MacroScope

How stiff is EU’s resolve?

Russian troops seized two Ukrainian naval bases, including a headquarters in Sevastopol where they raised their flag. Moscow, continuing to insist it does not control the unbadged militia in Crimea, called for a detained Ukrainian navy commander to be freed, which has now happened. Make of that what you will.

Washington is keeping up the rhetorical pressure. Vice President Joe Biden, in Lithuania, said Russia was travelling a “dark path” to political and economic isolation. U.N. Secretary-General Ban Ki-moon is travelling to Moscow for talks with President Vladimir Putin, Foreign Minister Sergei Lavrov and other senior officials. He will move on to Kiev on Friday. 

More potent may be an EU leaders’ summit today and Friday. After subjecting 21 Russians and Crimeans to travel bans and asset freezes, tougher sanctions are already under consideration and minds have also been focused on ending decades of dependence on Russian gas. It’s a long-term project but one that could deal a hammer blow to the Russian economy if it succeeds.

Russian lawmakers scoffed at the paucity of western action. Washington and the EU says tougher measures could follow but to hit where it really hurts – with financial and trade sanctions – looks difficult for Europe with so many vested interests and links with Russia from the bloc’s biggest members to its smallest.

It’s not clear that the EU’s March 6 statement that it would consider financial sanctions if there were “any further steps by the Russian Federation to destabilise the situation in Ukraine” will be pursued soon.

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.

Euro zone looks to Washington

So the debt crisis is back (did it ever really go away?) but it’s not yet anything like as acute as it was late last year.

Spain is coming under real market pressure, and dragging Italy with it to an extent, but there are good reasons to think it won’t fall over; banks well funded for now and the government’s savvy move to take advantage of benign early year conditions to shift almost half its 2012 debt issuance in three months.

Madrid faces another key test with a Thursday bond auction. Two weeks ago, it suffered its first wobbly debt sale for some months. The turning point is pretty clear – Prime Minister Mariano Rajoy’s decision to rip up Spain’s agreed deficit target for 2012 without consulting his partners. Since then, Spanish borrowing costs have soared though given the amount of debt Madrid has already shifted, that might not be as damaging as it was.

Francophiles

Amid the storm of Europe’s sovereign debt crisis, investors have found a safe harbor in the Swiss franc. Attracted by its low levels of inflation and stable debt-to-GDP ratio, traders have pushed Switzerland’s currency up 15 percent against the euro in 2010 and 6 percent so far this year. This has been a boon to the Swiss government’s ability to finance its operations — Switzerland’s 10-year benchmark bond is currently yielding just 1.53% — as well as Swiss tourists, who are enjoying huge discounts on trips abroad thanks to their favorable exchange rate.

Swiss exporters, though, are not so thrilled with the franc’s rally. Nearly half of the Swiss corporate executives that the central bank surveyed earlier this year admitted they “experienced negative effects” due to the currency’s strength. But it’s the chairman of the Swiss National Bank, a former hedge-fund manager named Philipp Hildebrand, who may be come out as the biggest loser from these events. In an effort to contain the franc’s upward climb early last year, Hildebrand spent 147 billion francs — nearly 25% of the country’s GDP — buying mostly euros, U.S. dollars, and British pounds sterling. The central bank reported a book loss of nearly $21 billion last year as the franc continued its ascent.

Now Hildebrand, like his American counterpart Ben Bernanke, is facing heat at home for his unorthodox monetary maneuvers. Reuters Zurich bureau chief Emma Thomasson wrote an illuminating profile of Hildebrand last month that nicely captured his opponents’ gripes.