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Strong Debt Auction Provides Some Relief for Spain

December 15, 2011 by Leave a Comment

The Bank of Spain announced that the Treasury had sold €6 billion, or $7.8 billion, of bonds, far above the €3.5 billion it had set as the maximum target for the auction.

The sale included €2.2 billion of 10-year bonds, priced to yield 5.24 percent, down from the 5.43 percent it paid to sell similar securities on Oct. 20.

The yield for 10-year bonds of another beleaguered euro zone member, Italy, fell 0.22 percentage point, to 6.514 percent, in the open market even after the government called a confidence vote for Friday on a new austerity package.

Analysts said the European Central Bank’s new medium-term bank financing program
, which gets under way next week, was already helping to buoy euro zone debt.

The E.C.B. last week said it would start providing banks loans for three years, compared with a previous maximum of about one year. It also cut its benchmark interest rate target to 1 percent from 1.25 percent.

“Without a doubt it’s helping to generate support,” said Charles Diebel, head of market strategy at Lloyds Banking Group in London. “I don’t think it was really Spain-specific.”

Mr. Diebel said banks were taking advantage of low borrowing costs to take advantage of the so-called carry trade.

“If you can get funding from the E.C.B. at 1 percent and buy bonds from the Spanish government at 5.4 percent, that carries pretty well for three years,” he said. “You’re earning 440 basis points,” or 4.4 percentage points.

Steven Saywell, head of global currency strategy in London for the French bank BNP Paribas, said, “to really turn things around, we’re going to need more aggressive action from the E.C.B. I don’t think this is a turning point.”

Indeed, Mario Draghi, the president of the European Central Bank, again ruled out more aggressive sovereign bond purchases by the central bank, saying during a speech in Berlin that the euro zone’s “firewall” was the bailout fund set up by European governments.

He also indicated that struggling governments in Europe would in the end have to solve their own problems.

“There is no external savior for a country that doesn’t want to save itself,” he told the audience in Berlin, The Associated Press reported.

That idea was reinforced Wednesday by Ben S. Bernanke, the U.S. Federal Reserve chairman, who told senators at a meeting behind closed doors in Washington that the Fed was not planning to ride to the rescue of the embattled euro, news agencies reported.

The euro ticked back above $1.30 during trading Thursday, from an 11-month low of $1.2946 during trading Wednesday. European stocks rose as well.

But Mr. Saywell predicted the euro would remain weak in the near term, with selling driven both by fears of a breakup of the currency union as well as more prosaic concerns about the economic outlook, with the European economy now widely expected to be mired in recession for at least part of next year.

A survey of euro zone purchasing managers showed both the services and manufacturing sectors continuing to contract for a fourth straight month in December. Markit Economics said Thursday that its composite index rose to 47.9 from 47 in November, but still signaled a contraction. A reading above 50 indicates an expansion.

Further weighing on the euro, Mr. Saywell said, was the E.C.B.’s rate cut, which had the effect of narrowing the advantage money market managers gain by holding euro-denominated assets and making dollars relatively more attractive.

This article has been revised to reflect the following correction:

Correction: December 15, 2011

An earlier version of this article gave a wrong date for when the European Central Bank’s new medium-term bank financing program, announced last week, goes into effect. It is next week, not Thursday.

Article source: http://www.nytimes.com/2011/12/16/business/global/strong-bond-sale-in-spain-and-russian-support-fail-to-lift-euro.html?partner=rss&emc=rss

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Frenchman to Join Board of Europe’s Bank

December 15, 2011 by Leave a Comment

Mr. Coeuré, 42, will take office in January, giving France a representative on the six-member board for the first time since Jean-Claude Trichet retired in October as E.C.B. president.

During testimony before a committee of the European Parliament on Monday, Mr. Coeuré said that it might be necessary for the E.C.B. to step up its purchases of sovereign bonds in order to maintain the bank’s control over interest rates.

