MacroScope

EU ratings day: Portugal modest thumbs up, Dutch unscathed, Ireland awaited

Friday is European ratings day since EU rules took force requiring ratings agencies to say precisely when they will make sovereign pronouncements and to do so outside market hours.

S&P has already shifted its outlook on Portugal’s rating from creditwatch negative to negative. The rating remains at BB, one notch below investment grade. That sounds obscure but it’s actually something of a vote of confidence though probably short of what the market had been hoping for.

The ratings agency said it expects Lisbon to meet its budget deficit target this year based “partly on indications that the economy has been showing signs of stabilization since mid-2013” – another fillip as Lisbon tries to follow Dublin out of the bailout exit door this year.

Portuguese Prime Minister Pedro Passos Coelho will take part in his first parliamentary debate of 2014, after a roaringly successful bond issue last week, which has helped to bring debt yields in the secondary market to their lowest levels since 2010. He is likely to be asked whether the country will need a precautionary loan after the end of the bailout.

Fitch is also out with its verdict on the Netherlands, keeping its AAA rating with a negative outlook. The Dutch have already lost a triple A rating from S&P.
Fitch said public finances had deteriorated but remained within the “tolerance” of a top-notch rating, some relief to the Dutch government although the agency’s forecast of stagnation this year followed by anaemic 1 percent growth in 2015 is hardly cause to put out the bunting.

Spain ascendant?

Spain appears to be on the road to recovery, if you can call it that with around a quarter of the workforce without a job.

The government says growth hit 0.3 percent in the final quarter of the year, the second quarterly expansion in a row, and may upgrade its forecast for 0.7 percent growth in 2014.

Its borrowing costs have tumbled to four-year lows in a new year bond rally and today Madrid will try to cash in by selling up to 5.5 billion euros of bonds following an above-target sale last week.

Hollande’s moment of truth

This afternoon, French President Francois Hollande will expand upon his New Year announcement that French companies who agree to hire more workers could pay lower labour taxes in return and find themselves less tied up in red tape. Unemployment is running near to 12 percent and Hollande’s vow to get it falling by the end of 2013 fell short.

Unfortunately, the announcement has been eclipsed by his threat of legal action after a French magazine reported he was having an affair with an actress. France tends to overlook its politicians’ peccadilloes but with the economy in a hole, Hollande risks facing the charge that he should be focusing squarely on that.

To complicate matters his partner, Valerie Trierweiler, has been admitted to hospital following the reports. She will stay there for a number of days yet.
Given this is one of only two news conferences that Hollande has promised to give each year it’s hard to see how he can avoid it being hijacked by his personal life. As boxing promoter Don King was fond of saying: there are two chances, slim and none and Slim just left town.

Turkish troubles

Ask investors about their minimum criteria when putting money into a country and rule of law comes pretty high. That’s one of the reasons why Turkey’s corruption scandal, and the reaction of the government in ousting hundreds of police officers, is so serious. The lira touched a record low on Thursday.

Today, parliament’s justice commission will debate a draft law reforming the High Council of Judges and Prosecutors, which makes judicial appointments. Critics of the bill say it will give the justice minister significant influence over appointments, describing it as anti-constitutional and undermining the separation of powers.

Prime Minister Tayyip Erdogan’s ruling party is slipping in the opinion polls although it remains comfortably ahead of its opponents. Erdogan finishes an Asian tour today with a visit to Malaysia.

That sinking feeling

Euro zone inflation, or deflation, is the focus of the moment.

Germany’s HICP rate fell to 1.2 percent last month, Italy’s hit 0.6 percent and Spain’s just 0.3 in December (not to mention Greece’s -2.9 percent). Today we get the figure for the euro zone as a whole. Forecasts for it to hold at 0.9 percent may now look a little toppy.

It’s too early for any dramatic moves but the European Central Bank, which has a policy meeting on Thursday, may well be pushed into easing policy if inflation refuses to pick up and/or the banks clam up ahead of this year’s health tests.

A shock fall in euro inflation to 0.7 percent prompted an interest rate cut to 0.25 percent in November followed by a chorus of denials that deflation was a threat. ECB chief Mario Draghi adhered to that last week but added that he and his colleagues had to make sure inflation didn’t get stuck in the “danger zone” below one percent.

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.

Banking disunion

The full Ecofin of 28 EU finance ministers meets after Monday’s Eurogroup meeting of euro zone representatives didn’t seem to get far in unpicking the Gordian Knot that is banking union. Ireland’s Michael Noonan talked of “wide differences”.

The ministers are seeking to create an agency to close euro zone banks and a fund to pay for the clean-up – completing a new system to police banks and prevent a repeat of the bloc’s debt crisis.

But a German official rejected a euro zone proposal unearthed by Reuters that would allow the euro zone’s bailout fund, the European Stability Fund, to lend and help finance the cost of any future bank rescues or wind-ups. Berlin does not want to end up footing the bill for failures elsewhere and is still constrained because a coalition deal to form the next government has yet to win final approval from the Social Democrats.

ECB forecasts to contrast with Britain’s

The European Central Bank holds its last rates meeting of the year with some of the alarm about looming deflation pricked by a pick-up in euro zone inflation last week – though at 0.9 percent it remains way below the ECB’s target of close to two percent.

The spotlight, as always, will be on Mario Draghi but also on the latest staff forecasts. If they inflation staying well under target in 2015 (which is quite likely), expectations of more policy easing will gather steam again.

For today, another rate cut after last month’s surprise move would be a huge shock. Launching quantitative easing is anathema to much of the Governing Council unless it was clear a Japan-style downward price spiral was in the offing, which it isn’t. The bank’s vice-president, Vitor Constancio, has said the ECB would only cut the deposit rate it pays banks for holding their money overnight – now at zero – into negative territory in an extreme situation.

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.

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.