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Draghi Signals Slight Optimism for Europe’s Prospects

August 1, 2013 by

“The picture seems to be better from all angles than it was a year ago,” Mr. Draghi said at a news conference after the E.C.B.’s decision to leave its benchmark interest rate unchanged at a record low of 0.5 percent.

Mr. Draghi was referring to questions about the euro zone’s integrity, though, and less to the immediate prospects for an end to recession and record unemployment.

The fragile state of the euro zone economy means that any decision to raise interest rates is still a long way off, Mr. Draghi indicated. Policy makers expect “the key E.C.B. interest rates to remain at present or lower levels for an extended period of time,” Mr. Draghi said, repeating a pledge he first made a month earlier.

In London on Thursday, Britain’s central bank, the Bank of England, also decided to hold interest rates steady.

The Bank of England held its interest rate at 0.5 percent, already a record low, and made no change to its program of economic stimulus, leaving the target at £375 billion, or about $570 billion. In Britain, which does not use the euro, the government had reported last week that the economy grew 0.6 percent in the second quarter from the previous quarter and that all main industries were reporting faster growth for the first time in three years.

For Mr. Draghi, it has been about a year since he defused fears of a euro zone breakup by promising to do “whatever it takes” to keep the common currency together. That expression of resolve helped check the euro zone’s decline, but was not enough to push the region onto a growth pathagain.

Asked to take stock of the state of the euro zone today, Mr. Draghi listed numerous improvements, including stronger exports from countries like Spain and Italy; lower market interest rates for government bonds; and progress by political leaders in reducing their deficits and improving economic performance.

“We are seeing possibly the first signs this significant improvement in confidence and interest rates is finding its way to the economy,” Mr. Draghi said.

But he took a more cautious view than many analysts of recent surveys of business sentiment, which have raised hopes that the euro zone economy could be emerging from recession. The surveys “tentatively confirm the expectation of a stabilization of economic activity at low levels,” Mr. Draghi said.

At least one analyst detected a nuanced shift in Mr. Draghi’s assessment.

“If there was any change at all, his description of economic prospects sounded slightly more optimistic,” Jörg Krämer, chief economist at Commerzbank in Frankfurt, said in a note to clients.

“Slightly” is the key word. Credit for businesses remains scarce, Mr. Draghi noted, and the labor market is weak. Unemployment in the euro zone was stuck at a record high of 12.1 percent in June, according to official data published Wednesday, though there was an infinitesimal decline in the total number of jobless people: 24,000 fewer people were out of work in May out of a total of 19 million.

Even if the euro zone economy does emerge from recession soon, economists say, growth will be weak and it will take years before joblessness in countries like Spain — where more than a quarter of the work force is unemployed — returns to tolerable levels.

With E.C.B. interest rates already at record lows, Mr. Draghi has in recent months been trying to use his powers of persuasion to talk down market rates and make credit more available to businesses and consumers. Last month, he broke with precedent by promising to keep rates low for an extended period. Before then, the E.C.B. had refused to offer so-called forward guidance.

Julia Werdigier contributed reporting from London.

Article source: http://www.nytimes.com/2013/08/02/business/global/european-central-bank-keeps-key-rate-at-0-5.html?partner=rss&emc=rss

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Unemployment Hits Record High in Euro Zone

May 31, 2013 by Leave a Comment

LONDON — Unemployment in the euro zone continued its relentless march higher in April, according to official data published Friday, hitting yet another record amid a prolonged recession and the lack of a coordinated response by policy makers.

The jobless rate for the 17 countries that use the common currency rose to 12.2 percent, from 12.1 percent a month earlier, with 19.4 million people out of work, according to Eurostat, the E.U. statistics agency. Nearly a quarter of job-seekers under age 25 were unemployed. Some analysts said the jobless rate could hit 20 million by the end of the year.

Despite the rise, most analysts do not expect the European Central Bank to cut interest rates or take other action to stimulate growth when its policy-making council meets in the coming week. Separate data from Eurostat showed that inflation in the euro zone rose to 1.4 percent from 1.2 percent, which could prompt the E.C.B. to wait for clearer signs that there is no risk of higher prices.

Analysts said the continued rise in youth unemployment was particularly alarming. It reached 62.5 percent in Greece and 56.4 percent in Spain in April, Eurostat said, threatening to become a long-term drag on growth as young people are unable to start their careers.

“Youth joblessness at these levels risks permanently entrenched unemployment, lowering the rate of sustainable growth in the future,” Tom Rogers, an economist who advises the consulting firm Ernst Young, said in an e-mail message.

