private sector involvement

European Central Bank Raises Rates as Expected

FRANKFURT — The European Central Bank raised its benchmark interest rate Thursday for the second time this year, as expected, continuing to nudge the cost of money back to precrisis levels, despite heightened fears about Greek debt.

The E.C.B. raised its key interest rate to 1.5 percent from 1.25 percent, where it had been since April. Jean-Claude Trichet, the E.C.B. president, had signaled last month that a rate increase was likely at the monetary policy meeting this month.

Mr. Trichet was scheduled to give a news conference later Thursday, and analysts and investors were expected to be listening closely for indications of how quickly the E.C.B. might adjust rates in the future.

Mr. Trichet was also expected to face many questions about how the E.C.B. might react to plans by European governments to get private investors to share in the cost of Greek debt relief. The rating agency Standard Poor’s warned Monday that a French plan for private sector involvement might be considered a default, an event that could shake the European banking system and impair the E.C.B.’s own substantial holdings of Greek debt.

Economists at Nomura International forecast that the E.C.B. would raise the benchmark interest rate a quarter point again in October and then about every three months next year. That would raise the rate to 2.75 percent by the end of 2012, its highest level since 2008, before the collapse of the investment bank Lehman Brothers prompted the E.C.B. and other central banks to take emergency measures to stabilize the global financial system.

However, the E.C.B., which has sworn to make price stability its main priority, could raise rates more gradually if there are signs that inflation pressures are easing or that the euro area is growing more slowly. Inflation for the past several months has been above the E.C.B. target of about 2 percent.

“We think Mr. Trichet will stick with last month’s line that the recovery is continuing, ‘albeit at a slower pace,”’ Jens Sondergaard, senior European economist at Nomura, said in a note Tuesday. “But the tone of the press conference will be carefully scrutinized for signs of less hawkish rhetoric.”

Many economists say the E.C.B. is wrong to raise rates when there are signs that European growth is slowing and the debt crisis continues to cast a shadow over the euro.

“We think that now is not the time to raise rates,” Marie Diron, an economist who advises the consulting firm Ernst Young, said Wednesday in a note. “With the specter of a disorderly restructuring of Greek debt looming over the euro zone’s future, the risks to the growth (and hence inflation) outlook are so skewed to the downside, that prudent monetary policy management would suggest waiting before raising rates.”

At the news conference, Mr. Trichet was expected to be asked about the E.C.B.’s standoff with European governments on how to deal with Greek debt. Germany and other countries are insisting that banks contribute to Greek debt relief, but the E.C.B. has refused to consider any plan that it is not voluntary.

Standard Poor’s indicated Monday that it would be difficult, if not impossible, for governments to design a plan for private sector participation that would not be considered a default.

The E.C.B. and national central banks in the euro area, which together make up the so-called Eurosystem, have become the largest holders of Greek bonds. Analysts say that the Eurosystem could absorb the losses of a Greek default but that such an event would be a blow to the E.C.B.’s prestige.

HSBC estimates the potential losses to the Eurosystem at €23 billion, or $33 billion. “The ECB’s potential reputational loss is the true issue,” Astrid Schilo, senior European economist at HSBC in London, said in a note.

In addition, even a short-lived, controlled default would raise questions about whether the E.C.B. could continue to accept Greek bonds as collateral for short-term loans. Without access to E.C.B. funding, Greek banks would probably collapse.

Mr. Trichet does not like to respond to hypothetical questions and was thought unlikely to offer much insight into how the E.C.B. would respond to such a situation.

Article source: http://feeds.nytimes.com/click.phdo?i=247efa70a2144dba7732232b142914dc

Europeans Face Up to Chance of 2nd Greek Bailout

BRUSSELS — Confronting the looming prospect of a second bailout for Greece, European finance ministers insisted Tuesday on further deficit-cutting efforts from the government in Athens and acknowledged for the first time that the private sector could be included in a restructuring of Greek loans.

Two days of talks in Brussels ended with public concessions that the idea of “reprofiling” Greek debt, or voluntarily extending maturities without changing interest rates or the amount of the loan, was being contemplated, at least as a last resort.

For months, European officials have been wary of any discussion of private sector involvement in the restructuring of Greek loans before 2013, fearing a negative reaction in the markets.

That taboo was broken by Jean-Claude Juncker of Luxembourg, who presides over the euro zone finance ministers’ meetings, when he said late Monday that he would not exclude “a kind of reprofiling.” Mr. Juncker then referred Tuesday to a “soft restructuring of Greek debt.”

The suggestion was refined by the deputy finance minister of Germany, Jörg Asmussen, who said Tuesday that it might be considered as a last resort.

If other moves prove insufficient, “we’ll have to consider measures that aren’t just at taxpayers’ expense but also involve the private sector on a voluntary basis,” Mr. Asmussen said.

The policy shift follows intensive talks in which several ministers expressed frustration at the meager progress Greece has made so far on a promised program of state asset sales to investors that would raise 50 billion euros ($71 billion) .

Within a fractious monetary union, the politics of offering new loans are increasingly difficult, particularly if voters in creditor countries do not see greater evidence of Greek consolidation.

“They promised 50 billion of privatization, but they are still where we were in the 1970s,” said Maria Fekter, the Austrian finance minister, referring to Greece.

But with its debt level now at almost 150 percent of gross domestic product, Greece risks being trapped in a spiral of negative growth, prompting speculation that a new package of about 30 billion euros of new loans may be needed.

Officials from the European Central Bank, the International Monetary Fund and the European Commission, the executive arm of the European Union, are compiling a report to be used next month when the governments contemplate a second bailout — nicknamed “Grease II.”

But before agreeing to a second round of aid, finance ministers want more evidence that Greece is fulfilling its part of the existing bargain.

Olli Rehn, the European commissioner for economic and monetary affairs, said that although Athens had made budgetary adjustments in the last 12 months, further “decisive steps by the Greek authorities are indispensable.”

The Dutch finance minister, Jan Kees De Jager, said, “We now expect Greece to do the heavy lifting by cutting, reforming and privatizing, painful as it is.” He added, “If Greece doesn’t deliver on its promises and the I.M.F decides not to extend the second tranche of its loans, the Netherlands will follow the I.M.F.”

The depth of division over the rescue plans was highlighted Tuesday by Michael Noonan, the Irish finance minister, who suggested that the terms attached to European bailouts were so stringent that they threatened to make growth impossible and were thereby self-defeating.

“You can enhance the possibility of success of the programs if you reduce the pricing,” said Mr. Noonan, who is campaigning for a reduction in the interest paid on Ireland’s bailout loans.

Mr. Noonan said that the mindset under which struggling countries were asked for concessions in exchange for easier conditions “was not the smartest way to proceed.”

Ireland’s bid for lower rates has run into resistance from France and Germany, which want an increase in the low Irish corporate tax rate of 12.5 percent. But Mr. Noonan ruled out any such concession.

Article source: http://feeds.nytimes.com/click.phdo?i=6948d282083dacce2e38b1292affa4ff

European Central Bank Raises Rates as Expected

Europeans Face Up to Chance of 2nd Greek Bailout

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