Today, the economic calendar is rather thin with only the euro zone industrial production data and final figure of Italian CPI inflation. Euro area Finance Ministers meet in Brussels and Spain (12/18 month T-Bills), Germany (Bubills) and Italy (BTPs) will tap the market.
In the euro area, industrial production is forecast to have risen for a second straight month in March, but the pace of increase is expected to have slowed.
The consensus is looking for a 0.4% M/M rise in March, half the pace registered in February (0.8% M/M). In February however, production was boosted by energy due to the extremely cold weather. Earlier released national data showed a mixed picture. German and Italian production showed a weather related rebound, while Spanish and French production fell back in March.
For the euro area, we believe that the risks are on the downside of expectations, as the EMU reading does not include the construction sector, while also utilities will probably fall back.
Today, the Italian debt agency taps the market in difficult market circumstances. The lines on offer are the on the run 3-yr BTP (€2.5-3.5B 2.5% Mar2015) and a combination of the off the run 10-yr BTP (4.25% Mar2020), the on the run 10-yr BTP (5% Mar2022) & off the run 15-yr BTP (5% Mar2025) for an extra €1-1.75B. The relatively low amount on offer, and the focus on the short tenor, should however be able for (domestic) investors to digest.
The Finnish treasury taps the on the run 5-yr RFGB (€1B 1.875% Apr2017). It’s only the second time Finland comes to the bond market for €-issuance this year. The AAA-rated paper will probably meet with good demand.
Today, the Euro group (EMU Finance Ministers) meets in Brussels, while tomorrow the wider Ecofin meets. It might be an interesting meeting, now that the euro debt crisis is back from never having been away completely.
Stress in Greece and Spain are most eye-catching. However, also the French elections have changed the debate together with economic risks. In this context, various key EMU leaders have spoken about a growth pact. The Finance Ministers will probably talk and prepare the growth pact that will be further discussed at an informal “growth pact” dinner by the EMU leaders and should be agreed on at the end-of-June EU Summit.
The principle might more or less have been agreed, but on concrete measures the differences in opinion are still very wide and that should also be the case on the financing of the pact.
Commissioner Rehn in the weekend said he rejected as false the austerity stimulus choice. Both are needed. Countries need to stay on course on fiscal consolidation while more public and private investment is needed. The proposal of the EU Commission to Spain that it might be granted one extra year to cut the deficit to 3% of GDP (under certain conditions) may be generalized to other countries.
If they implement the agreed austerity measures and the deficit would nevertheless exceed the target, they might not be obliged to take additional measures.
The second theme of the meeting will certainly be the situation in Greece and its fate inside EMU. Over the week-end, EU president of the Commission, Barroso, suggested Greece would have to quit the euro if it doesn’t follow the rules of the euro (pacts, bailout programme). There were other influential sources that put Greece for the choice to abide with the rescue programme or face default and exit.
We think Greece will prominently be present at the Eurogroup discussions and while not made public, there should be a plan B on preparation. So, the comments afterwards might be interesting.
Lastly the third big issue is Spain. The government has ever less options and some kind of multilateral support should be more than welcome. However, a full scale package that would keep them off the markets for some time is probably counterproductive, but some support for the banking sector via EFSF, if it doesn’t have to go through the Spanish accounts, might be constructive.
We are afraid that the latest banking initiative will fail to ease tensions in the markets. We don’t think the Euro group is already on the point of taking/suggesting decisions, but the matter might be discussed.
