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Week Ahead (29 July)

Tuesday 30 July, FTID board to meet in an attempt to finalise Carige rescue

The plan to save Carige was agreed in principle last week. As anticipated, €700 million is expected to come from a capital strengthening operation with the other €200 million expected from the issuing of Tier 2 subordinated bonds. Questions remain around the identity of participants in the latter although Credito Sportivo has agreed to underwrite €20 million worth while the board of Medio Credito meets today to discuss its involvement. The FTID board will meet again tomorrow to determine next steps.

Thursday 1 August, Brecon and Radnorshire by-election set to reduce new PM’s majority to 1 MP

Upon entering office, Boris Johnson oversaw the biggest cabinet clear-out in nearly 60 years with 17 members of Theresa May’s cabinet now gone from office. Thursday’s by-election in Brecon and Radnorshire is odds on to reduce Johnson’s majority to one MP, including the 10 DUP votes. He will also have 17 disgruntled ex-members of cabinet on the backbenches. With a general election in mind, Johnson’s backroom team draws heavily on staff from the victorious Vote Leave campaign, most notably its director Dominic Cummings. This is a statement of intent clearly designed to demonstrate that Johnson is serious about no deal but also to put him on an election footing.

Thursday 1 August – ECB to release latest TARGET2 data

On 1 August the ECB will release the latest data on the balances in its TARGET2 mechanism – something which has been highlighted as indicative of a return to the malaise which engulfed the Eurozone in 2010/2011.

We do not share this assessment. Rather, the return of TARGET2 imbalances have coincided with the ECB’s asset purchase programme. According to ECB data, 50% of the institutions that sell bonds to the national central banks as part of the QE programme are not in the euro area and settle their account with one or two core countries where the financial centres reside.

Similarly, the higher TARGET liabilities incurred by the Bank of Spain and the Bank of Italy, reflect the fact that their respective purchases of Spanish and Italian debt are often from sellers that hold accounts in Germany. Therefore, TARGET2 balances are as much a reflection of where bondholders prefer to bank rather than distress.

Thursday, 1st August - Tax exemption for under 26-year olds in Poland kicks in

On Thursday, Polish and EU citizens resident in Poland under the age of 26 will become exempt from taxation provided their incomes do not exceed 85,500 zlotys (€20,000) per annum. The law is expected to benefit around 2 million Polish citizens and aims to encourage young people to stay in and return to Poland, which has haemorrhaged young people since joining the EU in 2004. Along with welfare incentives for each additional child born in Poland, the move is part of an effort by the governing Law and Justice party to improve Poland’s demographic profile.

Friday 2 August – Fitch to assess Greek sovereign rating

The Greek Public Debt Management Agency will look to take advantage of a situation where, despite the IMF deeming the country’s debt unsustainable, Greece’s 10-year debt carries a record low interest rate of 2%. As a result, at least one more debt issuance worth €2.5 billion is planned for 2019.

A second issuance may take place should Fitch unexpectedly upgrade Greece’s debt rating to BB – one notch below investment grade. However, Fitch is understood to be wary of upgrading Greece to BB before the Thessaloniki International Fair – which opens on 7 September and at which New Democracy is expected to unveil a more comprehensive investment plan.

The same calculus applies to Moody’s – which will review Greece on 23 August. While S&P will conduct its rating later in the year, on 25 October, the agency is understood to be waiting to see more content of New Democracy’s plans before deciding. Greece remains at least two notches below investment grade with all these agencies. A return to investment rating with one would allow for Greek bonds to be included in ECB bond purchases, in the likely event that the Central Bank decides to resume bond purchases and from the reinvestment program, which is ongoing.

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