March 26, 2023

Euro Zone Economy Shows Some Positive Signs

As usual, Mr. Draghi was careful to qualify his upbeat assessment of the euro zone financial crisis, which is now entering its third year. Though financial markets have calmed and some economic indicators have stabilized, he said it was too early to declare a turning point.

Also Thursday, the Bank of England decided to keep its benchmark interest rate unchanged in a dismal economic outlook for 2013 that could keep the economy on the brink of another recession.

Mr. Draghi listed a number of indicators that the euro zone economy could be on the mend. Market interest rates on government bonds have fallen, while stocks have risen. The flow of bank deposits from troubled countries has reversed, and euro zone economies have become more competitive, he said.

Where problems in one country once infected other members of the currency union, optimism is now spreading, Mr. Draghi said at a news conference after the regular monthly monetary policy meeting of the central bank’s governing council.

“There is a positive contagion when things go well,” Mr. Draghi said. “That’s what is in play now.” But, he added, “The jury is still out. It’s too early to claim success.”

Mr. Draghi’s comments suggested that the central bank would not cut its main interest rate further, as some economists have argued it should, given that unemployment is at a record high and inflation is close to the central bank’s target of 2 percent and falling. Many businesses continue to have trouble obtaining credit, without which a recovery of the European economy is unlikely.

Some analysts read Mr. Draghi’s comments as simply a way of justifying the central bank’s inaction.

“Despite the pervasive weakness of the real economy in the single currency area, the E.C.B. is sitting firmly on its hands in the hope that the upturn in sentiment will eventually filter through to the real economy,” Nicholas Spiro, managing director of Spiro Sovereign Strategy, said in a note Thursday.

But others agreed that there were tentative signs that the euro zone economy could emerge from its downturn soon. On Thursday, the Bank of France’s indicator of sentiment in French industry rose unexpectedly.

“Draghi is right to stress that several leading indicators have stabilized recently,” Jörg Krämer, chief economist at Commerzbank, wrote in a note to clients. “The recession in the euro zone is likely to come to an end in spring. This makes a further E.C.B. rate cut unlikely.”

While cutting interest rates is a standard policy tool of central banks, Mr. Draghi has often complained that the central bank has lost much of its influence over rates in troubled countries like Spain. Commercial banks there are already struggling with problem loans and reluctant to lend except at much higher rates.

The central bank’s governing council may have concluded that a rate cut now would be superfluous or even dangerous if it encouraged some investors to take too much risk. Mr. Draghi said on Thursday that some recent leveraged buyout deals were overvalued, though such examples of risky behavior were limited.

Mr. Draghi was asked several times whether the central bank might consider other ways of encouraging credit, for example by emulating the Bank of England’s Funding for Lending Scheme, which rewards banks that lend more. Mr. Draghi said that existing central bank programs were already comparable with those of the Bank of England.

The European bank has been allowing lenders to borrow as much as they want from the central bank at 0.75 percent, if they can provide collateral. But the central bank cannot compel banks to pass on lower rates to customers, and many do not.

The Bank of England on Thursday decided to leave its interest rate at 0.5 percent, a record low, and also held its program of economic stimulus at £375 billion, or $600 billion.

Positive data from the manufacturing industry in December had surprised some economists, but many warned that the British economy would continue to move at a snail’s pace this year because households were reluctant to spend.

“It’s still not looking good,” Vicky Redwood, an economist at Capital Economics, said before the rate announcement. “The underlying picture is still flat.”

Britain had emerged from a recession in the third quarter, albeit with its economy growing slower than expected.

Many British consumers are concerned that a 2.7 percent inflation rate, which is above the Bank of England’s 2 percent target, combined with the government’s austerity program will squeeze their disposable income. Consumer confidence fell in December and the British Retail Consortium called holiday sales “underwhelming.”

If the euro zone is stabilizing, Mr. Draghi can probably take much of the credit. The turnaround began after he vowed last year to do whatever it took to preserve the euro zone and announced a program to buy bonds of countries whose borrowing costs were rising too high.

Mr. Draghi provided another example Thursday of how he has been willing to interpret the central bank’s charter more flexibly than his predecessor, Jean-Claude Trichet, a habit that has pleased investors.

