EU Economic Update – 08 February 2015
European markets track western counterparts higher, supported by oil price gains and some brighter spots of economic data
Investors still appear to be shrugging off risks emanating from Greece in favour of a focus upon easy policy from the ECB and hopes of brighter days to come on the corporate earnings front.
This is despite that the new Prime Minister has held firm to his earlier promises to “tear up” the nation’s bailout agreement and put an end to the austerity process that has ravaged the Greek economy for the best part of the last last four years.
In response to this persistence the European Central Bank announced late last week that it would no longer accept Greek government bonds as collateral for loans to commercial banks in the country, prompting a sharp rise in funding costs for Greek financial institutions.
This means that Greek banks will now be dependent upon emergency liquidity assistance (ELA) when it comes to securing short term funding, a process which involves the national central bank advancing high interest loans to institutions.
While access to such a facility may provide cause for calm across markets over the near term, such assistance is dependent upon the ECB’s ongoing approval and therefore, could be what ultimately leads the nation into crisis.
Most notably, because when both Cypriot and Irish banks became reliant upon such assistance during their respective meltdowns, it was the threat of the ECB withdrawing its approval for such measures which forced both nations into their bailout and austerity programs.
With the Greek government remaining resolute that it will not extend a program of austerity that it blames for butchering both its economy and the social fabric of its society, it is not difficult to imagine a world where a clash between a hard line ECB and a staunch Greek government leads to crisis.
Looking to the week ahead we expect Greece to take more of a front row seat for investors as the new finance minister meets his continental counterparts at the Eurogroup meetings where he is expected to make another attempt at gaining support for an alternative economic plan for Greece.
This is a risk event for markets as few finance ministers have shown any inclination of giving way to Yanis Varoufakis in individual meetings last week. Therefore, the risk is that the Greek minister is rebuffed in his efforts and at best, a further period of increased uncertainty begins to set in.
The worst case scenario outcome for this event is that Greece is left looking as if it is being forced toward the exit and concerns of a potential default on the part of the government begin to set in further.
In terms of economic data, after a bounce in Italian and Spanish manufacturing surveys last week, the the key focus of the coming days is likely to be the release of preliminary Q4 GDP figures for Italy, France and Germany.
These are expected to present as a mixed bag of outcome with French growth likely to have slowed during Q4, while official projections suggest a moderate improvement in the pace of expansion in both Germany and Italy.
EU Indices ( DAX – Black) / (CAC 40 – Blue) / (IBEX 35 – Red)
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