bailout

High & Low Finance: The Inevitability of a Greek Default

May 6, 2011 by NewsMaker Leave a Comment

“It would have a tremendous cost, with no benefit,” the minister, George Papaconstantinou, said in an interview on Greek television. “Greece would be out of markets for 10, 15 years.”

To financial markets, and to many other observers, it is more than thinkable. It is very close to a sure thing. When, how, and how messy it will be are open to question.

It was just a year ago this weekend that Europe bailed out Greece, amid much self-congratulatory talk. Olli Rehn, the European commissioner for monetary policy, said the move was “particularly crucial for countries under speculative attacks in recent weeks,” a reference to Spain and Portugal.

Markets — described by Anders Borg, Sweden’s finance minister, as “wolf packs” — returned to their lairs on the Monday after the bailout. The yield on three-year Greek government bonds plunged to 7.7 percent from 17.5 percent, as the price of such bonds soared 28 percent in a single day.

And how have things gone since then? Just fine in Germany, where growth is accelerating and unemployment is lower than at any time since German unification. The European Central Bank is even raising interest rates to curb inflation there. It’s going more or less acceptably in France and Italy, each of which recorded G.D.P. growth of 1.5 percent in 2010, well below Germany’s 4.0 percent. But it’s not going well at all in the country that supposedly was rescued. Greece’s economy shrank 6.6 percent, far more than the 1.9 percent decline in 2009.

The market wolves are howling again. The yield on Greek three-year bonds is more than 23 percent, not that anyone thinks that yield will really be received. The yields on similar Portuguese and Irish bonds have also soared into double digits. Investors are a little more skittish about Spanish and Italian bonds than they had been, but there is no sense of impending disaster.

Longer-term rates on Portuguese debt did slide a little this week after a tentative agreement on a bailout, but they remain at levels that show widespread doubts about the country’s ability to pay.

The trading patterns of Greek bonds indicate that traders expect a restructuring, and they think it will be messy.

That yields are as low as they are — if you can call 23 percent low — is a reflection of the fact that the bailout has been going on below the surface. The European Central Bank has been lending money to Greek banks, accepting Greek bonds as collateral on loans to other banks, and even buying bonds.

Keeping up the fiction that all will somehow be well if we just wait has its own disadvantages.

“Delays in restructurings are costly,” Alessandro Leipold, the chief economist of the Lisbon Council, a Brussels-based research group, and a former official of the International Monetary Fund, wrote in a paper this week. He warned that the longer the inevitable was delayed, the more potential economic production would be lost and the greater the amount of good money that would be thrown after bad in the form of ever larger bailouts. Ultimately, he said, the result would be larger losses for bondholders.

“The real problem is capital shortfalls in European banks,” said Whitney Debevoise, a partner in Arnold Porter and a former executive director of the World Bank, who has been involved as a lawyer for countries and creditors in several restructurings. Until the banks have more capital, forcing them to admit to losses would be problematic, to put it mildly.

Stalling has worked before. In the early 1980s, major American banks could not afford to admit that they had lost huge sums in the Latin American debt crisis. “There was,” Mr. Debevoise said in an interview, “a five-year period of temporizing while Citibank and other banks rebuilt capital.” Finally, there was a debt restructuring and the banks admitted to their losses.

Currently, some European banks would probably be hard pressed to take losses, a group that may include some of the German landesbanks, which are generally owned by state governments and are badly in need of new capital.

The European Central Bank itself would hate to report losses, which is one reason that the first Greek restructuring, when it comes, may avoid forcing bondholders to accept “haircuts,” or reductions in principal. Instead, cutting interest rates and postponing maturities could allow the central bank to pretend it had not lost money. Eventually, however, haircuts seem inevitable.

Although there have been plenty of defaults and restructurings by national governments in recent decades — a partial list includes Argentina, Brazil, Uruguay, Russia, Ukraine, Pakistan and Ecuador — there is no agreement on the way to arrange a restructuring. Nearly a decade ago, the I.M.F. tried to put together what it called a “sovereign debt restructuring mechanism,” a sort of international bankruptcy law. The effort collapsed.

As a result, restructurings can be messy. Some bondholders can try to hold out on approving a plan, hoping they will be paid more than those who agree. Lawsuits will be filed.