A decision by E.U. leaders to allow distressed countries more time to cut their government budgets will help, he said, as would a cut in the benchmark interest rate by the E.C.B. last month. But Mr. Rogers added, “Much more remains to be done to stimulate a recovery.”

For the moment, though, there is little prospect of major additional stimulus from governments or the E.C.B. The central bank remains reluctant to undertake more radical measures like those used by the U.S. Federal Reserve or the Bank of England. The E.C.B. benchmark interest rate is already at a record low of 0.5 percent, and it is unlikely that a further cut would do much to relieve a credit crunch in countries like Italy.

The E.C.B. aims for inflation of about 2 percent, and still has room for additional measures without violating its mandate to maintain price stability. But the uptick in inflation reported Friday, caused primarily by a rise in prices for food, alcohol and tobacco, could quiet those who have argued that the euro zone is in danger of sinking into deflation, a sustained decline in prices that can be even more destructive than inflation because it is so hard to reverse.

In one bit of good news, unemployment in Ireland fell to 13.5 percent, from 13.7 percent, and down from 14.9 percent a year earlier. The improvement is a sign that Ireland is slowly recovering from the banking and debt crisis that began in 2008.

Article source: http://www.nytimes.com/2013/06/01/business/global/euro-zone-economic-data.html?partner=rss&emc=rss

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Fed Maintains Rates and Strategy

March 20, 2013 by Leave a Comment

WASHINGTON — The Federal Reserve produced no surprises on Wednesday, affirming that it would plow ahead with its efforts to stimulate the economy even as it hailed “a return to moderate economic growth following a pause late last year.”

The Fed under its chairman, Ben S. Bernanke, has made clear that it regards its program of low interest rates and large asset purchases as necessary for the economy to keep growing fast enough to return unemployment to normal levels.

In a statement issued after a two-day meeting of its policy-making committee, the Fed reiterated that it would continue to hold short-term interest rates near zero at least until the unemployment rate falls below 6.5 percent, which forecasters expect no sooner than 2015. The February unemployment rate was 7.7 percent.

To hasten that process, the central bank said it also would keep to buy $85 billion a month in Treasury and mortgage-backed securities.

While spending by consumers and businesses has increased recently, the Fed noted that fiscal policy “has become somewhat more restrictive.”

“The committee continues to see downside risks to the economic outlook,” the statement said.

The decision was supported by 11 members of the Federal Open Market Committee. Esther George, the president of the Federal Reserve Bank of Kansas City, recorded the only dissent, as she did in January, again citing her concerns that the Fed’s efforts could destabilize markets and seed future inflation.

The Fed separately released economic forecasts by 19 of its senior officials showing a slight strengthening in the consensus view that the central bank will need to suppress short-term interest rates for several more years. While a majority of the officials continued to predict that the Fed would begin to raise its benchmark interest rate by the end of 2015, the average predicted rate declined slightly as a number of officials shifted forecasts downward.

In keeping with that shift, the officials’ expectations for the economy soured slightly. They predicted that the economy would expand between 2.3 and 2.8 percent this year, down from their December forecast of growth between 2.3 and 3 percent. The consensus forecast for 2014 also fell. Officials now expect growth between 2.9 and 3.4 percent in 2014, compared to a December forecast of growth between 3 and 3.5 percent.

Concerns about inflation remained in abeyance. Fed officials do not expect inflation above 2 percent over the next three years, well below their self-imposed ceiling of 2.5 percent inflation. They forecast slightly less inflation during the current year and slightly more by 2015, as compared with their December projections.

At the same time, officials were modestly more optimistic about job growth. They predicted that the unemployment rate would rest between 6.7 and 7 percent at the end of 2014. In December they had predicted that the rate would sit between 6.8 and 7.3 percent at the end of 2014.

The unusual rigidity of the Fed’s basic course has diminished the importance of the regular meetings of its policy-making committee. Unless economic circumstances change dramatically, the year could pass without significant action.

Dissenters on the policy-making committee – most of whom are not voting members this year — have increased the volume of their protestations in recent months. Increasingly, the focus of their concerns has shifted from the specter of future inflation to the possibility that asset purchases and low interest rates will destabilize financial markets.

Historically, such divisions often presaged a turn, or at least a moderation, in the thrust of Fed policy. But analysts who follow the central bank see little evidence of a shift in the current debate. They say that Mr. Bernanke and his allies remain firmly in control and do not seem inclined to take further steps to appease the concerns of the minority.

“The hawks are nothing more than an irritant,” Ian Shepherdson, chief economist at Pantheon Macroeconomic Advisers, wrote in a note to clients ahead of Wednesday’s announcement. “The chairman will be unmoved by their protestations, not least because their fears that QE would spark rampant inflation have been so wide of the mark,” he wrote, referring to the Fed’s quantitative easing.

