December 5, 2023

In Surprise, Fed Decides Not to Curtail Stimulus Effort

As Congressional Republicans and the White House hurtle toward another showdown over federal spending, the Fed said it was concerned that fiscal policy once again “is restraining economic growth,” threatening to undermine what the Fed had described just months ago as a recovery gaining strength.

Stock markets jumped after the 2 p.m. announcement, with the Standard Poor’s 500-stock index touching a record high and the Dow Jones industrial average ahead more than 150 points.

The Fed’s decision also may reflect the consequences of yet another premature retreat from its own policies. Mortgage rates have climbed and other financial conditions have tightened since the Fed signaled in June that it intended to reduce its asset purchases by the end of the year, the Fed noted Wednesday.

“The tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and the labor market,” it said in a statement released after a regular two-day meeting of its policy-making committee.

The decision, an apparent victory for the Fed’s chairman, Ben S. Bernanke, and his allies who have argued for the benefits of asset purchases, was supported by all but one member of the Federal Open Market Committee. Esther George, president of the Federal Reserve Bank of Kansas City, dissented as she has at each previous meeting this year, citing concerns about inflation and financial stability.

The Fed may still begin to reduce asset purchases by the end of the year, consistent with its previous statements. The Fed also refrained from any change in its stated intention to hold short-term interest rates near zero at least as long as the unemployment rate remains above 6.5 percent.

The statement said the committee sees recent economic data “as consistent with growing underlying strength in the broader economy.” However, the statement continued, “The committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.”

In their economic forecasts, also published Wednesday, Fed officials once again retreated from overly optimistic predictions about the pace of growth over the next several years.

The aggregation of forecasts by the 17 officials who participate in policy-making showed that Fed officials expect growth to remain sluggish for years to come, with persistent unemployment and little inflation, suggesting that the dismantling of the Fed’s stimulus campaign will remain slow and cautious.

The middle of the forecast range for economic growth this year was 2 percent to 2.3 percent, down from June predictions of growth between 2.3 percent and 2.6 percent. For 2013, Fed officials forecast growth between 2.9 percent and 3.1 percent, down from a range of 3 percent to 3.5 percent in June.

The Fed unrolled an aggressive combination of new policies last year in an effort to increase the pace of job creation. It started adding $85 billion a month to its holdings of Treasuries and mortgage bonds, and said it planned to keep buying until the outlook for the labor market improved substantially. The Fed also said that it would keep short-term rates near zero for even longer – at least as long as the unemployment rate remained above 6.5 percent.

Half a year later, in June, Mr. Bernanke, surprised many investors by announcing that the Fed intended to cut back on those asset purchases by the end of the year, an intention the Fed affirmed in July.

Critics had warned that the Fed would be pulling back too soon if it acted Wednesday. Economic growth remains sluggish and job creation is barely outpacing population growth. Roughly half the decline in the unemployment rate over the last year is because fewer people are looking for work, not because more are finding jobs.

Jack Ewing contributed reporting from Frankfurt.

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Manufacturing in China Contracts Further

HONG KONG — China’s manufacturing sector contracted in July at the quickest pace since last summer, according to the early reading of a survey released on Wednesday.

The survey came in at an 11-month low of 47.7 points for July, down from the final June figure of 48.2. A result below the 50-point level signals contraction.

The monthly survey of purchasing managers in the manufacturing sector, compiled by the research firm Markit and released by the British bank HSBC, offers one of the earliest glimpses at how the economy is doing each month and is closely watched by economists and investors. Final figures for July, based on more complete survey results, are scheduled to be released next week, alongside the results of an official manufacturing survey to be published the National Bureau of Statistics.

The so-called flash P.M.I. data provided the latest sign of the pressures faced by China as a whole as the authorities in Beijing try to raise productivity, living standards and domestic demand while shifting the economy away from its reliance on exports and investment.

The new P.M.I. data “suggests a continuous slowdown in manufacturing sectors thanks to weaker new orders and faster destocking,” Qu Hongbin, the chief China economist at HSBC, said Wednesday in a statement accompanying the survey results. The July figure puts pressure on the labor market and “reinforces the need to introduce additional fine-tuning measures to stabilize growth.”

The efforts by President Xi Jinping and Prime Minister Li Keqiang, who took office in March, to rebalance the economy involve a delicate attempt to rein in the inefficient investments and surging lending of the past few years — but to do so without snuffing out the growth that is needed to create jobs, and maintain social and financial stability.

