November 18, 2017

German Court to Weigh Bond Buying by E.C.B.

On one side is Jens Weidmann, the president of the Bundesbank, the German central bank. He plans to argue that the European Central Bank acted illegally when it promised last year to buy unlimited amounts of government bonds if needed to help prevent Italy and Spain from having to leave the euro.

The other, Jörg Asmussen, a member of the executive board of the European Central Bank, will defend the central bank’s actions, which have significantly eased fears that the euro zone will disintegrate.

The two men — who studied under the same economics professor at the University of Bonn, Manfred J. M. Neumann — are among the most prominent expert witnesses scheduled to appear before the Federal Constitutional Court in Karlsruhe on Tuesday and Wednesday. Their testimony is already being portrayed as a duel between those who contend that Europe’s central bank has a duty to do whatever is necessary to save the currency union, and those who argue that the central bank has merely rewarded the feckless behavior of countries like Italy and Greece.

The court is considering lawsuits brought by German citizens in response to central bank actions to contain the euro zone crisis. While no national court in Europe has the power to tell the central bank what to do, the German Constitutional Court could place limits on the country’s participation in anticrisis measures. One former high court justice, Udo Di Fabio, even argued in a recent paper that Germany would have to withdraw from the currency union if central bank actions violated national laws — a move that, if it reached that point, would probably destroy the euro.

Most analysts do not expect such a drastic result when the Constitutional Court issues a ruling this year. But the legal challenges, and the media attention they have received, may already be restraining central bank action.

The bank “pays a lot of attention not only to the court but also to public opinion,” said Thomas Harjes, an economist at Barclays in Frankfurt. “If they feel they are losing support in Germany, their credibility would be damaged.”

Much of the intellectual foundation for the legal challenges comes from the academic work of people like Mr. Neumann, the University of Bonn professor. His views, including a fixation on inflation and an almost moralistic belief that countries must live with the consequences of their past mistakes, have had an obvious influence on Mr. Weidmann, the Bundesbank president. Mr. Weidmann worked as a research assistant to Mr. Neumann while earning his doctorate in the 1990s.

“The position that he represents is also the position that I would take,” Mr. Neumann said of his protégé on Monday.

As for Mr. Asmussen, his other former pupil, Mr. Neumann was more restrained in his praise: “He has to formulate the majority opinion of the E.C.B. That is different from the German position.”

Mr. Weidmann has made no secret of his opposition to bond buying, even in theory. “Such burden-sharing measures should lie only with elected parliaments, not independent central banks,” he told an audience in Paris last month.

To his critics, Mr. Weidmann is seen as someone who insists on a narrow interpretation of European Union treaties written decades ago, when no one could imagine such a persistent crisis. While the threat of a euro breakup has receded, the Continent has been stuck in recession for a year and a half. But Mr. Weidmann also speaks for millions of Germans who are suspicious of European institutions and fearful that the country’s taxpayers will ultimately pay the bill.

So far the debate is largely theoretical. The European Central Bank has not bought any government bonds since it announced a willingness to do so last autumn. The mere threat of action was enough to calm bond markets and lower borrowing costs for Italy and Spain.

Article source: http://www.nytimes.com/2013/06/11/business/global/german-court-to-weigh-bond-buying-by-ecb.html?partner=rss&emc=rss

DealBook: At Davos, Financial Leaders Debate Reform and Monetary Policy

World Economic Forum in Davos
View all posts

DAVOS, Switzerland — Jamie Dimon, the chief executive of JPMorgan Chase, apologized again for the bank’s $6 billion trading loss, this time in front of an audience that included the elite of the financial world. But in character for the confident chief executive, it was a diet portion of humble pie.

“If you’re a shareholder of mine, I apologize,” Mr. Dimon said at the World Economic Forum annual meeting here. But he quickly added, “We did have record profits. Life goes on.”

During an often contentious panel discussion in Davos that included several other bank executives, Mr. Dimon clashed with a top official of the International Monetary Fund about whether the banking system was still too dangerous.

Zhu Min, deputy director of the I.M.F., said the financial industry was too large in proportion to the economy. More than four years after the financial crisis, Mr. Min noted that banks still operated on too much borrowed money and still traded in overly complicated derivatives that were impossible for outsiders to understand.

“The whole financial sector is too big,” Mr. Min said.

Mr. Dimon responded that JPMorgan was fulfilling its duty to lend to businesses and governments. He said JPMorgan and other banks no longer dealt with subprime mortgages and some of the other complex financial concoctions that led to the crisis. He also said JPMorgan had not abandoned Spain or Italy despite the risks in those highly indebted countries.

“Everyone I know is trying to do a good job for their clients,” Mr. Dimon said during a debate moderated by Maria Bartiromo of the cable channel CNBC on the opening day of the meeting.