In the absence of major business, the committee has turned its attention to fine-tuning its current efforts. It is considering changes to improve the clarity of its public communications and in the details of its plan to unwind its huge investment portfolio. More details about those discussions are likely to emerge in three weeks, when the Fed publishes an account of its meetings Tuesday and Wednesday.

Article source: http://www.nytimes.com/2013/03/21/business/economy/fed-maintains-rates-and-strategy.html?partner=rss&emc=rss

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DealBook: Europe’s Banks to Repay $183 Billion in Loans Early

January 26, 2013 by Leave a Comment

Mario Draghi, the president of the European Central Bank, at the World Economic Forum in the Swiss resort of Davos on Friday.Pascal Lauener/ReutersMario Draghi, the president of the European Central Bank, at the World Economic Forum in the Swiss resort of Davos on Friday.

5:21 p.m. | Updated

DAVOS, Switzerland — The European Central Bank said on Friday that more banks than expected planned to pay back some low-interest three-year loans early, signaling that at least some banks are now healthier and able to raise money on their own.

The central bank said 278 banks would pay back 137 billion euros ($183 billion) out of a total of 489 billion euros ($652 billion) they borrowed a year ago. Banks borrowed 530 billion euros ($707 billion) more in a second installment last February, bringing the total to more than 1 trillion euros ($1.33 trillion).

Banks could borrow the money at the central bank’s benchmark interest rate, now at 0.75 percent. But some may have felt that there was a stigma attached. Even though the central bank does not disclose borrowers, banks may have been concerned about appearing weak in its eyes. In addition, banks needed to post bonds or other assets as collateral, and some may now prefer to deploy the assets elsewhere.

World Economic Forum in Davos
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The cheap loans provided a life raft for the region’s banking sector, which ran into difficulty in the Continent’s debt crisis. During the period of uncertainty, financial institutions refused to lend to one another. Many feared the banks, particularly in Southern Europe, would not be able to repay the short-term loans.

But Europe’s largest financial institutions just sat on the cash instead of pumping the money into local economies and providing funds to other banks. Instead, banks returned the money to the European Central Bank for safekeeping, even though it did not pay interest on the deposits. As politicians, business leaders and the general public fretted about the fate of the euro zone last year, European banks continued to break records for deposits at the central bank, with firms handing over more than $1 trillion at certain points in 2012.

And even as credit conditions started to improve late last year, many banks refused to open their coffers to new lending. European banks said they had imposed tougher lending conditions on companies and consumers during the third quarter of 2012, the latest figures available from the central bank, adding that demand for loans was expected to fall even further during the last three months of the year.

At an appearance at the World Economic Forum here, Mario Draghi, the president of the central bank, said that its measures last year had prevented a banking crisis. And he also praised government leaders for steps they took to strengthen the currency union, for example agreeing to put the central bank in charge of supervising banks — a change that will be phased in over the next year.

But he also expressed concern that calm on financial markets had not yet led to economic growth and better lives for European citizens.

“To say the least, the jury is still out,” Mr. Draghi said. “We haven’t seen an equal momentum on the real side of the economy. That’s where we have to do some more.”

The euro zone economy has stabilized at a very low level, he said, and should begin to recover in the second half of 2013.

Looking ahead, Mr. Draghi described 2013 as a year when the central bank and governments would begin carrying out decisions they made last year.

The central bank will begin assuming authority over banks, he said, and governments will carry out changes intended to improve their ability to respond to crises and police one another’s spending. As principal supervisor, the central bank is expected to be more willing than national regulators to force sick banks to confront their problems.

Mr. Draghi defended the central bank’s position that euro zone governments must continue to work to get spending under control. Austerity — a word Mr. Draghi said he did not like — has been a de facto condition for measures the central bank has taken to contain the crisis and give governments space for economic reforms.

“Fiscal consolidation is unavoidable,” Mr. Draghi said during onstage questioning by John Lipsky, a former first deputy managing director of the International Monetary Fund. “There can’t be any sustainable growth, any sustainable equity achieved through an endless creation of debt.”

But Mr. Draghi conceded that budget-cutting could push countries into recession, and he said governments should cut spending on operations rather than curtailing outlays for infrastructure projects like bridges and roads.

Asked by Mr. Lipsky whether the central bank would follow the Federal Reserve in setting benchmarks for unemployment that would prompt the central bank to lower rates or take other action, Mr. Draghi said no.

In what could signal a subtle shift in the central bank’s thinking, Mr. Draghi suggested that the bank could pursue economic growth as part of its prime mandate to defend price stability.

“We have given plenty of evidence we can do so within the existing framework,” he said.