Analysts generally agree that the newfound emphasis on the quality, rather than the sheer speed, of growth is encouraging because it could bring about some of the changes that are needed to put China’s once supercharged economy on the path toward a more sustainable pace of expansion in the long term.

But this process also entails the risk that growth could slow down more sharply than intended, some economists warn.

Data released on July 15 showed that China’s gross domestic product grew 7.5 percent in the second quarter of this year, compared with the same period a year earlier. That was a notable slowdown from previous quarters, showing that China’s economy continues to cool and indicating that Beijing may struggle to meet its official growth target of 7.5 percent for the full year if the deterioration continues.

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High & Low Finance: Foreign Banks in U.S. Face Greater Restrictions

Those days are gone. Despite a lot of talk about the need for international cooperation in regulation, it now appears that American regulators intend to assure that foreign banks operating in the United States have adequate capitalization.

It was not always such. Until the financial crisis, the Federal Reserve was happy to allow American subsidiaries of foreign banks to have no capital at all, and some did not. At the end of 2007, Deutsche Bank’s American operations reported having a negative $8.8 billion in capital.

How could any regulator allow that? The idea was that the presumably well-capitalized parent back home would stand behind the American operation if it ran into trouble. And the United States could, of course, rely on home countries to both regulate their banks and, if something went badly wrong anyway, provide bailouts.

But as the crisis approached, some funny things were happening. Until the turn of the century, American operations of foreign banks tended to receive financing from home. But as the credit party grew after 2003, those banks increasingly borrowed in America’s short-term markets and sent the money back home to the parent.

When the credit crisis appeared, that financing — a significant part of which had come from selling short-term securities to United States money market funds — dried up.

“Foreign banks that relied heavily on short-term U.S. dollar liabilities were forced to sell U.S. dollar assets and reduce lending rapidly when that funding source evaporated, thereby compounding risks to U.S. financial stability,” Daniel K. Tarullo, a Fed governor, said in a speech late last year.

The foreign banks ended up needing a disproportionate share of loans the Fed handed out to stabilize banks. And since then the ability, let alone the willingness, of some countries, particularly in Europe, to provide what the Fed delicately calls “backstops” — a term that sounds much less harsh than “bailouts” — appears to have diminished.

In December, the Fed proposed new rules that have set off loud protests from overseas and are likely to provoke a flood of complaints before the comment period ends on Tuesday.

The rules would require that American subsidiaries of each foreign bank be put together in a holding company that would have to maintain capital, and liquidity, in the United States. In some cases the requirements would be greater than home countries require of the parent institutions.

In a letter to the Fed, Michel Barnier, the European commissioner in charge of internal markets, complained that the proposal was “a radical departure” from internationally accepted policies. He darkly warned that if the Fed did not back down and accept that Europe will do a perfectly good job of regulating its own banks, the new rules “could spark a protectionist reaction” from other countries and bring on “a fragmentation of global banking markets and regulatory frameworks.”

The proposed rules seem to be particularly objectionable to some European banks in two ways. The first is the introduction of an effective 5 percent leverage ratio — calculated as the equity capital of the operation divided by the total amount of assets.

To banks with a lot of securities market activities, that sounds like a harsh rule. Deutsche Bank is particularly upset.

Some other European banks seem to be worried by the application of rules requiring an adequate level of very liquid assets relative to the bank’s short-term financing. The idea there is that if the short-term financing dries up again, the bank will be able to cope for at least a brief period without having to either conduct a fire sale of assets or turn to the Fed for help.

These rules might not actually require the banks to raise a lot of cash, or invest a lot of money in low-returning assets. To meet the liquidity rules, a bank could add more superliquid securities, like United States Treasury or agency securities. Or it could change its financing. Rather than borrowing huge sums overnight, it could borrow at longer maturities, perhaps 45 days. Then it would not need as many liquid assets.

Floyd Norris comments on finance and the economy at

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I.M.F. to Contribute 1 Billion Euros to Cyprus Bailout

“This is a challenging program that will require great efforts from the Cypriot population,” Christine Lagarde, the managing director of the I.M.F., said in a statement.

The goal was to “stand by Cyprus and the Cypriot people in helping to restore financial stability, fiscal sustainability and growth to the country and its people,” Ms. Lagarde said in a second statement she issued jointly with Olli Rehn, the European Union commissioner for economic and monetary affairs.

The statements follow agreement on Tuesday between Cyprus and the so-called troika of international organizations — the European Central Bank, the European Commission and the I.M.F. — that painstakingly negotiated the €10 billion, or $13 billion, bailout and the terms of the deal.