The central bank’s chief mandate is to contain prices. But he added that unemployment was “a very important factor in our assessment of price stability.”

Jack Ewing reported from Frankfurt and Julia Werdigier from London.

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E.C.B. Sees a Healing Euro Zone but Warns of Risks

FRANKFURT — Tensions in the euro zone have eased noticeably since the summer, the European Central Bank said Friday, but it warned that the situation remained fragile in part because commercial banks were still in a weakened state.

“There is a risk in spite of the recent improvements,” Vitor Constâncio, the vice president of the E.C.B., said at a press briefing Friday.

In its annual report on financial stability, the E.C.B. noted a number of indications that the euro zone is starting to heal. For example, borrowing costs for troubled countries have dropped substantially, and banks in Portugal and Ireland have regained access to money markets.

Countries including Spain and Italy have been able to increase their exports because labor costs have fallen, improving their competitiveness, the E.C.B. said. While that is positive, it came about partly because of high unemployment and falling wages.

“This adjustment has had a heavy cost,” Mr. Constâncio said. “But at least we can say the adjustment occurred.”

Unemployment will start to fall by 2014 as the stressed countries begin to grow again, Mr. Constâncio said.

The E.C.B. attributed the ebbing of fear in the euro zone to a combination of central bank policy, improved competitiveness at some countries and progress by political leaders toward creating a more durable euro zone. Mr. Constâncio said it was impossible to separate out how much each of those factors contributed.

The E.C.B. gave itself credit for some of the improvement, including its promise to buy government bonds as needed to contain countries’ borrowing costs. It also lauded the decision by euro zone leaders this week to give the E.C.B. overall authority for regulating banks.

Mr. Constâncio emphasized that, even though the E.C.B. has direct control only over about 150 of the biggest banks as part of the so-called banking union, it sees itself as overseer for the whole banking system, with the power to assume oversight of any bank it chooses. Mr. Constâncio said that political leaders understood this.

The E.C.B. “has legal competence over all the banks,” he said. “This is a very important idea.”

Banks, and falling bank profits, were the major weaknesses identified by the E.C.B. in the report. European bank shares are currently valued at much less than the value of their assets, the report said.

“It really is a very negative judgment by the stock market,” Mr. Constâncio said.

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DealBook: Ireland Mortgage Bill Aims to Aid Owners and Jump-Start Economy

DUBLIN — With its economy still reeling from the housing crash, Ireland is making a bold move to help tens of thousands of struggling homeowners.

The Irish government expects to pass a law this year that could encourage banks to substantially cut the amount that borrowers owe on their mortgages, a step that no major country has been willing to take on a broad scale.

The initiative, which would lower a borrower’s monthly payment, could prevent a tide of foreclosures, an uncertainty that has been hanging over the Irish housing market for years. If it works, the plan could provide a road map for other troubled countries.

Without the proposed law, Laura Crowley, a nurse who lives in a village 30 miles west of Dublin, figures she will lose her home. In 2007, Ms. Crowley and her husband bought a small home for the equivalent of $420,000. But they can no longer afford the $1,400 monthly payment. Her husband, a construction worker, is earning far less and her take-home pay has been cut by the country’s new austerity measures, which include new taxes. “This bill is the only light at the end of the tunnel for us,” she said.

Most countries that have suffered housing busts, including the United States, have made limited use of so-called mortgage write-downs, the process of forgiving a portion of the principal on the loan. The worry has been that some borrowers who can afford their mortgages will stop making payments to take advantage of a bailout. Banks have also been reluctant since they could face unexpected losses.

Ireland is different from the United States and most countries. During the financial crisis, Ireland bailed out the banks, and the government still has large ownership stakes in some of the biggest mortgage lenders. So taxpayers are already responsible for mortgage losses. In other countries, the burden of principal forgiveness would largely fall on privately owned banks.

But the debate is the same: whether to push lenders to take losses now, in hopes that things will get better faster, or wait for the housing market to heal on its own, which could cloud the economy for years to come.

Countries suffering from a housing hangover will most likely be watching Ireland closely to see how the law works. Spain, swamped with mortgage defaults, introduced a measure in March that allows for debt forgiveness, though under strict conditions.

