MacroScope

The Iranian thaw

A landmark deal curbing Iran’s nuclear programme in return for a loosening of sanctions appears to be underway, an agreement intended to buy time for a permanent settlement of a decade-old standoff.

Under the deal, Iran must suspend enrichment of uranium to a fissile concentration of 20 percent. An Iranian official has just said Tehran will start its suspension of uranium enrichment up to 20 percent in a few hours.

EU foreign ministers meet in Brussels and are expected to suspend some sanctions against Iran in line with the Nov. 24 interim agreement if as expected, the United Nations’ nuclear watchdog confirms Tehran is meeting its end of the bargain.

Given the green light, Tehran will be able to retrieve $4.2 billion in oil revenues frozen in overseas accounts, and resume trade in petrochemicals, gold and other precious metals. Iranian President Hassan Rouhani will court global business in Davos later in the week.

If things go according to plan, the potential of a market of 76 million people in a country with some of the world’s biggest oil and gas reserves will be hard for foreign business to ignore. Iranian trade officials say delegations from Turkey, Georgia, Ireland, Tunisia, Kazakhstan, China, Italy, India, Austria and Sweden have visited Iran since early December.

New face at the ECB

The European Central Bank held a steady course at its first policy meeting of the year but flagged up the twin threats of rising short-term money market rates and the possibility of a “worsening” outlook for inflation – i.e. deflation.

The former presumably could warrant a further splurge of cheap liquidity for the bank, the latter a rate cut. But only if deflation really takes hold could QE even be considered.
Sabine Lautenschlaeger, the Bundesbank number two poised to take Joerg Asmussen’s seat on the executive board, breaks cover today, testifying to a European Parliament committee. A regulation specialist, little is known about her monetary policy stance though one presumes she tends to the hawkish.

Iran and the EU announced on Sunday that a deal between Tehran and six major powers intended to pave the way to a solution to a long standoff over its nuclear ambitions will come into force on Jan. 20. Thereafter, negotiations will begin on a final settlement. Brent crude has fallen in response. It’s early days but if oil falls significantly this year, that will factor into fears about deflation taking hold in Europe.

Data to shape ECB week

Euro zone service sector PMIs and German inflation (with the euro zone number to follow on Tuesday) will lay the ground for the European Central Bank’s first policy meeting of the year.

The surveys are likely to show the currency bloc ended the year on a reasonably robust note with Germany leading the way as always, Italy and Spain showing signs of life and France looking worryingly weak.

Ireland’s reading is already out and has posted its fastest services growth in seven years. Much more importantly for the world, growth in China’s services industries slowed in December, confirming that the world’s second-largest economy lost steam at the end of last year.

In euro bond markets, world still upside down

Corporate bonds normally yield more than sovereign debt since companies are seen as more likely than states to go bust. But during the euro zone debt crisis, when various governments had to be bailed out, that relationship broke down in Spain and Italy.

Click here for graphic by Vincent Flasseur.

Madrid and Rome are paying more to borrow in the market than similarly-rated companies generally. Ten-year Spanish and Italian sovereign bonds offer a comfortable premium of more than 60 basis points over a basket of BBB-rated corporate debt, even though that gap has more than halved from this year’s highs.

Spain and Italy are also paying more to borrow in the market than BBB-rated companies in their own countries. Calculations by Fathom Consulting using Thomson Reuters data show the average yield for 10-year Italian corporate debt within the euro zone basket is 2.4 percent versus 4.06 percent in the equivalent sovereign. For Spain, the average BBB corporate yield is 2.00 percent – also below a sovereign yield of 4.03 percent.

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.

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.

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.