Jack Ewing reported from Davos, Switzerland, and Mark Scott from London.

Article source: http://dealbook.nytimes.com/2013/01/25/despite-calm-draghi-raises-economic-concerns/?partner=rss&emc=rss

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DealBook: Geithner Faces Senate on Rate-Rigging Scandal

July 26, 2012 by Leave a Comment

Senator Richard Shelby, right, Republican of Alabama, attacked Timothy F. Geithner on Thursday over the rate-rigging scandal.Alex Wong/Getty ImagesSenator Richard Shelby, right, Republican of Alabama, attacked Timothy F. Geithner on Thursday over the rate-rigging scandal.

Congress intensified its focus on the interest-rate rigging scandal on Thursday, as Timothy F. Geithner, the Treasury secretary, vowed that authorities would forcefully pursue criminal investigations into some of the world’s biggest banks.

In testimony before a Senate panel, the second Congressional hearing this week to focus on Mr. Geithner, he promoted the government’s efforts to punish banks that tried to manipulate a benchmark interest rate during the financial crisis. He also deflected questions about his response to the wrongdoing, which occurred in 2008 when he ran the Federal Reserve Bank of New York, which focused on reforming the rate-setting process rather than halting the illegal actions.

Authorities around the world are investigating whether more than a dozen big banks manipulated the London interbank offered rate, or Libor, a measure of how much banks charge to lend to one another. The benchmark rate underpins trillions of dollars in mortgages and other loans.

“We cannot lose sight of the fact that the Libor issue, at its core, is about fraud,” Senator Tim Johnson, Democrat of South Dakota and chairman of the Senate Banking Committee, said at the hearing on Thursday. “I want you to commit to me and the American people that the administration will make sure that those involved in Libor fraud will be held accountable and prosecuted.”

“Absolutely,” Mr. Geithner replied. “I’m very confident that the Department of Justice and the relevant enforcement agencies will meet that objective.”

Libor Explained

Last month, Barclays settled accusations that it undermined Libor to aid profits and deflect concerns about its health, the first action to come from the multiyear investigation. The British bank agreed to pay $450 million to authorities.

Republicans, however, took aim at Mr. Geithner for his somewhat passive approach to the Barclays fraud.
In April 2008, the New York Fed learned that Barclays had been artificially depressing its rates. “We know that we’re not posting, um, an honest” rate, a Barclays employee told a New York Fed official. At the time, Mr. Geithner ran the regional Fed bank.

But when Mr. Geithner discussed Libor with other American regulators in May 2008, he did not disclose the specific wrongdoing at Barclays. He also stopped short of referring the matter to the Justice Department.

“He, too, may have tempered his response,” said Senator Richard C. Shelby of Alabama, the ranking Republican on the committee. The statement echoed Republican criticism at a House Financial Services Committee hearing on Wednesday, where Mr. Geithner faced an even sharper attack.

At both hearings, Mr. Geithner pushed back on the critique, citing his May 2008 conversations with other regulators. He also noted the New York Fed pressed for an overhaul of the rate-setting process. In a June 2008 e-mail to the Bank of England, the country’s central bank, Mr. Geithner recommended that British officials “eliminate incentive to misreport” Libor.

“I believe that we did the necessary and appropriate thing,’ he said on Thursday.

Democrats also came to his defense.

“There are some who seek to put the entire blame on the cops,” Mr. Johnson said. “But it would be a mistake to shift the focus away from the continued effort to hold the companies and individuals who committed fraud accountable.”

Mark Warner, Democrat of Virginia, cheered Mr. Geithner for being “the only guy who actually sounded the alarm.”

For his part, Mr. Geithner acknowledged that Libor was the most recent scandal in a string of Wall Street blowups. The problems, he said, have delivered an enduring black eye to the financial industry.

“We’ve seen a devastating loss of trust in the integrity of the financial system.”

This post has been revised to reflect the following correction:

Correction: July 26, 2012

An earlier version of this post misspelled the name of the senator from Alabama who serves as the ranking Republican on the Senate Banking Committee. It is Richard C. Shelby, not Selby.

Article source: http://dealbook.nytimes.com/2012/07/26/geithner-faces-senate-on-rate-rigging-scandal/?partner=rss&emc=rss

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DealBook: Facing House, Geithner Is Grilled on Rate-Rigging

July 25, 2012 by Leave a Comment

Timothy F. Geithner, the Treasury secretary, answering questions from lawmakers on Wednesday.Brendan Smialowski/Agence France-Presse — Getty ImagesTimothy F. Geithner, the Treasury secretary, answered questions from lawmakers on Wednesday.

