June 24, 2017

European Central Bank Commits to Low Rate

FRANKFURT — The European Central Bank said Thursday it would keep interest rates low “for an extended period of time,” an unprecedented commitment for an institution that had steadfastly refused to offer guidance on its future policy.

With the promise of easy money, Mario Draghi, the president of the E.C.B., offered more certainty to investors at a time when tensions in the euro zone are rising again. So-called forward guidance is considered one of the tools available to central banks, but one the E.C.B. had never used before.

The E.C.B. kept its main rate at a record low of 0.5 percent, as expected. The relative calm in the euro zone has been threatened in recent weeks by a political crisis in Portugal, a rise in the risk premium that investors demand on bonds issued by Italy and other troubled countries, and reluctance by political leaders to take bold steps to build a stronger currency union.

The commitment to keep rates low may be intended to amplify the effect of the current low rate by reassuring investors that they can count on easy money for the foreseeable future. The statement may also be intended to counteract any effect in Europe from expectations that the U.S. Federal Reserve may gradually begin to tighten its monetary policy.

Mr. Draghi has in recent weeks stressed that policy makers were ready to take action if needed, but he and other members of the governing council have few obvious options left to stimulate the slumping euro zone economy.

“The bank has nothing more it can do within its institutional framework to help return the euro land economy to prosperity,” Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York, wrote in a note to clients Wednesday.

Mr. Draghi has often stressed that E.C.B. anti-crisis measures could only buy time for political leaders to take action, for example by removing barriers to entrepreneurship in countries like Italy or cooperating more closely to fix ailing banks.

But now that fear of a euro zone breakup has ebbed, political leaders seem to have lost the will to address flaws in the currency union. An agreement by national leaders last month on a so-called banking union, designed to make the euro zone less prone to financial crises, fell short of what economists say is needed to deal with weak lenders and restore the flow of credit.

In recent days market borrowing costs for Italy and Spain have risen again, after a political crisis in Portugal raised questions about whether governments will be able to withstand public discontent about budget cutting and joblessness.

Further increases in government borrowing costs could test whether the E.C.B. can deliver on its promise last year to buy bonds of troubled countries if needed to eliminate fear of a euro zone breakup. Some analysts doubt whether the program could be deployed quickly in a crisis, since it requires countries to request help and agree to economic reforms and other conditions.

The E.C.B. appears unwilling to take more radical steps to stimulate the economy, such as massive, broad-based bond purchases similar to the quantitative easing used by the U.S. Federal Reserve or Bank of England. Already, the E.C.B. faces a legal challenge in Germany’s Constitutional Court to the bond buying program and is probably reluctant to further alarm Germans fearful that they will wind up paying for problems in Italy and Spain.

The E.C.B.’s job is further complicated by signs that the Federal Reserve could begin to gradually roll back its economic stimulus in the United States. Expectations of tighter monetary policy in America have rattled financial markets in Europe, and Mr. Draghi may try to reassure investors that the E.C.B. is a long way from going in the same direction.

“President Draghi might note that contrary to market expectations the E.C.B. has not followed the strategy pursued by the Federal Open Market Committee in recent years,” economists at Royal Bank of Scotland wrote in a note to investors earlier this week, referring to the Federal Reserve’s policy-making panel.

Article source: http://www.nytimes.com/2013/07/05/business/global/european-central-bank-leaves-interest-rates-at-record-low.html?partner=rss&emc=rss

European Bank Cuts Rate, but Signals It Has Limits

For now, at least, the bank remains unwilling or unable to wield the more powerful weapons that many economists say are needed to jolt the Continent out of recession. Although the big fear last year that the euro zone might break apart has receded, the danger now could be prolonged stagnation like that which has plagued Japan for most of the last two decades.

Even the traditionally conservative Bank of Japan has become bolder lately, aggressively buying government bonds to try to double the supply of money in circulation and spur growth. Such a step would be unthinkable for Mr. Draghi, who is hemmed in by the bank’s narrower mandate and the historically rooted inflation fears of Germany, the euro zone’s wealthiest and most politically powerful member.

