September 16, 2019

Wall Street Sharply Higher

Stocks rose on Wall Street on Thursday, with the Standard Poor’s 500-stock index topping the 1,700 level for the first time, after data pointed to a modestly improving global economy and kept afloat expectations for continued support from global central banks.

China’s official purchasing managers’ index for manufacturing rose to 50.3 in July, defying expectations that it would fall and suggesting a rise in activity as growth in new orders increased.

Adding to the optimism, Markit’s purchasing managers’ index for euro zone manufacturing rose to 50.3 in July from 48.8 in June, topping the 50 threshold indicating growth for the first time since July 2011.

But a rival HSBC report on China’s manufacturing was more gloomy, falling to 47.7 in July, the weakest reading since August 2012, which tempered growth expectations.

Both the Bank of England and European Central Bank kept interest rates at 0.5 percent. While the Bank of England opted not to revive its bond-buying program, Mario Draghi, president of the European Central Bank, reiterated that its rates would remain at their present level or lower for an “extended period” of time.

In its latest policy statement on Wednesday, the Federal Reserve gave no hint that a reduction in the pace of its bond-buying program was imminent, as the economy continues to recover but is still in need of support.

“Bottom line, it’s still free money everywhere — whether it is in the U.S., the Bank of England, the E.C.B. — they are all saying the same thing and everyone is kind of loving it,” said Joseph Saluzzi, co-manager of trading at Themis Trading in Chatham, N.J.

In morning trading, the Dow Jones industrial average rose 0.8 percent, the S. P. 500 gained 0.96 percent and the Nasdaq added 1 percent.

Weekly initial jobless claims dropped 19,000, to a seasonally adjusted 326,000, the lowest level since January 2008 and better than the forecast of 345,000, suggesting a steadily improving labor market.

The drop in initial claims, coupled with Wednesday’s better-than-expected ADP employment report, bodes well for payroll data on Friday.

The data provider Markit said its final purchasing managers’ index for manufacturing in the United States rose to 53.7 for July, the highest since March, beating both a preliminary July estimate of 53.2 and the 51.9 reading for June.

The Institute for Supply Management said its index of national factory activity rose to 55.4 in July from 50.9 in June, its highest level since June 2011, topping expectations for 52.

But construction spending dropped 0.6 percent in June, below expectations of a 0.4 percent rise.

The benchmark S. P. index had traded within 10 points of the 1,700 level in the previous 10 sessions, representing a technical resistance level that could lead to more gains if convincingly pierced.

Shares in Procter Gamble, the world’s largest household products maker, rose 2.1 percent, to $81.97, after posting a quarterly profit that fell less than expected. It added that full-year earnings should rise at least as much as last year.

But shares in Exxon Mobil dipped 1.8 percent, to $92.06, after second-quarter profit declined.

The consumer review Web site Yelp surged 19.6 percent, to $49.95 a share, after it posted a smaller-than-expected quarterly loss and forecast third-quarter revenue above analysts’ expectations.

According to Thomson Reuters data through Wednesday morning, of the 331 companies in the S. P. 500 that have reported earnings for the second quarter, 67.7 percent have exceeded analyst expectations.

As earnings season enters its latter stages, 40 companies in the S. P. 500 are expected to report earnings on Thursday, including Kraft Foods.

Article source: http://www.nytimes.com/2013/08/02/business/wall-street-sharply-higher.html?partner=rss&emc=rss

Fed’s Easing of Stimulus Could Hamper European Recovery

Recent fears that the Federal Reserve could begin withdrawing its economic stimulus have prompted interest rates to rise around the world, putting business loans further out of reach for companies in Spain, Italy and France.

For the United States, the Fed easing on stimulus efforts would signal that the American economic rebound has enough momentum to continue on its own. But for most of Europe, still struggling through a recession, the Fed’s moves could make a recovery even harder to achieve.

The problem is evident to companies like Herbert Kannegiesser, which makes equipment here for large commercial laundries. It is the kind of niche industrial business that has continued to grow even during the economic crisis and helped sustain German exports. But laundry systems costing hundreds of thousands of euros are a tougher sell when loans are more expensive.

“Europe is our home market,” Martin Kannegiesser, son of the company’s founder, said in an interview in this rural corner of northwestern Germany. “Banks, especially outside of Germany, are very reluctant to give loans and financing to small and medium-size businesses. That is a problem.”

The Kannegiesser problem is a microcosm of the broad issue confronting Mario Draghi, president of the European Central Bank. He must keep trying to find ways to steer the euro zone out of recession even as his American counterpart at the Fed, Ben S. Bernanke, contemplates how soon to take his foot off the accelerator of the United States economy.

