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Global Markets Jump on Europe’s Greek Debt Deal

October 27, 2011 by Leave a Comment

 While the deal helped to restore confidence to the financial markets, analysts noted that questions remained about how it would be implemented. They also worried that fully fixing the problems of excessive debt and weak growth could take years.

Still, after days of anticipation, the markets put whatever uncertainties remained behind them, at least for now. Financial stocks in particular were up more than 6 percent.

The Dow Jones industrial average soared 339.51 points to close up 2.86 percent at 12,208.55, while the broader Standard Poor’s 500 index was up even more, 3.43 percent, at 1,284.56 and the Nasdaq composite index rose 3.32 percent to 2,738.63.

 The S.P. moved into positive territory for the year on Thursday, up about 2.1  percent. The Dow was up more than 5 percent and the Nasdaq more than 3 percent for the year.

Stocks closed up as much as 6 percent in Europe, after a strong showing in Asia.

It was a marked turn-around from just a few weeks ago, when anxiety over the European debt crisis helped push Wall Street to the brink of a bear market. On Oct. 3, the S.P. 500 was down 19.4 percent from its high on April 29.

The latest news from Europe came early Thursday, when officials from the European Union and the International Monetary Fund reached a deal with bankers to write down the face value of their Greek debt by 50 percent, hoping to reduce the ratio of the country’s debt to gross domestic product to 120 percent by 2020. Economists believe that is essential if Greece is not to default on its loans.

Officials also agreed that European banks would need to raise more capital and said they would increase the euro zone bailout fund to $1.4 trillion, a move that they hope will provide the capacity necessary to keep Italy and Spain from following Greece’s painful path.

“The most important outcome is it seems to remove from the table fears of an imminent bank crisis,” said David Joy, chief market strategist for Ameriprise Financial. “What this does is it buys Europe time to do the hard work of initiating structural reforms.”

But like others, he injected a note of caution: “It addresses the symptoms, but not the disease. They need to follow through, there is no question.”

Economists noted that the deal Thursday was but the latest in a series of such agreements addressing the debt crisis, which are usually followed by gains, then losses in the financial markets.

After the last deal was struck in July, for example, stocks and bonds in Europe and the United States gave it a positive reception. But the sentiment soon turned and markets failed to sustain their gains. The S.P. in the United States fell below 1,300 after about a week. and eventually sank to its lowest level for the year.

“Overall, then, while the plans represent a step forward, we suspect that they will soon be viewed in the same way as every other policy response during this crisis — as too little, too late,” Jonathan Loynes, an economist with Capital Economics, wrote in a research note.

He said he still expected a “prolonged recession in the euro zone,” further market turbulence, and continued to have doubts about the future of the euro itself “in its current form.”

The Euro Stoxx 50 index, a barometer of euro zone blue chips, closed up 6.1 percent, while the FTSE 100 index in London gained 2.9 percent. In Paris, the main index was up 6.3 percent, while Frankfurt’s was 5.35 percent higher.

Financial shares led European indexes.

The United States 10-year Treasury bond yield rose to 2.37 percent, from 2.21 percent on Wednesday.

The dollar fell against most major currencies. The euro rose to $1.42 from $1.39 late Wednesday in New York, while the British pound rose to $1.61 from $1.5975. The dollar also fell to 75.8 yen from 76.17 yen, and to 0.86 Swiss franc from 0.88 franc.

Anthony Valeri, a fixed income investment strategist for LPL Financial, said that the European deal, to an extent, removed one of the lingering risks to the market and more specifically, to the banking system.

“But the devil is in the details,” he added. “There are some implementation risks going forward.”

He said there were questions about participation in increasing the bailout fund.

“We don’t know the participation from private investors or the emerging market countries, as the case may be,” he said.

Another negative was that banks must meet a new core capital ratio of 9 percent by the middle of 2012, he added. That could mean they could either raise capital or shed assets, which would be a negative for the market because of the pressure on prices.

In Asia, shares were stronger almost across the board. The Tokyo benchmark Nikkei 225 stock average rose 2 percent, the Sydney market index S.P./ASX 200 rose 2.5 percent, and Hong Kong’s Hang Seng index rose 3.3 percent.

