Eurozone: Extension for France's deficit target

ECB council meeting: Midterm monetary course already set in January

Greece: Negotiations with creditors only just started

Eurozone: Extension for France’s deficit target

ECB council meeting on Thursday

After the announcement of an asset purchase program in January, the ECB’s monetary policy course seems set for the medium term. From March until September 2016, the ECB will purchase securities in the amount of EUR 60bn per month. Further details of the program will be announced next week, but we do not expect any significant market impact. Greece is likely to be a topic at the press conference held by ECB President Draghi. In one respect, Draghi has already committed himself.
In a speech to the European Parliament this week, Draghi said that Greek government bonds will again be accepted as collateral once ‘the Governing Council will decide that the conditions for a successful completion of the program are in place.’ In our view, this will only be the case once negotiations between Greece and its creditors are completed.

US monetary policy

In an interview with Reuters, St. Louis Fed President James Bullard warned that bond markets could wake up abruptly and re-price for tighter monetary policy, posing problems for the Federal Reserve. Bullard added that, the longer the Fed keeps the rates near zero, the greater the risk of damaging asset price bubbles over the next few years. Bullard is currently a non-voting member of the monetary decision making committee of the US central bank.

Negotiations with Greece

A list of reform measures sent by the Greek government was assessed by the institutions (EU Commission, ECB and IMF) as a valid starting point for further negotiations. Accordingly, EMU finance ministers approved an extension of the current support program for Greece on Tuesday.
However, this is only the first step in what is to be a strenuous process over the coming months. Detailed negotiations concerning the conditions of the program are to follow and must be completed successfully before additional money is lent to Greece. The timeframe was set at two months, i.e. until the end of April. After recent experiences, these negotiations can be expected to be very difficult, especially as the outcome should serve as a blueprint for the third support program for Greece, which in our view will become necessary after the completion of the current one at the end of June. It can almost be ruled out that Greece will be able to refinance maturing debt through capital markets by then. But Greece needs to deal with its financing needs already during the coming two months as well. In March and April, redemptions (excluding bills) in the amount of EUR 2bn become due, which in all likelihood will not be covered from existing cash buffers. So, a solution needs to be found quickly. The ECB will remain cautious and only accept Greek government bonds again as collateral by the end of April, once an agreement on the conditions of the extended program is reached. Until then, Greek banks will depend on the Emergency Liquidity Assistance, which requires regular approvals by the ECB council.

Eurozone – France gets extension for lowering deficit target

There has been detailed debate this week over the country-specific situation regarding compliance with the Stability and Growth Pact (aimed at boosting investments, accelerating structural reform and pursuing fiscally-responsible policy). France, Italy and Belgium have been in focus, as the final decision regarding 2015 budgetary drafts for these countries was postponed in November last year. With regard to Italy and Belgium – after taking into account all relevant factors, such as weak growth and the implementation of structural reforms – it was concluded that the opening of Excessive Deficit Procedures at this stage was not warranted. The situation in France is a little more complicated, as France is already in an Excessive Deficit Procedure. It now looks as though France will be granted an extension until 2017 in order to bring its budget deficit below 3% of GDP. This is in line with the current budgetary draft submitted by France’s government in November. For 2015, however, France will have to step up its consolidation efforts with regard to the structural deficit. The proposal to the EC will demand an annual reduction of 0.5% of GDP in 2015, which is 0.2% above France’s current assumption of 0.3% of GDP. A final decision by the EC can be expected next week. In addition, under the Macro-Economic Imbalance Procedure, France was identified as having excessive imbalances requiring policy action and specific monitoring. Until mid-April all member states will have to submit their national reform programs and the EC will come up with country-specific recommendations by May. Should France’s structural reform efforts be deemed insufficient, an Excessive Imbalance Procedure could be opened in May. Looking at the current deficit targets, we think that, if inflation remains low for longer than is currently expected or if GDP growth disappoints in the first two quarters, a renewed deficit discussion for countries like France or Italy can be expected by August.

Regarding the economy the most recent lending statistics for January by the ECB delivered some positive indications. The negative loan growth to the private sector lost further dynamic (-0.8% y/y). This development confirms the most recent encouraging survey data from the lending survey where banks reported rising demand of loans for investment purposes.

Important US economic indicators next week

Important US indicators are scheduled for release next week, which will shape markets expectations on the outcome of the upcoming FOMC meeting (March 17-18). On Monday, the ISM index will show the activity in the manufacturing sector. Wednesday’s ADP employment numbers will give a first indication of the development of the labor market before the official labor market numbers are reported on Friday.