The bank’s Governing Council, meeting in Bratislava, reduced its benchmark interest rate to 0.5 percent from 0.75 percent. But that move was widely seen as mostly symbolic, to avoid the impression that the bank and Mr. Draghi were doing nothing as the euro zone recession threatens to engulf countries, like Germany, that have previously been spared.

The central bank also extended its promise to provide banks with as much cheap cash as they need through 2014, and said it was exploring ways to use the European Union’s house bank to stimulate lending to small businesses.

Intriguingly, Mr. Draghi raised the possibility of imposing a “negative rate” on the deposits that banks routinely park at the central bank, essentially charging banks to store their money. That might discourage lenders from hoarding cash rather than lending. But it could have unintended consequences. For example, banks might store huge amounts of paper bills as a low-risk alternative to central bank vaults.

Mr. Draghi insisted that the rate cut, which takes effect May 8, would stimulate growth, especially now that the economic slump that has afflicted Spain and Italy for more than a year is spreading north to countries like Germany, Austria and Finland. Anticipating skepticism, he urged reporters “not to underestimate the impact” of the rate cut and other measures at his news conference on Thursday, under a crystal chandelier in an ornate building that houses the Slovak Philharmonic. It was one of the central bank’s twice-a-year meetings in the capital of one of its member countries.

Not only is the central bank avoiding Japanese-style shock therapy, but it remains far from pursuing any equivalent of the so-called quantitative easing that the United States Federal Reserve Board and the Bank of England have used to stimulate their economies.

“The bright minds in the Eurotower are still working hard to come up with a new magic bullet,” Carsten Brzeski, an economist at ING Bank, said in a note to clients, referring to the central bank’s headquarters in Frankfurt. “In the meantime, the only thing Draghi found in his tool kit was an old tool and a chill pill to keep markets happy in the waiting room.”

Under the euro zone’s political structure as a loose confederation, the European Central Bank does not have the monolithic power of the Fed, Bank of England or Bank of Japan. Even if Mr. Draghi and some others on the 23-member Governing Council wanted to do more to spur growth, they are hamstrung by a charter that obliges the bank to defend price stability above all else and forbids it from providing financing to governments.

Mr. Draghi has at times been willing to stretch that mandate. Last summer, for example, he promised to buy government bonds in unlimited amounts to control borrowing costs. His expression of resolve has been enough to keep speculators at bay and tamp down the interest rates on Spanish and Italian debt, without any actual bond purchases.

Mr. Draghi also must contend with the politics of the central bank’s Governing Council, which includes the heads of all 17 national central banks in the euro zone. Germany, in particular, remains staunchly opposed to bond buying or other aggressive measures to stimulate growth, for fear of inflation.

Article source: http://www.nytimes.com/2013/05/03/business/global/03iht-euro03.html?partner=rss&emc=rss

Blaming Europe’s Central Bank

But increasingly, people on the financially stricken island nation are focusing their anger on another institution, one that is more accustomed to praise for its handling of the euro zone crisis: the European Central Bank.

Throughout much of the euro zone’s financial crisis, the bank has faced criticism for not doing enough — not printing enough money or not buying enough bonds or not cutting interest rates fast enough. In Cyprus, though, the bank is accused of doing too much.

When the bank’s governing council meets on Thursday, the hopes of recessionary Europe are pinned to its doing something to stimulate the regional economy — even if that is only the largely symbolic step of reducing its already historically low benchmark interest rate a quarter-percentage point, to 0.5 percent.

Some hold out hope that the bank and Mario Draghi, its leader, might soon take even bolder stimulus steps — although just what remains unclear.

In coming months and years, the euro zone plan is for the central bank to play an even more central role in overseeing European banks — acting as the master supervisor and, eventually, wielding the rule book by which failing banks would be banished from the field.

All of which is why complaints from Cyprus, the latest euro zone country to sustain a banking collapse, sound like either a startling indictment or a sore loser’s excuse, depending on one’s point of view.

“The big question is, did the E.C.B. help Cyprus or did it make things worse?” asked Nicholas Papadopoulos, chairman of the Committee on Financial and Budgetary Affairs in the Cyprus Parliament. Expressing a view widely shared in the country, he said, “My opinion is that it made things worse.”