“Bank recapitalization, haircuts and more firepower for the rescue funds are supposed to form a euro-style bazooka,” Carsten Brzeski, an economist with ING in Brussels, said in a research note. “Even if there are still loose ends and unsolved questions, yesterday’s summit was an important step in the right direction.”

Shortly after the deal was announced, United States crude oil futures for December delivery rose 2.8 percent to $92.71 a barrel. Comex gold futures slipped were mostly unchanged, at $1,723.40 an ounce.

Bond market movements showed investors moving out of the securities considered the most secure and into riskier assets.

The Federal Reserve on Thursday is starting a bond buy-back measure that will bump up prices on long-term notes, Mr. Valeri said.

Bond prices for embattled euro zone governments rose sharply, while the yields fell. The yield on Greek 10-year bonds was 22.16 percent, down 1.17 percentage points. Spanish and Italian bond yields also fell.

David Jolly reported from Paris.

Article source: http://feeds.nytimes.com/click.phdo?i=09c7dbb3afeec1789b72a157854fbade

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Bucks Blog: A Tough Year for Market Predictions

October 8, 2011 by Leave a Comment

Richard Madigan, chief investment officer for J. P. Morgan’s Global Access Portfolios, has been right about something he wishes he had gotten wrong: unemployment in the United States.J.P. MorganRichard Madigan, chief investment officer for J. P. Morgan’s Global Access Portfolios, has been right about something he wishes he had gotten wrong: unemployment in the United States.

Who could have predicted the turmoil in the financial markets this year caused by the earthquake in Japan, the revolutions in the Middle East, European debt problems and the downgrade of American debt by Standard Poor’s? Not even the best forecasters.

Paul Sullivan, in his Wealth Matters column this week, goes back to four market prognosticators he has talked to each quarter this year to see what assessments they’ve gotten right and what they’ve gotten wrong. And what he found was that the best calls were the most conservative — moving into dividend-paying stocks and stocks of companies that get a significant proportion of their income from outside the United States.

Not surprisingly, none of the four was willing to go far in predictions for the fourth quarter, other than to say that markets would continue to be volatile.

How about you? What are your predictions for the markets in the upcoming quarter? In a time of market volatility, your guess may be as good as an expert’s.

Article source: http://feeds.nytimes.com/click.phdo?i=752f59ae88c7769b4366956557a1b87b

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News Analysis: Europe Tries to Stave Off a Reckoning

October 6, 2011 by Leave a Comment

But these days the problem for Europe may be that it has not had — and may not have — its own Lehman Brothers, at least in the sense that Lehman shocked Americans to take divisive and expensive steps to repair the damage. Instead, it has seen a slow-motion leak of confidence and a steady drain on credibility that has extracted a large and growing toll on stock and bond prices and on the livelihoods of its citizens.

Nearly two years after the euro crisis began with concerns about the solvency of Greece, fears have spread to big banks and large countries like Spain and Italy and squashed the gradual recovery from the 2008 recession. But Europe still has not had the all-hands emergency response the Bush administration and the United States Federal Reserve were forced to undertake after the collapse of Lehman on Sept. 15, 2008, and it is unclear if even the intensified market turmoil now is enough to prompt one.

An uncontrolled Greek default or a run on a major European bank could still overturn expectations and compel France, Germany and the European Central Bank to act with much greater urgency. But for now, political and financial leaders are buying time, putting out fires one by one, like propping up Dexia Bank, and making vague promises, as European officials did Wednesday, about scheduling new meetings to discuss the recapitalization of European banks.

“Economists are trained to think about eventual outcomes and work backwards, and that’s the way financial markets function, too,” said Charles Wyplosz, an economist at the Graduate Institute in Geneva. “That’s 180 degrees from how politicians function. They ask themselves about tomorrow or next week or maybe the next election and solve problems as they come. So they’re always behind the markets.”

Despite the fact that economists and bank analysts now widely expect that Greece will have to default on its debt, no European leader will say so, at least for the record. Instead, the countries in the euro zone are continuing to act as if measures agreed to in July to shore up Greek finances, and that slow-moving European parliaments have yet to fully approve, are sufficient to contain the crisis. One sign that Europe is preparing to address the problem might be a sudden outbreak of candor about the real condition of Greece, or an acknowledgement that leading European banks that hold sovereign debt of Greece and other troubled countries in the region will need hundreds of billions in new capital to ensure their stability.

