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ECB Barrel Scraping Getting Louder?

There was never any doubt that the ECB would ease policy at today’s Governing Council meeting. In the event, however, it beat expectations, adjusting policy in several different ways:

  • Further rate cuts
  •  Increased asset purchases
  • More, and more innovative, long-term liquidity operations

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Euro banks' equity valuations - credit still to catch up?

  • Equity valuation of European banks hit its lowest point since 2 August 2012.
  • This drop in valuations reflects what appear to be growing fears around the health of the banking sector in Europe.
  • But while equity valuations have tanked, the move in CDS has been much less pronounced, and is still a far cry from the 280 level hit on 2 August 2012.

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Market-testing the euro area recovery

  • While the euro area economic recovery continues for now, heightened global financial market turmoil risks denting business and consumer confidence and hitting GDP growth.
  • Given the weakened inflation outlook the ECB will ease policy again in March. But whatever is announced seems unlikely to be transformative.

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Greece's threat of euro exit has cheated it of a recovery

  • As the money runs out in Athens, signs are that the Greek Government is inching towards a last-minute deal.
  • But the damage done to the Greek economy during the negotiations has been immense.

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Grexit: Avoiding the slippery slope

  • The Greek government’s reshuffle of its bailout negotiating team has raised hopes that a deal will be reached to avoid default and euro exit. And that remains our baseline scenario.
  • But not least due to difficult domestic politics and the amateurish nature of the government, the risk of a disorderly end to Greece’s membership of the euro remains significant.

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