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Bank of England Leaves Interest Rate Unchanged

May 9, 2013 by Leave a Comment

LONDON — The Bank of England decided to keep its benchmark interest rate unchanged on Thursday amid doubts about the strength of Britain’s economic recovery.

The central bank left its interest rate at 0.5 percent, a record low, and also held its program of economic stimulus at £375 billion, or about $580 billion. Some economists expect the Bank of England to expand its bond-buying program later this year to help the recovery, while others said recent economic data was encouraging and further stimulus might not be necessary.

“There are broad improvements in business sentiment and with equity markets heading to new high, we are not expecting anything” until Mark Carney takes over as governor of the Bank of England in July, said James Knightley, an economist at ING Bank in London, before the rate announcement.

The British economy narrowly avoided falling back into a recession for a third time in five years at the beginning of this year. The 0.3 percent growth in the first three months of this year was hardly a sign of a robust recovery, but it allowed George Osborne, the chancellor of the Exchequer, to dispel critics of his austerity measures, who had argued that spending cuts and tax increases would pull Britain back into a recession.

While still in decline, the manufacturing and construction industries shrank less than some economists had expected in April and the services sector also strengthened last month. Economic confidence is improving and house prices increased to the highest in almost three years in April, according to Halifax, a mortgage lender.

Under pressure to show his austerity program was indeed repairing Britain’s economy by reducing the budget deficit without choking off growth, Mr. Osborne in March gave the Bank of England more flexibility in supporting the economy without the need to lower inflation in the short term.

Consumer price inflation is at 2.8 percent, above the Bank of England’s 2 percent target. Prices have been climbing faster in Britain than in the euro zone or the United States, squeezing households as salaries remain broadly unchanged.

The European Central Bank cut its benchmark interest rate to a record low of 0.5 percent from 0.75 percent last week. The move was widely expected and seen as mostly symbolic, to show that the E.C.B. president, Mario Draghi, was willing to act to bolster the euro zone as recession threatens to engulf countries that were previously spared, like Germany.

The troubles in the euro zone also weighed on Britain, which is a member of the European Union but not part of the euro zone. The region is Britain’s largest single export market. Mr. Osborne repeatedly pointed to weak demand for goods and services from the euro zone as a reason for the slow recovery of the British economy.

Mr. Knightley is among the economists who expect the arrival of Mr. Carney at the helm of the Bank of England in two months to bring some change to the London institution. Mr. Carney, currently the governor of the Bank of Canada, might be more specific about what to expect from interest rates in the future, Mr. Knightley said. Few economists currently expect interest rates to increase before the end of next year.

Article source: http://www.nytimes.com/2013/05/10/business/global/Bank-of-England-leaves-rate-unchanged.html?partner=rss&emc=rss

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Greek Debt Is Focus of Another Euro Zone Finance Ministers Meeting

December 3, 2012 by Leave a Comment

Euro zone finance ministers will gather here on Monday for their fourth meeting in four weeks. Last week they hashed out a plan by which Greece can try to unlock a long overdue bailout loan installment. The country needs the money desperately to avoid bankruptcy, to pay wages and pensions and to carry out economic changes demanded by its international creditors.

On Monday, the finance ministers are expected to vet Greece’s planned response to a central provision of that plan: a buyback of some of the Greek bonds held by investors, at a discount, as a way to reduce its staggering debt load.

Greece has until Dec. 13 to make that happen if it hopes to receive its next tranche of bailout money.

Even as the Greek economy continues to falter, the latest meeting of finance ministers comes against a backdrop of grim new data for the euro region as a whole. Despite an optimistic forecast on Friday from the European Central Bank president that the euro zone would emerge from recession sometime in the second half of next year, the nearer-term data indicates that things may get worse before they can get better.

Figures released Friday showed euro zone unemployment rising to a new high in October, with nearly 19 million people — 11.7 percent of the 17-nation currency bloc’s work force — without jobs.

Greece’s international lenders froze aid in June because they perceived the government in Athens to be dragging its heels on fulfilling the terms of its bailout program. Since then, the country has accelerated the economic revamping and budget cuts that creditors have demanded.

But the economic outlook for Greece has worsened significantly in the interim — some critics blame the austerity program, in part — prompting the International Monetary Fund to pressure lenders, including Germany, to relieve some of its burden.

A centerpiece of those efforts, agreed upon last week, is the debt buyback. The plan is for authorities in Athens to borrow European funds to buy Greek bonds that are already trading at a deep discount from their face value.