But European leaders, especially in France and Germany, whose own banks are exposed, are reluctant to broach the inevitable. Why? Because they do not yet have in place a big pool of funds to ensure that an orderly Greek default does not lead markets to assume that the much larger economies of Spain and Italy will soon follow it into insolvency. And partly because they do not have the political will to commit those funds.

Without a trillion-plus-dollar “bazooka” in place to shock and awe increasingly skeptical markets and recapitalize banks, Europeans see themselves as having no choice but to temporize, even if that pushes up the cost of an eventual Greek default. And it renders any bad news — even bad news that has been anticipated and published in advance, like Greece’s again missing its deficit reduction targets this week — enough to send markets into a fresh nose dive.

The incremental approach of European leaders has frustrated their counterparts in the Obama administration and the Federal Reserve, who have repeatedly urged them to commit to a much bolder rescue plan. It has also done little to calm investors, who have already priced in a Greek default and are looking hungrily at Italy. “The markets need clarity,” Mr. Wyplosz said. “They have no reason to believe there’s a floor on public debt, so they fret. Once they have a floor, they can calculate their losses. Markets accept losses and can deal with them, but need a backstop.”

Ultimately, only the European Central Bank can intervene with the firepower necessary to set a floor under the price of the region’s sovereign debt. But its departing chairman, Jean-Claude Trichet, has ruled out the idea of the bank’s acting as the lender of last resort, even if it only guarantees the bond purchases of another fund, the European Financial Stability Facility.

Germany, the Dutch and the Finns, too, are against allowing the bank to make unlimited bond purchases from sovereign states.

The reluctance blocks even obvious moves, like marking down the value of Greek debt to something approaching the market price, which is now only 40 percent of its face value.

Article source: http://www.nytimes.com/2011/10/06/world/europe/europe-tries-to-stave-off-a-reckoning.html?partner=rss&emc=rss

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Geithner Tells Europeans to Work Together on Debt Crisis

September 24, 2011 by Leave a Comment

The Continent’s financial woes grabbed the attention of the policy-setting committees of the 187-nation International Monetary Fund and the World Bank during the lending institutions’ annual meetings.

Treasury Secretary Timothy F. Geithner told the I.M.F. panel that the debt crisis posed the most serious threat to the global economy and that failure to take bold action raised the risk of domino-style defaults by heavily indebted European countries.

He said the European Central Bank should try to ensure that governments pursuing sound reforms could get loans at affordable rates and that European banks have access to the capital they need to operate. The European Central Bank is the central bank for the 17 nations that use the euro as a common currency.

Global financial markets plunged last week on fears of a possible default within weeks by Greece and on worries that a default would cause runs on major European banks with heavy exposure to Athens’s debt.

“The threat of cascading default, bank runs and catastrophic risk must be taken off the table. Otherwise, it will undermine all other efforts, both within Europe and globally,” Mr. Geithner said. “Decisions as to how to conclusively address the region’s problems cannot wait until the crisis gets even more severe.”

Mr. Geithner was one of a number of finance leaders demanding forceful action.

Mark Carney, head of Canada’s central bank, called for “overwhelming” the problem with a big increase in Europe’s rescue fund for indebted countries.

In an interview with CBC radio, Mr. Carney suggested that a European financial stability fund should be increased to 1 trillion euros from the current 440 billion euros. At current exchange rates, that would be the equivalent of expanding a $590 billion fund to $1.35 trillion. “You need a big pot of money,” he said.

For Christine Lagarde, the I.M.F. chief, the debt crisis was a tough first test. Ms. Lagarde has warned that without strong and collective action, the world’s major economies risk slipping back into recession.

To avoid that, officials of the Group of 20 pledged on Thursday to “take all necessary actions to preserve the stability of banking systems and financial markets.”

