WORLD ECONOMIC & MARKET DEVELOPMENTS
GLOBAL MARKETS: DBRS downgraded Italy’s sovereign rating to BBB-High from A-Low on Friday evening amid declining “political ability to sustain the structural reform effort and the continuing weakness in the banking system, amid a period of fragile growth.” The main implication of such a decision is that Italian government bonds and government guaranteed bonds posted as collateral by banks at ECB liquidity operations will be subject to higher haircuts. The impact on government bond yields was modest so far. In FX markets, GBP came under pressure early on Monday weighed down by a press report suggesting that Prime Minister Theresa May will lay the groundwork for a hard Brexit at tomorrow’s speech in order to regain control on immigration and exiting jurisdiction from the European Court of Justice.
GREECE: In the aftermath of German FinMin’s statement that the Eurozone could potentially proceed without the IMF with a support programme for Greece, European Commission’s Deputy Chief spokesperson Alexander Winterstein reaffirmed on Friday the EC’s intention for the IMF to participate in the Greek bailout programme noting that the role of the IMF in support programmes is included in the ESM Treaty and that the Commission continues to work with the Fund in this context. According to press reports, the ESM is working on the specification of the medium term debt relief measures for Greece, which along with an explicit commitment by the European institutions that they will be implemented upon successful completion of the programme in 2018 constitute a prerequisite for the ECB to conduct the debt sustainability analysis upon which the decision for the inclusion of Greek marketable securities into the ECB quantitative easing programme (QE) will be based.
SOUTH EASTERN EUROPE
BULGARIA: The domestic equities market continued to rally last week facing some profit taking on Friday. Meanwhile, both the local and Eurobond markets remained quiet.
ROMANIA: The EUR/RON hovered around 4.4870/4.5060 last week, 100 pips lower than a week earlier. Meanwhile, near-term RON rates remained close to the central bank’s deposit facility of 0.25% as large budget deficit spending at the end of December added to ample market liquidity and RON government bonds remained on the back foot.
SERBIA: The EUR/RSD moved slightly higher last week, despite repeated Central Bank interventions.
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