Article source: http://feeds.nytimes.com/click.phdo?i=033fe6a6e2272e1a3316b46e814da886

Filed Under: Business News Tagged With: bailout, borg, observers

Borrowing Costs Rise for Portugal Despite Deal on Bailout

May 4, 2011 by NewsMaker Leave a Comment

The auction, which raised €1.1 billion, or $1.6 billion, came hours after José Sócrates, the caretaker prime minister, announced that he had agreed to terms for a loan package of €78 billion from the European Union and the International Monetary Fund.

The exact terms of the deal, outlined in a nationally televised speech late Tuesday, were expected to be officially confirmed Thursday and only after further talks between the creditors and the center-right Portuguese opposition parties Wednesday.

Mr. Sócrates resigned in March after Parliament refused to endorse his proposals for additional austerity measures. To break the political deadlock, Portugal is set to hold a general election June 5.

But in the meantime, the caretaker government officially asked for assistance last month after the government had failed to meet its 2010 deficit target and investors had sent borrowing costs to record high levels. Those developments heightened concerns about its ability to meet refinancing obligations.

Officials from the I.M.F., the European Commission and the European Central Bank then went to Lisbon to discuss an aid package that would allow Portugal to receive E.U.-led rescue funding by June, the month when it is to face its toughest refinancing hurdles this year.

Underlining Portugal’s economic difficulties, the I.M.F. also forecast last month that the Portuguese economy would contract 1.5 percent this year and 0.5 percent in 2012, which would add up to one of the most protracted downturns in all of Europe.

On Tuesday, Mr. Sócrates, who is negotiating while campaigning for the June 5 election, suggested that Portugal had negotiated better terms for its bailout than those accepted last year by Greece and Ireland. He highlighted creditors’ agreement to give Portugal more time to cut its budget deficit than his government had initially foreseen. He also described the outcome of the negotiations as “a good deal that defends Portugal.”

In the absence of more details about the aid program, however, some analysts poured cold water on his characterization. Also, with the election ahead, the center-right opposition parties are unlikely to want Mr. Sócrates to reap political benefit from negotiating a bailout for which they blame his government in the first place.

Gilles Moec, a fixed-income analyst at Deutsche Bank, said in a research note, “Sócrates may have gone too fast in going public on the package, sidelining the opposition and spinning his role in the negotiations as a protector of his electoral base.”

He added: “It could create a volatile news flow in the coming few days and also create the possibility of some re- negotiation of the package after the elections.”

On Wednesday, Portugal sold three-month Treasury bills at an average yield of 4.65 percent, the country’s debt management agency said. That was higher than the 4.05 percent yield when Portugal last sold such bills April 20. The auction attracted bids for 1.9 times the amount offered, compared with a bid-to-cover ratio of 2 two weeks earlier.

Chiara Cremonesi, a fixed-income analyst at the Italian bank UniCredit, said that the auction had gone well, given that the rise in the cost of financing was below the level on the secondary market.

Still, she urged caution, adding, “Portugal will not be immune over the next months from market pressure, given it still has to convince markets that it has a credible growth strategy and given that the debate of a Greek debt restructuring will continue.”

Meanwhile, Finland moved closer Wednesday to potential support for Portugal’s rescue package, as the biggest party in the Finnish Parliament decided to separate euro rescue negotiations from its talks on forming a coalition government with the True Finns, a party critical of euro-zone bailouts that won 19 percent of the vote in an election last month.

The arrangement could allow Finland to decide on whether to support further euro rescue packages before a meeting of E.U. finance ministers May 16, as well as before the formation of a new Finnish coalition government.

Some analysts expressed surprise Wednesday that Portugal had apparently managed to negotiate a slower deficit-cutting timetable than initially envisaged, as well as terms that might allow it simply to roll over outstanding money-market securities to cover its financing needs next year. The negotiations in Portugal, however, come amid heightened concerns that Greece will soon have to restructure its debt, despite having received emergency funding last year. Greece secured a bailout package worth €110 billion, and Ireland one worth €85 billion.

