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Eco Focus is an aperiodic publication providing up-to-the-minute analysis of a current topic.
Spain political landscape is changing rapidly. The rise of the 12-month old anti-establishment party of Pablo Iglesias, Podemos, is breaking the country two-party system. Lying behind voters support for Podemos is an austerity fatigue, but also the anger against the corruption of the two traditional parties, the socialists PSOE and, even more, the currently ruling rightist Partido Popular (PP).
The 19 February Eurogroup agreement lays the ground for continued financial assistance to Greece pending the approval of a list of reforms to be submitted by the Greek government today. It looks unclear how the Greek government will fund itself during the negotiations process; a further deterioration in the state cash position could require an increase in T-bills issuance as a bridging option.
In spite of mounting pressure we believe that an agreement between Greece and its creditor countries will be achieved and we look at a 'Grexit' as a tail risk.The compromise should probably be a mix of maturity extension, more concessional rates, fiscal easing and structural reforms.Fiscal easing should favour rather than jeopardise the success of the Greek adjustment program by providing a reflationary impulse and improving debt sustainability.
The BoE remained on hold at its February meeting (Bank rate at 0.5% and programme of asset purchases at GBP375bn). The February Inflation Report (to be published on Thursday, 12 February) will be the main UK key event for markets next week. We expect strong positive revisions to the growth forecasts and substantial downward revisions to near-term inflation owing to the recent decline in oil prices.
The main 'known' risk event this year in the UK is the general election, which will take place on 7 May. Uncertainty is running high over the configuration and stability of the next government. Polls suggest that neither of the two mainstream parties will have sufficient support to secure a majority, leading to a hung parliament and a coalition as the most likely scenario.
Commercial banks in the Eurozone expanded credit to the non-financial private sector at the fastest pace seen in over three years at the end of last year. Supportive business surveys as well as looser monetary conditions suggest this trend should continue in the coming months.
Yesterday's ECB announcement of an Expanded Asset Purchase Programme (EAPP) is unambiguously positive, in our view, in terms of the size and scope of purchases (including agencies and linkers, up to 30Y, until at least September 2016). The limitations that could potentially mitigate the market impact, including an attempt to reduce the degree of risk-sharing and the fact that capital keys favour large core countries, should not be overstated in our view.
Following months of speculation, the ECB is likely to announce a new broad-based asset-purchase programme on Thursday, which has the potential to surprise the market in various directions. The hope is that a compromise with the hawks on the degree of risk-sharing and moral hazard will allow for a more ambitious programme. The easiest and ‘cleanest' way to surprise would be with a flexible programme of at least EUR500bn, with more to come if needed.
Greece legislative elections are scheduled for January 25th after current coalition parties failed to secure enough votes to elect a new President in December. If elections are to mirror public opinion polls, then Greece far-left opposition party, Syriza, will be ahead of current coalition parties. Given Syriza economic program, confrontational negotiations on public debt are expected with the most likely scenario of longer maturities.
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