Unfortunately for European executives and central bankers, what happens in Washington does not stay in Washington. Rising yields, or market interest rates, on United States Treasury bonds have had worldwide repercussions.

The yield on the 10-year Treasury bond is now 2.66 percent, compared with 2.19 percent before remarks by Mr. Bernanke on June 19 raised expectations that the Fed would soon begin to taper off its stimulus program of buying government securities.

The better return available on American debt draws money away from Europe and pushes up rates for euro zone government bonds as well as commercial loans. Yields on Spanish and Italian government bonds rose sharply after Mr. Bernanke’s remarks. Euro zone yields have retreated somewhat since but are still higher than they were before June 19. The Spanish 10-year bond is at 4.79 percent, compared with 4.5 percent in early June.

“From the European point of view, the worst thing that could happen is an increase in long-term interest rates, which is what the Fed action is threatening to do,” said Charles Wyplosz, a professor of international economics at the Graduate Institute in Geneva.

The timing is terrible for Europe. The European Central Bank is still fighting a severe credit crisis in Southern Europe, which is making it difficult for countries like Spain to emerge from a prolonged recession that has pushed the unemployment rate to 27 percent.

Even before Mr. Bernanke mentioned the word “taper,” lending in Europe had been in a slump. In May, the most recent month for which data is available, loans to corporations excluding banks fell at an annual rate of 3.1 percent, according to European Central Bank data.

The central bank in early May cut its main interest rate to 0.5 percent, a record low. Last week, in an unprecedented step, Mr. Draghi assured investors that the rate would not rise above 0.5 percent for an extended period and could be cut further.

European political leaders are a long way from addressing the causes of the euro zone crisis and need all the help they can get from low interest rates. On Wednesday, European Union officials announced a plan to deal with failing banks that would include centralized decision making and an emergency fund. But the plan, considered essential to prevent bank failures from taking down entire nations, could face resistance from Germany and other countries wary of giving up control over their banks.

Article source: http://www.nytimes.com/2013/07/11/business/global/feds-easing-of-stimulus-could-hamper-european-recovery.html?partner=rss&emc=rss

Federal Reserve’s Easing of Stimulus Could Hamper a European Recovery

Recent fears that the Federal Reserve could begin withdrawing its economic stimulus have prompted interest rates to rise around the world, putting business loans further out of reach for companies in Spain, Italy and France.

For the United States, the Fed easing on stimulus efforts would signal that the American economic rebound has enough momentum to continue on its own. But for most of Europe, still struggling through a recession, the Fed’s moves could make a recovery even harder to achieve.

The problem is evident to companies like Herbert Kannegiesser, which makes equipment here for large commercial laundries. It is the kind of niche industrial business that has continued to grow even during the economic crisis and helped sustain German exports. But laundry systems costing hundreds of thousands of euros are a tougher sell when loans are more expensive.

“Europe is our home market,” Martin Kannegiesser, son of the company’s founder, said in an interview in this rural corner of northwestern Germany. “Banks, especially outside of Germany, are very reluctant to give loans and financing to small and medium-size businesses. That is a problem.”

The Kannegiesser problem is a microcosm of the broad issue confronting Mario Draghi, president of the European Central Bank. He must keep trying to find ways to steer the euro zone out of recession even as his American counterpart at the Fed, Ben S. Bernanke, contemplates how soon to take his foot off the accelerator of the United States economy.

Unfortunately for European executives and central bankers, what happens in Washington does not stay in Washington. Rising yields, or market interest rates, on United States Treasury bonds have had worldwide repercussions.

The yield on the 10-year Treasury bond is now 2.66 percent, compared with 2.19 percent before remarks by Mr. Bernanke on June 19 raised expectations that the Fed would soon begin to taper off its stimulus program of buying government securities.

The better return available on American debt draws money away from Europe and pushes up rates for euro zone government bonds as well as commercial loans. Yields on Spanish and Italian government bonds rose sharply after Mr. Bernanke’s remarks. Euro zone yields have retreated somewhat since but are still higher than they were before June 19. The Spanish 10-year bond is at 4.79 percent, compared with 4.5 percent in early June.

“From the European point of view, the worst thing that could happen is an increase in long-term interest rates, which is what the Fed action is threatening to do,” said Charles Wyplosz, a professor of international economics at the Graduate Institute in Geneva.

The timing is terrible for Europe. The European Central Bank is still fighting a severe credit crisis in Southern Europe, which is making it difficult for countries like Spain to emerge from a prolonged recession that has pushed the unemployment rate to 27 percent.