The buyback plan may have allayed fears of an imminent Greek default, but how well it will work remains to be seen. Some in the financial sector have complained about the prospect of being forced to sell bonds at fire-sale prices.

The Market Monitoring Group of the Institute of International Finance, a global association of banks and other financial institutions, said last week that it was “critical that any buyback be conducted on a purely voluntary basis,” even as Yannis Stournaras, the Greek finance minister, warned Greek banks holding many of the bonds that participation was a “patriotic duty.”

But unless Greece reduces its debt, the I.M.F. could still refuse to approve aid. That would probably mean another flurry of emergency meetings to draw up yet another plan.

In a sign that at least some investors are eager to sell back their Greek bonds, if the price is right, some big hedge funds have been accumulating the bonds on the open market.

Those funds, including Third Point and Brevan Howard, are betting that to make the buyback succeed, the Greek government will have to meet their price demands. On the open market, the bonds in question are trading at around 30 cents on the euro — in other words, about 30 percent of their face value. The most aggressive hedge funds are insisting that they will not sell for any price below 35 cents on the euro.

That raises a risk that investors will push up the price to a point at which it does not make economic sense for Greece to complete the buyback.

“There is a limited amount of money to do this,” Mr. Stournaras said in an interview on Saturday. “But in the end I do think it will be successful.”

To seal the debt overhaul deal last week, after three late-night, marathon meetings in three weeks, Christine Lagarde, managing director of the I.M.F., had to battle to persuade reluctant finance ministers like Wolfgang Schäuble of Germany. She argued that Greece was sinking so deeply that, without immediate relief, it might never repay its loans.

Mr. Schäuble declined to go along with a relief plan until a way was found to avoid the politically unpalatable step of forgiving Greece’s loans. Besides the debt buyback, the revamped plan included extending the payback dates for some of the debt held by other euro zone governments. Central banks in countries that use the euro also agreed to return to Greece any profits made on Greek bonds purchased by the European Central Bank.

On Friday, the German Parliament approved the new relief plan by a wide margin, a sign of continuing fears about the fate of the euro zone if Greece defaults. But the approval carried a political cost for the German chancellor, Angela Merkel, as nearly two dozen legislators in her own Christian Democrat party voted against the measure.

Landon Thomas Jr. contributed reporting from London, and Niki Kitsantonis from Athens.

Article source: http://www.nytimes.com/2012/12/03/business/global/03iht-ministers03.html?partner=rss&emc=rss

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Europeans Accept New Greek Bailout

June 24, 2011 by Leave a Comment

“We have agreed that there will be a new program for Greece,” Angela Merkel, the chancellor of Germany, told reporters at the end of a two-day meeting in Brussels. “This is an important decision that says once again we will do everything to stabilize the euro over all.”

The comments came a day after Greece agreed with international creditors to more austerity measures as part of revised plans for 2011-15 aimed at plugging a gap in its future financing.

If the Greek Parliament approves this proposal next week, the European Union and the International Monetary Fund will release a 12 billion euro ($17 billion) tranche of emergency aid, and then put together a second rescue.

The shape and size of the new bailout could become clear at a meeting on July 3 of euro zone finance ministers in Brussels.

All this comes a little more than a year after the government in Athens won a package of loans worth 110 billion euros.

“Greece is supported,” President Nicolas Sarkozy of France said at a news conference. “Europeans trust the Greek authorities and Parliament in their endeavors to implement the bold measures that have been decided.”

After discussions with the Greek prime minister, George Papandreou, European leaders expressed confidence that Greece’s Parliament would approve the austerity package, which has already prompted large protests in Athens.

Changes to the plan, negotiated with European and I.M.F. officials Thursday, are certain to make it even less popular among Greek citizens.

The new austerity program will now include a one-time levy on personal income ranging from 1 to 5 percent, depending on income.

Meanwhile, the tax-free threshold on income will be lowered to 8,000 euros a year from 12,000 euros, with the lowest rate set at 10 percent — but with exemptions for people up to 30 years old, pensioners older than 65 and the disabled. There will also be an annual levy of 300 euros on the self-employed.

On Thursday, at a meeting of center-right parties in Brussels, the Greek opposition leader, Antonis Samaras, refused to bow to pressure to change course and support the new plan during next week’s vote. During the discussion, Mr. Samaras was warned that Europe was engaged in a war for its economic stability, according to one official who spoke on the condition of anonymity.

Reflecting the disappointment of European leaders at Mr. Samaras’s stance, Mrs. Merkel said that “it would be better to have the widest support.”