“This is an important development which brings a long period of uncertainty to an end,” Christos Stylianides, a spokesman for the Cypriot government, said Tuesday in a statement made available on Wednesday.

“Undoubtedly, the completion of the agreement with troika should have taken place a lot sooner, under more favorable political and financial circumstances,” said Mr. Stylianides, who was apparently referring to infighting in Cyprus about responsibility for the financial debacle.

The memorandum of understanding between Cyprus and the troika outlines budget cuts, privatizations and other conditions Cyprus must meet to receive its allotments of bailout money. A parliamentary vote in Cyprus is needed to approve the deal, while Germany and Finland are also expected to seek the approval of their Parliaments.

Olivier Bailly, a spokesman for the European Commission, said Wednesday that the memorandum would not be made public while euro-area governments reviewed the document. But Cypriot authorities on Tuesday described elements of the agreement that they regarded as favorable.

Mr. Stylianides, the Cypriot spokesman, said the deal safeguarded important parts of the economy by keeping deposits of natural gas in offshore waters under Cypriot jurisdiction, and by winning two more years until 2018 to hit deficit targets and carry out privatizations.

Mr. Stylianides also said the government saved the jobs of contract teachers and of 500 civil servants, and had overcome demands by the troika to tax dividends.

Even so, the memorandum could be hotly contested in by the Cypriot Parliament, where many lawmakers have criticized crisis measures that already have been taken, like capital controls, which threaten to make a bleak economic outlook even worse.

In a move partly aimed at easing those tensions and smoothing parliamentary approval of the memorandum in Cyprus, the government in Nicosia on Tuesday appointed a new finance minister, Harris Georgiades, to replace Michalis Sarris, who resigned. Mr. Sarris has been blamed at home and abroad for his handling of the crisis. Mr. Georgiades was the deputy finance minister.

Over the course of the negotiations to reach a deal for Cyprus, the spotlight fell on whether the I.M.F. was too forceful in pressing countries like Cyprus to limit debt and force losses on investors. The approach of the I.M.F. strained relations with the European Commission, which had harbored concerns about the potentially confidence-sapping effects of such aggressive measures on other economies within the euro area.

The I.M.F. proportion of the package Cyprus is smaller than in some previous arrangements for countries like Greece, but that was not a sign of a change in the I.M.F.’s policy in the euro area, said Mr. Bailly, the commission spokesman. The sums given by the I.M.F. depend on “specific situation” in each country, he said, adding that the €1 billion, three-year loan for Cyprus “was unanimously agreed in the troika.”

Ms. Lagarde said substantial spending cuts would be needed “to put debt on a firmly downward path” including in areas like social welfare programs.

But she said the plan, which the I.M.F. could agree to early next month, sought fairness.

“The fiscal and financial policies of the program seek to distribute the burden of the adjustment fairly among the various segments of the population and to protect the most vulnerable groups,” she said.

More than 95 percent of account holders at Laiki Bank, which will be closed under the plan, and at the Bank of Cyprus, which is being restructured, were fully protected, she said. Bank of Cyprus and Laiki Bank are the two biggest banks in the island nation.

Key fiscal measures included raising the country’s corporate income tax rate to 12.5 percent from 10 percent, she said.

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European Leaders, Committed to Budget Cuts, Meet in Brussels

BRUSSELS — Jeered by angry protesters demanding an end to austerity and shaken by a resounding rejection of their economic strategy from Italian voters, European leaders gathered for an economic summit meeting Thursday amid few signs that the bloc’s policies were healing the twin blights of rising unemployment and recession.

Instead of bowing to a rising anti-austerity tide, however, leaders seemed determined to stay the course, insisting that only budget cuts and other measures to restore financial stability could return the continent to economic growth and create jobs.

Speaking as thousands of protesters gathered just out of earshot in a nearby Brussels park, Herman Van Rompuy, the president of the European Council, the body that organizes the leaders’ summit meetings, emphasized “green shoots” of recovery and said growth was returning, albeit slowly.

Officials of the European Union have repeatedly predicted a return to growth, only to be disappointed by data showing rising unemployment and continuing recession in the euro area.

The economy of the 17-member euro zone is expected to shrink for a second consecutive year in 2013, and growth for the whole of the 27-nation European Union is forecast to be about 0.1 percent. Unemployment in Spain and Greece, the hardest-hit countries, has soared above 25 percent.