Even before Mr. Bernanke mentioned the word “taper,” lending in Europe had been in a slump. In May, the most recent month for which data is available, loans to corporations excluding banks fell at an annual rate of 3.1 percent, according to European Central Bank data.

The central bank in early May cut its main interest rate to 0.5 percent, a record low. Last week, in an unprecedented step, Mr. Draghi assured investors that the rate would not rise above 0.5 percent for an extended period and could be cut further.

European political leaders are a long way from addressing the causes of the euro zone crisis and need all the help they can get from low interest rates. On Wednesday, European Union officials announced a plan to deal with failing banks that would include centralized decision making and an emergency fund. But the plan, considered essential to prevent bank failures from taking down entire nations, could face resistance from Germany and other countries wary of giving up control over their banks.

Article source: http://www.nytimes.com/2013/07/11/business/global/feds-easing-of-stimulus-could-hamper-european-recovery.html?partner=rss&emc=rss

Lowering Forecast, European Central Bank Keeps Rate Steady

FRANKFURT — Defying some calls for bolder action, the European Central Bank left its benchmark interest rate unchanged on Thursday, even as it changed its economic forecast to a gloomier reading for the rest of the year.

The E.C.B. left its main rate at 0.5 percent, as expected. Despite ever more insistent calls from economists for more aggressive moves to stimulate lending in the euro zone, the E.C.B. may have decided it needed to assess the significance of a slight uptick in inflation as well as some evidence that consumers and business managers are becoming less pessimistic.

In a news conference after the announcement, Mario Draghi, the president of the E.C.B., cited “downside risks surrounding the economic outlook for the euro area.” Those, he said, include the possibility of weaker-than-expected domestic and global demand and slow or insufficient policy changes in euro zone countries.

He also said the central bank was lowering its 2013 economic forecast for the euro area, now expecting the region’s economy to shrink by 0.6 percent this year, worse than the 0.5 percent decline previously forecast. But the central bank expects growth in the euro zone of 1.1 percent next year — slightly higher than previous forecasts.

The E.C.B. had hinted in recent months the bank was considering additional unconventional measures to fix a credit crunch in southern Europe. That might even include the unprecedented step of obliging banks to pay to store their money at the central bank, rather than earning interest on it — resulting in a so-called negative deposit rate. The goal would be to force banks to put their money to work, by lending it. Mr. Draghi indicated that the central bank’s governing council, which met before he spoke, had considered that move but decided not to proceed with it.

Judging from recent speeches by E.C.B. policy makers, they are concentrating more on getting banks to deal with problem loans and other issues that may be interfering with their ability to lend.

Mr. Draghi called for euro zone policy makers to move forward with a uniform system for winding down failing banks in an orderly manner.

Marie Diron, an economist who advises the consulting firm Ernst Young, said that, while fixing weak banks was a worthy goal, it was unlikely to yield dividends for some time.

While “a cleanup of banks’ balance sheets is necessary to ensure sustained growth in the medium term, it would probably be negative for growth in the short term,” Ms. Diron wrote in an e-mail before the meeting Thursday. “It is not clear why the E.C.B. seem to have changed its focus since early May.”

Some recent economic indicators have kept alive hope that the euro zone is close to hitting bottom. Surveys have shown that businesses and consumers are a little less pessimistic than they were. And inflation has accelerated slightly, although it is still below the E.C.B. target of about 2 percent.

Many economists have urged the E.C.B. to be bolder, as unemployment remains a persistent problem, with joblessness in the euro zone at a record high of 12.2 percent. France on Thursday reported a 10.8 percent unemployment rate for the first quarter, also a record high

James Bullard, president of the Federal Reserve Bank of St. Louis, said in Frankfurt last month that the E.C.B. should consider so-called quantitative easing similar to that undertaken by the Fed — large bond purchases meant to drive down market interest rates.

It is very unusual for central bankers to put pressure on their peers so publicly. But Mr. Bullard warned that Europe was acting as a dead weight on the global economy.

“You have to be concerned,” he told an audience in Frankfurt. “The European Union as a whole is the biggest economy in the world.”

Article source: http://www.nytimes.com/2013/06/07/business/global/ecb-keeps-interest-rates-unchanged-in-hopes-for-recovery.html?partner=rss&emc=rss

Monte dei Paschi di Siena Admits $985 Million in Losses From Secret Deals

FRANKFURT — Monte dei Paschi di Siena, an ancient Tuscan bank whose troubles have shaken Italian politics and caused jitters around the euro zone, on Wednesday confirmed earlier estimates of losses from a series of secret transactions that were used to conceal the scope of the bank’s problems.

