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All Eyes on Fiscal

16 July 2020 by jbchevrel

The ECB meeting today was close to a non-event, with no policy change, as expected. Both the Main and the SnrFin indices tightened in the area of -1bp to 61 and 70 respectively. ECB GC members didn’t agree on whether they expect to use the full amount of the PEPP €1.35T envelope, but President Lagarde subsequently said that the envelope is likely to be used in full. She sounded like the bar was high for that not to happen. That contrasted with the more hawkish members of the GC, e.g. Schnabel and Mersch (both also members of the Executive Board) who recently stressed the improving economy and the ramifications that this may mean for the PEPP (potentially partial) use. The market’s focus has quickly shifted to the main event re. Europe this week. Namely, EU leaders will gather in Brussels to hammer out a deal on a proposed €750B recovery fund, financed through mutualised debt. The Frugal 4 (Netherlands, Sweden, Austria and Denmark) have not yet sounded like they are on board for an accord. They are against dishing the money out as grants rather than loans and want tough conditions and strict oversight, attached to any aid. One member can veto it. Swedish PM said he might use that veto, on Wednesday. Merkel and Macron talked in favour of an agreement this week, while stressing that an accord was not done yet. The Dutch PM Rutte made it clear that member states (rather than the commission) will have the final say on whether a country deserves aid payments. PM Rutte has presented a national veto as the democratic price of solidarity. This idea has strong support in the Dutch Parliament. The NL will hold national elections next year, and far-right Eurosceptics remain a threat although a majority of Dutch are currently committed to EU membership. Today the Czech PM added that he was not happy with the current version of the European stimulus plan, as the latter is not favouring his country. Indeed, Czech Republic has amongst the lowest unemployment rates in the EU, and that makes this criteria sub optimal for Czech Republic. A bit