Under the three-year plan negotiated between the government and creditors, Portugal will need to cut its budget deficit to 5.9 percent of gross domestic product this year, 4.5 percent in 2012 and 3 percent in 2013. That is a slower schedule than that pledged by the government in March, when it said that it aimed for a deficit of 4.6 percent this year, 3 percent in 2012 and 2 percent in 2013. Ralph Solveen, a Commerzbank economist, said that “the relatively moderate conditions of the program indicate that the E.U. and the I.M.F. would also be prepared to show an accommodating stance toward Greece and Ireland with regard to the comparatively harsh terms of their financial aid programs if need be.”The €78 billion package was in line with estimates made last month by senior E.U. officials of what Portugal would require. Analysts estimate that about €12 billion of that money will be channeled toward the banking sector.

“The size of the package signals the determination of the E.U. authorities to ring-fence problems in the periphery, especially given the elevated market concerns about Greece and subsequent contagion risks that could arise from that,” Barclays Capital said in a research note Wednesday.

Article source: http://www.nytimes.com/2011/05/05/business/global/05portugal.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: bailout, economic difficulties, hurdles

Expectations Grow for Greek Debt Restructuring

April 19, 2011 by NewsMaker Leave a Comment

Nevertheless, the notion keeps popping up that Greece, and perhaps even other weak European Union countries like Ireland and Portugal, will be forced to restructure.

Almost a year after it was saved from default by a bailout of 110 billion euros, or about $157 billion, from its European partners and the I.M.F., the Greek economy continues to sag under 340 billion euros in debt. Greece’s budget deficit is expected to be 8.4 percent of gross domestic product this year, compared with a mandated target of 7.5 percent.

The bond markets have taken note as economists, as well as German politicians, have emphasized a restructuring solution that will require bond investors and banks to take a loss on their debt holdings. On Monday, the yield on 10-year Greek bonds hit a high of 14.3 percent. Yields on Spanish and Portuguese debt also shot up as electoral gains made by an anti-euro party in Finland fed concern that a possible 80 billion-euro plan to rescue Portugal — which requires unanimous assent by European Union countries — might be jeopardized.

All of which reflects an emerging view, although it has not yet been officially stated, that it makes little economic sense for the monetary fund and the European Union to keep lending money to Greece so that the government can pay back private investors at double-digit interest rates — especially as Greek citizens suffer the effects of a severe austerity program.

“Behind the curtains, they are looking for a smooth restructuring,” said Theodore Pelagidis, an economist in Athens and the author of recent book on the Greek economy’s collapse. “The basic reality is that we cannot service our debt, and if Greece does not see a radical solution, it will consume itself.”

Proponents of restructuring say banks have had more than a year to prepare by either selling positions at a loss or raising capital. The markets, proponents argue, have already factored in a restructuring, so why wait until 2013 for investors to take their first losses, as proposed by European leaders in the structure of the future bailout funds?

Until recently, France and Germany — and especially the European Central Bank — have been adamantly opposed to any restructuring that would require investors to take “a haircut,” or reduced returns, because of the effect this might have on French, German and Greek banks.

Lately, however, there have been signs that once-closed minds are opening up to alternative solutions.

The German finance minister, Wolfgang Schäuble, raised the possibility of a Greek restructuring last week in comments to a German newspaper. He also alluded to a coming European Union study on the sustainability of Greek debt that would guide Europe’s conduct on the issue.

It is not clear what the conclusion of the report, expected to be published in June, will be. One option that has attracted some attention, though, is a plan that would ask bondholders to trade in their current paper for debt with lower rates and longer maturities.

Such a proposal, which was successfully used by Uruguay in 2003, would, in theory, minimize banking losses and extend debt payments further into the future, easing Greece’s financing burden in the near term.

“It’s being talked about more, and the official sector should want to do this,” said Lee C. Buchheit, a lawyer for Cleary Gottlieb Steen Hamilton, who has worked on debt restructuring deals dating to the 1980s. In Greece’s case, however, “the worry is that it may not go far enough. This is a country where debt is 150 percent of G.D.P.”

Mr. Buchheit, who recently co-wrote a paper on possible variations for Greece’s debt crisis, says an approach like this would be similar to a solution reached on Latin American debt in the 1980s in that it would give creditors and debtors more time to prepare themselves for an eventual restructuring.

But before banks accepted such a deal, they would require extra cash, which in today’s political environment might be difficult to come by.

They will also need to be persuaded to, in effect, increase their exposure to Greece when the country’s efforts at reviving its economy seem to be stumbling amid continued difficulties in raising the revenue it needs to reduce its deficit.