The bank said its losses from three questionable transactions were 730 million euros (about $985 million), only slightly higher than an estimate in October of a loss of 720 million euros. The disclosure Wednesday, after a meeting of the bank’s board that lasted into the evening, could calm financial markets if investors conclude that all of the bank’s skeletons are out of the closet.

The disclosure came as Italian prosecutors said on Wednesday they had ordered the seizure of assets worth about 40 million euros in connection with possible fraud against Monte dei Paschi, Reuters reported. Prosecutors did not give details, but Italian news organizations reported that the money was seized from other banks that did business with Monte dei Paschi.

Problems at Monte dei Paschi, founded in 1472 and commonly known as M.P.S., have rippled far beyond the medieval Tuscan city of Siena, which is also the bank’s largest shareholder.

Former Prime Minister Silvio Berlusconi has seized on the scandal as an issue as he tries to make a political comeback.

The timing of the scandal has been inopportune for Mario Draghi, the president of the European Central Bank, raising questions about his supervision of Italian banks when he was governor of the Bank of Italy, the Italian central bank.

The Bank of Italy has insisted that it subjected M.P.S. to intense scrutiny. Last week the central bank issued a detailed account of the numerous steps it took since 2008 to force Monte dei Paschi to raise capital, install new management and deal with risks stemming from its holdings of Italian bonds, which were declining in value.

Some managers withheld critical information about the questionable trades that came to light only recently, the Bank of Italy said.

But at the least the case of Monte dei Paschi has illustrated the limits of bank supervision, and called into question whether the central bank would be able to do a better job than national supervisors at keeping an eye on banks.

Mr. Draghi is likely to face many questions about Monti dei Paschi when the central bank holds its regular monthly news conference on Thursday.

The problems at M.P.S., which led to a 3.9 billion euro ($5.3 billion) bailout by the Italian government, have also led to criminal investigations.

Prosecutors in Siena on Wednesday heard testimony from Antonio Vigni, former chief executive of Monte dei Paschi and one of several previous managers being investigated on a series of charges including false accounting and fraud. Giuseppe Mussari, the bank’s former president, will also be heard this week.

The bank’s troubles stem in part from the 9 billion euro ($12 billion) purchase of Antonveneta bank in 2008, just months after the Spanish bank Santander had bought it for 6.6 billion euros ($8.1 billion). The Siena magistrates are also looking into allegations of bribery related to that deal.

Investigations have branched out to other Italian cities, including Trani, in Sicily, where prosecutors are looking closely at derivatives operations carried out by Monte dei Paschi and other Italian banks as well as the role of the regulatory bodies entrusted with monitoring those banks.

Jack Ewing reported from Frankfurt and Elisabetta Povoledo from Rome.

Article source: http://www.nytimes.com/2013/02/07/business/global/monte-dei-paschi-di-siena-admits-985-million-in-losses-from-secret-deals.html?partner=rss&emc=rss

Banks Win an Easing of Asset Rules

The rules are meant to make sure banks have enough liquid assets on hand to survive the kind of market chaos that followed the collapse of Lehman Brothers in 2008. Meeting in Basel, Switzerland, the committee, made up of bank regulators from 26 countries, also loosened the definition of liquid assets.

The decision marks the first time regulators have publicly backed away from the strict rules imposed by the Basel Committee in 2010. The easing takes some pressure off banks, which have complained that the new guidelines would throttle lending and hurt economic growth.

Mervyn A. King, governor of the Bank of England and chairman of the group, said there was no intent to go easier on lenders. “Nobody set out to make it stronger or weaker,” he said of the rules in a conference call with reporters, “but to make it more realistic.”

Still, the decision was a public concession from the authors of the so-called Basel III rules that the regulations could hurt growth if applied too rigorously. It was endorsed unanimously by participants, including Ben S. Bernanke, chairman of the Federal Reserve, and Mario Draghi, president of the European Central Bank.

The rules were drafted by the Basel Committee on Banking Supervision, named after the Swiss city where many of the discussions have taken place. The Basel rules are not binding on individual countries, but there is substantial international pressure for countries to comply.

Much of the debate so far has focused on increasing the amount of capital that banks hold in reserve to absorb losses. After Lehman’s collapse, trust among financial institutions evaporated and banks refused to lend to one another. Many banks discovered that they did not have enough cash or readily salable assets to meet short-term obligations. In some cases, banks that were otherwise solvent faced collapse.