Critics in the Cypriot government that replaced the communists in February say the central bank broke its own rules by enabling Cyprus’s central bank to keep the country’s second-largest lender, Laiki Bank, on life support long after it was insolvent. That made the nation’s banking collapse worse than it might have been otherwise, critics say.

The new Cypriot president has recently exchanged harshly worded letters with Mr. Draghi. But even as Cyprus levels its criticisms, much of Europe still wants the European Central Bank to ride to the rescue.

Central bank officials declined to comment in detail for this article, but they said that the Central Bank of Cyprus had taken the lead on crisis measures.

The European Central Bank’s defenders say it is unfair to blame it for a larger policy blunder by European political leaders.

“The big mistake was not forcing negotiations in 2012 when it was obvious Cyprus was in trouble,” said Nicolas Véron, a senior fellow at Bruegel, a research organization in Brussels. “But I wouldn’t single out the E.C.B. It’s really a collective failure of European institutions.”

Still, the suggestion by a euro zone member, even crippled Cyprus, that the central bank committed serious policy missteps illustrates the hazards lurking as the bank heads further outside the realm of conventional monetary policy in hopes of keeping the euro zone intact.

As Cyprus demonstrates, the European Central Bank risks being sucked into the quagmire of local politics by measures intended to help struggling banks and prevent financial shocks. The hazard of such political entanglements, and the potential to make mistakes, might only grow as the bank begins assuming control of supervising euro zone banks in July.

Cypriot critics say the central bank acted as an enabler by acquiescing as the Central Bank of Cyprus provided low-cost financing to keep Laiki Bank afloat long after it should have been left to fail. The delay in dealing with problems at Laiki raised the cost of the bailout for taxpayers in Cyprus and the large depositors who will bear much of the cost, critics in the government say.

Article source: http://www.nytimes.com/2013/04/30/business/global/blaming-europes-central-bank.html?partner=rss&emc=rss

European Central Bank Holds Rate Steady

Mario Draghi, president of the E.C.B., also noted during a press conference in Frankfurt that the error of the bank deposit tax was quickly corrected, and that Cyprus was “no template” for future crises.

He stressed the E.C.B.’s willingness to take action in response to threats to euro zone stability.

“If anything the events on Cyprus have reinforced the governing council’s determination to support the euro while maintaining price stability and acting within our mandate,” he said.

The muted market reaction to events in Cyprus showed “we are now in a position to cope with serious crises without them becoming existential or systemic,” he said.

Mr. Draghi spoke at a press conference after the governing council of the E.C.B. left its benchmark interest rate unchanged at a record-low 0.75 percent, as expected.

The Bank of England akept its benchmark interest rate unchanged on Thursday amid concern that the British economy fell back into recession at the beginning of the year.

The central bank decided to leave its interest rate at the record low of 0.5 percent, where it has been since March 2009. It also held its program of economic stimulus at £375 billion, or about $568 billion.

The governor of the Bank of England, Mervyn A. King, has been pushing this year for more fiscal stimulus to help the economy grow, but has been overruled by other members of the central bank’s interest rate setting committee. Mr. King is to be succeeded in three months by Mark J. Carney, the governor of the Bank of Canada.

The E.C.B. president faced pressure to reassure financial markets that he would not let a banking crisis on the island become a threat to the integrity of the euro zone.

Since Mr. Draghi’s last press conference a month ago, the second-largest bank in Cyprus has been shut down, wealthy depositors in Cyprus banks face huge losses on their holdings, and the country has imposed restrictions on large transfers of money to prevent a flight of capital.

The E.C.B. was a key player in events, in effect threatening to withdraw support for Cyprus banks unless local political leaders agreed to a bailout that would impose much of the cost on rich depositors, many of them Russians.

The turmoil in the small island nation has begun to blunt business confidence in the euro zone, threatening a recovery that was already shaky.

Data from Markit, a research concern, confirmed the continued downturn on Thursday, as a survey of business activity showed a marked drop in France and a stalling of growth in Germany, the largest and most robust euro zone economy.