Mr. Van Rompuy acknowledged “social distress” and said the success of anti-austerity and anti-establishment parties in the recent Italian elections was something that the leaders needed to consider. But he insisted that the departing Italian prime minister, Mario Monti, who was roundly defeated in the elections last month, had done “an excellent job” and that Italy and the European Union should “stick to the same general direction of the last 12 months.”

Italy is effectively without a functioning government after the Five Star Movement, led by Beppe Grillo, a comedian turned activist, made stunning gains in both houses of Parliament in the elections. Five Star has rejected an appeal by the Democratic Party to work together to lead the country. Without an alliance, the Italian government could limp along for as long as a year, political analysts say, before a likely collapse would force new elections.

The Brussels meeting is meant to focus on the tougher budgetary oversight agreed upon over the last two years to combat the kinds of extreme debt and deficit problems in many countries that nearly brought down the euro currency union. Leaders were also expected to endorse a strategy that should give France, Spain and Portugal more time to meet their deficit-reduction goals, on condition that they stick to a path of cutting debt.

Protesters, even if they were aware of such concessions, were clearly unconvinced.

“All they do is cut, but we need jobs,” said Michael Mercier, a worker at a Belgian prison for juveniles who took part in an anti-austerity rally organized by trade union groups in Parc du Cinquantenaire, near the site of the summit meeting and the headquarters of the European Commission, the bloc’s executive arm.

“This is all the fault of the E.U.,” said Mr. Mercier, who added that the way the bloc was run mixed “too many different things in the same big pot, and this causes problems for everyone.”

One group of demonstrators managed to enter an annex of the European Union’s principal economic policy-making arm, the European Commission’s Directorate General for Economic and Financial Affairs, and staged a protest meeting in the cafeteria.

“We occupied their building to denounce the misery they are imposing on millions of Europeans,” said Michel Vanderopoulos, a spokesman for the group, which organized the protest, called “For a European Spring.” He said those who took part came from Belgium, Germany, Italy and Denmark.

The annex houses some of the officials who form part of the “troika” of international lenders detested by many people in countries like Greece and Portugal for its role in demanding painful belt-tightening in exchange for bailouts.

A spokesman for the commission said the protest lasted about 15 minutes and did not involve any violent confrontations. “The Belgian police arrived on scene, and the protesters left of their own accord,” the spokesman said.

At the meeting, the increasingly acrimonious dispute over austerity pitted those who favor budget discipline — the European authorities and leaders of countries like Germany and Finland — against countries like France and Spain and groups like trade unions, which favor more government spending to promote growth.

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High-Speed Trades Hurt Investors, a Study Says

The chief economist at the Commodity Futures Trading Commission, Andrei Kirilenko, reports in a coming study that high-frequency traders make an average profit of as much as $5.05 each time they go up against small traders buying and selling one of the most widely used financial contracts.

The agency has not endorsed Mr. Kirilenko’s findings, which are still being reviewed by peers, and they are already encountering some resistance from academics. But Bart Chilton, one of five C.F.T.C. commissioners, said on Monday that “what the study shows is that high-frequency traders are really the new middleman in exchange trading, and they’re taking some of the cream off the top.”

Mr. Kirilenko’s work stands in contrast to several statements from government officials who have expressed uncertainty about whether high-speed traders are earning profits at the expense of ordinary investors.

The study comes as a council of the nation’s top financial regulators is showing increasing concern that the accelerating automation and speed of the financial markets may represent a threat both to other investors and to the stability of the financial system.

The Financial Stability Oversight Council, an organization formed after the recent financial crisis to deal with systemic risks, took up the issue at a meeting in November that was closed to the public, according to minutes that were released Monday.

The gathering of top regulators, including Treasury Secretary Timothy F. Geithner and Ben S. Bernanke, the Federal Reserve chairman, said in its annual report this summer that recent developments “could lead to unintended errors cascading through the financial system.” The C.F.T.C. is a member of the oversight council.

The issue of high-frequency trading has generated anxiety among investors in the stock market, where computerized trading first took hold. But the minutes from the oversight council, and the council’s annual report released this year, indicate that top regulators are viewing the automation of trading as a broader concern as high-speed traders move into an array of financial markets, including bond and foreign currency trading.

Mr. Kirilenko’s study focused on one corner of the financial markets that the C.F.T.C. oversees, contracts that are settled based on the future value of the Standard Poor’s 500-stock index. He and his co-authors, professors at Princeton and the University of Washington, chose the contract because it is one of the most heavily traded financial assets in any market and is popular with a broad array of investors.