The rules require banks to have enough cash or liquid assets on hand to survive a 30-day crisis, like a run on deposits or a credit rating downgrade. They will not take full effect on Jan. 1, 2015, as originally planned, but will be phased in more gradually and not take full effect until Jan. 1, 2019.

This so-called liquidity coverage ratio also defines what qualifies as liquid assets: the assets cannot be already pledged as collateral, for example, and they must be under the control of a bank’s central treasury, so it can act quickly to raise cash if needed.

On Sunday the central bankers and regulators broadened the definition of liquid assets. For example, banks will be allowed to use securities backed by mortgages to meet a portion of the requirement.

A large majority of big banks already meet the requirements, but some do not, Mr. King said. The decision reduces pressure on those banks to hold more cash or buy high-quality government bonds to meet the rules on liquid assets.

The panel said it was continuing to discuss another set of regulations aimed at preventing banks from becoming overly dependent on short-term funds. But it did not announce any new decisions Sunday.

Before the Lehman bankruptcy, some institutions made long-term loans using money borrowed for very short periods. The practice is a normal part of banking, but it can, if carried to extremes, make a bank vulnerable to market disruptions.

Depfa, an Irish bank owned by Hypo Real Estate of Germany, issued long-term loans to governments using money it borrowed in short-term money markets. The bank made a profit from the difference between what it could charge for the long-term loans and what it paid to borrow short term. But after Lehman collapsed, Depfa was no longer able to roll over its obligations by borrowing on international money markets. Its parent company required a taxpayer bailout to survive.

The new rules seek to ensure that banks have a variety of fund sources and are not overly dependent on one market or lender.

Although the Basel Committee drafts global banking rules, it is up to individual countries to write them into law. The United States has lagged countries including China, India and Saudi Arabia in putting the rules into force, according to an assessment by the Basel Committee in September. The American delay has led to some grumbling from other members.

Bank industry representatives have argued that stricter capital and liquidity requirements increase banks’ financing costs, which they must pass on to customers. One of the most vocal critics of the new regulations is the Institute of International Finance in Washington, whose members include many large American and European banks, including Goldman Sachs, Morgan Stanley and Deutsche Bank.

In October, the institute issued a report arguing that the rules would make banks less willing to issue longer-term loans or hold debt issued by smaller companies, whose bonds usually have lower credit ratings. The rules would also penalize banks in emerging countries, the institute said, because they have less access to low-risk assets.

Proponents of the new rules argue that banks will be able to raise money more cheaply if they are perceived as being less vulnerable, thus offsetting the cost of the new rules. They point out that American banks have generally recovered from the crisis more quickly than European banks because United States regulators forced them to raise new capital.

Article source: http://www.nytimes.com/2013/01/07/business/global/07iht-banks07.html?partner=rss&emc=rss

Unemployment in Euro Zone Reached New High in October

Annual inflation in the euro zone was 2.2 percent in November, the European Union’s statistics office, Eurostat, said on Friday, dropping from 2.5 percent in October.

Months of stubborn inflation combined with record unemployment have made life even harder for indebted families struggling through three years of a public debt crisis that has forced governments and companies to drastically cut jobs.

One of the smallest rises in energy price inflation in a year helped bring consumer inflation to near the European Central Bank’s target of 2 percent, according to Eurostat’s first estimate.

But the euro zone economy, which this year sank into its second recession since 2009, may manage only a weak recovery next year and unemployment levels will continue to rise, economists and policymakers say.

“We have not yet emerged from the crisis,” the European Central Bank president, Mario Draghi, said on Friday. “The recovery for most of the euro zone will certainly begin in the second half of 2013,” he told France’s Europe 1 radio.

Unemployment rose to 11.7 percent in October, Eurostat said, up from 11.6 percent in September and a marked increase from the 9.9 percent level a year ago, leaving almost 19 million people out of a job.

Portugal, for instance, shed more than one in 20 public sector jobs in the first nine months of 2012, while employers ranging from car makers to financial groups have announced thousands of job cuts since September.

Still, the overall number masks wide divergences across the 17-nation bloc, with Austrian unemployment running at 4.3 percent of the working population and Spain’s joblessness levels at 26.2 percent, the highest in Europe.

Article source: http://www.nytimes.com/2012/12/01/business/global/daily-euro-zone-watch.html?partner=rss&emc=rss

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 euro zone growth, which could confirm that the region is in recession. The report also provided another example of how the Bundesbank and the E.C.B. have 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 crunch, money has poured into Germany because it is perceived as a haven from euro zone 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 talk of 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 key cause of the financial crises in Spain and Ireland, not to mention the United States.

The downbeat Bundesbank report came a week after Mario Draghi, president of the European Central Bank, argued that there were signs, albeit tentative ones, that tensions in the euro zone had eased.

