BoJ governor, EZ current Account, ECOFIN

Friday’s calendar has little to offer in terms of macro numbers and after the Federal Reserve’s ‘taper-bomb’ and China’s version of the Lehman-moment, it makes sense to look at more pressing issues: namely, what are the Europeans up to, and will the Japan's ‘Abenomics’ really work.

Japan BoJ Governor Kuroda (06:35 GMT): The central bank governor will be speaking at the annual meeting of the National Association of Shinkin Banks held in Tokyo. The Bank of Japan’s aggressive quantitative easing programme and inflation targeting have been questioned lately — it seems that markets would have hoped to see more structural reform and concrete action and not just unconventional monetary policies. Following the nervousness in China and the previous volatility of the JPY and Nikkei, some soothing words should be expected.

EZ April Current Account (08:00 GMT): is expected to show a surplus of EUR 14.2 billion, down heavily from the March 25.9 billion. The fall in surplus might start working against the strength of the EUR, and following the Federal Reserve’s planned tapering announcement, the data release could provide EURUSD with additional downside momentum — perhaps enough to clear the 1.3180-1.3200 support area.

EU Economic and Financial Affairs Council (ECOFIN): The proceedings already started yesterday with the Eurogroup (Eurozone finance ministers) meeting and the board meeting of the European Stability Mechanism (ESM). Late night reports from these events stated that of the full EUR 500 billion firepower of the ESM, a maximum of EUR 60 billion could be used for direct support of distressed banks. More importantly, the previous stance was that the ESM could only support banks that have become troubled after the single supervisory mechanism is in place.

Yesterday, this was changed so that the ESM funds can now be used to support banks that have got into trouble at an earlier point, but decisions will be made on a case-by-case basis. This would allow, for example, Ireland to request the ESM to buy Ireland’s stakes in distressed banks. These decisions regarding the role of the ESM will be ratified today at the ECOFIN meeting of the EU-27 finance ministers. The event will be held in Luxembourg and there will be a press conference around lunchtime and also later in the afternoon. For additional decisions made on Thursday see the Council’s press release. For Friday’s event, see the Reuters story EU to decide who pays when banks fail and the Open Europe’s briefing. For even more, see the Council’s Banking Recovery and Resolution documents and the live webcast.

The main takeaway from the European meetings should be that the rules for rescuing distressed banks are now in place. This should be seen as supportive of the crisis countries but an eventual burden on the core creditor countries. On the other hand, the ESM’s share of support measures is limited to 10-20 percent, while any supported banks’ host country would have to pick up the rest of the bill. Any ESM support to banks cannot be done before the end of 2014, and markets have other things to focus on right now. But it is important to note that burden-sharing is soon to be officially accepted and can be done without the previous long, arduous political processes.