Using previously private data, Mr. Kirilenko’s team found that from August 2010 to August 2012, high-frequency trading firms were able to reliably capture profits by buying and selling futures contracts from several types of traditional investors.

The study notes that there are different types of high-frequency traders, some of which are more aggressive in initiating trades and some of which are passive, simply taking the other side of existing offers in the market.

The researchers found that more aggressive traders accounted for the largest share of trading volume and made the biggest profits. The most aggressive scored an average profit of $1.92 for every futures contract they traded with big institutional investors, and made an average $3.49 with a smaller, retail investor. Passive traders, on the other hand, saw a small loss on each contract traded with institutional investors, but they made a bigger profit against retail investors, of $5.05 a contract.

Large investors can trade thousands of contracts at once to bet on future shifts in the S. P. 500 index. The average aggressive high-speed trader made a daily profit of $45,267 in a month in 2010 analyzed by the study.

Industry profits have been falling, however, as overall stock trading volume has dropped and the race for the latest technological advances has increased costs.

Ben Protess contributed reporting.

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Euro Crisis Still Poses Threat, Germany’s Central Bank Asserts

“The risks to the German financial system are no lower in 2012 than they were in 2011,” the Bundesbank said in its annual report on financial stability in the largest European Union country.

The report came a day before highly anticipated official data on growth in the 17 European Union countries that use the euro, which could confirm that the region is in recession. The report also provided another example of how the Bundesbank and Europe’s central bank diverged in their views of the state of the crisis and how best to fight it.

Even as countries like Spain suffer a severe credit squeeze, money has poured into Germany because it is perceived as a haven from European turmoil. That has pushed down borrowing costs for German businesses and consumers, producing some worrying consequences, including a sharp rise in real estate prices in urban areas, the Bundesbank warned.

Andreas Dombret, a member of the Bundesbank’s executive board, said it was too early to speculate about a real estate bubble. But at a news conference, he added: “The experiences of other countries show that precisely such an environment of low interest rates and high liquidity can encourage exaggerations on the real estate markets.”

Real estate bubbles were a primary cause of the financial crises in Spain and Ireland.

The downbeat Bundesbank report came a week after Mario Draghi, the European central bank’s president, argued that there were signs, albeit tentative ones, that tensions in the zone had eased.

Countries have begun to bring their debts under control while their labor costs have fallen, making them more able to compete on world markets, Mr. Draghi said.

These and other improvements will lead to what he described at a news conference last week as a “slow, gradual but also solid” recovery.

The Bundesbank acknowledged those improvements but warned that there could be a hangover from the measures the central bank has taken to combat the crisis, which include a record-low benchmark interest rate of 0.75 percent.

“The side effects of short-term stabilization measures could leave a difficult legacy for financial stability in the medium to long term,” the bank said.

On Thursday, the European statistics agency is scheduled to release official figures on third-quarter gross domestic product for the zone. The data is likely to show that the region suffered a fourth consecutive quarter of little or no growth.

Figures released Wednesday reinforced expectations that output might have declined again. Industrial production in the 17 countries using the euro fell 2.5 percent in September from August, according to Eurostat, the European statistics office. That was worse than expected and the weakest monthly performance since January 2009.

German factories, which until recently had managed to avoid the worst of the crisis, were largely responsible for the decline.

In addition, Greece sank deeper into depression in the third quarter, as output fell 7.2 percent compared with figures in the period a year earlier. In Portugal, gross domestic product fell 3.4 percent from a year earlier, the seventh consecutive quarterly decline. Unemployment in Portugal rose to 15.8 percent from 15 percent in the second quarter.

The Bundesbank no longer sets monetary policy but remains a strong influence in the region. It is the largest member of the so-called Eurosystem, the network of 17 national central banks overseen by the central bank. The Bundesbank handles some important tasks for the euro zone as a whole, like administering a system used to transfer large sums of money.

The Bundesbank, with its emphasis on preserving price stability, also served as the template for Europe’s central bank. The Bundesbank has complained that the central bank has exceeded its mandate by effectively becoming lender of last resort for governments.

Some of the Bundesbank’s dismay was on view Wednesday. “The progressive blurring of boundaries between monetary and fiscal policy has increased the longer-term risks and side effects of crisis management measures,” the Bundesbank said.

Low interest rates have encouraged investors to take more risk as they try to earn better returns, the Bundesbank said. Despite a gloomy economic outlook, corporations, not including banks, issued a record 201 billion euros ($255 billion) in bonds from January to October, the Bundesbank said. Investors were willing to accept an average interest rate of just 1.3 percent on the highest-rated corporate debt.