In many ways, Ireland has to try something audacious. House prices are still 50 percent below their peak, compared with 30 percent in the United States. And more than half of Irish mortgages are underwater, meaning the house is worth less than the outstanding debt. While some of those borrowers can afford to keep making payments, more than a quarter of mortgage debt on first homes, roughly $39 billion, is in default or has been modified by lenders.

The housing market is now in a state of limbo as the government and the banks have made little effort to clean up the mortgage mess.

Unlike in the United States, Irish banks have foreclosed on very few borrowers. While Ireland’s leaders have considered it socially unacceptable for banks to seize large numbers of homes, they also feared the fiscal cost of foreclosures.

This approach creates doubt about the true level of bad mortgages at Irish banks. And borrowers, unsure of whether they will keep their homes, remain in a state of financial paralysis.

The new law aims to end this stalemate by overhauling Ireland’s consumer debt and bankruptcy laws.

While banks aren’t required to reduce the mortgage debt, the legislation gives them a powerful incentive to write down mortgages for troubled borrowers. Under the new rules, it will be less onerous to declare bankruptcy, making it easier for people to walk away from their homes altogether. As the threat rises, banks are more likely to reduce homeowners’ debt, rather than risk losing the monthly income and getting stuck with the property.

“For the banks, where there are losses, they have to be recognized,” said Alan Shatter, Ireland’s justice minister, who has sponsored the new law, called the Personal Insolvency Bill. “This legislation gives homeowners hope for their future.”

The legislation is intended, in part, to reach homeowners who are on the verge of running into trouble, as Geraldine Daly is.

A health care worker, Ms. Daly bought a home in 2009 in Belmayne, a new development in northern Dublin. Until last month, Ms. Daly said, she has been making her $1,200 payment. Then she fell behind after some unexpected expenses, including a car repair.

Ms. Daly estimates that her finances would become manageable if her monthly mortgage payments were cut to around $900. “Right now, I am a slave to this dog box.”

Critics contend the law could have unintended consequences.

One fear is that banks won’t have the money to absorb the potential losses on the mortgages. A big mystery is the level of defaults on so-called buy-to-let mortgages, loans that many Irish people took out to buy second homes to rent. In theory, the insolvency bill allows for write-offs on this type of mortgage, and analysts expect defaults on such loans to be higher than on first homes. Ireland’s central bank is expected to release the data soon.

To qualify, borrowers will have to prove that they are in a precarious financial position and cannot afford to pay. Analysts are concerned that the bill may actually be too restrictive and homeowners will continue to default. “There are so many layers that borrowers have to go through to get a write-down,” said Paul Joyce, senior policy researcher at Free Legal Advice Centers, a legal rights group that has supported moves to make Irish bankruptcy law more lenient. For instance, borrowers will most likely have to pay a big fee upfront to the person who handles their case.

John Chubb, a former construction worker who lives on a quiet cul-de-sac on the outskirts of Dublin, isn’t too worried about the process right now. He just wants to save his home.

Since having an operation for colon cancer in 2004, Mr. Chubb has lived primarily on government disability payments, and the bank has allowed him to pay only mortgage interest. But the lender is in the process of deciding whether to foreclose.

“I am expecting the word any day now,” he said. “I don’t know if I will be out on the front path before the bill passes.”



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DealBook: BNP Paribas Profit Falls 13% in Second Quarter

A BNP Paribas branch in Paris.Chris Ratcliffe/Bloomberg NewsA BNP Paribas branch in Paris.

PARIS — Europe’s deepening debt crisis curbed trading revenue at the French bank BNP Paribas, pushing its net profit down by 13 percent in the second quarter compared to the same period last year.

Net income in the three months through June 30 fell to 1.85 billion euros, or $2.27 billion, from 2.13 billion euros a year ago, France’s largest bank said on Thursday.

Revenue from its advisory and capital markets operations, a mainstay of its business, slumped 33 percent to 1.2 million euros.

“Against a general background of crisis in the capital markets and strong volatility, there was less demand from clients and the businesses were managed cautiously,” the bank said.

At the same time, BNP Paribas said it had also significantly shored up the amount of capital regulators are requiring it and other financial institutions to hold in reserve against a worsening of the crisis.

The bank said it had completed 90 percent of a restructuring plan designed to bring in funds to lift its capital cushion to 9 percent by the end of the year to conform with new regulations.