During the same discussion, Axel Weber, the chairman of UBS and former president of the Bundesbank, harshly criticized the European Central Bank and other central banks for keeping interest rates at record lows.

Mr. Weber said it was wrong to combat a crisis caused by excessive borrowing by encouraging even more borrowing. Record low official interest rates and other extraordinary measures to pump cash into the economy would eventually backfire, he said.

“We are trying to solve the crisis with more leveraging,” he said. “We are having a better life at the expense of future generations.”

Mr. Weber was once the front-runner to become president of the European Central Bank. But he resigned as head of the German central bank in 2011 after clashing with other members of the E.C.B. governing council over its purchases of euro zone government bonds.

Mario Draghi, who became president of the European Central Bank instead, has since calmed financial markets with a promise to buy government bonds in whatever amounts needed to contain borrowing costs for countries like Spain.

“I haven’t changed my views too much” on bond purchases, said Mr. Weber, who did not mention Mr. Draghi by name.

Mr. Weber has since presided over attempts by UBS to deal with the aftermath of the financial crisis and wrongdoing by some bank employees. UBS, based in Zurich, agreed to pay a $1.5 billion fine as part of a settlement last month over the manipulation of crucial benchmarks used to set mortgage and other interest rates.

“There have been excesses,” Mr. Weber said on Wednesday. “We need to fix them and move forward.”

Participants in the panel agreed that new bank regulations had fallen far short of what was needed to prevent problems at individual lenders from causing wider economic and financial crises, though they disagreed on what could be done better.

“We just experienced the worst financial crisis since the 1930s,” Mr. Min of the I.M.F. said. “We’re not safer yet.”

Mr. Dimon said conditions for economic growth were good “if we do all the right things.”

“If not,” he added, “we could be experiencing crises for another 10 years.”

Article source: http://dealbook.nytimes.com/2013/01/23/at-davos-financial-leaders-debate-reform-and-monetary-policy/?partner=rss&emc=rss

German Bank Chief Sticks to Hard Line on Euro Support

FRANKFURT — The president of Germany’s powerful central bank reiterated his opposition to huge bond purchases Friday, potentially deflating hopes that the European Central Bank is preparing to intervene more forcefully in financial markets.

The comments by Jens Weidmann, president of the Bundesbank, muddied expectations that central bankers and government leaders were moving toward a broad agreement on how to finally tame the sovereign debt crisis, which threatens a global credit crunch.

“I don’t believe that the euro would be stabilized over the long term by ignoring constitutions and treaties,” Mr. Weidmann said during an interview. “The central bank is forbidden from redistributing debt obligations in massive amounts among the euro zone countries.”

Optimism about a solution to the debt crisis rose Thursday after Mario Draghi, the president of the E.C.B., made comments that were widely interpreted as opening the door to a European version of quantitative easing — huge purchases of government bonds to stimulate bank lending and growth. Signs of a grand bargain to save the euro, along with a drop in U.S. unemployment, helped push up major stock indexes in Asia, Europe and the United States on Friday.

A growing number of economists and policy makers argue that the crisis has become so large that only an overwhelming display of E.C.B. firepower will preserve the euro and avoid a global economic calamity. Even a relatively orderly breakup of the euro zone would be worse than the bankruptcy of Lehman Brothers in 2008, with European output plunging 12 percent over two years, according to a report this week by the Dutch bank ING.

Mr. Draghi had suggested Thursday that the E.C.B. would be willing to move more aggressively if European leaders took decisive steps to impose greater spending discipline on members and address the underlying structural flaws of the euro zone. Several key leaders have indicated they would be willing to deliver just such changes when they hold a summit meeting on Dec. 9.

Chancellor Angela Merkel of Germany, for example, called Friday for a “union of stability” able to enforce controls on individual European economies. “Where we today have agreements, we need in the future to have legally binding regulations,” she told the German parliament.

Mr. Weidmann has only one vote on the E.C.B.’s 23-member governing council, but it would be very difficult for Mr. Draghi to execute huge bond purchases — effectively printing money — without the support of Germany. Members of the E.C.B. governing council are extremely conscious of the need to maintain the consent and trust of euro-area citizens.

Mr. Weidmann’s views are widely shared in Germany and influential among political leaders, including Mrs. Merkel. Mr. Weidmann, 43, served as her economic adviser before becoming Bundesbank president in May.

“There is a clear message coming through that sets Germany against any form of debt monetization,” said Mark Cliffe, chief economist at ING Group in Amsterdam.

Mr. Weidmann declined Friday to comment directly on Mr. Draghi’s remarks a day earlier. But he said he did not believe his opinions were far apart from those of the E.C.B. president.

“Financing nations by printing money is absolutely incompatible with a monetary policy that guarantees price stability,” Mr. Weidmann said. By law, the European Central Bank is supposed to make price stability its top priority.