As the country where the debt crisis began, Greece remains the focal point of investors’ concerns. The tax increases and spending cuts being imposed by the Greek government as part of its rescue package have deepened a pervasive gloom in Athens. Some economists now forecast that Greek growth will plunge 2 to 3 percent in 2012 after an expected 4 percent retraction this year.

Such a double dip would likely drive unemployment, already around 14 percent, to Spanish levels of around 20 percent and further complicate the Greek government’s task of persuading its citizens to sacrifice more.

With 25 billion euros that Greece must raise from the public markets in 2012, the pressure is building on Athens to find a solution that somehow shares the pain more equally.

“Greece is a symbol of the crisis,” said Mr. Pelagidis, the economist. “We don’t need another bailout — we need creditors to take a hit.”

Article source: http://feeds.nytimes.com/click.phdo?i=2d56656d77030ea1edf3473a2510feae

Filed Under: Business News Tagged With: bailout, budget deficit, economic sense

High & Low Finance: Resentment Is Rising In Euro Zone

April 15, 2011 by NewsMaker Leave a Comment

They are trying that in Europe these days. Germany has the gold and it sees no reason other countries should not do as the Germans say.

The prescription for the so-called peripheral countries of the euro zone is simple: Enact the reforms Germany thinks are needed. Cut spending. Take wage and benefit cuts. Reform your tax system to produce more revenue, which may mean raising tax rates or just forcing people to comply with existing laws. Require people to work longer and retire later. Follow austerity as far as the eye can see.

Do all those things, and the rest of Europe will provide grudging assistance.

To some with the gold, this is simply a morality play. “They had their fun,” a former European central banker told me a few weeks ago, speaking of the peripheral countries. A different official used the same words last week.

In each conversation, I was reminded that the creation of the euro led to interest rates declining sharply in peripheral countries and to economic booms. Those countries lost competitiveness in export markets because they tolerated inflation and did not hold the line on wages. Now, those who partied deserve the pain of hangovers.

It is probable that countries will follow the German prescription. From the perspective of a national government, the alternatives may seem worse.

But democracy can be messy. Will populations go along?

There are a couple of hints that they may not. One comes from Portugal, the other from Iceland, which is not in the euro zone but is in a mess.

In Portugal, the government is seeking a European bailout but seems not to have the authority to agree to one. The opposition has forced elections, which it is widely expected to win, but it won’t say what it will do. In the meantime, the situation is in limbo, which may force Europe to help out before it can get any enforceable promises of reform.

In Iceland, the issue is whether the population should pay for the sins of its banks. The banks had big operations in Britain and the Netherlands, and when they collapsed, the British and Dutch governments made good on the deposits. The government of Iceland promised to pay the money back.

The amount is $5.8 billion, 46 percent of Iceland’s gross domestic product in 2010. A similar bill sent to the United States would call for a payment of $6.8 trillion.

I’m not really clear on why Iceland should be responsible. No doubt its bank regulators performed abysmally. But where were the British and Dutch regulators when the banks were taking in deposits from their citizens?

For reasons good or bad, Iceland’s citizens appear to be reluctant to pick up the bill. Nearly 60 percent of voters turned down the agreement backed by their government, which called for Iceland to pay the money over 30 years beginning in 2016. Britain and the Netherlands now plan to ask something called the European Free Trade Association Surveillance Authority to order Iceland to pay.

Both the Irish and Greek governments embraced the required austerity to get European help, and electorates threw out those deemed responsible for the mess. But there are signs that the new governments are losing support, and there is no indication of early economic recovery. Portugal’s government fell precisely because the opposition would not sign off on the required austerity.

What would be happening without the euro?

Neither the boom nor the bust would have been as great in the peripheral countries. But when the bust did arrive, the currencies of those countries would have plunged in value. That would have made them poorer and unable to afford the imports they once bought. Prices, measured in local currencies, would have risen. In Ireland, where a property boom collapsed, that would have ameliorated the problems faced by homeowners who owe far more than their homes are worth. Exports would have gained competitiveness, stimulating some growth.

But of course there are no separate currencies. There is no provision for allowing a country to leave the euro zone. That idea was not even considered when it turned out that Greece had lied its way into the club. In retrospect, everyone might be better off if it had been kicked out.