Since the middle of last year, BNP Paribas, like other European banks, has moved to reduce its exposure to the crisis by shedding large amount of sovereign bond holdings from Greece and other troubled countries to help protect its capital levels. The bank took a write-down of 3.2 billion euros on Greek government debt in 2011.

BNP Paribas said its risk-related costs had fallen more than 20 percent in the first six months of 2012 compared to a year ago, to 1.8 million euros. That included a hit of 534 million euros it took in marking down the value of its Greek bond holdings in the second quarter of 2011.

The French bank said it continued lending into economies where it operates despite the difficult economic environment. As consumers reduced spending and stashed more money in their bank accounts, BNP Paribas said its commercial business was marked in particular by a growth trend in deposits across all its networks.

Revenue was stable at 3.96 billion euros compared to the second quarter of 2011, while operating expenses fell 1.2 percent from a year earlier.

In early morning trading in Paris, shares in the French bank rose 1.6 percent.

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Economix Blog: Simon Johnson:Is Europe on the Verge of a Depression, or a Great Inflation?


Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”

The news from Europe, particularly from within the euro zone, seems all bad.

Today’s Economist

Perspectives from expert contributors.

Interest rates on Italian government debt continue to rise. Attempts to put together a “rescue package” at the pan-European level repeatedly fall behind events. And the lack of leadership from Germany and France is palpable – where is the vision or the clarity of thought we would have had from Charles de Gaulle or Konrad Adenauer?

In addition, the pessimists argue, because the troubled countries are locked into the euro, no good options are available. Gentle or even dramatic depreciation of the exchange rate for Greece or Portugal or Italy is not in the cards. As a result, it is hard to lower real wages so as to restore competitiveness and boost trade. This means that the debt burdens for these countries are likely to seem insurmountable for a long time. Hence default and global financial chaos seem likely.

According to the September 2011 edition of the Fiscal Monitor of the International Monetary Fund, 44.4 percent of Italian general government debt is held by nonresidents, i.e., presumably foreigners (see Statistical Table 9), on Page 72). The equivalent number for Greece is 57.4 percent, while for Portugal it is 60.5 percent.

And if you want to get really negative and think the problems could spread from Italy to France, keep in mind that 62.5 percent of French government debt is held by nonresidents. If Europe has a serious meltdown of sovereign debt values, there is no way that the problems will be confined just to that continent.

All of this is a serious possibility – and the lack of understanding at top European levels is deeply worrisome. No one has listened to the warnings of the last three years. Almost all the time since the collapse of Lehman Brothers has been wasted, in the sense that nothing was done to put government finances on a more sustainable footing.

But perhaps the pendulum of sentiment has swung too far, for one simple and perhaps not very comfortable reason.

There is no way to have just a little debt restructuring for Italy. If Italian debt involves serious credit risk – an end to the view that government debt has “no credit risk” and is a “risk-free asset,” with zero probability of default – then all sovereign debt in Europe will need to be repriced downward.

Will Germany will remain a safe haven? Even that is far from clear. According to the I.M.F., gross government debt in Germany will be 82.6 percent of gross domestic product at the end of this year (Statistical Table 7 of the Fiscal Monitor, on Page 70; the net government debt number for 2011, in Statistical Table 8, on Page 71,is 57.2 percent). Reports of German fiscal prudence have been greatly exaggerated.

German policy makers and the German public will not do well in the event of a major sovereign-credit disaster. Credit would tighten across the board. German exports would plummet. The famed German social safety net would come under great pressure.

There is an alternative to a decade of difficult austerity. The Germans could agree to allow the European Central Bank to provide “liquidity” support across the board to the troubled governments.

Many things are wrong with this policy – and it is exactly the kind of moral hazard-reinforcing measure that brought us to the current overindebted moment. None of us should be happy that Europe – and the world – has reached this point.

Among others, the bankers who bet big on moral hazard – i.e., massive government-backed bailouts – are about to win again. Perhaps the Europeans will be tougher on executives, boards and shareholders than the Obama administration was in early 2009, but most likely all the truly rich and powerful will do very well.

But if the German choice is global calamity or, effectively, the printing of money, which will they choose?