That was not a declaration in favor of wholesale bond purchases by the E.C.B., which a large group of economists advocate as the only way to hold down borrowing costs and save the euro. But the statement suggested that Mr. Coeuré may be more flexible on the issue than Jürgen Stark, a German who is leaving the executive board at the end of the year because of his discomfort with E.C.B. bond market intervention.

Jörg Asmussen, a high-ranking official in the Finance Ministry, will replace Mr. Stark and is seen as less of a hard liner. However, Mr. Asmussen is also close to Jens Weidmann, the president of the German Bundesbank who has been an implacable opponent of stepping up E.C.B. bond purchases.

Mr. Weidmann repeated his opposition to more bond buying Wednesday in a speech in Berlin. “One idea should be dispensed with once and for all, namely the idea of using the printing press to create emergency funds,” he said. “That would endanger the most important foundation of a stable currency: the independence of a central bank focused on price stability.”

Mr. Coeuré replaces Lorenzo Bini Smaghi, an Italian who resigned to make way for a French representative. Members of the executive board are supposed to represent the interests of the euro area and not a particular country. But there is an unwritten rule that the largest countries in the euro area should each have a seat on the executive board.

After Mario Draghi took over as president of the E.C.B. at the beginning of November, Italy was seen as over-represented on the board.

Mr. Coeuré, deputy director-general of the French Treasury, belongs to the inner circle of officials who manage the country’s debt and finances and has also been a key figure behind the scenes at meetings of the Group of 20 countries.

Official interest rates and other key policy decisions are set by the E.C.B. governing council, which consists of the executive board plus heads of the central banks of the 17 euro nations. But the members of the executive board play a particularly influential role, managing E.C.B. operations and proposing policy initiatives.

The E.C.B. governing council has not yet decided what portfolios Mr. Coeuré and Mr. Asmussen will assume when they join the executive board. Mr. Stark has been the E.C.B.’s de facto chief economist, a position both Mr. Coeuré and Mr. Asmussen are likely to covet.

The European Parliament approved Mr. Coeuré by a wide margin.

Liz Alderman contributed reporting from Paris

Article source: http://www.nytimes.com/2011/12/15/business/global/new-ecb-official-may-be-open-to-bond-buying.html?partner=rss&emc=rss

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European Central Bank Moves to Head Off Credit Crunch

December 8, 2011 by Leave a Comment

But stocks fell after Mario Draghi, the E.C.B. president, quashed hopes that the bank might drastically scale up its purchases of euro area government bonds to help contain the sovereign debt crisis. Yields on Italian and Spanish bonds rose, an indication that investors were more pessimistic about those countries’ creditworthiness.

At a news conference, Mr. Draghi said he was “surprised” that comments he made last week were interpreted as a signal that the E.C.B. would buy more bonds if political leaders, who are meeting Thursday and Friday in Brussels, delivered tougher rules on budgetary discipline.

“While Draghi had opened the door for more E.C.B. support last week, he closed it again today,” said Carsten Brzeski, an economist at Dutch bank ING. “According to Draghi, it was up to politicians to solve the debt crisis.”

On Thursday evening European leaders were to begin their latest summit meeting on the sovereign debt crisis that threatens to stifle economic growth far beyond Europe’s shores.

Taken together, the moves showed that Mr. Draghi, president of the E.C.B. for just over one month, is willing to break with precedent to combat the crisis, even as the bank awaits the outcome of the Brussels meeting.

At the same time, Mr. Draghi seems to remain unwilling to violate the ultimate E.C.B. taboo and effectively print money by buying bonds in massive quantities. Mr. Draghi also threw cold water on expectations the E.C.B. might use the threat of deflation as a justification to expand the money supply.

“We don’t see any high probability of deflation,” he said.

The E.C.B. cut its key rate to 1 percent from 1.25 percent, as expected, returning it to the record low level that had prevailed from 2009 until earlier this year.

