Time.news – Wall Street closed the month of February down 3%, despite the rebound of the last two sessions, a strange rebound, which saw the markets challenge an aggressive and winning Putin in Ukraine. “Next week – comments Antonio Cesarano, chief global strategist of Intermonte Partners – I expect a Fed that will go on its own a bit, without looking too much at war, unlike the ECB, which is instead at the epicenter of the crisis, if anything, granting as the only ‘discount’ an increase of 25 instead of 50 basis points in March “.
I however, there will be three main market movers: Ukraine, the Swift – that is the interbank messaging system that regulates payments between banks of the same country and of different countries -, and the next moves by central bankswhich will culminate on Wednesday afternoon, when, within a few hours, the Fed ‘hawk’, James Bullard, the head of the Federal Reserve, Jerome Powell and the chief economist of the ECB, Philip Lane, will intervene.
On Monday 28 February there are two important events to report: the OPEC + meeting, which will leave the increases of 400,000 barrels per month unchanged, even if Russia, given the situation, could only pretend to adhere to these production increases, even if in fact it will not. Also on Monday, there will be preliminary inflation in the euro area, which in February is expected to rise from 5.1% to 5.3% annually. Of course, Ukraine will remain the main market mover next week. At stake is the survival of Kiev, the Minsk negotiations and an invasion, which is very different from previous Russian ones, in Georgia and Crimea, because Putin, after Ukraine, threatens to up the ante and his the next ‘target’ could be the Baltic countries, which are under the umbrella of the Atlantic Alliance. Furthermore, at the negotiating table, Putin raised the question of missiles Born in Romania and Poland. To stop this escalation, which among other things risks triggering dangerous chain reactions, such as that of pushing China to attack Taiwan, it is necessary to go beyond the rather soft sanctions applied up to now and isolate Russia. And to do so, the only real deterrent is to exclude Russia from Swift, the messaging system that regulates bank payments from country to country, even if this would mean activating “an economic atomic bomb”. The ministers of foreign affairs of the European Union will meet on the Ukrainian crisis today at 6 pm by videoconference to return to discuss support measures for the country invaded by Russia. On the table, the possible assessment of further sanctions including the ouster of Russia from the Swift banking system, after the German government’s opening to a targeted solution.
Swift, what it is and why removing Russia scares the West
But what is the Swift and why does the exclusion of Russia from the global payments circuit scare the West so much? “Let’s also say that the exclusion from the swift could have repercussions not only for Russia but also for Europe” says Cesarano. Swift is an acronym, which stands for Society for Worldwide Interbank Financial Telecommunication, owned by 3,500 banks. The company is based in Brussels and was created in 1973, so it is old stuff but important, because it is the indispensable technological infrastructure currently for the payments of goods, services, raw materials and – above all – energy products, including gas. and oil, which constitute Russia’s main wealth. The Swift is the standard that is used for concluding orders, currency exchanges, sales and purchases.
Cut Moscow out of this international highway of bank payments it is a very dangerous move, because it means isolating it, not allowing it to make payments but also to receive them. Russia is impoverished because it cannot collect money, but others cannot pay it too and therefore can no longer buy gas and oil. Many Western companies, unable to receive payments from Russia anymore, could go into default. The lower supply of Russian gas and oil could in turn trigger sharp price increases, severely reducing the purchasing power of households and putting companies in difficulty. As a result, bank bad debts could increase. Ousted from the Swift, Russia could stop supplying raw materials and this would risk putting countries like Italy in difficulty, which depends for 40% on Russian gas and certainly could not replace it in a short time with other energy resources. In short, the Swift is a double-edged sword, but it would certainly make it possible to isolate Moscow. This is why the EU says that the hypothesis is on the table and has not yet been ruled out. Today the European foreign ministers are meeting by videoconference and the idea of excluding Russia from the Swift becomes more and more concrete. After the substantial green light from Italy and Hungary, the proposal also garnered the support of Germany, albeit with reservations. To convince the German Chancellor Olaf Scholz, Polish Prime Minister Morawiecki, who went to Berlin on purpose, moved. In the end, it emerged that Germany is working for a “limited and targeted” exclusion of Russian financial institutions from Swift to avoid “collateral damage”, especially to Italy and Germany ”.
What will the ECB and the Fed do to defuse the war effect?
Estimates of the economic costs of the war in Ukraine came out last week. The ECB has estimated that this year the conflict could compromise the growth of the Eurozone by 0.3% -0.4% of GDP. This would be the average scenario while in the serious one, GDP would fall by almost 1%. Instead, in the ‘lighter’ scenario there would be no impacts but this is considered very unlikely. The Fed has not released any forecasts, but Gregory Daco, chief economist at consulting firm EY-Parthenon, has estimated that the rise in the price of oil, which is a direct consequence of the war, will reduce US GDP growth by about 0.3. percentage points in 2022. Furthermore, last Friday Christine Lagarde said that the ECB will do “everything to safeguard the stability of the system”, in fact, according to Cesarano, the ECB “opens to a hypothesis, which has yet to be defined, to make something extraordinary in the name of the emergency. In other words, the ECB, due to the Ukrainian crisis, will soften the monetary normalization process ”. As we do not yet know, we will know at the meeting on 10 March. The markets, however, take it for granted that the ECB will continue to buy public debt securities and will not set a precise deadline for purchases. This is demonstrated by the drop in the spread, which last Friday closed down at 161 points. The Fed will also have to take into account the war in Ukraine in some way, but certainly with less urgency than the ECB. On March 16, the Fed will raise rates and will do so by 25 basis points and not by half a percentage point. In 2022, it will raise rates at least six times. There is less clarity on the Fed budget cuts, which currently account for around 40% of US GDP. Powell will have to say something about it next Wednesday and Thursday in his two hearings before Congress. And something will also have to say about the war, even if for the Fed it does not represent a serious problem like that of inflation, which remains the ‘public enemy one’.