While that is good for companies, it could backfire if interest rates rise again or more companies than expected have trouble repaying their debts.

Low interest rates have also driven up real estate prices in cities, as Germans take advantage of cheap loans to buy property.

On a more positive note, the Bundesbank said that German banks stand on more solid foundations than a year ago. They have been able to raise money from more reliable sources, like deposits. In addition, German banks have increased the amount of capital they hold in reserve, and reduced the amount of money they have at risk in troubled zone countries like Greece, the Bundesbank said.

However, German banks still held almost 59 billion euros in Spanish and Italian government debt, the Bundesbank said. Their total exposure to the two countries, including other kinds of loans, was about 203 billion euros at midyear, the Bundesbank said.

“A substantial escalation of the sovereign debt crisis would, of course, have an adverse impact on the German financial system, too,” said Sabine Lautenschläger, a member of the Bundesbank’s executive board who is responsible for bank regulation.

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DealBook: Geithner Urges an Overhaul of Rules on Money Market Funds

Treasury Secretary Timothy F. Geithner on Thursday urged the regulatory team that he leads to push ahead with new rules aimed at America’s money market funds, which manage $2.6 trillion.

In a letter to the Financial Stability Oversight Council, a special committee of senior regulators set up after the 2008 financial crisis, Mr. Geithner said the changes were “essential for financial stability.”

The Securities and Exchange Commission, which is the primary regulator for money market funds, had proposed the main changes favored by Mr. Geithner in his letter.

But the commission dropped its attempt at a money market fund overhaul last month after it become clear that a majority of its commissioners were not going to vote for the measures. Large mutual fund companies fiercely opposed the reforms, saying they were unnecessary and could harm a type of investment fund that had proved to be popular.

“You can be sure that the firms on the receiving end won’t take this passively,” said Jay G. Baris, a lawyer at Morrison Foerster, which represents money market funds.

During the 2008 crisis, investors fled money market funds in droves, which worsened the credit freeze that gripped the banking system. Money funds then received a big bailout from the Treasury and the Federal Reserve.

Before the passage of the Dodd-Frank Act, attempts to make changes to the money market fund industry would most likely have died after the commission dropped them. But the Financial Stability Oversight Council, set up by the Dodd-Frank financial overhaul legislation, can choose to take over from the commission.

Mr. Geithner lays out a number of ways in which the council, which meets Friday, can act.

In his letter, he urges the council to gather public comments on a range of reforms and then make a final overhaul recommendation to the Securities and Exchange Commission. The commission would be required to adopt those changes, or explain why it did not. Mr. Geithner said the council’s staff was already working on recommendations and he hoped they would be considered at the council’s November meeting.

The recommendation would include two changes supported by the commission. One would require money market funds to hold loss buffers. The other would end the money market funds’ practice of valuing investors’ shares at $1 even when the funds’ assets should reflect a value slightly below $1.

Mr. Geithner said in his letter that, while the S.E.C. is best positioned to regulate money market funds, the Financial Stability Oversight Council could move forward without waiting for the commission. The council, he wrote, could designate certain money market fund entities as systemically important and subject those firms to regulation by the Federal Reserve, which could then impose an overhaul.

Mr. Baris, the lawyer, said that a designating a money market fund as systemically important could make it hard for it to stay in business. “Who would want to invest in a fund that has been designated by the federal government in this manner?” he said. “It will drive investors away.” Mr. Baris said he believed that Mr. Geithner might face resistance on the council if any new rules single out specific money market funds.

In addition, the council could designate money market fund activities as critical to the working of the financial system’s plumbing. That would allow regulators to impose heightened risk management standards on money market funds.

Mr. Geithner wrote that without the changes, “our financial system will remain vulnerable to runs and instability.”

If the council acts, the mutual fund industry will almost certainly fight back. The industry’s lawyers will most likely contest the council’s interpretation of Dodd-Frank and perhaps even the council’s authority to act.

Geithner Letter to FSOC

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Permanent Rescue Fund Seems Nearer in Europe

The ministers backed efforts by Greece to keep the interest rate on newly issued bonds below 4 percent, Jean-Claude Juncker, who represents the 17 nations using the euro currency, told a news conference. That is below the level offered by bondholders in exchange for their current holdings of Greek debt.

“The negotiations will have to be resumed on that point as we don’t have a final picture,” said Mr. Juncker, referring to the interest rate on Greek debt.