The index fell to 46.4 in March, down from 47.9 in February and slightly lower than a preliminary reading of 46.5 two weeks ago, Markit said. The index has been below 50, the level that separates contraction from growth, in all but one of the 20 previous months.

The figure for France was 41.3 in March, the lowest level since February 2009 and down from 43.7 in February.

Germany’s economy, while still nominally growing, slowed to a crawl in March, with the index falling to 50.6 from 53.3 in February.

In keeping with the bank’s mandate to ensure price stability in the 17 European Union countries that use the euro, Mr. Draghi said that in coming weeks the E.C.B. would closely monitor the outlook for prices.

With inflation already below the E.C.B.’s target of about 2 percent, the statement could be interpreted as a sign that policy makers were more open to cutting rates in order to prevent deflation, a broad decline in prices that can be more destructive than inflation.

Mr. Draghi also said, however, that risks to prices stability are “broadly balanced.”

The E.C.B. chief is also under pressure to reassure investors and euro zone citizens that the E.C.B. will act to prevent an exodus of deposits from other weak countries like Italy or Spain, where banks are also troubled. A bank run in those countries would pose a much more serious threat to the euro than tiny Cyprus.

There are limits, however, to what the E.C.B. can do without violating its mandate. The E.C.B. can supply banks with cheap loans, but it cannot offer cash to replenish depleted bank reserves.

While European leaders have agreed to give the E.C.B. power to oversee euro zone banks, they remain divided on measures to protect bank depositors and to deal with failed financial institutions.

Events in Cyprus, which were unprecedented in the euro zone, have added urgency to the debate about a banking union.

“The ongoing busting of euro area taboos makes it more urgent to deliver economic recovery, as well as to accelerate banking union,” analysts at Barclays Capital wrote in a note before the meeting.

Jack Ewing reported from New York

Article source: http://www.nytimes.com/2013/04/05/business/global/european-central-bank-holds-steady-on-interest-rate.html?partner=rss&emc=rss

Europe Officials Seek to Contain Cyprus Damage

The Cyprus bailout “was the solution to a problem that had become desperate,” Benoît Coeuré, a Frenchman and a member of the E.C.B.’s governing council, told Europe 1 radio. “Cyprus was in bankruptcy, that is something that doesn’t exist anywhere else in the euro zone.”

“The situation was so unique that it needed a unique solution,” he added. “But I don’t see any reason to employ the same methods elsewhere.”

In the €10 billion, or $13 billion, agreement announced Monday between Cyprus and its three international lenders, only insured accounts up to €100,000 were protected from taxation to help fund the bailout, with estimates that uninsured depositors with larger accounts could face losses of up to 40 percent. The lenders, known as the troika, are the E.C.B., the European Commission and the International Monetary Fund.

Mr. Coeuré criticized the head of the Eurogroup of euro zone finance chief, Jeroen Dijsselbloem, for suggesting on Monday that the Cyprus model, in which losses were forced on large depositors, might be used as a “template” any for future bailouts.

“He was wrong to say what he did,” Mr. Coeuré said. “The experience of Cyprus is not a model for the rest of the euro zone, because the situation there attained a magnitude that is not comparable to any other country.”

Mr. Dijsselbloem later retracted his words, saying in a statement that Cyprus was “a specific case with exceptional challenges,” and that bailouts were “tailor-made to the situation of the country concerned and no models or templates are used.”

But the damage was done: Global stock markets gave up early gains Monday as Mr. Djisselbloem’s words bred new anxiety about the supposed sanctity of euro zone bank deposits. And the Cypriot government decided to extend a bank holiday until Thursday, fearing a possible run by nervous depositors.

The island’s faltering banks suffered a new indignity on Tuesday, as Fitch Ratings said it was cutting its credit grades on Cypriot banks because of the losses imposed by the bailout deal on senior creditors. Fitch said it was cutting its rating on Cyprus Popular Bank, to “default,” as that bank, also known as Laiki, is shut down.

