MacroScope

A reminder that all is not well in the euro zone

Bank of Portugal Governor Costa arrives to read a statement in Lisbon

A reminder that while the euro zone crisis may be in abeyance, it still has the ability to bite.

Portugal will blow 4.4 billion euros of the 6.4 billion euros left from Lisbon’s recently exited international bailout programme shoring up troubled lender Banco Espirito Santo which will be split into “bad” and “good” banks. Junior bondholders and shareholders will be heavily hit.

BES’s tale of woe is so specific that there is no obvious reason to think it will be replicated. But it is a reminder that bank stress tests later this year could throw up other nasties and more immediately the saga leaves Lisbon short of rescue funds should anything else blow up. The bond market is likely to react adversely. The 4.4 billion euros will come in the form of a state loan to a bank resolution fund which the government insists will be paid back.

Jean-Claude Juncker, the new European Commission President, will visit Athens for talks. The point at which Greece will ask its euro zone peers for some form of further debt relief is nearing amid signs of its economy finally pulling out of recession after six years.
EU officials have warned that Greece is slowing down on the reform front after the opposition, anti-bailout Syriza party won the country’s EU election in May.

Prime Minister Antonis Samaras has also promised austerity-weary Greeks gradual some relief on the tax front as Athens expects to post another budget surplus before debt servicing costs this year, but that has not yet won the backing of EU/IMF lenders.

ECB – stick or twist?

 

The European Central Bank meets today with emerging market disorder high on its agenda.

It’s probably  too early to force a policy move – particularly since the next set of ECB economic and inflation forecasts are due in March – but it’s an unwelcome development at a time when inflation is already uncomfortably low, dropping further to just 0.7 percent in January, way below the ECB’s target of close to but below two percent.

If the market turbulence persists and a by-product is to drive the euro higher, which is quite possible, the downward pressure on prices could threaten a deflationary spiral which ECB policymakers have so far insisted will not come to pass.