The central bank also announced additional measures to aid euro area banks suffering from a dearth of money-market funding. The E.C.B. said it would begin giving banks loans for three years, compared to a maximum of about one year previously. The move means the E.C.B. is intervening for the first time in the market for medium-term bank funding.

Banks will be able to borrow as much as they want at the benchmark interest rate. They must provide collateral, but the E.C.B. on Thursday also broadened the range of securities it accepts, which will help banks that have large amounts of assets that are hard to sell on the open market. The E.C.B. also eased its requirements for reserves that banks must maintain.

The measures will also help smaller community banks that may not have been able to borrow from the E.C.B. because they lack the required collateral, Mr. Draghi said.

In a sign of how badly banks need the money, 34 institutions took advantage Wednesday of a new lower interest rate offered by the E.C.B. in conjunction with other central banks for three-month loans denominated in dollars. The banks borrowed a total of $50.7 billion.

Mr. Draghi, who took over the E.C.B. from Jean-Claude Trichet on Nov. 1, has wasted little time reversing the rate increases imposed in April and July. Those policy moves were widely criticized as an overreaction to tentative signs of inflation and may have helped hasten a widespread economic slowdown in Europe.

Lower interest rates will be particularly welcome in countries like Portugal and Italy, where the debt crisis has pushed up market interest rates and made it harder for businesses to get loans.

At their summit meeting Thursday night and Friday, E.U. leaders were to discuss ways to impose more central control on government spending to avoid future debt crises. Mr. Draghi had suggested that more action could follow if leaders made serious progress. But following his comments Thursday it is unclear what those measures might be.

The European economy is almost stagnant, growing just 0.2 percent in the third quarter, with unemployment at 10.3 percent. Economists expect the economy in the 17 E.U. nations that use the euro to slip into recession early next year if it has not already. Declining output makes the debt crisis even worse by cutting tax receipts.

Earlier Thursday, the Bank of England held its benchmark rate steady at 0.5 percent.

Article source: http://feeds.nytimes.com/click.phdo?i=fc0c5fd823ed87e454cca43e94b94136

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Mixed Signals for European Central Bank as Data Point to Slowdown

October 31, 2011 by Leave a Comment

The Organization for Economic Cooperation and Development forecast Monday that euro zone economies will see a “marked slowdown” next year, and called on the European Union to clarify its anti-crisis measures, The Associated Press reported.

In an update of economic forecasts timed to coincide with this week’s meeting of the Group of 20 major economies, the Paris-based O.E.C.D. said “patches of mild negative growth” were likely in the euro zone in 2012.

It predicted economic growth in the euro zone would stall at 0.3 percent next year, after just 1.6 percent growth this year. That is down from the O.E.C.D.’s forecast in May of 2 percent growth in the euro zone in 2012.

“Detailed information is needed” on how the European Union will implement the package of measures announced last week aimed at resolving the European debt crisis, the O.E.C.D. said.

Inflation in the 17 countries that belong to the euro area was steady in October at 3 percent, according to figures from Eurostat, the European Union statistical agency. That was contrary to analyst predictions of a slight drop because of slowing economic growth. However, unemployment edged higher to 10.2 percent in September from 10.1 percent in August, Eurostat said.

The data, along with a muted official forecast for Spanish growth, offer no easy choices for Mario Draghi when he presides over his first monetary policy meeting as president of the European Central Bank on Thursday.

Some economists expect the E.C.B. to cut its benchmark interest rate on Thursday in response to signs of a marked slowdown by the euro area economy. The Bank of Spain said Monday that the Spanish economy stopped growing in the three months through September, as government austerity measures cut into domestic consumption.

At the same time, inflation remains well above the E.C.B.’s target of about 2 percent. As a result Mr. Draghi, anxious to establish his credentials as an inflation fighter, may be hesitant to preside over a rate cut just days after succeeding Jean-Claude Trichet as E.C.B. president.