Fitch also cut its rating on Bank of Cyprus, the island nation’s biggest bank, to “restricted default,” a grade Fitch said means the bank has experienced a payment default on a bond, loan or other material obligation but has “not entered into liquidation or ceased operating.”

Laiki’s soured assets are being hived off into a so-called bad bank. Its good assets are being transferred to Bank of Cyprus, which is being recapitalized by converting uninsured depositors’ claims into equity. Fitch said it expects the losses on Bank of Cyprus’s uninsured deposits “to be material.”

Article source: http://www.nytimes.com/2013/03/27/business/global/europe-officials-seek-to-contain-cyprus-damage.html?partner=rss&emc=rss

A Downgrade by Fitch Leads to a Decline in Greek Bonds

Greek bonds led declines among euro area nations on Friday on concern a restructuring of its debt would reignite Europe’s sovereign debt crisis.

The spread, or yield difference, between benchmark Greek debt and German bunds widened to the most on record.

Fitch Ratings said that it downgraded Greece’s credit ratings by three levels, to B+ from BB+, four notches below investment grade.

German bonds rallied as Jens Weidmann, the president of the Deutsche Bundesbank and a member of the European Central Bank’s governing council, said the bank might no longer be able to accept Greek bonds as collateral if maturities were extended, stoking demand for the relative safety of Europe’s benchmark debt.

“I see the downgrade as a response to the continued deterioration of Greece’s fiscals and the need for further significant austerity measures,” said Peter Chatwell, a fixed-income strategist at Crédit Agricole in London. “The decision is not a great shock, although I’m sure the timing is unhelpful for many as the market has already slid quite strongly today.”

The prime minister of Luxembourg, Jean-Claude Juncker, this week proposed “reprofiling” Greek debt maturities as a way of limiting the losses of private bondholders.

European Central Bank officials opposed the idea, with an executive board member, Jürgen Stark, saying any form of restructuring would be a catastrophe for the banking system. Another board member, Lorenzo Bini Smaghi, said a solution for reducing debt “but not paying for it will not work.”

Ioannis Sokos, an interest-rate strategist at BNP Paribas in London, said a reprofiling of the debt appeared to be inevitable. “It’s not a matter of if there’s a reprofiling. It’s a matter of when and how significant it is.”

Meanwhile, the International Monetary Fund said Ireland’s ability to sell sovereign bonds remains “elusive” and its situation may worsen unless the European Union develops a more comprehensive plan to deal with the region’s debt crisis.

Ireland’s plan to stabilize its banks and reduce its deficit is “off to a strong start,” the fund said in a review on Friday of its aid agreement with Ireland. “This decisive approach to program implementation, which should be supported by a more comprehensive European plan, offers the best prospect to overcome market doubts.”

Ireland received an 85 billion euro ($121 billon) bailout in November, led by the European Union and I.M.F., as bank rescue costs related to a real estate collapse led to a mounting fiscal deficit. It was the second euro region nation to get aid after Greece last May, and bond yields have jumped since Portugal sought aid last month.

“Notwithstanding the strong policy implementation, risks to the program have risen in some respect,” said Ajai Chopra, deputy director of the I.M.F.’s European department. “Financial market conditions are more adverse, with spreads at unsustainable levels. This is due to external developments.”

He said there was a need for an “upgrade” to the European Financial Stability Facility to deal more comprehensively with problems, and that fixing Ireland’s banks would be assisted by a medium-term European Central Bank funding plan.

“We hope that such financing will be available” as Ireland sticks to bank-deleveraging targets, he said.

Irish bond yields have jumped in the last month. The spread between Irish 10-year yields and German bunds was at 741 basis points Friday. That compares with 594 basis points on April 6, the day Portugal said it would seek aid. The Greek premium was at 1,344 points.

“Deepening financial stress for other euro area periphery countries presents a critical yet largely exogenous risk that needs to be addressed through a more comprehensive European plan,” the I.M.F. said.

The fund also said Ireland’s 2011 growth outlook was “moderately weaker” than when the aid package was approved. Exports will be the main driver of growth as domestic demand “will continue to face headwinds,” it said.

“A continued inability to regain market access for the sovereign, and hence for the banks, would impede growth,” the I.M.F. said.

