MacroScope

Ireland at the finishing line

Ireland will officially exit its bailout on Sunday. Not much will happen but symbolically it’s huge and will be used by the EU as evidence that its austere crisis-fighting approach can work. Today, the IMF will confirm Dublin passed the last review of its bailout programme – the final piece in the jigsaw. Finance Minister Michael Noonan is also expected to speak.

For Dublin, this is only the beginning.

Support for the coalition government has slumped with the minority Labour party suffering worst (‘twas ever thus in coalitions).
As a result, Labour is pressing for a loosening of the purse strings while the dominant Fine Gael under premier Enda Kenny seems prepared to bet on a return to growth delivering the votes they need to rule outright after the next election, due by early 2016.

There are already some signs of easing with the government opting for a smaller package of spending cuts and tax hikes in its 2014 budget and the IMF warning planned 2 billion budget cuts planned for 2015 year may not be sufficient. The main benefactor in the polls so far has been Sinn Fein. 

We will interview Slovenian central bank governor Bostjan Jazbec a day after the country said it had a 4.8 billion euro hole in its banking system that it can plug without turning to Europe for a bailout.

That has spared the European Union a politically fraught problem but the small euro zone country’s problems are far from over. A fire sale of state assets will now be triggered and the banks are so embedded into the Slovene economy that deleveraging will cause great damage.

Judgment day for Slovenia

The Slovenian government is poised to publish the results of an external audit of its banks, which will say how much cash the government must inject to keep them afloat. We’ve heard from sources that the euro zone member needs as much as 5 billion euros to recapitalize largely state-owned banks.

The central bank said on Tuesday that sufficient funds were available to an international bailout but, while the euro zone might breathe a sigh of relief, Ljubljana’s problems are far from over. A fire sale of state assets will be triggered and the banks are so embedded into the Slovene economy that deleveraging will cause great damage.

The government may raid its own cash reserves of 3.6 billion euros, hit junior bank bondholders to the tune of 500 million euros and, if necessary, tap financial markets. But all this may just be delaying the inevitable for a country that is expected to wallow in recession until 2015. Prime Minister Alenka Bratusek has called a cabinet meeting and a news conference is tentatively scheduled for 1000 GMT.

Confidence in Italy?

Emboldened by the splitting of Silvio Berlusconi’s party and the media mogul’s expulsion from parliament, Prime Minister Enrico Letta has already won one confidence vote in parliament. Today, he has called another to cement his coalition’s standing.

Letta is expected to win with the help of a centre-right group which split from Berlusconi but tensions are rising between his centre-left PD, now by far the biggest party in the coalition, and the small group led by Interior Minister Angelino Alfano.

That’s partly because there’s a new man in town who may press for more left-wing policies that would enrage the centre-right.

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.

Hopes for a weaker euro looking more like fantasy

Hopes that the soaring euro will eventually fall and help the economy with a much-needed export boost for struggling euro zone nations are looking more and more like fantasy.

The collective talk about its inevitable drop is beginning to sound much like the drum-beat of opinion lasting more than half a decade that said the yen would fall while it stubbornly marched in the other direction.

Only the most spectacular fusillade of Japanese central bank cash in history managed to turn the situation around, and even now the yen is barely trading much weaker than the most conventional of predictions a few years ago.

Union? Don’t bank on it

The Eurogroup of euro zone finance ministers meets, followed by the full Ecofin on Tuesday, to try and unpick the Gordian Knot that is banking union.

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 prevent a repeat of the bloc’s debt crisis.

But Germany, which does not want to foot the bill for failures elsewhere, is wary not least because a coalition deal to form the next government has yet to win final approval from the Social Democrats.

Banking union talks, storm allowing

The finance ministers of Germany, France, Italy and possibly Spain are expected to meet in Berlin to discuss banking union. Two sources told us Dutch Finance Minister Jeroen Dijsselbloem – who chairs the Eurogroup of euro zone finance ministers — should attend as will EU commissioner Michel Barnier and key European Central Bank policymaker Joerg Asmussen.

There is a possibility, however, that a violent storm that has hit Germany could prevent the participants reaching Berlin. If they make it, they will bid to come closer to a solution on a planned European resolution mechanism to deal with troubled banks ahead of a full meeting of euro zone finance ministers next week to help fashion a deal by the end of the year.

The last time the ministers met it didn’t go so well.  

Germany is cool to the original idea that the euro zone clubs together to tackle frail banks. Instead, Berlin wants losses imposed on bank creditors, including bondholders, once stress tests due next year expose any weak links.

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.

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.