Countries have begun to get 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 E.C.B. 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 E.U. statistics agency is scheduled to release official figures on third-quarter gross domestic product for the euro zone. The data is likely to show that the euro zone suffered a fourth quarter in a row of little or no growth.

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

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 a year earlier. In Portugal, gross domestic product fell 3.4 percent from a year earlier, the seventh quarterly decline in a row. 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 euro zone. It is the largest member of the so-called Eurosystem, the network of 17 national central banks overseen by the E.C.B. 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 when European leaders were designing the E.C.B. But as the E.C.B. has effectively become lender of last resort for governments, the Bundesbank has complained that it has exceeded its mandate.

Article source: http://www.nytimes.com/2012/11/15/business/global/daily-euro-zone-watch.html?partner=rss&emc=rss

IHT Rendezvous: The Future of the Euro: Jack Ewing Answers Readers’ Questions

A machine counts and sorts euro notes at the Belgian Central Bank in Brussels.Thierry Roge/ReutersA machine counts and sorts euro notes at the Belgian Central Bank in Brussels.

First of all, thank you for the large number of excellent questions in response to our call for your queries about the euro crisis. I have picked some questions that were most representative of the interest — from all over the world — and most pertinent. And many thanks to readers like “abo” from Paris who did my work for me and supplied replies of their own.

I’ve condensed and edited the questions somewhat, so apologies if I have misconstrued anything.

An anonymous reader writes:
I would like to understand why it appears that the governments of Greece and Spain, to say nothing of European Central Bank officials, have done nothing to address the looming threat of bank runs in these countries. It seems like they should have long ago thought about how to address this most basic threat.

Your question gets at one of the fundamental issues raised by the crisis. Banks are still regulated at the national level, but their problems can have international consequences.

Greece and Spain have deposit guarantee programs designed to reassure bank customers and prevent runs. But bank customers naturally may wonder whether the guarantees are any good, considering that the governments have severe fiscal problems of their own.

European leaders have talked about a Europe-wide deposit guarantee fund, but so far there has been little action. Mario Draghi, the president of the European Central Bank, has promised that healthy banks won’t be allowed to run out of money. But the E.C.B. can only give banks loans. It can’t replace depleted capital reserves or guarantee deposits.

So for the time being bank runs remain a threat.

From Hanno Achenbach in Essen, Germany:
How can one seriously believe that 5 percent inflation in Germany would help Greece, Italy, Spain or France in any significant way? Do you believe that? If so, please indicate precisely how much that would help those countries over their ears in debt?

The argument — and I’m not saying I agree with it — is that higher inflation in Germany makes it easier for Greece, Spain, Italy and Portugal to become competitive again. By some estimates Greek wages need to fall 40 percent before unit labor costs are on a par with Germany. (German workers earn much more than Greeks, but on average are more productive, so it is cheaper to produce something in Germany than Greece.)

If wages in Germany rise faster, then wages in other countries don’t need to fall as much, or so the argument goes. Also, inflation erodes the value of the debt, which then becomes easier to repay.

The big problem with this argument is that European countries don’t just compete with each other. They compete with the whole world. So if German wages rise too much, the whole continent could become less competitive.

From Schmid in East Lansing, Michigan:
Why can’t the E.C.B. do like the U.S. and Iceland did — essentially loan money to banks and nations? Iceland nationalized the banks and wrote off the bad loans and started over. The U.S. took equity interest in failing banks. If central banks can loan to banks, why can’t they loan to nations?

The E.C.B. can and does loan huge sums to banks, but by charter it is not allowed to finance governments. The E.C.B. has already bent this rule by buying some government bonds on open markets. But it is unlikely that the E.C.B. will ever buy government bonds on the same scale as the Federal Reserve. Some economists and political leaders think it should, but “quantitative easing” would encounter huge resistance in Germany and other northern countries.

Europe is discussing pooling its debt into some form of euro bond, but for the time being Germany remains allergic to any solution that calls for its taxpayers to assume the financial burdens of other countries.

From Rational Expectations, New York:
It seems to me that the version of austerity which has been applied by the indebted European governments has been to stick it to the private sector by raising or increasing collection of taxes, which is contractionary, with little, if any, pro-growth supply side policies such as labor market reforms, privatizations or reductions in civil service numbers, salaries or benefits. Is this a correct impression, and, if so, what can be done to get the governments to take some of the pain themselves so that the affected economies have a chance to grow?