Article source: http://www.nytimes.com/2011/09/25/business/geithner-tells-europe-it-must-work-together-on-debt-crisis.html?partner=rss&emc=rss

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Europeans Struggle to Clear Hurdles to Latest Euro Rescue Plan

September 16, 2011 by Leave a Comment

They also found themselves at odds with the U.S. Treasury secretary, Timothy F. Geithner, who, after his highly unusual attendance at a meeting of top European officials, warned them that a lack of decisive action could leave “the fate of Europe” to outsiders.

The first of two days of talks in Poland left the European finance ministers no closer to overcoming crucial hurdles holding up their bailout plan for Greece. And it highlighted trans-Atlantic differences over the best ways to revive growth in developed economies and restore stability to the financial markets.

Mr. Geithner suggested increasing the firepower of the euro zone’s bailout fund to help protect banks potentially vulnerable to a default by Greece and other deeply indebted countries, but did not appear to convince European ministers. Conversely, Mr. Geithner opposed a European proposal for a financial transaction tax, the officials said.

Meanwhile Jean-Claude Juncker, president of the group of euro area finance ministers, ruled out any possibility that Europeans might change course and stimulate economic growth, citing this as a significant difference with the Obama administration.

The talks came at a time of continued anxiety in the financial markets, and before a deadline for Greece’s foreign creditors to decide whether to release the next installment of its original bailout.

If Greece does not get its next €8 billion, or $11 billion, in funds scheduled to be released in October, it could have to default on its debts, with potentially devastating consequences for Europe and the global economy.

The fact that Mr. Geithner made the trans-Atlantic journey — just one week after attending the meeting of finance ministers from the Group of 7 countries in Marseille — was seen as a signal of the seriousness with which the United States viewed the European situation.

Meeting in the morning with finance ministers representing the 17 nations in the euro zone, Mr. Geithner suggested that they give the euro zone’s planned €440 billion bailout fund added heft by allowing it to act more like a bank and borrow more freely on the financial markets.

A similar model was used by the United States after the collapse of Lehman Brothers at the height of the 2008 financial crisis. That program, known as TALF, began while Mr. Geithner was still president of the Federal Reserve Bank of New York. Under it, the U.S. Treasury made $20 billion available in seed money that the New York Fed expanded into $200 billion to help revive lending in the consumer and small-business markets by purchasing securities backed by auto loans, business loans and credit card receivables.

“He raised it among other issues but did not press it,” Mr. Juncker said, who added, pointedly, that the euro group was not discussing “an increase or expansion” of its bailout fund “with a nonmember of the euro area.”

The Irish finance minister, Michael Noonan, said Mr. Geithner had been “very succinct” in raising the question. “It’s something he suggested that should be examined by Europe,” he said.

Mr. Geithner spoke first with ministers from euro zone countries and then addressed those from all 27 nations of the European Union. Officials at the U.S. Treasury Department said they would not comment on the details of private discussions. But at a separate business conference in Wroclaw, Mr. Geithner appealed to Europeans to solve the crisis themselves.

“One of the starkest ways to emphasize the importance of Europe getting on top of this,” Mr. Geithner said, according to a transcript of his remarks, “is that you don’t want the fate of Europe to rest in the hands of those who provide financing” to the International Monetary Fund “or who provide financing outside of the I.M.F.”

Maria Fekter, the finance minister of Austria, criticized Mr. Geithner for calling on Europeans to spend more to resolve the crisis while rejecting the idea of a small financial transaction tax to raise revenue from traders in the stock market.

“He conveyed dramatically that we need to commit money to avoid bringing the system into difficulty,” Ms. Fekter said. But when European officials, including the German finance minister, Wolfgang Schäuble, countered by suggesting the United States join Europe in adopting a transaction tax as a way to also promote more market stability, Mr. Geithner “ruled that out,” she said.

There was also a clear gap over who is primarily to blame for the current economic troubles plaguing both the United States and Europe.

Article source: http://www.nytimes.com/2011/09/17/business/global/europeans-struggle-to-clear-hurdles-to-latest-euro-rescue-plan.html?partner=rss&emc=rss

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Retirement

September 16, 2011 by Leave a Comment


In Annuities, Better Rates Come With Complexity

By CONRAD DE AENLLE 3:31 PM ET

Variable annuities, whose returns are tied to gains in financial markets, can offer higher income but are often expensive and tricky to understand.