The European Central Bank has established a great deal of credibility with regard to keeping inflation at or close to 2 percent. It could probably offer a great deal of additional support – through creating money – without immediately causing inflation. And if the bank is providing a complete backstop to Italian government debt, the panic phase would be over.

None of this is a lasting solution, of course. Europe needs a proper fiscal center – much as the United States needed in 1787 and got under Alexander Hamilton’s policies from 1789. When he became Treasury secretary, the United States was in default and the credit system was almost completely broken. Some centralized tax revenue and control over fiscal deficits are needed.

Silvio Berlusconi stood in the way of all this. Other European leaders would not trust him to tighten Italian fiscal policy. But if he is really gone from power – and we should believe that only when we see it – there is now time and space for Italy to stabilize and, with the right help, find its way back to growth.

Of course, if the European Central Bank provides unconditional financial support to Italian, or other, politicians who refuse to bring their deficits under control, we are heading for another Great Inflation.

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Heads of Europe Back Broad Plan to Rescue Greece

The pact, negotiated in Brussels, is part of a rescue package of 109 billion euros, or $157 billion, for Greece, the most troubled economy in the euro zone. It will force many investors in Greek debt to accept some losses on their bonds.

The deal would also provide substantial debt relief for Ireland and Portugal. And by giving the main European rescue fund increased powers to assist countries that have not been bailed out — like Spain and Italy — leaders are betting that the program, described by some as a new Marshall Plan for Europe, will serve as a firebreak against the contagion that has threatened to engulf some of the region’s largest economies.

Officials have long shunned proposals that would make banks and other creditors share some losses on Greek debt. But European leaders are taking the calculated risk that they can avoid spooking investors by expanding the aid package to include other troubled countries on Europe’s periphery.

The fear had been that a failure by Greece to pay its debt in full could lead to panicked selling of other European bonds. That could make it impossible for other countries to borrow at a reasonable interest rate and finance themselves.

The lack of a solution to Greece had also rattled financial markets, ultimately forcing European leaders to act this week. On the eve of the summit meeting, Nicolas Sarkozy of France and Angela Merkel of Germany met in Berlin, along with the president of the European Central Bank, and came to a general agreement that euro zone taxpayers would have to cover the rescue costs to preserve the integrity of the single European currency. How German and French citizens will react to the proposal is unclear.

Financial markets in Europe and the United States rallied Thursday on news that a broad agreement was imminent, one that would end the piecemeal approach that has brought only temporary relief in the last couple of years.

Most economists had deemed Greece incapable of repaying its debt mountain, which amounts to 150 percent of its gross domestic product.

Under the plan, Greece would receive assistance in several ways. Holders of short-term obligations would be able to swap their notes for debt with longer maturities and backed by high-rated bonds. An organization that includes most major European banks said its members would accept the offer and expected 90 percent of all Greek bonds to be exchanged.

Separately, officials said that the terms of the aid package from Europe to Greece would be eased, with maturities lengthened to 15 years from 7.5 years, at an interest rate of a quite low 3.5 percent.

The euro zone leaders would give wide-ranging new powers to the region’s rescue fund, the European Financial Stability Facility, by allowing it to buy government bonds on the secondary market and to help recapitalize banks — which might be needed when they write down the value of their Greek bonds.

The new powers would effectively turn the facility into a prototype European monetary fund — a move that has long been resisted by Germany, the euro zone’s richest nation, but that has drawn the support of economists and government officials outside Europe.

Together, the various measures are intended to show that the euro zone’s leaders are committed to taking forceful policy measures — just as the United States and Britain did during the 2008 crisis — that will stem the spread of contagion.

“This is a move in the right direction,” said Peter Bofinger, an economist in Germany who is a member of an economic panel that advises the German government. “The important thing is that they have agreed on a more flexible role for the E.F.S.F. — that should help in reducing tensions.”

But the true test will most likely come in the months ahead, when nations like Portugal, Ireland and Spain, which are struggling to impose unpopular austerity measures on their people, confront the difficulty of cutting budget deficits in the face of brutal recessions.

While the agreement to increase the powers of the euro bailout fund did not come easily, the debt deal was perhaps harder to secure.

The move will be deemed a selective default by the credit ratings agencies, something the European Central Bank had previously said was unacceptable.

James Kanter contributed reporting.

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