At stake is the need to pare Greek debt to levels where the country can conclude a bailout with the European Union and the I.M.F. that would give it the cash it needs to repay loans coming due in March and, officials hope, allow Athens to finance its needs through 2013. Without such a package, Greece could be faced with a chaotic default that would further destabilize the rest of the euro zone.

Efforts to address another aspect of the region’s debt crisis took a step forward late Monday, as ministers made progress toward establishing a permanent rescue fund, the European Stability Mechanism.

Olli Rehn, the European Union’s commissioner for economic and monetary affairs, said the ministers were able to complete most of the details of the permanent fund, which should be “in place and operational” by July after member states ratify the agreement.

Setting up a permanent fund and giving it adequate financial firepower is a priority for European leaders including Chancellor Angela Merkel of Germany and for officials like Christine Lagarde, the head of the I.M.F.

An obstacle to establishing the fund was cleared on Monday night when ministers found a way to ease concerns in Finland, one of the contributing nations, that it would not incur additional liabilities without prior consent.

Earlier Monday, Ms. Lagarde suggested that the 440 billion-euro European Financial Stability Facility, a temporary bailout fund established in 2010, could be rolled into the 500 billion-euro permanent fund.

The fund is expected to be less exposed to downgrades by ratings agencies than the existing European Financial Stability Facility.

“I am convinced that we must step up the fund’s lending capacity,” to help defend “innocent bystanders” elsewhere in the world who are hurt by the euro contagion, Ms. Lagarde said. “A global world needs global firewalls.”

Mrs. Merkel said that she wanted to see the new fund put into operation quickly. She also said Germany was willing to speed up its share of payments.

Despite continuing concerns about Greek debt, the euro strengthened to an almost three-week high against the dollar after the French finance minister, François Baroin, said in Paris that negotiations with Athens were making “tangible progress.”

Evangelos Venizelos, the Greek finance minister, said as he arrived in Brussels that Greece was ready to complete a private sector debt swap “on time.”

Private sector bondholders are seeking yields of nearly 4 percent, but Greece, as well as Germany and the I.M.F., argue that a yield closer to 3 percent is necessary to give the restructuring a serious hope of success. With the talks at an impasse, the pressure is now mounting on finance ministers to push for a solution.

Reinforcing the need for a deal, Mrs. Merkel said she wanted an agreement “soon enough that no new bridge loan whatsoever will be needed” for Greece.

Even as ministers prodded financiers to do their part to ease the crisis in the euro zone, the I.M.F. pressed European governments to bolster the bailout funds available for euro zone countries so that the region’s problems could be contained.

Ms. Lagarde called on European leaders to complement the “fiscal compact” they agreed to last month with some form of financial risk-sharing. She mentioned bonds backed by debt securities issued by the euro zone or a debt-redemption fund as possible options.

While the sense of crisis has ebbed and markets have calmed since the European Central Bank last month announced longer-term refinancing operations to inject nearly 490 billion euros of liquidity into the banking system, analysts say the central bank has only bought time for leaders to put the 17-country currency bloc on firmer footing.

Without more such actions from governments and the central bank to reassure financial markets, Ms. Lagarde said, “countries like Italy and Spain, that are fundamentally able to repay their debts, could potentially be forced into a solvency crisis by abnormal financing costs.”

Ms. Lagarde also called for more fiscal integration among euro members, saying, “it is not tenable for 17 completely independent fiscal policies to sit alongside one monetary policy.” She called for new measures to increase the sharing of risk, including possibly jointly issued euro area debt instruments, or, as Germany has proposed, a debt redemption fund.

The monthly meeting of the ministers in Brussels came at a time of widespread gloom about the broad European economy. Austerity budgets in the euro zone are reducing demand and weighing on growth.

Even Germany, where factories are bustling, is feeling the effects. The Federal Statistical Office said last month that the German economy probably contracted by about 0.25 percent in the fourth quarter of 2011 from the previous three months.

The economy of Spain, which is struggling with an unemployment rate of more than 20 percent, may contract about 1.5 percent this year, the Bank of Spain estimated.

James Kanter reported from Brussels and David Jolly from Paris. Reporting was contributed by Melissa Eddy in Berlin and Landon Thomas Jr. in London.

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Swiss Bank Chief Vows Not to Resign Over Currency Trades

“I am not aware of any legal transgressions,” Mr. Hildebrand said at a news conference in Zurich. “But I understand that the public also poses the moral question.”

