MacroScope

To QE or not to QE?

ECB Vice-President Vitor Constancio testifies to the European Parliament prior to attending the IMF Spring meeting in Washington at the back end of the week along with Mario Draghi and other colleagues. Jens Weidmann, Yves Mersch and Ewald Nowotny also speak today.

There has undoubtedly been a change in tone from the ECB, which is now openly talking about printing money if inflation stays too low for too long (no mention of deflation being the required trigger any more). Even Bundesbank chief Weidmann has done so.

Last week, Draghi made it sound as if really serious thought was being given to how to do it. He raised the prospect of buying private sector assets, rather than government bonds as other central banks have. The question is whether he is trying to talk the euro down or whether the central bank is now more alarmed, and therefore deadly serious.

Over the weekend, Frankfurter Allgemeine Zeitung reported an ECB study which showed one trillion euros of new money would raise inflation by just 0.2 percentage points, while another model came up with 0.8 points. We have established the studies do exist and if they are believed it’s hard not to conclude that the bar for instigating QE remains high, whatever the rhetoric.

At the IMF, the debate about growth over austerity will be reignited after the Fund urged the ECB to do more and a reshuffled French government said new tax cuts might mean it takes longer to meet its EU budget deficit targets.

Good news for Greece?

Unemployment is sky high, national debt is not far short of double the size of an economy which is still shrinking and its ruling coalition has a wafer-thin majority, yet there are glimmers of hope in Greece.

Having finally struck a deal with the EU and IMF to keep bailout loans flowing, Athens is preparing to dip its toe back into the bond market with a five-year bond for up to 2 billion euros.

The government has not said when the syndicated issue might be launched but having mandated banks for the sale the likelihood is sooner rather than later. It’s a remarkably quick return two years after a debt restructuring which was essentially a default.

ECB uncertainty

For European markets, Germany’s March inflation figure is likely to dominate today. It is forecast to hold at just 1.0 percent. The European Central Bank insists there is no threat of deflation in the currency area although the euro zone number has been in its “danger zone” below 1 percent for five months now.

Having appeared to set a rather high bar to policy action at its last meeting, this week the tone changed. Most notable was Bundesbank chief Jens Weidmann, normally a hardliner, who said printing money was not out of the question although he would prefer negative deposit rates as the means to tackle an overly strong euro.

That looked like a significant shift although he did stress there was no need for imminent action.

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 welcomes Crimea in

Vladimir Putin has told Russia’s Duma that he has approved a draft treaty to bring Ukraine’s Crimea region into Russia and in doing so continues to turn a deaf ear to the West’s sanctions-backed plea to come to the negotiating table.

Overnight, Japan added its weight to the sanctions drive, suspending talks with Moscow on an investment pact and relaxation of visa requirements. EU and U.S. measures have targeted a relatively small number of Russians and Ukrainians but presumably there is scope to go considerably further, particularly if Putin decided to move into eastern Ukraine too.

EU foreign ministers yesterday began discussing how to reduce energy reliance on Russia. That’s a long-term project but one that could deal a hammer blow to the Russian economy if it succeeds.

Last-ditch talks on Crimea

U.S. Secretary of State John Kerry and Russian Foreign Minister Sergei Lavrov will meet in London, a last chance by the look of it to make diplomatic headway before Sunday’s Crimean referendum on joining Russia which the West says is illegal.

Kerry said he would present “a series of options that are appropriate in order to try to respect the people of Ukraine, international law, and the interests of all concerned” and that sanctions would be imposed against Moscow if the referendum went ahead.

A full NATO meeting will take place in Brussels with the Russian and Ukrainian ambassadors invited. There is no sign yet of Vladimir Putin coming to the negotiating table.

Sanctions loom for Russia

The European Union, as we exclusively reported yesterday, has agreed on a framework for sanctions against Russia, including travel restrictions and asset freezes, which goes further than many expected. The list of targeted individuals is still being worked on but will be ready for the bloc’s foreign ministers to look at on Monday.

Angela Merkel will speak to the German Bundestag about the standoff with Russia. Merkel has been cautious about imposing anything too tough as she tries to convince Vladimir Putin to agree to a “contact group” that would reopen communications between Moscow and Kiev. But yesterday she said measures would be imposed next week – after a Crimean referendum on joining Russia which the West says is illegal – unless diplomatic progress is made.

There is no sign of Vladimir Putin coming to the negotiating table and no question of western force being deployed. In Washington, Ukrainian Prime Minister Arseny Yatseniuk said his government was ready to negotiate over Moscow’s concerns for the rights of ethnic Russians in Crimea – a possible diplomatic avenue? The U.N. Security Council will discuss the crisis in an open meeting later.

Odds on Britain leaving EU shift again

Kiev has appealed for Western help to stop Moscow annexing Crimea, where a referendum on joining Russia will be held on Sunday. Ukrainian Prime Minister Arseny Yatseniuk will take that message to Washington and the United Nations.

The West says the referendum is illegal. U.S. lawmakers are preparing sanctions against Russia and European Union leaders could impose penalties, such as bans on visas for key Russian officials, as early as Monday if Vladimir Putin does not come to the negotiating table. There is no sign that he will and there is no question of western force being deployed.

Germany’s Angela Merkel is in Warsaw for talks with Prime Minister Donald Tusk. Poland has been pressing for more aggressive action while Germany – with its deep economic and energy ties to Russia – is more reluctant. But it appears the EU is moving closer to imposing sanctions.
Ed Miliband, leader of Britain’s opposition Labour party, has stated in today’s FT that he would only hold an EU referendum if there was a new transfer of power from London to Brussels.

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.

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.