Article source: http://feeds.nytimes.com/click.phdo?i=b77c65063f84d882853246b0d4e37eb9

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News Analysis: Europe May Be Looking for a New ‘Mr. Euro’

September 14, 2011 by Leave a Comment

BRUSSELS — Is Europe about to get a new Mr. Euro?

More than 18 months after Europe’s monetary union first toppled into trouble, officials are debating whether more streamlined decision-making — and better presentation — could help their epic battle with the financial markets.

France and Germany agreed last month that the leaders of the 17 countries of the euro zone should meet as a group at least twice a year under the chairmanship of Herman Van Rompuy, the president of the European Council. He currently runs summit meetings of the full 27-member European Union.

That has prompted speculation that Mr. Van Rompuy might also lead the monthly meetings of the Eurogroup, made up of euro zone finance ministers, a job held since 2005 by Jean-Claude Juncker, the long-serving prime minister of Luxembourg.

In part, the debate, which may come to a head next month when E.U. leaders discuss proposals to strengthen the euro, reflects grumbling over the performance of Mr. Juncker, whose influence has waned as his relations with the two main power brokers, Berlin and Paris, have become more and more strained.

On top of some perceived public-relations blunders, he also did not help his position when he began advocating jointly issued euro bonds last year — knowing full well that Berlin was staunchly opposed.

“It was always clear that his ability to do the job would suffer substantially if and when lines of communication with Berlin and Paris broke down,” said Thomas Klau of the European Council of Foreign Relations and author of a book on the creation of the euro. “His advocacy of euro bonds damaged his relationship with Berlin and Paris and impaired his ability to function.”

In an e-mailed response, Mr. Juncker’s spokesman, Guy Schuller, said Mr. Juncker intended to complete his mandate, which ends next June.

“Not one single head of state or government or finance minister has ever publicly, or in the presence of Prime Minister Juncker, criticized his leadership of the Eurogroup,” he added.

To be sure, the crisis has strained all the euro zone’s ramshackle structures and drawn attention to the need for deeper economic integration, something well beyond the ability of any single person to resolve.

One of the veterans of the E.U. scene, the chain-smoking Mr. Juncker was once one of the most influential figures in the bloc. Though the country he has led since 1995 is tiny, Mr. Juncker, who speaks fluent French and German as well as English, specialized in playing the go-between and deal maker.

As head of the Eurogroup of finance ministers, Mr. Juncker vied with the president of the European Central Bank for the informal title of Mr. Euro.

But under his leadership, the Eurogroup has failed to emerge as a body able to broker big deals during the latest crisis, often having to refer difficult decisions to national leaders.

During one meeting this year, Mr. Juncker canceled the customary news conference afterward, only to give ad hoc interviews in different languages as he left the building. Officials of the International Monetary Fund, who attended the meeting, said privately that they were shocked by the chaotic presentation.

“He has contributed to the crisis,” said one European diplomat not authorized to speak publicly, “but I don’t think it’s correct to say that, were there a more disciplined Eurogroup chairman, the crisis would not have happened.”

According to another senior official, also speaking on condition of anonymity because of the sensitivity of the issue, Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France have pulled back from the idea of trying to oust Mr. Juncker before the end of his term. “They decided the downside of doing that exceeded the upside,” he said. “No one is going after Juncker.”

One complication is that, under a protocol to the E.U.’s governing treaty, the finance ministers themselves “shall elect” their own president, so imposing a candidate from outside would be difficult.

An emerging proposal, however, would make the Eurogroup chief accountable to Mr. Van Rompuy. Under this plan, the agenda of euro zone finance ministers would be discussed with Mr. Van Rompuy before meetings, as would any decision to call an emergency meeting of finance ministers.

That arms-length approach would probably suit Mr. Van Rompuy, whose position was instituted less than two years ago, since he is supposed to operate at the level of government leaders, not finance ministers.

Mr. Schuller said that Mr. Juncker favored the selection of “a full-time president for the Eurogroup” after his term expires, someone who would have that “as his or her only job.” Ideas being discussed include tapping “a former finance minister or even an outstanding expert,” he added.