Article source: http://feeds.nytimes.com/click.phdo?i=7d3ab28f8f38287a8b609b90c3f558b8

Filed Under: Business News Tagged With: bailout, germans, national government

In Financial Crisis, No Prosecutions of Top Figures

April 14, 2011 by NewsMaker Leave a Comment

Answering such a question — the equivalent of determining why a dog did not bark — is anything but simple. But a private meeting in mid-October 2008 between Timothy F. Geithner, then-president of the Federal Reserve Bank of New York, and Andrew M. Cuomo, New York’s attorney general at the time, illustrates the complexities of pursuing legal cases in a time of panic.

At the Fed, which oversees the nation’s largest banks, Mr. Geithner worked with the Treasury Department on a large bailout fund for the banks and led efforts to shore up the American International Group, the giant insurer. His focus: stabilizing world financial markets.

Mr. Cuomo, as a Wall Street enforcer, had been questioning banks and rating agencies aggressively for more than a year about their roles in the growing debacle, and also looking into bonuses at A.I.G.

Friendly since their days in the Clinton administration, the two met in Mr. Cuomo’s office in Lower Manhattan, steps from Wall Street and the New York Fed. According to three people briefed at the time about the meeting, Mr. Geithner expressed concern about the fragility of the financial system.

His worry, according to these people, sprang from a desire to calm markets, a goal that could be complicated by a hard-charging attorney general.

Asked whether the unusual meeting had altered his approach, a spokesman for Mr. Cuomo, now New York’s governor, said Wednesday evening that “Mr. Geithner never suggested that there be any lack of diligence or any slowdown.” Mr. Geithner, now the Treasury secretary, said through a spokesman that he had been focused on A.I.G. “to protect taxpayers.”

Whether prosecutors and regulators have been aggressive enough in pursuing wrongdoing is likely to long be a subject of debate. All say they have done the best they could under difficult circumstances.

But several years after the financial crisis, which was caused in large part by reckless lending and excessive risk taking by major financial institutions, no senior executives have been charged or imprisoned, and a collective government effort has not emerged. This stands in stark contrast to the failure of many savings and loan institutions in the late 1980s. In the wake of that debacle, special government task forces referred 1,100 cases to prosecutors, resulting in more than 800 bank officials going to jail. Among the best-known: Charles H. Keating Jr., of Lincoln Savings and Loan in Arizona, and David Paul, of Centrust Bank in Florida.

Former prosecutors, lawyers, bankers and mortgage employees say that investigators and regulators ignored past lessons about how to crack financial fraud.

As the crisis was starting to deepen in the spring of 2008, the Federal Bureau of Investigation scaled back a plan to assign more field agents to investigate mortgage fraud. That summer, the Justice Department also rejected calls to create a task force devoted to mortgage-related investigations, leaving these complex cases understaffed and poorly funded, and only much later established a more general financial crimes task force.

Leading up to the financial crisis, many officials said in interviews, regulators failed in their crucial duty to compile the information that traditionally has helped build criminal cases. In effect, the same dynamic that helped enable the crisis — weak regulation — also made it harder to pursue fraud in its aftermath.

A more aggressive mind-set could have spurred far more prosecutions this time, officials involved in the S.L. cleanup said.

“This is not some evil conspiracy of two guys sitting in a room saying we should let people create crony capitalism and steal with impunity,” said William K. Black, a professor of law at University of Missouri, Kansas City, and the federal government’s director of litigation during the savings and loan crisis. “But their policies have created an exceptional criminogenic environment. There were no criminal referrals from the regulators. No fraud working groups. No national task force. There has been no effective punishment of the elites here.”

Even civil actions by the government have been limited. The Securities and Exchange Commission adopted a broad guideline in 2009 — distributed within the agency but never made public — to be cautious about pushing for hefty penalties from banks that had received bailout money. The agency was concerned about taxpayer money in effect being used to pay for settlements, according to four people briefed on the policy but who were not authorized to speak publicly about it.

To be sure, Wall Street’s role in the crisis is complex, and cases related to mortgage securities are immensely technical. Criminal intent in particular is difficult to prove, and banks defend their actions with documents they say show they operated properly.

But legal experts point to numerous questionable activities where criminal probes might have borne fruit and possibly still could.

