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Eco Focus is an aperiodic publication providing up-to-the-minute analysis of a current topic.
What is at stake in the near-term for Greek authorities is to secure financial support to meet a tight repayment schedule which implies to step backwards on several campaign promises while maintaining its support home. But what is at stake for Greek people in the longer term is to find a lasting solution for the debt problem which does not stake a claim on future growth prospects.
The Russian crisis is spreading to the French economy via several trans¬mission channels. Foreign trade is affected, of course. Conversely, direct investment flows seems slightly affected by the situation. Another effect will spread via a deterioration in confidence levels and more marked wait-and-see agent behaviour. Nor should we forget that, although it did not trigger the crisis, the oil price fall has acted as an accelerator in the Russian crisis.
The take-up at today's TLTRO exceeded expectations, with 143 banks borrowing an extra EUR97.8bn from the ECB. TLTRO will help expand the ECB's balance sheet at the margin but, more importantly, they will contribute towards improving monetary policy transmission and to lower borrowing costs even further. We continue to look for a stronger pick-up in Eurozone bank lending in the coming months.
From a macro perspective, yesterday's biggest surprise came from the upbeat revisions to medium-term ECB staff forecasts, with 2017 GDP (2.1%) and HICP (1.8%) median projections reflecting a high degree of confidence over the impact of QE on financial markets and the economy. However, it must be noted that, as a result of a change in methodology, the 1.8% forecast for 2017 HICP incorporates the full expected impact of monetary-easing measures for the first time ever.
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.
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