Timothy F. Geithner was grilled on Wednesday about the growing interest rate rigging scandal, as lawmakers questioned why he failed to thwart the illegal activity during the financial crisis.

As head of the Federal Reserve Bank of New York in 2008, Mr. Geithner learned that big banks were trying to manipulate a benchmark interest rate. Rather than curbing the bad behavior at specific firms, Mr. Geithner pushed broad reforms to the rate, known as the London interbank offered rate, or Libor.

“It appears you treated it as a curiosity, or something akin to jaywalking, as opposed to highway robbery,” Jeb Hensarling, Republican of Texas, said at a House hearing on Wednesday.

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Even as Republicans slammed Mr. Geithner on Wednesday, many Democrats came to his defense. Mr. Geithner, now the Treasury secretary, challenged the Republican critique as well. In testimony before the House Financial Services Committee, Mr. Geithner said he was “very concerned” that the rate-setting process lacked integrity and he promptly notified other regulators about his worries.

Last month, Barclays struck a $450 million settlement with American and British authorities over accusations that it undermined Libor. The case against the British bank was the first action to stem from a global investigation into more than 10 other banks.

Libor Explained

“We took the initiative to bring those concerns to the broader regulatory community,” Mr. Geithner said, referring to the Commodity Futures Trading Commission and Securities and Exchange Commission. “I believe we did the necessary and appropriate thing very early in the process,” he said.

But Mr. Geithner on Wednesday also acknowledged that he did not alert federal prosecutors to the wrongdoing.

The revelation prompted lawmakers to question whether his response was sufficient, given the scope of wrongdoing and the importance of Libor to the broader financial system. Libor, a measure of how much banks charge to lend to one another, is a benchmark for trillions of dollars in mortgages and other loans.

In April 2008, the New York Fed learned from Barclays that it was artificially depressing its Libor reports to deflect concerns about its health. “We know that we’re not posting um, an honest” rate, a Barclays employee told a New York Fed official in April 2008.

Mr. Geithner said he was not aware at the time of “that specific conversation.”

But that same day, New York Fed officials wrote in a weekly internal memo that the problem was widespread. “Our contacts at Libor contributing banks have indicated a tendency to underreport actual borrowing costs,” New York Fed officials wrote, “to limit the potential for speculation about the institutions’ liquidity problems.” At the time, high borrowing costs were a sign of poor health.

Even after discovering that banks were manipulating Libor, the New York Fed pursued a somewhat passive approach.

When Mr. Geithner briefed other American regulators on Libor in May 2008, he did not disclose the specific wrongdoing at Barclays. Republicans pressed him on Wednesday to explain why he didn’t notify the Justice Department about the illegal behavior.

He explained that the Justice Department did not belong to the working group of regulators that were focused on Libor.

Mr. Geithner, who outlined the state of Wall Street regulation on Wednesday, heralded his past efforts to reform Libor. He noted that the New York Fed repeatedly pushed a British trade group that oversees Libor to overhaul the rate-setting process.

In a June 2008 e-mail to the Bank of England, the country’s central bank, Mr. Geithner recommended that British officials “strengthen governance and establish a credible reporting procedure” and “eliminate incentive to misreport” Libor.

The New York Fed then advocated fixes more forcefully than its British counterparts, records show. The trade group later adopted only some of Mr. Geithner’s recommendations.

“We gave them very specific detailed changes,” Mr. Geithner said, adding that “if more of those would have been adopted sooner, you would have limited the risk.”

But Representative Randy Neugebauer, Republican of Texas, questioned why the New York Fed focused on policy solutions rather than the bright-line legal violations.

“If they were having structural problems, then I think your e-mail was appropriate,” said Mr. Neugebauer, who is leading a Congressional investigation into how the New York Fed handled the Libor scandal. “But what was being disclosed here was fraud.”

Ultimately, Mr. Geithner said, responsibility rests with the British regulators. “We felt, and I still believe this, it was really going to be on them to fix this. This is a rate set in London.”

Democrats echoed his argument. “I for one am not part of the ‘blame America first’ crowd,” said Representative Brad Sherman, Democrat of California.

In deferring to overseas authorities, Mr. Geithner drew further ire from Republicans. “It wasn’t just a British problem,” Mr. Neugebauer said, noting that the rate affects the cost of borrowing around the world.

Despite the scrutiny, Mr. Geithner escaped relatively unscathed. While Republicans rebuked his approach to the Libor problems, few new revelations emerged from the more than two-hour hearing. And the pressure eased at times when Democratic lawmakers praised Mr. Geithner for championing reforms to Libor.

“There’s been an effort to blame you for all of this,” said Barney Frank, the ranking Democrat on the committee. But “you reported this” to other regulators.