Article source: http://feeds.nytimes.com/click.phdo?i=0975703da83aa19cb7378851a35af0d0

European Bank Raises Rate for 1st Time Since 2008

Jean-Claude Trichet, the E.C.B. president, argued that the bank needed to attack inflation even though many economists believe that raising borrowing costs could damage weaker economies like Portugal, which only a day earlier became the third country in the euro area to request an international bailout.

With what sometimes sounded like contrarian pride, Mr. Trichet said that the rate increase was perfectly in tune with economic growth.

“There is no contradiction, but full complementarity in doing what is our prime mandate, which is to deliver price stability,” he said at a news conference after a meeting of the governing council of the E.C.B. “We do what we have to do even when it is difficult, even when it is not necessarily pleasing everyone.”

Asked by an Irish reporter what he would say to families in Ireland who will now have to make higher payments on their adjustable-rate mortgages, Mr. Trichet said low inflation “benefits all, including, of course, those who have the most difficulty at the present.”

The increase in the benchmark policy rate to 1.25 percent from 1 percent puts the E.C.B. at odds with the Federal Reserve, which continues to stimulate the U.S. economy, as well as the Bank of England, which on Thursday left its benchmark interest rate at 0.5 percent, despite an increase in inflation.

The E.C.B.’s decision, which Mr. Trichet said was unanimous on the 23-member governing council, drew muted praise from places like Germany, where the rate increase could help prevent the economy from overheating. But the reaction from other quarters was sometimes scathing.

The rate increase could have dire consequences for Greece, Ireland and Portugal when they are already having severe problems borrowing money at reasonable rates, some economists said. Portugal’s caretaker government gave in to market pressures on Wednesday and joined Greece and Ireland in seeking an emergency bailout.

“Tighter monetary policy will only add to the burden of reeling peripheral countries and increase the risk of a much worse debt crisis,” Marie Diron, a former E.C.B. economist who now advises the consulting firm Ernst Young, said in a note Thursday. “We hope that this rate hike is not the start of a series of rate increases that would seriously endanger the fragile recovery.”

Michael T. Darda, chief economist at MKM Partners, a research firm in Stamford, Connecticut, said the E.C.B. was repeating the same mistake that the Fed made in the 1970s and 1980s, when it responded to higher oil prices by raising rates, and, instead, created recessions.

“Those recessions were not oil-induced but Fed-induced,” said Mr. Darda, citing an academic paper by Ben S. Bernanke, now the Fed chairman, that criticized Fed policy at the time.

Though interest rates are still low by historical standards, they are high in relation to Europe’s stuttering growth rate, Mr. Darda said.

“The ultimate effect is that they are going to restrain inflation in Germany and France but will cause deflation in the periphery, which will cause austerity programs to fail,” Mr. Darda said by telephone. “This could very well spread into Spain and Italy.”

Mr. Trichet said that a rate increase would hold down long-term borrowing costs, by giving lenders confidence that inflation would not erode their profits.

The Bank of England faces similar inflation concerns, but left its main policy rate alone after recent economic data painted a mixed picture of the strength of Britain’s recovery. It also kept its bond-purchase plan at £200 billion, or $325 billion.

Not all economists were so critical of the E.C.B. move.

“Fear that this step by the E.C.B. will lead to a worsening of the crisis in the peripheral countries is overdone,” Michael Heise, chief economist at the German insurer Allianz, said in a note to clients. Even if the E.C.B. raises the rate to 2 percent by the end of the year, real interest rates would still be lower than inflation, he said.

In light of strong German growth, the “rate decision was without doubt logical,” Karl-Heinz Boos, executive director of the Association of German Public Sector Banks, said in a statement, though he added that the E.C.B. should be cautious about raising rates further.

And Mr. Trichet suggested that another rate increase soon was not a foregone conclusion. “We did not decide today that it was the first of a series of interest rate increases,” he said. Analysts interpreted his remarks to mean that the E.C.B. might wait several months before raising rates again.

Article source: http://www.nytimes.com/2011/04/08/business/global/08iht-rates08.html?partner=rss&emc=rss