In fact, the European Central Bank has criticized governments for applying the wrong kind of austerity, increasing sales taxes for example when they could cut government bureaucracy. European governments almost everywhere, not just the troubled countries, have been slow to deregulate labor markets or take other steps — structural reforms — that economists say would promote growth. Even Germany, though often praised for loosening its labor rules in recent years, faces criticism for regulations that impede lively competition among small service businesses.

If political leaders took steps to encourage growth, they would also have an easier time paying the national debt. But they are still dragging their feet. The problem, from an elected official’s point of view, is that most of these changes cost votes. If a government cuts the salaries of 500,000 public employees, for example, it probably loses the votes of those workers without necessarily getting much credit from the rest of the electorate.

From Mark T., New York:
It seems to me that there are two Europes, the productive and less corrupt north and the less productive and more corrupt south. Is there any talk of simply going to two currencies, one for the northern and one for the southern nations?

Many people would find your characterizations of southern and northern Europe over broad. That said, we can all understand that at heart your question is about relative levels of corruption and productivity.

In fact, some people have proposed exactly this solution. Most economists would agree that a common currency has a better chance of working among countries that have similar levels of productivity and growth. The problem would be how to disentangle the euro zone without incurring enormous costs. Also, the idea of having two currencies is built on the assumption that the northern and southern countries will always be similar to one other. But there is not really any reason why this should be so. Only a few years ago Germany was seen as the sick man of Europe and a drag on the rest of the continent. So I would not assume that the northern countries will always have better economies than the southern countries.

Taxpayer in Athens writes:
Has anybody calculated so far how much (and if) Germany has benefited from the euro, including the amount already paid for aiding Greece and other countries in trouble?

I’m not aware of anyone who has come up with a sum total of the benefits to Germany, but you raise an important point. Germany is able to borrow money at nearly zero interest rates, which is helping the country to lower its deficit without too much pain.

In addition, German companies are almost certainly enjoying a lower exchange rate with the euro than they would if they still had the Deutschmark — just look at how the Swiss franc has gone through the roof (though part of the current rise has to do with being a so-called safe haven during the turmoil around the euro). Still, the weak euro makes German products less expensive in dollars or other foreign currencies and makes it easier for German companies to compete on price in export markets.

It is probably impossible to quantify those benefits, but I think it is safe to say they exceed the cost of aid provided to Greece and other countries.

From Arnie in San Diego:
One reads about structural impediments such as the wealthy evading taxes in Greece and Italy, and about the lack of competition in these countries because of the strength of unions, and the difficulty in obtaining new business licenses and the like. Even if some austerity conditions imposed by the E.C.B. and others were relaxed or eliminated, as some economists propose, would the economies of these countries become sound if the existing structural impediments were not eliminated?

The debt crisis probably wouldn’t exist if Spain, Greece, Italy and Portugal had healthier economies. Greece, in particular, is known for being a difficult place to do business. It takes 77 days just to get electricity hooked up, according to the World Bank. Any long-term solution to the debt crisis has to include an overhaul of economies in the troubled countries. The political leaders know this. They are just having trouble getting it done.

From Spanky in France:
Could you detail the kinds of steps that would have to be taken for Greece to exit (or be forced out of) the euro zone?

There is no official procedure for a country to leave the euro zone, and no country can be kicked out. If Greece decides to leave on its own, or is forced to by circumstances, European leaders will have to improvise. There is no road map. While some economists say a Greek exit is manageable, others think it could create social chaos in Greece and financial turmoil in Europe and the rest of the world, perhaps on the same scale as the collapse of Lehman Brothers in 2008.

Adam Corson-Finnerty of Southampton, Pennsylvania, asks:
I wonder whether this crisis could represent a milestone in the further integration of European nations. Is the cost of unwinding steeper than the cost of moving forward? I also wonder if the United States has an interest in which way things go? We seem to be standing on the sidelines.

The crisis has already forced European nations to create a common bailout fund and agree on ways to impose more fiscal discipline on each other. There is talk, though not much action, of common supervision of banks and euro bonds (see above). One of the lessons of the crisis, not lost on political leaders, is that it is very hard for a common currency to work in a fragmented economic and political system. The costs of unwinding the euro and the benefits of doing so are probably impossible to quantify, but the risks are massive and it is not in the nature of policymakers to embark on grand experiments. So, yes, the crisis could well push Europe closer together.

The United States definitely has an interest in the way things go because financial upheaval in Europe can easily spread across the Atlantic via the banking system. Europe is also an important market for many U.S. companies. I wouldn’t say the United States is standing on the sidelines. President Obama and other top U.S. officials have repeatedly pressed their European counterparts to move more aggressively to contain the crisis. But there is a limit to what they can get the Europeans to do.