Mr. Frank, a Massachusetts Democrat, cast the blame not on regulators but the banks that ran afoul of the law. The banks, he said, “grievously misbehaved.”

Article source: http://dealbook.nytimes.com/2012/07/25/facing-congress-geithner-grilled-on-rate-rigging/?partner=rss&emc=rss

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Demand for E.C.B. Loans Surpasses Expectations

December 21, 2011 by Leave a Comment

European stocks and the euro gained, while bond yields fell for euro-zone governments like Spain and Italy that had been under pressure of late.

In its role as lender of last resort to banks, the E.C.B. allocated 489.2 billion euros, or $644 billion, to 523 institutions. That was well above the roughly €300 billion expected by analysts polled by Reuters and Bloomberg News.

It was the first time that the E.C.B. has extended such loans for maturities of longer than about a year. Banks will pay the benchmark interest rate, currently 1 percent.

The E.C.B., as part of its effort to prevent a credit crunch, also broadened the collateral it will accept in return for loans. The central bank is even accepting outstanding loans as security, a measure designed to help smaller community banks that may lack conventional forms of collateral like bonds.

Mario Draghi, the E.C.B. president, said earlier this week that helping the smaller banks was crucial because they provide most of the credit to small businesses.

The three-year loans are also designed to compensate for a dearth of longer-term market funding, at a time when banks are facing the need to roll over an extraordinarily high amount of their own debt. Banks in the euro zone must raise more than 200 billion euros in the first three months of 2012, according to data compiled by Dealogic and cited by the E.C.B.

Banks often borrow money for relatively short periods and loan it for longer periods, profiting from the difference in short-term and long-term interest rates. But this so-called maturity transformation means that banks must continually roll over their debts. An otherwise healthy bank can fail if it is not able to raise fresh cash.

The cheap loans issued by the E.C.B. may also indirectly help governments like Spain and Italy that have faced higher borrowing costs. Spain paid sharply lower interest on debt it auctioned on Tuesday, as banks appeared to use cheap E.C.B. money to buy the bonds, profiting from the difference in interest rates.

The E.C.B. stepped up its lending to banks after the collapse of Lehman Brothers in 2008, allowing them to borrow as much as they want at the benchmark interest rate. But until Wednesday the E.C.B. had not offered loans for more than about a year.

Mr. Draghi has been reluctant to step up E.C.B. intervention in sovereign debt markets, saying the bank is forbidden by treaty from financing governments. But he acknowledged Monday that banks may be using money borrowed from the E.C.B. to buy government bonds, which would be a form of indirect financing.

The E.C.B. cannot tell banks how to use the money, he told the European Parliament on Monday. “We don’t know how many government bonds they are going to buy,” Mr. Draghi said.

The sovereign debt crisis has raised doubts about the creditworthiness of euro area banks and constrained interbank lending, which is crucial to functioning of the financial system.

“People don’t trust each other and if they don’t trust each other they don’t lend to each other,” Mr. Draghi said.

Article source: http://www.nytimes.com/2011/12/22/business/global/demand-for-ecb-loans-surpasses-expectations.html?partner=rss&emc=rss

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Markets Edge Lower Ahead of European Summit

December 8, 2011 by Leave a Comment

Stocks edged lower Thursday as officials gathered in Brussels for negotiations on resolving the euro crisis and after the European Central Bank cut its main interest rate target.

In morning trading on Wall Street, the Dow Jones industrial average fell 0.5 percent after a 0.4 percent rise on Wednesday. The Standard Poor’s 500-stock index slipped 0.7 percent, and the Nasdaq composite index was down 0.5 percent. European stocks were down about 1 percent.

Earlier Thursday, the European Central Bank cut its benchmark interest rate for the second month in a row and radically expanded the emergency funding it provides to cash-starved banks.

But Mario Draghi, president of the central bank, indicated in a news conference that he was cautious about future bond purchases, and yields on Italian and Spanish bonds rose after his remarks. The yield on 10-year Italian bonds climbed 28 basis points to 6.28 percent, and Spanish yields advanced 23 basis points to 5.66 percent.

Standard Poor’s said late Wednesday that it was putting the credit ratings of the entire 27-nation European Union on watch for a possible cut from its top AAA rating, citing “concerns about the potential impact on these member states of what we view as deepening political, financial, and monetary problems within the euro zone.”

The action, of mainly technical interest since the bloc itself does not issue debt on a large scale, came after the agency on Monday put 15 of the 17 euro member nations on watch for downgrade, meaning all of the euro zone countries face ratings cuts — and potentially higher borrowing costs — if the crisis meetings fail.