“Our forecast is for the first cut to be delivered this week but this uncomfortably high headline inflation reading may make the E.C.B. want to wait until December,” analysts at HSBC wrote in a note to clients Monday.

Economists said joblessness was likely to rise further as the sovereign debt crisis continues to act as a drag on euro-area growth. An additional 188,000 people became unemployed in September, a total of 16.2 million people, the biggest increase in two years.

“The outlook is not particularly bright for the euro area labor market,” Francois Cabau, an analyst at Barclays Capital, wrote in a note.

Unemployment was highest in Spain, at 22.6 percent, and Greece, at 17.6 percent. Italy recorded one of the biggest jumps in joblessness, to 8.3 percent from 8 percent, as well as one of the biggest increases in inflation, to 3.8 percent from 3.6 percent.

The rise in Italian prices was caused partly by an increase in the value-added tax. Still, the data may add to the heat that Prime Minister Silvio Berlusconi is feeling from other leaders, who are showing frustration with his failure to push through policies to make the Italian economy perform better. Italy has replaced Greece as the biggest threat to the euro area, as bond investors begin to doubt that the country will be able to service its debt.

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Markets Mixed a Day After Big Rally

October 11, 2011 by Leave a Comment

Monday’s so-called “relief rally” dissipated at the opening bell on Wall Street on Tuesday, with major market indexes off slightly in morning trading after gaining 3 percent the day before.

In Europe, stocks were down slightly, after a rally in Asia, as the European Central Bank’s departing chief warned of an increasing risk of financial contagion from the euro zone debt crisis and officials recommended that Greece receive additional bailout funds from international lenders.

The broad European market was off less than 1 percent in late trading. Jean-Claude Trichet, who is stepping aside from the top E.C.B. post to make way for Mario Draghi, told the European Parliament in Brussels on Tuesday that the financial crisis “has reached a systemic dimension,” Bloomberg News reported.

“Sovereign stress has moved from smaller economies to some of the larger countries,” Mr. Trichet said. “The crisis is systemic and must be tackled decisively.”

Mr. Trichet was speaking in his capacity as head of the European Systemic Risk Board, a body created last year to ensure supervision of the European Union financial system. He steps down as E.C.B. chief on Nov. 1.

In morning trading, the Standard Poor’s 500-stock index and the Dow Jones industrial average were up about 0.1 percent.

Investors both in Europe and on Wall Street were awaiting the outcome of a vote in Bratislava, where Slovakian lawmakers debated Tuesday on whether to back an expansion of the European Financial Stability Facility. The Slovak government is divided on the bailout mechanism, and a rejection could, at the very least, further complicate plans to shore up the euro zone.

On Tuesday afternoon, the so-called troika, made up of teams from the European Commission, the E.C.B. and the International Monetary Fund, announced that it was recommending that Greece receive 8 billion euros, or $10.9 billion, of financial support.

The embattled government in Athens cannot expect to reach its deficit targets for this year, the troika inspectors concluded, but they said it appeared that measures agreed for 2012 made the country’s goals attainable.

“Overall, the authorities continue to make important progress, notably with regard to fiscal consolidation,” the troika’s review found.

On Monday, the European Council president, Herman Van Rompuy, said a European Union summit meeting on the debt crisis would be delayed by a week to Oct. 23 to give the bloc time “to finalize our comprehensive strategy on the euro area sovereign debt crisis covering a number of interrelated issues.”

Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France have promised a plan to recapitalize European banks before a Group of 20 summit meeting on Nov. 3.

“The sense of urgency among European officials that became apparent two weeks ago appears to be gathering steam,” analysts at DBS wrote in a note to clients. “One can’t be unhappy about that.”

In afternoon trading, the Euro Stoxx 50 index, a barometer of euro zone blue chips, was down 0.3 percent, while the FTSE 100 index in London was down a 0.2 percent. Energy companies posted the largest declines as oil prices fell.