Some within the European Commission are pressing for the economic and monetary affairs commissioner, Olli Rehn, to get the job, but that idea is likely to be resisted by Germany and France, who want to retain as much control as possible.

It would also blur the lines of the structure in which the European Commission is supposed to be policing the finance ministers, ensuring that countries meet their economic objectives.

All this means that the most likely solution is one that ties the head of the euro zone finance ministers group more clearly into a new line of command with Mr. Van Rompuy at the head.

While Mr. Klau said he believed that more streamlined structures made sense, he warned that they are only a small element of any long-term solution for the euro.

“Tinkering with the chairmanship is no alternative to devising a form of governance that operates on politically integrated or federal grounds,” he said.

Article source: http://www.nytimes.com/2011/09/15/business/global/europe-may-be-looking-for-a-new-mr-euro.html?partner=rss&emc=rss

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Stocks Give Up Early Gains

August 17, 2011 by Leave a Comment

The stock market rose in early trading on Wednesday as investors absorbed new data and corporate results, but gave up its gains by midday as the technology sector lagged.

While key sectors like energy and financial stocks recovered on Wednesday, after leading the overall market decline on Tuesday, technology shares were weighed down as Dell dropped more than 9 percent. The company said Tuesday that a weaker economy had lowered demand, flattening its sales in the quarter ended July 29, and it said it had pared low-margin sales. Its net income rose 63 percent in the quarter, but it lowered its revenue forecast for the rest of the year.

The declines in the equities market were slight — less than 1 percent in each of the three main indexes — but a reversal from the trend in early trading.

The market is recovering from a bout of volatility last week, and fell on Tuesday in the aftermath of a meeting between leaders of the euro zone’s two largest economies, France and Germany.

While many believe that the equities markets will remain unsteady for some time, bargain-hunters are benefitting from the recent lows.

“I think that the market is still reacting to a pretty oversold condition technically,” said Tom Samuels, managing partner for Palantir Capital Management, on Wednesday.

Mr. Samuels said that in the short term, meaning through Labor Day in early September, the market might continue to be “a little bullish,” but for now the respite was a time to reposition portfolios. Still, the balance was so tenuous that the financial markets were “one fundamental announcement” away, he added, from additional problems coming out of the euro zone or from economic statistics.

“There could be some more rough sailing ahead once we get out of August,” he said.

In early afternoon trading, the Standard Poor’s 500-stock index was down half a point. The Dow Jones industrial average was down 0.25 percent and the Nasdaq was slightly lower at 0.71 percent. The yield on the 10-year Treasury note was 2.17 percent, compared with 2.22 percent late Tuesday.

After the previous week’s extreme volatility and swings of hundreds of points, Wall Street tacked on gains over three consecutive trading days that had helped shares recover by Monday from losses in the wake of the Aug. 5 downgrade of America’s long-term credit rating. But then the markets declined on Tuesday after talks in Paris between Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France that analysts said fell short of easing concerns over how the euro zone’s finances would be handled.

On Wednesday, there appeared to be an early rally leading the riskier side of the market, and some strength in the commodity sector after a relatively benign reading in a key indicator on producer prices, Mr. Samuels noted.

The broadest indicator of wholesale prices edged up 0.2 percent in July, according to the Labor Department. Not counting food and energy, the indicator, the Producer Price Index, was up 0.4 percent, the most rapid rise in six months.

“The Treasury market is trading slightly lower this morning as investors renew their on-again, off-again love affair with riskier assets,” said Kevin H. Giddis, the executive managing director and president for fixed-income capital markets at Morgan Keegan Company.

“Favorable earnings reports appear to be boosting the appeal of stocks this morning, but the stronger than expected results from the P.P.I. are probably playing a role as well,” he added in a market commentary.

A range of stocks gained on Wednesday, with a rise of more than 1 percent in the utilities and telecommunications sectors. Consumer staples also rose as the markets responded to signals about the business sector and economy extracted from the latest corporate results.

Seasonal factors appeared to help Target, for example, which reported a higher quarterly profit helped by school related sales toward the end of the period. Its shares rose more than 4 percent. Staples rose 2.25 percent after it raised its outlook and after its earnings exceeded expectations.