“A bit of pressure is not unwelcome,” Jean-Claude Juncker, the Luxembourg prime minister who acts as head of the Eurogroup, said on French radio regarding the S.P. action, according to Reuters. Still, he said, “the pressure would have existed even if there hadn’t been these warnings from the agencies.”

At their two-day summit meeting, European leaders are expected to consider proposals for tougher fiscal rules from the German chancellor, Angela Merkel, and President Nicolas Sarkozy of France.

José Manuel Barroso, the president of the European Commission, sought to instill confidence that a solution would be found, saying: “I believe this is possible,” according to The Associated Press.

“My appeal — my strong appeal — to all the heads of state and government is to show this commitment to our common currency,” Mr. Barroso said. “I think this is indispensable, and leadership is about making possible what is indispensable.”

Mr. Barroso was in Marseille along with Mr. Sarkozy and Mrs. Merkel for a meeting of the European People’s Party, the conservative bloc in the European Parliament. They were all to leave later for Brussels for the start of the summit meeting.

The monetary authorities are equally in the spotlight. The Federal Reserve joined with major central banks last week to increase dollar liquidity in global markets, and the European Central Bank has comes under increasing pressure to act.

“Tougher rules that will be policed better than before can indeed prevent future fires,” Holger Schmieding, chief economist at Berenberg Bank in London, wrote in a note. “But they cannot douse the flames that are consuming the European house at the moment. For that, the fire brigade, the E.C.B., would finally have to stop lecturing the world about how to prevent future fires and get out to actually extinguish the current one.”

In its second monetary easing in just five weeks, the E.C.B. cut its main overnight rate by a quarter of a percentage point, to 1 percent. The Bank of England’s Monetary Policy Committee, which also met Thursday, left the main British overnight rate unchanged at 0.5 percent.

Mr. Schmieding said central bank actions would come to naught without credible action on the political front.

“Unless the euro zone can convince global investors that Italian and Spanish bonds are not toxic (and that Austrian, French and German bonds are not at risk of turning toxic), no amount of E.C.B. liquidity support for banks can stop the vicious circle into which the euro zone has pushed itself,” he wrote.

In afternoon trading, the Euro Stoxx 50 index, a barometer of euro zone blue chips, fell 1.8 percent, while the FTSE 100 index in London lost 0.3 percent.

The euro rose after the central bank lowered its interest rate, but then slumped. It was trading at $1.3305 from $1.3412 late Wednesday in New York, and the British pound fell to $1.5627 from $1.5710. The dollar fell to 77.50 yen from 77.68 yen, but rose to 0.9222 Swiss franc from 0.9236 franc.

German 10-year bonds were trading to yield 2.14 percent, up 4 basis points, while equivalent United States Treasury securities were at 2.09 percent, up 6 basis point. A basis point is one-hundredth of a percent.

Asian shares declined. The Tokyo benchmark Nikkei 225 stock average fell 0.7 percent. The Sydney market index S.P./ASX 200 fell 0.3 percent. InHong Kong, the Hang Seng index fell 0.7 percent and inShanghai the composite index fell 0.1 percent.

United States crude oil futures fell 1.6 percent to $98.88 a barrel. Comex gold futures fell 1.3 percent to $1,717.90 an ounce.

 

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More Stimulus Expected From E.C.B., but Will It Be Enough?

December 6, 2011 by Leave a Comment

FRANKFURT — For someone with a reputation for caution, Mario Draghi is off to an audacious start as president of the European Central Bank. Since taking office little more than a month ago, he has presided over an interest rate cut, signaled a greater willingness to deploy E.C.B. resources to fight the European debt crisis, and turned up the pressure on governments to remake the euro zone.

More action is likely Thursday when the bank’s policy council meets. Analysts expect another cut, perhaps a big one, in the bank’s benchmark interest rate, currently at 1.25 percent.

The E.C.B. is also expected to start offering longer-term loans to banks to compensate for a flight from European financial institutions by private lenders. And Mr. Draghi is likely to re-emphasize the tacit bargain he offered political leaders last week: The central bank would temporarily stabilize financial markets if the politicians make concrete progress on fixing the structural flaws in the euro zone.

Mr. Draghi, businesslike and direct in his public statements so far, seems unencumbered by past policy moves and determined to take the initiative before the strains of the crisis exhaust him, as they sometimes seemed to have worn on his predecessor, Jean-Claude Trichet.

While Mr. Trichet remains an esteemed figure in Europe, with a legendary stamina, three years of nearly nonstop crisis management took their toll in his final months in office. For now, at least, Mr. Draghi appears fresh and unafraid of putting his own stamp on policy.

“Draghi can say different things,” said Marie Diron, an economist in London who advises the consulting firm Ernst Young. “People won’t say, This is not what you were saying a few months ago. It makes a change of policy, a bit of U-turn, easier.”