“The pressure on euro zone officials has ratcheted higher, and risks of failure are now too significant to jeopardize with half measures,” analysts at Crédit Agricole CIB said. “Weekend promises of banking sector capitalization by Germany and France have helped but will not be enough should such promises prove empty.”

Asian shares were higher across the board. The Tokyo benchmark Nikkei 225 stock average rose 2 percent. The Sydney market index S. P./ASX 200 rose 0.6 percent.

Chinese stocks initially rose a day after the country’s sovereign wealth fund bought shares in China’s four main banks in a show of support , but the Shanghai composite index gave up all but 0.2 percent of the gain by the end of trading.

The Hang Seng index in Hong Kong also pared an early surge of more than 4 percent but ended the day up 2.4 percent.

The dollar was higher against major European currencies. The euro slipped to $1.3597 from $1.3642 late Monday in New York, while the British pound fell to $1.5628 from $1.5668. The dollar climbed to 0.9105 Swiss francs from 0.9037 francs. But the U.S. currency fell to 76.62 yen from 76.68 yen.

American crude oil futures for November delivery fell 0.6 percent to $84.89 a barrel. Comex gold futures fell 0.6 percent to $1,661.60 an ounce.

David Jolly reported from Paris and Sei Chong reported from Hong Kong. Stephen Castle contributed from Brussels.

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Mario Draghi Holds E.C.B. Line Against Restructuring for Greece

June 14, 2011 by Leave a Comment

BRUSSELS — With European governments divided over how to shape a new bailout for Greece, Mario Draghi, the likely next president of the European Central Bank, warned Tuesday against forcing private investors to take part.

At a confirmation hearing at the European Parliament, Mr. Draghi, the former head of the Bank of Italy, also highlighted the risk that a Greek default could set off a “chain of contagion.”

“All in all, the costs outweigh the benefits,” he said.

His comments came as European finance ministers held an unscheduled meeting in Brussels to try to bridge differences in the new package for Greece.

The E.C.B. has been firmly against any restructuring of Greek debt, in part because of its own holdings. The Dutch finance minister, Jan Kees de Jager, told his Parliament in The Hague on Tuesday that the E.C.B.’s total exposure to Greece might be €130 billion to €140 billion, or as much as $200 billion. In addition, the E.C.B. has provided €90 billion of liquidity to Greek banks, he said, according to Bloomberg News.

In his remarks, Mr. Draghi suggested that at least one of the options under discussion for involving the private sector would be acceptable to the E.C.B, but that the central bank “excludes all concepts that are not purely voluntary.”

One acceptable option is known as the Vienna Initiative, after a deal in 2009 under which international lenders agreed to roll over credit lines to Central and East European countries. That, he said, “looks entirely voluntary.”

“Another one is a debt exchange, which I haven’t understood whether it is voluntary or it could end up being involuntary,” he added.

Germany has taken the firmest line on involving the private sector. The German government has received parliamentary support for a second bailout of Greece if necessary, but only if there is a substantive and quantifiable involvement of the private sector.

The government wants the extension of debt maturities to be considered, and has received support from some other capitals.

“You can’t leave the profits with the banks and make the taxpayers shoulder the losses,” Austria’s finance minister, Maria Fekter, said on arrival in Brussels.

Other governments, like France, share the E.C.B’s worries that too harsh a solution could lead to a cascade of problems that would destabilize the euro zone.

The meeting Tuesday night was not expected to produce a breakthrough. “It’s sounding-board time, not endgame time,” said one E.U. diplomat, who was not authorized to speak publicly.

A deal could come Friday in Berlin, when the German chancellor, Angela Merkel, will meet the French president, Nicolas Sarkozy, before another gathering of European finance ministers Monday in Luxembourg.

In an assured performance before a committee of European deputies, Mr. Draghi stressed his commitment to price stability, the E.C.B’s main mandate.