The 48-year-old head of the Swiss National Bank, who played a high-profile role in formulation of new global standards designed to limit risky behavior by bankers, was by turns contrite and angry during the one-hour appearance, which was broadcast on the Internet.

While expressing regrets, Mr. Hildebrand portrayed the accusation of insider trading as the work of his enemies on the Swiss political right, and said he was considering taking legal action against those who used information stolen from a personal account at Bank Sarasin, a Swiss private bank.

“The personal attacks against me have reached the point where I had to defend myself,” Mr. Hildebrand said.

An information technology worker at Bank Sarasin faces a criminal investigation for allegedly giving the information to the Swiss People’s Party, whose most visible leader, Christoph Blocher, has been a bitter critic of Mr. Hildebrand.

Appearing on a Swiss television program Thursday, Mr. Blocher confirmed that he had passed on information about the transactions and called Mr. Hildebrand “no longer tolerable.”

But Mr. Hildebrand also faces a storm of criticism across the political spectrum, with members of Parliament and commentators questioning whether he has damaged the credibility of the Swiss National Bank and Switzerland’s image abroad. Mr. Hildebrand is vice president of the Financial Stability Board, a group of central bankers and regulators that plays a leading role in recommending bank regulations to the leaders of the Group of 20 nations.

Mr. Hildebrand vowed to “continue to apply all of my energy to my job as president” of the Swiss central bank.

During the news conference, Mr. Hildebrand denied a key assertion by Weltwoche, a right-leaning Swiss magazine that first reported many details of the accusations. The publication said it had evidence that Mr. Hildebrand, and not his wife, had personally made a large investment in dollars just days before the Swiss National Bank stepped up its intervention in currency markets. The central bank was then engaged in an intense effort to stem the rise of the franc and protect Swiss exporters.

Mr. Hildebrand said that his wife, Kashya Hildebrand, had legal power to use the account and bought dollars because she considered them very cheap. He described her as an economist and “strong personality” who takes a keen interest in finance.

When he learned of the transaction the next morning, Mr. Hildebrand said, he immediately called his adviser at Bank Sarasin and told him not to make any more trades without his approval, and reported the transaction to S.N.B. compliance officials.

Mr. Hildebrand said he now regretted that he did not undo the transaction. Auditors from PricewaterhouseCoopers, hired by the council that oversees the Swiss National Bank, agreed with Mr. Hildebrand’s version of events.

But Mr. Hildebrand also said the case showed the need for more disclosure by top officials in the central bank. In the future, he said, he and other members of the S.N.B. directorate should make public all transactions worth more than 20,000 Swiss francs, or $21,000, and get clearance from the bank’s compliance department.

Mr. Hildebrand said he had donated 75,000 francs to an organization that promotes preservation of Swiss mountain regions. That is the sum that Weltwoche, the magazine, said that Mr. Hildebrand earned on the trades.

But it is unclear how much profit Mr. Hildebrand actually made from the trades.

In August, Mrs. Hildebrand spent 400,000 francs to buy $504,000, the auditors said, two days before the S.N.B. stepped up its intervention in currency markets.

In October, Mr. Hildebrand sold about the same amount of dollars at a more favorable exchange rate, earning about 64,000 francs.

But in March, after the sale of a vacation home, Mr. Hildebrand had purchased nearly $1.2 million when the exchange rate was much less favorable. So at least on paper that investment was a money loser.

Any profit would not be a large sum for the Hildebrands, whose personal wealth was evident Thursday in the size of their real estate assets. One reason that Mr. Hildebrand bought dollars in March, he said, was that the family’s Alpine vacation home had just sold for 3.3 million francs and he wanted to diversify his currency holdings.

The accusations put huge political pressure on Mr. Hildebrand, but it appears unlikely that he will face criminal charges. Switzerland’s insider trading law does not apply to currency transactions, said Andreas Brunner, head of a prosecutor’s unit in Zurich that focuses on economic crimes.

Mr. Brunner’s office said Thursday that it would pursue a criminal investigation of a 39-year-old former employee of Bank Sarasin for possible violations of the country’s bank secrecy law. The man, who was not identified, is suspected of leaking records of Mr. Hildebrand’s currency transactions.

The employee was able to call up Mr. Hildebrand’s records on a bank computer but not print them out. Mr. Hildebrand asserted that the employee used a mobile phone or digital camera to photograph the computer screen.

Bank Sarasin said Tuesday that it had fired the employee, who had turned himself in to the police in Zurich. The charges carry a maximum sentence of three years in prison.

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