Article source: http://feeds.nytimes.com/click.phdo?i=f61e945899b2b0c0a444cc3e841d0a98

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The Lede: Latest Updates on the Financial Markets

August 10, 2011 by Leave a Comment

August 09

Riots in London and Paris: Plus Ça Change?

For many, the images from London called to mind the 2005 riots in France, but the events themselves appear to have less in common than meets the eye.

Article source: http://feeds.nytimes.com/click.phdo?i=cd33b1d96f88027f65363f6e559c7b17

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E.C.B. Fails in Bid to Quell Sovereign Debt Crisis

August 4, 2011 by Leave a Comment

The show of force initially bolstered Italian and Spanish bonds. But the move appeared to backfire as stock markets in Europe and the United States fell sharply after Jean-Claude Trichet, the central bank’s president, warned of dangers ahead. The modest scale of the bank’s bond buying apparently fell short of what investors considered adequate.

The market downturn began in Europe but quickly spread to the United States as soon as trading opened Thursday morning on intensifying investor fears about a slowdown in global economic growth and worries about Europe’s debt crisis, which is centered now on Italy and Spain.

In another response to the escalating crisis, the E.C.B. moved to prop up weaker banks that may be having trouble raising funds, expanding its lending to euro zone institutions at the benchmark interest rate. The central bank left that rate unchanged at 1.5 percent, while the Bank of England left its benchmark rate at a record low of 0.5 percent.

Mr. Trichet declined to say what bonds the bank was buying or how much. He said the bank acted in response to “renewed tensions in some financial markets in the euro area.” It was the first such intervention since March.

Mr. Trichet also said that uncertainty created by the U.S. budget debate had unsettled European markets.

“It’s clear the entire world is intertwined,” he said. “What happens in the U.S. influences the rest of the world.”

As markets demanded higher risk premiums on Spanish and Italian bonds during the past week, analysts began to speculate that the E.C.B. would return to the bond market. But most had not expected the bank to act so quickly.

The E.C.B. will not disclose the scope of its bond buying until next week at the earliest, but early indications were that the amounts were relatively modest.

“It might be interpreted as more of a warning shot rather than a broad-based onslaught,” analysts at Barclays Capital wrote in a note.

The E.C.B. first began buying bonds in the open market in May 2010, but tapered off the interventions earlier this year, a move investors may have interpreted as a lack of resolve. Michael T. Darda, chief economist at MKM Partners in Stamford, Connecticut, warned Thursday that half-hearted forays into the bond market “will fail, just like they did last year.”

“In each case, the debt crisis got worse instead of better,” he wrote in a note.

The E.C.B. also responded to signs of stress in interbank markets as institutions, wary of each other’s exposure to troubled government paper, became reluctant to lend to each other. One worrisome sign was a spike in the cost for European banks to borrow dollars in the open foreign exchange market.

Mr. Trichet said that next week the E.C.B. would lend banks as much cash as they wanted for six months at the benchmark interest rate, assuming the banks could provide collateral. A six-month term is longer than is customary.

The central bank’s actions on Thursday provided another example of the E.C.B. acting as the euro zone’s firefighter in the debt crisis.

European leaders decided last month to authorize the European Financial Stability Facility — the European Union’s bailout fund — to buy bonds in open markets, relieving the E.C.B. of that responsibility.

But it will take months before the rescue fund. known as the E.F.S.F., is able to start making purchases. In addition, European leaders did not increase the size of the fund, leaving questions about whether it would be up to the task if a country as big as Italy or Spain needed help.

Speaking to reporters Thursday after a regular meeting of the E.C.B. governing council, Mr. Trichet beseeched political leaders to speed up efforts to cut their budget deficits and remove impediments to growth, like overly protected labor markets. “The key for everything is to get ahead of the curve, in fiscal policy and structural reform,” he said.

With Italy in danger of being swept over the same waterfall as Greece, Prime Minister Silvio Berlusconi on Thursday pledged sweeping changes to increase growth.

At a news conference later, the Italian finance minister, Giulio Tremonti, said Italy was in contact with the European Union, International Monetary Fund and Organization for Economic Cooperation and Development on strategies for growth.

Article source: http://www.nytimes.com/2011/08/05/business/global/bank-of-england-and-european-central-bank-news.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,
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