The E.C.B. did not respond to Mr. Weidmann’s comments. But Mr. Draghi made no effort Friday to correct or amend his remarks from Thursday, as he might be expected to if he thought he had been misunderstood.

In a speech to European Parliament members on Thursday, Mr. Draghi called for a “new fiscal compact” among euro nations, and suggested that if one materialized the E.C.B. might be willing to take additional steps.

The central bank has other tools at its disposal that would not meet opposition from the Bundesbank. For example, when the E.C.B. meets next Thursday, it is expected to broaden its support to euro-area banks by offering them unlimited, low-interest loans for as long as three years. So far the maximum lending period has been 13 months.

Longer loans would help banks that have had trouble raising funds on the open market by issuing their own bonds. That is a typical way that banks collect money to lend to customers, but bond issuance has plummeted because investors have become uneasy about the health of euro-area institutions. Two- or three-year E.C.B. loans would also help banks that have longer-term obligations that must be continually refinanced.

The E.C.B. demands collateral in return for the loans, but it accepts securities that have lost value on the open market, including bonds from Greece. Defenders of the bank argue that its liberal collateral policy amounts to a form of quantitative easing, because it allows institutions to convert devalued paper into cash that can be lent to customers.

In a sign of the squeeze facing banks, institutions borrowed €8.6 billion from the E.C.B.’s overnight lending facility Thursday, up from €4.6 billion on Wednesday. Banks must pay a punitive 2 percent interest rate to borrow E.C.B. funds overnight, and only do so when the need is urgent. The E.C.B. closely guards information about the identity of the banks.

The E.C.B. still has room to reduce interest rates as well. Many analysts expect the bank to cut the benchmark rate to 1 percent from 1.25 percent at its meeting on Thursday, and it could conceivably go lower in coming months. But Mr. Cliffe of ING said that it would be difficult to solve the debt crisis without huge bond purchases, in order to keep borrowing costs for Italy from becoming ruinous. “They need to do something to improve the liquidity of government bond markets and give Italy a chance to avoid insolvency,” he said.

As he has before, Mr. Weidmann said that the solution to the crisis lay with governments, who must win back the trust of bond investors by addressing the shortcomings in the design of the euro zone. Countries, he said, must be willing to cede some control over their spending policy by, for example, by agreeing to automatic tax increases if their budget deficits rise above limits agreed to by treaty.

If political leaders announce a credible plan this coming week, he said, “calm could quickly return to markets.”

Nicholas Kulish contributed reporting from Berlin

Article source: http://feeds.nytimes.com/click.phdo?i=73743a58732f36b9cc9feef22b7ab1d0

Citing Global Weakness, Central Banks Hold Interest Rates Steady

The E.C.B. joined the Bank of England and several Asian central banks in leaving benchmark interest rates unchanged Thursday, as they wait to see if the global economy deteriorates.

Nearly stagnant growth in the euro zone has raised questions whether the E.C.B. acted prematurely when it raised rates twice earlier this year, to 1.5 percent from 1 percent.

While warning that the euro zone economy was “subject to particularly high uncertainty and intensified downside risks,” Mr. Trichet defended the E.C.B.’s earlier policy moves as necessary to hold down prices.

“We think what we did was appropriate,” he said at a news conference, which also included a rare outburst against his critics. Asked about complaints about E.C.B. policy in the German Parliament, Mr. Trichet said, with obvious irritation, “We do our job, it’s not an easy job.”

Mr. Trichet normally suffers the financial press corps with remarkable equanimity. But, with less then two months to go before retirement, he seemed to vent frustration at the lack of appreciation the central bank has received during the sovereign debt crisis, when it has effectively held the euro zone together while political leaders appeared to dither.

“We have delivered price stability impeccably — impeccably!” he said loudly, reminding his German critics that inflation under the E.C.B. had been lower than when the Bundesbank, the German central bank, oversaw the Deutsche mark.

As Mr. Trichet nears the end of his term leading the E.C.B., the bank is on the front lines of the most acute crisis the euro has seen. Some European banks are struggling to borrow on the interbank market because of questions about their solvency; the E.C.B. is keeping them afloat by providing them with emergency low-cost loans. The E.C.B. is also buying Spanish and Italian bonds on the open market to stem pressure on their borrowing costs, which have threatened to reach ruinous levels.

Mr. Trichet gave no clear sign that the E.C.B. was poised to dial back rates soon, as some economists have urged. But he said the bank’s economists expected inflation to decline next year, suggesting there would be room to cut rates if growth deteriorated further.

The E.C.B. “has effectively left the door open to a change of stance should the situation demand it, but in our view this is far from imminent,” Janet Henry, an analyst at HSBC in London, wrote in an analysis. “It would take a significant recession” before the E.C.B. changes direction, she wrote.

Dirk Schumacher, an economist in Frankfurt for Goldman Sachs, wrote in a research note: “The E.C.B. is keeping its options open.”