She also insisted that any new program for Greece should be monitored closely. “One needs to do a reality check on whether the assumptions are proved right,” she said.

Nonetheless, in a statement issued late Thursday, European Union leaders accepted the need for a “new program jointly supported by its euro area partners and the I.M.F.”

That could amount to as much as 120 billion euros, though no figures have been identified yet because euro zone countries are negotiating with private investors to determine their level of voluntary contributions.

After the meeting, Mr. Papandreou conceded that his country was on a “difficult path” but one that was “much better than the alternative path of defaulting.”

“I believe that this is something which is understood by the majority in the Greek Parliament,” Mr. Papandreou said, adding that he was sure that the 12 billion euros in emergency aid would be released next month.

At the summit meeting, an obstacle to the new rescue was removed when the leaders agreed that nations that do not use the euro would not be obliged to contribute through a fund that they finance along with countries that use the single currency.

Britain objected to taking part, arguing that it had not participated in last year’s Greek package and had no plans to join the single currency.

“For Britain, we weren’t involved in this bailout and we should not be involved, as a noneuro country, in anything that might happen subsequently,” David Cameron, Britain’s prime minister, said at a news conference. Some practical difficulties remain, including an insistence from Finland that any new loans to Greece should be guaranteed by collateral.

James Kanter contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=94153d5dcca328f96d46a003775d562c

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European Central Banks Hold Rates Steady

June 9, 2011 by Leave a Comment

FRANKFURT — The European Central Bank left its benchmark interest rate unchanged Thursday, but was expected to signal that markets should expect a move next month — despite the euro area’s uneven economic recovery.

The Bank of England, meanwhile, kept its main interest rate at a record low amid concerns that the country’s economy is still too weak to cope with higher borrowing costs. It did not issue a statement.

Jean-Claude Trichet, the E.C.B. president, was to hold his regular news conference at 2:30 p.m. Frankfurt time.

Analysts and economists predicted he would say that the bank is “strongly vigilant” toward inflation. That language would indicate a rate increase in July is probable, though the bank always leaves its options open.

On Thursday, the E.C.B. left its rate at 1.25 percent, after raising it in April from 1 percent, the first increase in two years. The benchmark rate in Britain was left at 0.5 percent and the central bank also kept the size of its asset purchase plan unchanged at £200 billion, or about $328 billion.

With Germany, the euro-zone’s largest economy, growing so quickly that some economists fear overheating, the E.C.B. has been trying to nudge interest rates back to levels that would be normal in an upturn.

But the bank faces a policymaking dilemma because the Greek debt crisis still threatens growth in the 17-member euro area as a whole. Economies in Spain, Ireland and other so-called peripheral countries remain sluggish. Higher rates could make it that much harder for those countries to recover.

The economy also remains fragile in Britain. Consumer confidence took a hit in April as more people claimed unemployment benefits and real wage increases lag inflation, weighing on living standards. Spending cuts and tax increases that are part of the government’s austerity program made households even more reluctant to spend.

“The story of weak growth is still going to continue for a while,” James Knightley, a senior economist at ING Financial Markets in London, said.

Some economists had predicted rates would rise in May this year, but as the economic outlook deteriorated have pushed that back to next February. Mr. Knightley expects an increase as early as November this year.

The British economy stagnated in the six months until the end of March. The Bank of England governor Mervyn King has warned that inflation could accelerate to about 5 percent in the short term before falling again. Higher consumer prices, partly a result of higher commodity prices, have started to dampen household spending as companies remain reluctant to hire and banks continue to hold back on lending.

Paul Fisher, a Bank of England official, argued last week that raising interest rates should be delayed until the economy was stronger. The International Monetary Fund on Monday backed Prime Minister David Cameron’s plan to cut the budget deficit, which had been criticized by the opposition Labor Party as too strict and harming the economic recovery.

Julia Werdigier reported from London.

Article source: http://feeds.nytimes.com/click.phdo?i=d065652efd335b9be0315dd9d7e31a29

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News Analysis: As Deficit Debate Begins in U.S., Less-Than-Promising Results in Britain

April 14, 2011 by Leave a Comment

But in Britain, one year into its own austerity program to plug a gaping fiscal hole, the future is now. And for the moment, the early returns are less than promising.

Retail sales plunged 3.5 percent in March, the sharpest monthly downturn in Britain in 15 years. And a new report by the Center for Economic and Business Research, an independent research group in London, forecasts that real household incomes will fall 2 percent in 2011. That would make Britain’s income squeeze the worst two years in a row since the 1930s.

