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.

Lew’s comes to Europe airing concerns

U.S. Treasury Secretary Jack Lew moves on to Berlin then Lisbon after spending yesterday in Paris. There, he urged Europe to do more to build up its bank backstops and capital, a fairly clear indication that Washington is underwhelmed by the German model of banking union which has prevailed.

Lew may also press for more German steps to boost domestic demand, after indirectly criticising Berlin for its policies during his last visit in April. If he does, he can expect a robust response from Schaeuble, at least in private.

Lew moves on to Portugal later in the day with Lisbon’s planned exit from its EU/IMF bailout presumably top of the agenda when he meets Prime Minister Pedro Passos Coelho.

And more from the ECB…

The bombardment of European Central Bank interventions continues today. ECB chief Mario Draghi addresses the European Banking Congress in Frankfurt and any number of his colleagues break cover elsewhere.

Draghi shepherded a surprise interest rate cut earlier this month and consistently says that other options are on the table though yesterday he said that talk of cutting the deposit rate into negative territory to try and force banks to lend more was people “creating their own dreams”.

Having said that, the prospect of printing money has been raised, at least in principle, and the markets still expect a new round of long-term liquidity pumped into the banking system – a repeat of last year’s LTROs – early next year. Anything more would be hugely difficult for Germany and its fellow travellers to swallow.

Of euro budgets and banks

Euro zone finance ministers meet today and will have one eye on budgetary matters given a Tuesday deadline for member states to send their draft budgets to the European Commission for inspection, and with protracted German coalition talks keeping other meaningful euro zone reform measures on hold.

Most draft budgets are in but we’re still waiting on Italy and Ireland. Dublin will unveil its programme on deadline day. Italy’s situation is more fluid so we may get something today.

Over the weekend, Dublin said it may quit its bailout by the year-end without any backstop in the form of a precautionary credit line. That would rule it out for ECB bond-buying support, which it probably also doesn’t need. But it needs at least the 1.8 percent growth forecast for next year to keep bearing down on debt.

Back from the beach

Back from a two-week break, so what have I missed?

All the big and ghastly news has come from the Middle East but there have been interesting developments in the European economic sphere.
It seems safe to say that Britain’s economic recovery is on track, and maybe more broadly rooted than in just consumer spending and a housing market recovery (bubble?).

Slightly more surprisingly, the euro zone is back on the growth track too with some unexpectedly strong performances from Portugal and France in particular in the second quarter. Latest consumer morale data have been strong and as a result European Central Bank policymakers have begun downplaying thoughts of a further interest rate cut. However, it’s unlikely that all these countries will grow as strongly in the third quarter. Tuesday’s reading of German sentiment via the Ifo index will be key this week.

Perhaps the biggest surprise was Germany’s Wolfgang Schaeuble admitting what was widely known but hitherto unacknowledged – that Greece will need more financial help. The real shock was not the news but the source; the assumption had been that no one would whisper a word until the German elections are out of the way in four weeks’ time. Angela Merkel has been notably more circumspect about Greece than her finance minister.

What no crisis?

 

It seems eons since the euro zone finance ministers’ meetings which made such a hash of the Cyprus bailout but they were only two months ago. Monday’s Eurogroup will be altogether less eventful with some of the gathering probably a little jaded having spent part of their weekend at the G7 outside London where the usual differences about growth versus austerity and banking reform were aired.

No one will be sorry for a more routine meeting and there are no icebergs on the horizon but the agenda is still a full one. Featuring will be the economic situation on the basis of the Commission’s latest forecasts, the state of play in Cyprus, the decision already taken to release more bailout money to Greece, the new steps taken by Portugal to fill the gaps in its budget after the country’s top court struck some measures out, a review of European Commission reports on what is ailing Spain and Slovenia and a broad discussion about the merits of the ESM bailout being allowed to recapitalise bank retroactively from next year.

Italy offers a range of bonds at auction worth up to 8 billion euros which should be snapped up given the European Central Bank’s underwriting of the euro zone and Japanese money coursing through the financial system.

What’s it all about?

G7 finance ministers meet London on Friday and Saturday. Since they and many more met in Washington only three weeks ago and not much has changed since, it’s tempting to ask what is the point of this British gathering. There have been mutterings from some of the travelling delegations to that effect.