Article source: http://feeds.nytimes.com/click.phdo?i=a1a7b250ec35e83d1df32c84d0ea5343

Filed Under: Business News Tagged With: bailout, debacle, unusual meeting

Bailout for Portugal Will Put Politicians in a Vise

April 11, 2011 by NewsMaker Leave a Comment

LISBON — To secure a bailout worth about €80 billion, Portugal may have to agree to international creditors’ demands that it impose tougher austerity measures than those its own lawmakers rejected less than a month ago.

This paradoxical situation is fueling divisions in Lisbon before a June 5 general election that was itself called because of a parliamentary standoff over how to clean up the public finances. In fact, Portuguese politicians may be more concerned about not getting blamed by voters for seeking outside help than about negotiating favorable terms for that rescue, valued at $116 billion.

“For the first time in three generations, the Portuguese are being forced to accept that they may find themselves worse off than their parents, and that is a huge shock for which nobody wants to take the blame,” said Miguel Morgado, a political science professor at the Catholic University of Portugal.

But officials from the European Union, the International Monetary Fund and the European Central Bank — expected to arrive Tuesday in Lisbon — will want to ensure that bailout conditions remain binding whatever the outcome of the June 5 vote. With that in mind, Olli Rehn, the European commissioner in charge of economic and monetary affairs, said last week that “a cross-party agreement” needed to be negotiated by mid-May, led by the caretaker Socialist government of Prime Minister José Sócrates but also involving opposition parties.

So far, the Portuguese response has been discordant.

Fernando Teixeira dos Santos, Portugal’s finance minister, said that “it is not for the government to negotiate with the opposition.”

Pedro Passos Coelho, the head of the main opposition Social Democratic Party, who will challenge Mr. Sócrates in June and is leading in opinion polls, backed the government’s call for a rescue, but called for any bailout package to be “minimal.”

International creditors will also be met in Lisbon with deep suspicion that a bailout, while necessary to meet Portugal’s immediate refinancing obligations, might not guarantee longer-term financial security. That fear has been fueled by the examples of Greece and Ireland, whose financing situation remains precarious even after securing last year €110 billion and €85 billion, respectively, in assistance.

“The chances of Greece not having to restructure its debt are not much higher than a year ago and that is something that our negotiators must keep in mind when discussing what interest rates are appropriate,” said António Nogueira Leite, a senior economic adviser to the Social Democratic Party.

While Portugal will be negotiating its rescue from a position of weakness, its European partners should also realize that “if the burden is not shared fairly in this third bailout, there is a genuine risk that resentment will poison the whole European project,” said Rui Ramos, a political analyst and professor of political history at the University of Lisbon.

“Germany and others must recognize that the problems of Southern European countries like Portugal are also due to excessive lending by their own banks,” he added.

When Portugal last called upon international assistance, in 1983, it was able to couple I.M.F. aid with a currency devaluation that resulted in an export-led recovery. That is no longer an option since the country adopted the euro.

In fact, the bailout negotiations come as Portugal faces another recession, with its central bank forecasting that the economy will contract 1.3 percent this year. Its public debt is expected to rise to almost 100 percent of gross domestic product this year from 60 percent five years ago.

Furthermore, Portugal recently revised its 2010 budget deficit — to 8.6 percent of G.D.P., rather than 7.3 percent — under stricter guidelines from Brussels about accounting at state-owned companies.

Some economists say they worry that Portugal’s difficulties will be harder to address than those of Greece or Ireland, where specific errors precipitated the crisis. Greece admitted to misstating public accounts while the Irish government guaranteed the debts of the country’s banks, which took huge write-downs on real estate loans.

Article source: http://www.nytimes.com/2011/04/11/business/global/11iht-bailout11.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: bailout, catholic university, public finances

European Central Bank Makes First Rate Hike Since 2008

April 7, 2011 by NewsMaker Leave a Comment

FRANKFURT — Worried about rising prices, the European Central Bank raised its benchmark interest rate for the first time since 2008 on Thursday, risking damage to weaker economies like Portugal, which only a day ago became the third country to request an international bailout.

A short time earlier, Britain’s central bank left its benchmark interest rate at 0.5 percent despite similar inflation concerns, after recent economic data painted a mixed picture of the strength of Britain’s recovery. The central bank also kept its bond-purchase plan at £200 billion, or $325 billion.

