There were no great surprises at yesterday’s meeting of EU finance ministers, but some positive noises. The battle lines over Spain’s deficit were drawn and re-drawn, resulting in a shift of this year’s target from 4.4% of GDP to 5.3%.
Still, the Spanish government was shooting for 5.8% and now faces a monumental task in delivering the required austerity against the backdrop of an economy flat on its back.
The other interesting shift was from Germany, where there were hints emanating that it is likely to sanction an increase in the EU’s overall fighting power via its rescue funds, most likely by keeping the current EFSF running in tandem with the new support mechanism, the ESM, from the middle of this year.
Guest post by FxPro
If this proves to be the case, it will be a welcome shift in German thinking that should offer further support to peripheral markets.
Commentary
The IMF steps back. Behind the many headlines surrounding Greece on Friday was confirmation that the IMF would be paying less into this second aid package for Greece than was the case for the first one back in May 2010. On Friday, it announced a further EUR 28bln contribution, although EUR 10bln of this belongs to the first aid program, so the contribution will actually be 14% of the EUR 130bln total of the second bailout package. Whilst not that surprising, it is nevertheless a further illustration that the IMF and international community (principally G20) are gaining the upper hand in their desire to see the EU play a greater role in further and subsequent bailouts, should they be required. But this shift has come more from the international community stepping back rather than the EU and its respective institutions stepping forward to shoulder the burden. The reasons for this reluctance on behalf of the EU to put its shoulder to the wheel are well known, such as the no bail-out clause of the founding treaty of the single currency together with the political implications and costs of doing so. These underline Germany’s ongoing reluctance to sanction an increase in the permanent rescue facility, due to become operational by the middle of this year. As EU leaders gather once again today to discuss the issue (no decision is likely until later in the month), the biggest risk is that, once again, they fall into the trap of complacency. Italian yields have spent most of this month below the 5% level (10yr), which has at least removed some of the immediate pressure on EU leaders. But rather than take this as an opportunity to praise their efforts, it’s exactly the time to be bolstering national defences. It’s very unlikely that Portugal will escape having to ask for further assistance and Greece is also far from being out of the woods, so there remains a clear risk of a period of further strain on peripheral debt. This is the EU’s opportunity to be ahead of the pack for once, and one that Germany should seize upon.
ECB bond holdings moving lower. The fall in the ECB’s portfolio of bonds held as part of their securities and markets program (SMP) was the largest (EUR 1.5bln) since it started back in 2010 and, according to the ECB, reflected maturing issues. Only partially offsetting this was the EUR 27m on bond purchases settled which for the bond-buying program is certainly on the low side. Most likely, this reflects purchases of Portuguese bonds settled early last week and reflects purchases made at the end of February and early March. Since that time the 10Y bond in Portugal has fallen to around the 13.65% level, whilst yields in Italy have maintained their move below the 5% level, greatly reducing near-term funding concerns. Furthermore, the amount of liquidity taken at the two 3Y tenders has shifted the focus of the ECB’s efforts, not least given the fact that this has proved a less controversial approach (although not completely so).
A word of caution on the US recovery. Friday’s payrolls data was unambiguously good news. Apart from the more buoyant jobs growth recorded over recent months by both the household and the establishment surveys, a particularly pleasing feature of recent reports is the sharp rise in labour force participation which suggests that the jobless have become more active in their search for work. At the same time, should America’s vast army of discouraged workers continue to return to the labour market then the decline in the unemployment rate witnessed in the last few quarters will slow. There are also some justifiable question marks over the sustainability of recent job gains. Firstly, in many parts of the United States the weather has been unusually warm over the winter; as a result, jobs growth in some sectors such as retail and construction has been temporarily boosted. Secondly, the rising price of oil must start to crimp household spending soon – the average price of gasoline is up 10% since the middle of last year. Although the consumer is feeling more confident and spending is rising in real terms, significant balance sheet-deleveraging is still an impediment for many and higher oil prices will only accentuate their pain and suffering. Today’s FOMC meeting is attracting little comment, in part because the recent run of favourable data allows policy-makers some breathing room. Some Fed officials have recently expressed reservations about how durable these green shoots of recovery will prove to be. In 2010 and 2011 they were right to be dubious. This time around, however, it might just be different.
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