If there is an angle, it is the unusual focus on financial regulation (usually not part of the Group of Seven’s remit) with some feeling that more than four years after the collapse of Lehman Brothers, efforts to put in place structures to prevent similar events spinning out of control in future are flagging. That puts the euro zone’s fluctuating plans for a banking union firmly in focus, which in turn puts German Finance Minister Wolfgang Schaeuble right in the spotlight.

On Tuesday, he said elements of a banking union would have to be pursued without lengthy and arduous treaty change, something he’d previously said would be necessary. Was that a softening of his position? Er, probably not. More likely, the subtext is that because treaty change takes too long, Berlin will pursue only those elements of banking union that don’t require it – i.e. bloc-wide regulation yes, but forget about a bank resolution mechanism let alone a joint deposit guarantee.

What did he mean by that?

“What did he mean by that?” 19th century Austrian diplomat Metternich is said to have asked of  Talleyrand when he heard the French statesman had died. The euro zone crisis, and the response of its leaders, has often required the same question to be asked.

There were some carefully chosen words from Germany yesterday with Finance Minister Wolfgang Schaeuble saying that elements of a banking union would have to be pursued without lengthy and arduous treaty change, something he’d previously said would be necessary.

Now you could view this as a sign of softening opposition, certainly the French read it that way. However, the subtext could just as easily be that because treaty change takes too long, Berlin will pursue only those elements of banking union that don’t require it – i.e. bloc-wide regulation yes, but forget about a bank resolution mechanism let alone a joint deposit guarantee. That would be a pale imitation of what was proposed nearly a year ago and wouldn’t provide the sort of structure that would foster confidence that a future financial crisis could be contained.

Austerity — the British test case

First quarter UK GDP figures will show whether Britain has succumbed to an unprecedented “triple dip” recession. Economically, the difference between 0.2 percent growth or contraction doesn’t amount to much, and the first GDP reading is nearly always revised at a later date. But politically it’s huge.

Finance minister George Osborne has already suffered the ignominy of downgrades by two ratings agencies – something he once vowed would not happen on his watch. And even more uncomfortably, he is looking increasingly isolated as the flag bearer for austerity. The IMF is urging a change of tack (and will deliver its annual report on the UK soon) and even euro zone policymakers are starting to talk that talk. It was very much the consensus at last week’s G20 meeting.

The government can argue that it hasn’t actually cut that hard – successive deficit targets have been missed – and that it does have pro-growth measures such as for the housing market and bank lending. But the inescapable political fact is that Osborne and his boss, David Cameron, have spent three years arguing that they would cut their way back to growth and that to borrow your way out of a debt crisis is madness. In fact, it’s arguably perfectly economically sane, given that if you get growth going, tax revenues rise and will eat away at the national debt pile.

One-off or precedent?

Cypriot banks were supposed to reopen today but they won’t and when they do capital controls will be slapped on to prevent money fleeing its borders (was that how the single currency zone and single market was supposed to work?) The controls are supposed to be temporary but the Icelandic experience showed that once imposed they can be devilishly hard to remove. It seems pretty certain that there will be a bank run when the doors are reopened, which is now slated for Thursday.

Dutch Eurogroup chief Jeroen Dijsselbloem gave markets a jolt yesterday. In an interview with Reuters he said in future, the onus would be put on banks to recapitalize and if they couldn’t “then we’ll talk to the shareholders and the bondholders, we’ll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders”. He added that he wanted to get to a situation where the euro zone never needed to use its ESM rescue fund to recapitalize banks directly – a plan that was created last year at the height of the crisis. That all seemed crystal clear but after some adverse market reaction a later statement was put out on his behalf reverting to the earlier line that Cyprus was a one-off case.

So which is it? One-off or precedent? With a banking system eight times the size of its economy and awash with foreign money Cyprus clearly is unlike any of its euro zone peers. But it’s been also clear for some time now that Germany and other northern Europeans don’t want taxpayers to be on the hook for future bailouts and are not keen on using the ESM to recapitalize banks (that was supposed to break the doom loop between weak banks and sovereigns but maybe not any more). German Finance Minister Wolfgang Schaeuble was explicit after the bailout was agreed in the early hours of Monday morning, saying with the bail-in “we got what we always wanted”. As such, the Bundestag is almost certain to vote for it.