But will it be enough to satisfy the large body of economists and political leaders who contend that the crisis endgame will have to include much more aggressive and controversial action by the E.C.B.?

Guntram B. Wolff, deputy director of Bruegel, a research organization in Brussels, argues that the E.C.B. may have no choice but to become lender of last resort to governments and not just banks, as the only way to prevent market panics that drive up borrowing costs for countries like Italy.

“A lender of last resort needs to be created in order to stop self-fulfilling sovereign crises,” Mr. Wolff wrote Monday. “Interest rates paid on sovereign bonds in a number of countries are clearly the result of self-fulfilling crisis, which will ultimately force default even on a country like Italy, with devastating consequences for the euro area as a whole.”

For all his differences in tone, Mr. Draghi also inherits the tensions that made Mr. Trichet’s tenure so difficult, including a mandate that did not anticipate the kind of crisis now threatening the European and global economies. And he faces, as Mr. Trichet did, determined opposition from Germany to any expansion of the E.C.B.’s writ beyond a single-minded focus on price stability.

Mr. Draghi last week tacitly offered to intervene more aggressively in bond markets to keep interest rates under control in countries like Italy and Spain, if euro zone governments did more to discipline their members. But it is not yet clear what he meant by that.

Would the E.C.B. simply expand its existing bond buying in a modest way? Or would it cross the Rubicon and buy securities on a scale that would amount to significantly enlarging the money supply? He did not say.

In any case, the reaction in Germany to Mr. Draghi’s remarks was swift. Jens Weidmann, the president of the German central bank, said he remained stalwartly opposed to more bond market intervention, which he regards as an illegal transfer of debts from one country to another. Mr. Draghi risks straining the unity of the euro zone if he radically steps up E.C.B. purchases of government bonds over the objections of Germany, the European Union’s largest member.

Jörg Krämer, chief economist at Commerzbank in Frankfurt, expressed a sentiment widely shared in Germany. “Huge purchases of government bonds in the euro zone threaten to shatter the monetary system,” he wrote Monday in a note to clients.

Opponents of E.C.B. bond buying argue that it is actually far riskier than securities purchases made by the U.S. Federal Reserve. The Fed has bought far more paper: $2 trillion versus €207 billion, or about $277 billion, by the E.C.B. But while the Fed’s purchases have included large amounts of U.S. Treasury securities, which remain an international haven, the E.C.B. has bought mostly bonds from troubled countries like Greece and Portugal, becoming what critics say is a storehouse for distressed government debt.

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Bank of England Holds Benchmark Rate Steady

November 10, 2011 by Leave a Comment

LONDON — The Bank of England agreed Thursday to keep its key interest rate unchanged on Thursday because of growing concerns that the debt crisis in Europe could push Britain’s economy back into recession.

The central bank left its benchmark interest rate at a record low of 0.5 percent. It also kept its bond purchasing program at £275 billion, or $441 billion, after increasing it by £75 billion last month in an attempt to help a weakening economy.

“The economic outlook has deteriorated over the last month,” Philip Shaw, an economist at Investec Securities in London, said. “The economic data suggested the U.K. could come close to a recession.”

Britain’s economic recovery is tightly linked to developments on the European Continent, where problems in Greece spread to Italy, which is struggling to calm investors and keep borrowing costs down.

The group of nations that share the euro as a common currency is Britain’s biggest export market, and Prime Minister David Cameron has repeatedly said that it was in Britain’s interest to find a solution for Greece’s debt problems and stabilize the euro.

Britain is a member of the European Union but not part of the euro zone.

Some economists said the Bank of England could decide to increase its bond-purchasing program further in the first quarter of next year if the economic outlook deteriorates. In an attempt to help economic growth in Europe, the new president of the European Central Bank, Mario Draghi, last week cut the benchmark rate to 1.25 percent to 1.5 percent.

There was a 50 percent chance that Britain’s economy could slip back into recession, the National Institute for Economic and Social Research said this month. British households are being squeezed as the government and many companies froze pay while costs for food and other items rose. Inflation is currently at 5.2 percent, more than double the central bank’s 2 percent target.

“The biggest threat to the British economy right now is uncertainty itself,” George Osborne, the Chancellor of the Exchequer, said in a speech to British entrepreneurs on Tuesday. The concerns are “rising energy prices, euro zone debt markets in turmoil, an international crisis of confidence,” he said.

In a sign that concerns about rising living costs and unemployment among some consumers translated into lower spending, retail sales fell 0.6 percent in October from a year earlier, according to the British Retail Consortium released Tuesday. An index of manufacturing also declined last month.

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