The Bank of England decided to leave its benchmark interest rate unchanged at 0.5 percent to help the weakening British economy, amid concerns that Europe’s debt crisis might become more of a drag on growth.

The central banks of South Korea, Indonesia, the Philippines and Malaysia all kept rates unchanged at their policy meetings Thursday, as they waited to see how their economies would be affected by slower growth and debt concerns in Europe and the United States.

Mr. Trichet will cede the E.C.B. presidency to Mario Draghi, governor of the Bank of Italy, at the end of October. The news conference Thursday was Mr. Trichet’s last at E.C.B. headquarters in Frankfurt. Next month’s governing council meeting, Mr. Trichet’s last, will be in Berlin, where concern is growing that Greece will not be able to fulfill conditions for further aid, raising the possibility it will have to default on its debt and exit the euro. “Ladies and gentlemen, the situation is serious in Greece,” Wolfgang Schäuble, the German finance minister, told members of the Bundestag, or Parliament.

Asked about Greece, Mr. Trichet said only that he still assumed the country would fulfill conditions set by the International Monetary Fund and European Commission. He also sought to calm alarm about tensions in the interbank lending market, which have made it more difficult for some institutions to raise funds from their peers and made them reliant on emergency loans from the E.C.B. He acknowledged that interbank lending had tightened, but said banks were not borrowing nearly as much from the E.C.B. as they could.

“Liquidity is a false problem and I can prove it,” he said.

Article source: http://feeds.nytimes.com/click.phdo?i=e403f896d66c7d00c70974131edd0bed

Gaps Remain in Girding Europe’s Banks

FRANKFURT — It is probably too early to panic about the European banking system, as some traders seem to be doing. But that is no reason to rest easy.

European institutions are better armored for a crisis than they were in 2008, analysts say. But some still have doubts whether that armor is thick enough to withstand another big shock.

The question has arisen amid signs that banks have become nervous about each other’s creditworthiness, invoking memories of the mistrust that prevailed during the dark days of 2008.

Despite progress in rehabilitating the financial system since then, analysts say, some big gaps remain, among them the continued lack of any mechanism to deal with the failure of a large bank.

And while regulators have pushed banks to reduce risk, bolster their reserves and become less dependent on fickle short-term financing, the measures were designed to be phased in over the course of the decade. As a result, they still fall short of what some experts, particularly in the academic world, consider adequate.

“We should have solved these problems of the banking sector well before the last few months,” said Harald A. Benink, a professor of banking and finance at Tilburg University in the Netherlands.

Numerous anxiety indicators, like emergency borrowing from the European Central Bank and the interest rates on short-term lending, have pointed to tension in the interbank lending market. In particular, there have been signs that some European institutions have had to pay more to borrow dollars.

“Without a doubt unsecured U.S. dollar funding markets have tightened somewhat recently,” Andreas Dombret, a member of the executive board of the Bundesbank, Germany’s central bank, acknowledged Wednesday. Money market funds in the United States “have become more selective when providing funding to nondomestic banks,” Mr. Dombret said.

But, like others who argue that fears of another crisis are overblown, Mr. Dombret said that banks are much better off than they were three years ago.

German banks, he said, have increased the capital they hold in reserve by about three percentage points since 2008, to an average of 12.6 percent of assets. That means they are better able to absorb losses if there is a surge in bad loans or the value of their government bonds declines.

“We are very far away from the situation we witnessed in 2008,” Mr. Dombret said during an appearance at a Bundesbank office in New York, according to a text of his remarks. “European banks, in general, have considerably improved their capital base, making them less vulnerable to financial strains.”

But some critics say that level of capital is still inadequate if there is another major crisis, especially for very large or interconnected banks that would spread destruction throughout the system if they failed.

Central bankers and regulators have made assiduous efforts to make the system less vulnerable to problems at these banks, known in regulatory jargon as systemically important financial institutions, or SIFIs. For example, the too-big-to-fail banks will be required to hold more capital in reserve than other banks.

But in Europe few if any measures are in place.

“What we are doing is right, but it is taking too long,” said Renato Maino, a former executive in the risk management department of Italian bank Intesa Sanpaolo who is now a lecturer at the University of Torino. “We didn’t remove the main sources of our financial instability.”

Fear that another big bank failure was imminent may help explain why markets reacted so nervously when a single bank last week took advantage of a European Central Bank program designed to prevent institutions from running short of dollars, as many did during the 2008 crisis. The unidentified bank borrowed $500 million for one week, the first time a bank had tapped the E.C.B. credit line since February.

The sum was big enough to suggest the borrower was a large bank with a substantial U.S. business — a SIFI, in other words.

Article source: http://feeds.nytimes.com/click.phdo?i=8d5274cc2d544546a8aae1c53742d0a2