MacroScope

Game of chicken in Kiev

No sign of tensions calming on the streets of Kiev, in fact today we could have a new flashpoint.

Prime Minister Mykola Azarov’s cabinet is holding its weekly meeting in the government building which protesters have blockaded since Monday, paving the way for a possible showdown.

Popular pressure, following President Viktor Yanukovich’s decision to reject an EU trade deal and turn back to Russia, is being matched by the markets, and it is from there that the potential tipping point could come.

The cost of insuring Ukrainian debt against default has been driven up to a level not seen since January 2010. Ukraine faces gas bills and debt repayments next year of more than $17 billion. Investors fear that the country could run out of cash to repay maturing debt and central bank calls on depositors to avoid a bank run suggests it fears just that.

Yanukovich is in China but Beijing tends to be longer on promises of help than hard cash in these situations. That leaves Moscow since it’s virtually impossible to imagine Kiev acceding to the sort of conditions the IMF would demand in return for help, with elections looming in 2015.

Putin’s Ukraine “victory” — pyrrhic?

Ukraine continues to top the European worry list.

Monday demonstrated how quickly the financial side of the equation can spiral out of control. The hryvnia currency slumped and the cost of insuring against Ukrainian default soared, forcing the central bank to intervene and urge its citizens not to spark a bank run.

Having turned its back on the EU, Kiev must find more than $17 billion next year to meet gas bills and debt repayments. Presumably Russia will have to help out if it is not to have a basket case on its doorstep.

Has Vladimir Putin factored that into his diplomacy? He is certainly concerned, describing the protestors who blockaded government buildings on Monday of pursuing pogrom – about as loaded a term as he could choose – engineered by “outsiders”, not revolution.

Crisis in Kiev

Ukraine’s shock decision to turn its back on an EU trade deal continues to reverberate with mass rallies on the streets of Kiev in protest at President Viktor Yanukovich’s decision.

To try to defuse tensions, Yanukovich issued a statement saying he would do everything in his power to speed up Ukrainian moves toward the EU. Is this another U-turn or mere semantics? The answer is important.

Kiev must find more than $17 billion next year to meet gas bills and debt repayments. Another sovereign meltdown is far from impossible.
Yanukovich is due to embark on a trip to China. Dare he go? And is the opposition cogent enough to threaten him? The call for a national strike will be an acid test.

France, Italy compare notes

French President Francois Hollande is in Rome for talk with Italy’s Enrico Letta. Both have a lot on their minds.

The French economy contracted in the third quarter and Hollande faces a blanket of criticism over his timid economic reforms (although he has pushed through some labour and pension changes).

The French government announced yesterday an overhaul of a complex tax system, hoping it will douse a public backlash against high taxes (which have been favoured over spending cuts so far) which has led to back-pedalling on several plans this year. It will not lower the overall tax burden but is promising a fairer system to be enshrined in the 2015 budget. Whether that does anything to revive its rock-bottom popularity rating remains to be seen. Detail is scant so far.

French travails

The Bank of France’s monthly report forecasts growth of 0.4 percent in the last three months of the year, up from an anaemic 0.1 percent in the third quarter. That still makes for a fairly doleful 2013 as a whole.

France is zooming up the euro zone’s worry list, largely because of its timid approach to labour and pension reforms. Spain has been much more aggressive and is seeing the benefits in terms of rising exports (and, admittedly, sky-high unemployment). So too has Portugal.

Tellingly, both the Iberian countries have had the outlook on their credit ratings raised to stable in recent days while S&P cut France’s rating to AA from AA+. It remains at a far stronger level but the differing directions of travel are clear.

Take-off has been delayed

Euro zone services PMIs and German industry orders data will offer the latest snapshot of the currency bloc’s economy which the European Commission now forecasts will contract by 0.4 percent this year and grow just 1.1 percent in 2014 – hardly escape velocity, in fact barely taxiing along the runway.

We know from flash readings for the euro zone and Germany that service activity expanded but at a slower rate last month. France’s reading crept back into expansionary territory for the first time since early 2012. Any revisions to those figures will be marginal leaving the focus more on Italy and Spain for which we get no preliminary release.

Italy’s service sector has been growing of late, according to the PMIs, while Spain’s has still been shrinking though at a slower pace. German industry orders posted a surprise 0.3 percent drop in August and are forecast to have grown by 0.5 percent in September.

It’s all Greek

The EU/IMF/ECB troika is due to return to Athens to resume a review of Greece’s bailout after some sparring over budget measures.

Greece’s president and prime minister have said they will not impose any further austerity measures and hope that their ability to run a primary surplus will persuade its lenders to cut it some more slack on its bailout loans to make its debt sustainable. The EU and IMF say there will be a fiscal gap next year that must be filled by domestic measures, be they further wage and pension cuts or tax increases.

We had a round of brinkmanship last week with EU officials saying they weren’t going to turn up because Athens had not come up with plausible ways to fill a 2 billion euros hole in its 2014 budget. But on Saturday, the European Commission said the review was back on after the Greek government came up with fresh proposals.

A question of liquidity

The Federal Reserve’s decision to keep printing dollars at an unchanged rate, mirrored by the Bank of Japan sticking with its massive stimulus programme, should have surprised nobody.

But markets seem marginally discomfited, interpreting the Fed’s statement as sounding a little less alarmed about the state of the U.S. recovery than some had expected and maybe hastening Taper Day. European stocks are expected to pull back from a five-year high but this is really the financial equivalent of “How many angels can dance on the head of a pin”. The Fed’s message was little changed bar removing a reference to tighter financing conditions.

However, the top central banks have sent a signal that they think all is not yet well with the world – the Fed, BOJ, European Central Bank, Bank of England, Bank of Canada and Swiss National Bank have just announced they will make permanent their array of currency swap arrangements to provide a “prudent liquidity backstop” indefinitely.

UK recovery, can you feel it?

Third quarter UK GDP data are likely to show robust growth – 0.8 percent or more, following 0.7 percent in Q2 – more kudos to a resurgent finance minister George Osborne who only a year ago was buried in brickbats.

We can argue about the austerity versus growth debate ‘til the cows come home – there is still a strong case that if the government hadn’t cut so sharply, growth would have returned earlier and debt would have fallen faster. But the fact that the economy is ticking along nicely 18 months before the next election means Osborne has won the argument politically.

And yet, and yet. The opposition Labour party has been nimble in switching its criticism from the government’s debt-cutting strategy to the fact that the economy might be recovering but the vast majority of Britons aren’t feeling it.

Forever blowing bubbles?

UK finance minister George Osborne is speaking at a Reuters event today, Bank of England Deputy Governor Charlie Bean addresses a conference and we get September’s public finance figures. For Osborne, there are so many question to ask but Britain’s frothy housing market is certainly near the top of the list.

The government is extending its “help to buy” scheme at a time when house prices, in London at least, seem to be going through the roof (no pun intended). Property website Rightmove said on Monday that asking prices for homes in the capital jumped 10.2 percent in the last month alone.

The Royal Institution of Chartered Surveyors has suggested the Bank’s Financial Policy Committee should cap house price inflation at 5 percent a year. A Bank of England policymaker retorted that it wasn’t down to his colleagues to regulate prices.