On Greece, he argued that the effect of a default was difficult to predict. “Who are the owners of credit-default swaps? Who has insured others against a default of the country?” he asked. “We could have a chain of contagion.”

Meanwhile, in Athens, the fragility of the Greek government was highlighted when two of the controlling party’s deputies said they would not support its latest package of austerity measures, which are a quid pro quo for more international aid. That reduces the Socialist government’s effective parliamentary majority to just a handful.

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Trichet to Leave a Difficult Legacy at E.C.B.

May 31, 2011 by Leave a Comment

Time and again the E.C.B. and its president, Jean-Claude Trichet, have applied pressure when they thought heads of state were not acting responsibly. As a result, when Mr. Trichet’s eight-year term expires at the end of October, he will leave behind an institution that has grown significantly in stature and influence.

He also leaves behind a difficult legacy for his likely successor, Mario Draghi, the governor of the Bank of Italy. Mr. Draghi appears to share Mr. Trichet’s ability to negotiate cordially with European leaders — and browbeat them when necessary. But Mr. Draghi, already an influential member of the E.C.B. governing council, will also inherit an institution that has become deeply entangled with the banking system, financial markets and the political process.

“The E.C.B. so far has done an admirable job, all things considered,” said Dennis Snower, president of the Kiel Institute for the World Economy in Kiel, Germany. “But it has found itself in a very uncomfortable place not of its own choosing. This place may become more uncomfortable as time goes on.”

In May 2010, Mr. Trichet and others pushed leaders to recognize that there was a crisis in the first place, and then to fashion a rescue package for Greece. The E.C.B. did its part by buying Greek government bonds.

This year, the E.C.B. has used its clout in the banking system to insist that Portugal and Ireland accept bailout loans. Mr. Trichet has also pushed, with limited success, to get governments to adopt tougher sanctions against euro countries that run up too much debt, with the goal of averting future crises.

In recent days, as the idea of letting Greece stretch out its debt payments gains traction, the bank has set itself up as the main opposition. It is not yet clear whether the E.C.B. will succeed in blocking a restructuring that many economists see as inevitable.

Mr. Trichet and others argue that a Greek default could disrupt financial markets in ways that would be unpredictable and impossible to control. But in recent weeks the E.C.B. has faced criticism that it has a conflict of interest.

In May 2010, the E.C.B. began buying Greek, Portuguese and Irish debt to try to stabilize markets for those bonds. The E.C.B. moved in concert with the national governments, who at the same time created a €500 billion bailout fund, worth $720 billion at current exchange rates, for the distressed countries.

As a result, though, the E.C.B. now holds €75 billion in bonds from those countries, and would take a big hit to its balance sheet if any of them defaulted.

Last month, Mr. Trichet walked out of a meeting with euro area leaders in Luxembourg. He was upset that the politicians were toying with the idea of a Greek debt restructuring.

Yet the E.C.B.’s foray into politics also created strains inside its own governing council. Axel A. Weber, the president of the German Bundesbank and a member of the council, argued strenuously that the E.C.B. was making a mistake by intervening in government bond markets.

Based on public statements Mr. Weber made later, it appeared that he believed the E.C.B. was moving too far into fiscal policy and letting governments off the hook.

“Primary decision making over wide areas of economic and finance policy remains with member states,” he and two Bundesbank economists wrote in a March commentary published in the Frankfurter Allgemeine newspaper.

The ideological split had lasting consequences for the E.C.B. Mr. Weber, who had long been seen as the front-runner to succeed Mr. Trichet, resigned as Bundesbank president at the end of April rather than have to defend polices with which he strongly disagreed.

Even though European politicians seem to resent E.C.B. meddling, they have been glad to allow the central bank to deploy its financial resources at crucial moments, propping up commercial banks with cheap credit and intervening in bond markets.

In many respects, the E.C.B. is far better equipped to deal with the crisis than national governments. It is a pan-European institution able to act quickly — and independently.

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