Robert Kahn

Macro and Markets

Robert Kahn analyzes economic policies for an integrated world.

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Showing posts for "Euro Zone"

The Geopolitical Paradox: Dangerous World, Resilient Markets

by Robert Kahn

Should we be worried by how well global markets are performing despite rising geopolitical volatility? I think so. In my September monthly, I look at the main arguments explaining the disconnect, and argue Europe is the region we should be most worried about a disruptive correction. Here are a few excerpts.

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EU Sanctions Rules Released

by Robert Kahn

The rules for implementing new EU sanctions against Russia have been released (see also here and here).  On quick glance, they are, as advertised, an important step that will have systemic effects in financial, energy and defense markets. In this respect, they are “sectoral” or “level three” sanctions in the language of policymakers.  While narrow in scope– the financial ban (Article V) is on new transferable securities of majority state-owned Russian banks with maturities greater than 90 days–one is left with the impression that Europe, like the United States, stands ready to extend the sanctions if there is evasion or further Russian efforts to destabilize Ukraine.

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Europe’s December Surprise?

by Robert Kahn
European Central Bank (ECB) president Mario Draghi speaks during the monthly ECB conference in Frankfurt on July 4, 2013. \ Courtesy Reuters European Central Bank (ECB) president Mario Draghi speaks during the monthly ECB conference in Frankfurt on July 4, 2013. \ Courtesy Reuters

Over the past year, Europe has enjoyed calm financial markets.  At the core of the market’s comfort were two assumptions about policy. First, that the European governments would do just enough to keep the process of European integration moving forward. Second, that the ECB would, in the words of Mario Draghi, do “whatever it takes”  to save the euro. The centerpiece of the ECB’s subsequent efforts was expanded liquidity (through long-term repurchase operations and easier collateral requirements for banks to access ECB liquidity) and a commitment to purchase government bonds to support countries return to market (the OMT program).  Even many pessimists who fear that Europe is trapped on a unsustainable, low-growth trajectory remain optimistic that Europe will do what it takes to navigate the near term risks.  It may be time to question that optimism.

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The IMF’s Outlook: Less Growth, Inadequate Policies

by Robert Kahn
Courtesy Reuters Courtesy Reuters

The IMF is out with a global update and a statement on Europe.  Unsurprisingly, it has revised its outlook down (again).  It still, optimistically, expects a return to growth in Europe next year, but it recognizes the risks are on the downside.  A few points to highlight.

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Greece and the Troika: Summer Break

by Robert Kahn
Courtesy Reuters Courtesy Reuters

The Greek government has reached agreement with the Troika (European Central Bank, European Commission, and IMF) on a set of policies putting its program back on track and opening the door for €8.1 billion in tranches over the summer, which should finance the government until September.  To get this done involves moving forward lending originally scheduled for later years.  That means a large financing gap looms for 2014.  But that’s an issue for after the summer break.

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Portugal: The Price of Austerity

by Robert Kahn
Portugal's Finance Minister Maria Luis de Albuquerque during her swearing-in ceremony at the Belem palace in Lisbon July 2, 2013 \ Courtesy Retuers. Portugal's Finance Minister Maria Luis de Albuquerque during her swearing-in ceremony at the Belem palace in Lisbon July 2, 2013 \ Courtesy Retuers.

News of the collapse of the Portuguese coalition government is further evidence of adjustment fatigue in the periphery that threatens the European project.  The leader of the junior coalition partner CDS-PP resigned yesterday, complaining that the new Finance Minister (Maria Luís Albuquerque, replacing Vítor Gaspar who resigned Monday) represented a “mere continuity” of failed austerity policies.  While it’s possible the government may survive as a minority party, the odds are rising that there will be early elections this fall, a vote that is set to become a referendum on austerity.  It is both an opportunity and a serious challenge for Europe.

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European Banking Union: Small Steps

by Robert Kahn

European finance ministers meet Wednesday to try and agree on common rules for resolving a failed bank, after failing to do so this past weekend.  If agreement is reached, and it appears far from certain that will happen, it’s likely to involve only limited flexibility for a country to bailout the bank without imposing losses on creditors.  Following on last week’s decision allowing the European Stability Mechanism (ESM) to directly recap banks, we are seeing the outlines of banking union.  That’s progress, but is it likely to draw a line under the financial crisis? It’s looking less and less likely. Read more »

No Break for Periphery Banks

by Robert Kahn

EU ministers apparently made little progress last week on terms under which the European Stability Mechanism (ESM) would recapitalize weak banks, though they still hope for an agreement by end month.  That said, if a draft plan circulated by European Commission Secretariat is a guide, we are seeing another step in the disappointing (and risky) retreat from last year’s promise to decisively break the link between troubled periphery banks and their sovereign.  This plan looks like more of a bruise, or a slight bend, rather than a break.  The good news is that events likely will force a change down the road.

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Cyprus and the IMF

by Robert Kahn

The IMF program for Cyprus has been released (here and here).  Growth is projected to fall 13 percent over the next two years, though the discussion of risks implicitly acknowledges that a larger decline is likely (many private analysts expect a decline of 15 percent this year alone).  Given that the program contains 6.6 percent of fiscal consolidation measures during 2013-14, and a major deleveraging of the financial system is underway, skepticism is warranted.  The Fund also acknowledges that should these downside risks materialize, or program implementation slip, government debt (which is forecast to peak at 126 percent of GDP in 2015) becomes unsustainable. The programs have buffers, but financing looks inadequate.  Coming after a negotiation where the Troika publicly promoted one financing gap (17 billion euros) knowing that the actual gap was far larger (shortly after agreement on the program, the gap was revised to 23 billion euros) further undermines confidence in these projections.  The next review, slated for September 15, likely will have to confront these issues.