But the E.C.B. is taking a more hard-line approach in raising its rate to 1.25 percent from the historic low of 1 percent, where it has been since the depths of the global financial crisis. The bank president Jean-Claude Trichet and other members of the governing council had warned repeatedly over the past month that they were worried that higher oil prices would fuel a general increase in prices.

Many economists and political leaders said that a rate increase for the euro zone was premature and unnecessary, arguing inflation is not a problem when factories are still not operating at full capacity, and that higher inflation is solely the result of volatile commodity prices.

“We cannot see what good purpose raising interest rates now will accomplish,” Carl B. Weinberg, chief economist at High Frequency Economics in Valhalla, N.Y., wrote in a note this week.

The E.C.B. move will hurt Greece, Ireland and Portugal when they are already having severe problems borrowing money at reasonable rates, critics said. Portugal’s caretaker government gave in to market pressures on Wednesday and joined Greece and Ireland in seeking an emergency bailout.

The rate increase will also raise monthly mortgage payments in countries like Spain and Ireland where many people have variable-rate loans.

However, a rate increase will be welcomed by individuals and companies who keep their money in savings accounts or low-risk investments, and have been earning interest below the rate of inflation.

Lorenzo Bini Smaghi, a member of the E.C.B. governing council, has argued that a rate increase would actually hold down long-term borrowing costs, by giving lenders confidence that inflation will not erode their profits.

Analysts expect the rate increase Thursday to be the first of two or three such hikes before the end of the year. Mr. Trichet will hold a press conference at 2:30 p.m. Frankfurt time, where he is likely to be asked how fast the E.C.B. will push rates back to more normal levels.

Economists at Nomura forecast that the next increase will come in July, and that the benchmark rate will reach 2.75 percent by the end of 2012, still a low rate by historical standards. But the E.C.B. could also hold off on further increases if there are signs that higher energy prices are becoming a drag on European growth.

“Any signs that the recovery is significantly losing momentum will likely make the E.C.B. pause its rate-hiking cycle,” Nomura economists said in a note Tuesday.

The E.C.B. may also say Thursday how it will deal with weaker banks in countries like Ireland, Greece and Germany that have become overly dependent on cheap central bank loans to finance their activities. Mr. Trichet and other governing council members have said they want to remove the financial system from life support, and avoid the risk of asset bubbles or other problems caused by too much cheap money.

In a break from the historic pattern, the E.C.B. is moving to slow the economy and head off inflation ahead of the Federal Reserve. More than the American central bank, the E.C.B. is required by charter to make fighting inflation its top priority.

E.C.B. resolve was probably strengthened by recent data. Inflation in the euro area rose at an annual rate of 2.6 in March, up from 2.2 in February and above the E.C.B. target of just under 2 percent.

The E.C.B. last raised its benchmark rate to 4.25 percent from 4 percent in July 2008. The following October, as the financial crisis took on alarming proportions, the E.C.B. reversed course and began a series of cuts that brought the benchmark rate to 1 percent in May 2009.

Rates in Britain also fell to a record low, but the Bank of England rate is likely to wait for more data at the end of this month before making any decision to lift interest rates, economists said.

Britain’s central bank fears that raising interest rates too soon could damage an already weak economic recovery. Some economists said consumers are still getting used to government spending cuts, which are coming into force this month, as well as higher taxes and oil prices. That made it harder for the Bank of England’s policymakers to judge whether the economy is strong enough to withstand an increase in interest rates.

Alan Clarke, an economist at BNP Paribas in London, said a rate increase by the E.C.B. could put additional pressure on the Bank of England to raise its own rate because it could weaken the pound. “A weaker pound in our recent experience has led to higher inflation,” he said.

The Bank of England had been trying to balance an inflation rate that is the highest since 2008 with economic growth that remains slow. In a meeting last month, central bank officials said that there was “merit” in waiting to see how the government’s austerity program, which includes thousands of public sector job cuts, would affect the economy.

Recent economic data renewed some concern that Britain is still struggling after shrinking 0.5 percent during the last three months of 2010. Britain’s manufacturing sector stopped to grow in February and overall industrial production fell unexpectedly. Yet, the services sector grew at its fastest pace in 13 months in March.

The average price of houses was little changed in March as potential buyers delayed decisions because of concerns about economic growth and as higher consumer prices hurt disposable incomes.

Julia Werdigier contributed reporting from London.

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Filed Under: Business News Tagged With: bailout, bank president, rate increase