Another week closes with the promise of a deal on the Greek PSI debt swap. The urgency for such a deal is rising with a hard deadline of 13 February approaching. The coming week will be a question of sequencing. The coming days should see Greece agree with the Troika measures to address deficit target slippage. This needs to be done by Monday’s Euro Area finance ministers meeting so it can approve Greece’s second bail out package, in turn necessary to allow the PSI deal to progress. The actual debt swap is slated for the second half of this month, to provide Greece with funds to meet its €14.5bn payment on 20 March. Markets remain sanguine over this sequence, but risks are evident.
Danske expect the ECB Governing Council meeting on Thursday to reflect not only the ECB’s alertness due to the substantial credit tightening taking place but also that the ECB is taking some comfort from signs that the euro area recession will be very short lived as data have started to improve and financial market stress has calmed down. Danske expect the ECB to keep interest rates unchanged and not announce any now instruments.
The coming week will focus on the prospects of further central bank stimulus. The ECB should keep policy unchanged. The ECB’s 3-year LTRO has provided a significant boost and gone some way to providing two of the three pillars necessary to resolving the Euro area’s debt crisis (growth stimulus and a contagion firebreak). The next operation is scheduled for 29 February and speculation has mounted that it could draw €1trn of demand. This would be an expansion of the ECB’s balance sheet of around 14% of GDP, not far short of the BoE’s current quantitative easing (18%). With this operation waiting in the wings, the ECB is likely to stand pat for now with the prospect of a narrowing of the interest rate corridor allowing a lowering of the refi rate still a possibility over the coming months. This month’s press conference will likely pose questions over the likely LTRO uptake, the ECB’s involvement in the Greek debt swap and the ECB’s future SMP purchases – none of which Lloyds TSB think Mr Draghi will be inclined to answer definitively.
Danske expect industrial production data for December to show a two-speed Europe but it may also give some indications that the industrial cycle has bottomed out – at least in some core countries. Euro area retail sales are set to remain weak.
Data suggest that recession in the euro area is almost a certainty in the first half of the year. German growth fell by 0.3% in Q4 and also looks like falling in Q1 2012. The loss of business and consumer confidence from the ongoing sovereign debt crisis in the eurozone is hitting consumer spending and company spending.
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