All of which has challenged the view of Britain’s top economic official, George Osborne, that during a time of high deficits and economic weakness, the best approach is to aggressively attack the deficit first, through rapid-fire cuts aimed at the heart of Britain’s welfare state. Doing so, according to Mr. Osborne, the chancellor of the Exchequer, secures the trust of the financial markets — thereby ensuring the low interest rates necessary for long-term economic growth.

That approach, and the question of whether it risks stifling an economic recovery that might itself help reduce the budget gap, lies at the root of the deficit debate in America. On one side is the go-slow approach favored by President Barack Obama. On the other is a more radical path advocated by the opposition Republicans. Both camps are no doubt closely watching Britain’s experiment.

On paper at least, both countries face broadly similar deficit challenges. Britain aims to close a fiscal gap of about 10 percent of gross domestic product; the comparable figure in the United States is projected at 9.8 percent.

In Washington, the Republican proposal recently sketched out by Representative Paul D. Ryan of Wisconsin calls for broad and significant cuts in social spending, including the Medicare and Medicaid health benefits for the old and the needy, as well as wide-ranging tax cuts. On Wednesday, Mr. Obama called for a more balanced approach, one that would combine some tax increases for the wealthy with selective spending cuts that he said would not break the “basic social contract” of programs like Medicare and Medicaid.

While severe in its approach to spending cuts, the British approach lacks the broad sweep of the Republican proposal. Britons will certainly feel pain at the local government level as funds dry up for care for the elderly, youth programs and trash collection. But in contrast to the Ryan plan, icons like the National Health Service have largely been spared.

There are other notable differences that suggest that even Europe’s most conservative party is markedly to the left of the mainstream Republican position in the United States and in some ways even more liberal than the position Mr. Obama has taken.

To strike a political balance, for example, the coalition government led by the Conservative prime minister, David Cameron, has retained a 50 percent income tax rate on the wealthiest individuals. That is among the highest in Europe, and it imposes more of a burden on the rich than anything Mr. Obama or anyone else in Washington would find politically feasible.

Elsewhere in Europe, countries like Ireland and Greece have had to confront deepening economic slumps as they put in place harsh austerity programs. The bond market has given them little credit for their efforts, punishing those countries’ 10-year government bonds with interest rates in or close to double digits.

But here in Britain, the big worry right now is not tax rates or high borrowing costs. Instead, the fear is that Mr. Osborne’s emphasis on social-spending cuts — which aim to achieve an approximate budget surplus by 2015 and are likely to result in the loss of more than 300,000 government jobs — threatens to tip the economy back into recession.

Already the government has had to cut its estimate for economic growth to 1.7 percent for this year from 2.4 percent, as consumer incomes are under pressure from high inflation, weak wage growth and stagnant economic activity.

“My view is that we are in serious danger of a double-dip recession,” said Richard Portes, an economist at the London Business School. “It is hard to see where demand is going to come from. This is going to be a cautionary tale.”

Not all economists agree, of course. And a slight improvement in the unemployment rate announced this week, to 7.8 percent, suggests it is still too early to declare a second slump inevitable.

No one would disagree with Mr. Portes that a deficit of 10 percent of G.D.P. is unsustainable over the long run. But, along with the opposition Labour party, he argues that moving so quickly in the face of weak economic growth is not justified.

The British government’s deficit-cutting plan is arguably the most aggressive by any economy that has not been compelled to take austerity measures as part of a bailout from the International Monetary Fund. Mr. Osborne proposes to cut the deficit to 1.5 percent of G.D.P. by 2015. By comparison, even the stark program put forward by Congressman Ryan does not project reaching that same goal until 2021.

Besides the speed, the crucial difference is how the two plans get there. Mr. Osborne’s plan calls for 75 percent of savings to come from spending cuts, and the rest from mostly indirect revenue and tax increases. That is not far off from the mix President Obama has proposed.

Mr. Ryan, on the other hand, proposes to reduce spending by $5.8 trillion but, in direct contrast to the British approach, would allow most of the spending reductions to be offset by $4.2 trillion in tax cuts rather than applied to closing the deficit gap. In other words, Mr. Ryan would not only lean almost completely on spending cuts to close the deficit, he is also hoping to spur the sort of supply-side economic growth most often discussed back when Ronald Reagan was in the White House.

Article source: http://www.nytimes.com/2011/04/15/business/global/15iht-pound15.html?partner=rss&emc=rss

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