice.

So full-on QE might be the only option to restore calm if the turmoil persists or worsens. We’re a long way from that yet and internal divisions within the ECB may rule it out altogether. Maybe that dawning realization, as the Federal Reserve prepares to turn the money taps off, has contributed to the unnerving of investors.

It is possible that if European bank stress tests – to be unveiled next Sunday – give a cleanish bill of health, credit and lending will start to flow again. But that will only happen if the demand for funds is there, and that is questionable, particularly at the rates banks are prepared to lend.

Greeks bearing bonds

Greece will sell its first bond in four years.

We know it will aim to raise up to 2.5 billion euros of five-year paper via syndication and wants to pay less than 5.3 percent – remarkable since only two years ago it was tipped to crash out of the euro zone and yields on 10-year debt peaked above 40 percent on the secondary market. They dropped below six percent for the first time since 2010 on Wednesday.

Athens has no pressing funding needs but wants to test the waters as part of its strategy to cover all its financing from the market by 2016. It still has a mountain to climb and may well need more debt relief from its EU partners to corral a national debt that is not falling much from 175 percent of GDP. 

But for all that, it’s a propitious time to borrow. Peripheral euro zone bond yields have tumbled this year, benefiting from wobbles in emerging markets, and now European Central Bank consideration of printing money has given bond prices a further lift.

A question of gas

Vladimir Putin will meet senior Russian government officials to discuss Russia’s economic ties with Ukraine, including on energy after state-controlled natural gas producer Gazprom said Kiev missed a deadline to pay a $2.2 billion bill.

In previous years, gas disputes between Moscow and Kiev have hurt supplies to Europe. The Ukraine government has said it would take Russia to an arbitration court if Moscow failed to roll back gas price hikes.

U.S. Secretary of State John Kerry accused Russian agents and special forces of stirring separatist unrest in eastern Ukraine, saying Moscow could be trying to prepare for military action as it had in Crimea. Armed pro-Moscow protesters occupied Ukrainian government buildings in two cities in the largely Russian-speaking east.

Turkish trouble

How much time does massive central bank currency intervention buy? About a day at a time in Turkey’s case. It spent $1.3 billion of its reserves yesterday to stop the lira going into freefall having thrown a record $2.25 billion at the market on Monday.

So far this year, the central bank has burned over $6 billion of its reserves which have now dropped below $40 billion. So that can’t go on for long, meaning an interest rate rise which a slowing economy really doesn’t need must be on the cards. The lira hit a record low versus the dollar on Monday.

Much of this is to do with the global emerging market sell-off sparked by the Federal Reserve’s exit plan from money-printing but Ankara has sown the seeds of crisis too, first with the very public standoff with protesters in its main cities who railed against what they see as Prime Minister Tayyip Erdogan’s increasingly authoritarian rule.

from Davos Notebook:

Groundhog Day in Davos

groundhog

The programme may strike a different  note -- this year's Davos is apparently all about Shared Norms for the New Reality -- but much of the discussion at the 41st World Economic Forum annual meeting in Davos this month will have a distinctly familiar ring to it.

Last January, the five-day talkfest in the Swiss Alps was dominated by Greece's near-death experience at the hands of the bond market and recriminations over the role of bankers in the financial crisis, as well as worries about China's rapid economic ascent and a lot of calls for a new trade deal.

Fast forward 12 months and not much has changed.

Ireland has joined Greece in the euro zone's intensive care unit and Portugal and  Spain are getting round-the-clock monitoring. The annual round of bankers' bonuses is once again stirring up trouble. China looms larger than ever on the global stage, after overtaking Japan in 2010 to become the world's second-biggest economy. And trade ministers who signally failed to make headway last year say they really must get down to business when they meet on the sidelines of Davos this time round.