Article source: http://rendezvous.blogs.nytimes.com/2012/06/01/the-future-of-the-euro-jack-ewing-answers-readers-questions/?partner=rss&emc=rss

European Central Bank Eases Euro Crisis a Bit

The surprisingly successful auctions owe little to improving economic data around the region. On the contrary, many of the countries that use the euro as their currency appear to be confronting a renewed recession, and pessimism about their growth prospects remains abundant. Just last week, Standard Poor’s stripped France of its coveted AAA rating for the first time in recent history and downgraded eight others.

Instead, most of the credit seems to go to the European Central Bank, which in late December under its new president, Mario Draghi, quietly began providing emergency loans to European banks — hundreds of billions of dollars of almost interest-free capital that the banks have used to come to the rescue of their national governments.

The central bank, based in Frankfurt, used typically understated and technical language to describe its actions, but it appears to have done what its leadership said repeatedly throughout 2011 that it would not do: namely, flood the financial markets with euros in a Hail Mary attempt to make sure that the region’s sovereign debt crisis does not lead to a major financial shock.

Though on a smaller scale and in a subtler manner, it has in many ways taken a page from the United States Federal Reserve’s playbook for the 2008 financial crisis, which has been roundly criticized in Europe as a reckless bailout that risks setting off uncontrolled inflation. And, at least for now, the effort has worked. Spain’s 10-year bonds now carry interest rates that hover around 5.5 percent, compared with 7 percent and higher in November, and Italy’s five-year bonds are approaching 5 percent, down from nearly 8 percent at their peak.

There have been moments before when European leaders declared the crisis contained, only to see it return with renewed fury. But the central bank’s incentives, combined with a push from the private banks’ home governments, seem to have convinced investors that this time may be different, and financial markets in Asia, Europe and the United States have responded with strong gains this year.

Fears of a bank collapse — the so-called Lehman Brothers moment, when one financial institution’s failure threatens the stability of the entire system — have subsided. And Greece appears to be closer to a deal with its creditors to pare back its debt obligations rather than a messy, disorderly default that could plunge the financial system back into chaos.

That encouraging situation seemed highly unlikely as recently as early December, when panic over the European debt crisis was reaching a peak, just before a European Union summit meeting in Brussels. While national leaders postured and pursued their parochial interests, Mr. Draghi, told reporters at the central bank’s headquarters that he would conduct “two longer-term refinancing operations” (in plain English, emergency funding) for cash-starved banks for three years instead of one year.

The European economy was on the brink, and threatening to take the rest of the world with it, and Europe’s new top central banker did not seem to get it. “Why is it so impossible for the E.C.B. to act like the other central banks, like the Federal Reserve System or the Bank of England?” a reporter asked him. “Why do you not act more directly to help European countries by buying up the debt on a massive scale?”

Mr. Draghi said he was bound by the European treaty, which “embodies the best tradition of the Deutsche Bundesbank,” the German central bank, code for strict inflation-fighting and the furthest thing from a wholesale emergency bailout.

European stocks fell. Financial experts declared that Mr. Draghi had disappointed. The world demanded a bazooka, but he had shown up with a water pistol, or so it seemed.

Less than two weeks later, on Dec. 21, the bank announced the results of its technical maneuver: the banks had taken $630 billion as part of the program. In the weeks that followed, the banks appear to have used a sizable share of the cash to buy the European bonds so desperately in need of customers. It was as if the European Central Bank had injected lenders with steroids, then asked them to do the heavy lifting. The strategy appears to be paying off. Even in the face of recession warnings and the agency’s downgrades, the European debt market keeps improving.

Financial experts say the central bank’s intervention seems to have catalyzed a virtuous circle: as new governments come in and promise to deliver spending cuts, tax increases and balanced budgets, once gun-shy banks have an added incentive to tap new financing from the central bank and jump back into bond markets that they were running from just a few months ago.

The question now is whether the E.C.B.’s action merely delayed the inevitable reckoning for the euro zone’s weakest members or whether falling interest rates and improved growth will become entrenched, bringing the critical phase of the Continent’s debt crisis to a close.

“I think that they have mastered it to the extent that this isn’t going to get a whole lot worse,” said Jacob Funk Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington. “We do have in my opinion fairly credible signs of stabilization.”

Jack Ewing contributed reporting from Frankfurt, Landon Thomas Jr. from London, and Steven Erlanger from Paris.

Article source: http://www.nytimes.com/2012/01/21/world/european-central-bank-eases-euro-crisis-a-bit.html?partner=rss&emc=rss