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India Adjusts Short-Term Interest Rates

September 20, 2013 by

JAKARTA — India’s central bank announced on Friday a complex series of changes to its interest rate policies, aimed at maintaining control of inflation while also making credit more available to the troubled industrial sector.

The Reserve Bank of India cut by three-quarters of a percentage point the short-term interest rate that has had the most effect on bank lending rates lately, while, in an unexpected move, raising by a quarter of a percentage point a separate interest rate that many banks rely on for their underlying financing.

The United States Federal Reserve’s decision on Wednesday not to begin decreasing its level of economic stimulus has given India a respite during which to pursue slightly less stringent monetary policies of its own. The Reserve Bank of India tightened policy sharply in mid-July in an effort to halt the fall of the rupee in currency markets.

The rupee continued to drop until the end of August, when a move by the central bank to provide dollars from its reserves to the country’s state-controlled oil distribution companies finally halted the tumble. The rupee and the Indian stock market, like currencies and shares in other emerging markets, rallied sharply on Thursday after the Fed’s decision on Wednesday.

The Reserve Bank of India has two short-term interest rates. Commercial banks are allowed to borrow part of their funds at the repurchase, or repo, rate, which was raised on Friday to 7.5 percent, from 7.25 percent.

Many in the Indian financial markets have long focused on the repo rate, even though it has been less important lately, and were disappointed to see it rise instead of fall on Friday.

“India’s core inflationary requirements mean that the market can no longer expect a complete rollback of interest rates,” said Vaibhav Agrawal, vice president for research and banking at Angel Broking.

Further borrowing by commercial banks comes from the so-called marginal standing facility, whose interest rate was cut on Friday to 9.5 percent, from 10.25 percent. Because the cost of borrowing for banks to make additional loans is essentially the interest rate on the marginal standing facility, that rate tends to have a greater effect on the interest rates that banks charge customers for loans.

The reduction of the marginal standing facility by 0.75 percentage point “is encouraging, as this is working as the short-term interest rate,” said Chandrajit Banerjee, director general of the Confederation of Indian Industry.

After the central bank’s action, the Mumbai stock exchange sagged 1.9 percent, wiping out much of the gain it had posted the previous day. The rupee fell to 62.44 per dollar, from about 62 just before the announcement.

While short-term interest rates may sound high in India, they are only slightly above inflation, with prices up 9.5 percent in August from a year ago at the consumer level and up 6.1 percent at the wholesale level.

Neha Thirani Bagri contributed reporting from Mumbai.

Article source: http://www.nytimes.com/2013/09/21/business/global/india-adjusts-short-term-interest-rates.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

European Central Bank Eases Euro Crisis a Bit

January 21, 2012 by Leave a Comment

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

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News Analysis: Central Bank’s Message to Europe: ‘No’ Means ‘No’

November 26, 2011 by Leave a Comment

The E.C.B. has a fire hose — its ability to print money. But the bank is refusing to train it on the euro zone’s debt crisis.

The flames climbed higher Friday after the Italian Treasury had to pay an interest rate of 6.5 percent on a new issue of six-month bills — more than three percentage points higher than a similar debt auction on Oct. 26. It was the highest interest rate Italy has had to pay to sell such debt since August 1997, according to Bloomberg News.

But there is no sign the E.C.B. plans a major response, like buying large quantities of the country’s bonds to bring down its borrowing costs. The E.C.B. “is not the fiscal lender of last resort to sovereigns,” José Manuel González-Páramo, a member of the executive board of the bank, told an audience at Oxford University on Thursday, a view that has been repeated by members of the bank’s governing council in recent weeks.

To many commentators, the E.C.B.’s attitude seems so incomprehensible that they assume the central bank is just putting pressure on politicians to make sure they keep their promises. Rather than let the euro break apart, the thinking goes, the bank will eventually relent and drench the economy with cash as the United States Federal Reserve and Bank of England have done.

But another possibility is that when the E.C.B. says “no,” it in fact means “no.”

“I think markets are going up a blind alley thinking there’s going to be a common euro bond or thinking that the E.C.B. is going to act as a lender of last resort,” Norman Lamont, the former British finance minister, told Bloomberg on Friday. “I think Germany would rather leave the euro than see the E.C.B.’s integrity affected.”

Instead, the E.C.B. insists, euro area governments must amend their errant ways. “Governments need to ensure, under any circumstances, the achievement of announced fiscal targets and deliver the envisaged institutional and structural reform programs,” Mr. González-Páramo said in London on Friday.

E.C.B. policy makers have been consistent in arguing that huge purchases of government bonds would violate the bank’s mandate and not solve the crisis.

Mr. González-Páramo even accused investors of cynical self-interest when they pleaded for a European version of quantitative easing, the use of large purchases of securities to encourage economic growth.

“Market participants that call for the E.C.B. to play this role may care only about the nominal value of their assets and the need to avoid losses,” he said in Oxford.

To outsiders, it may seem that the E.C.B., based in Frankfurt and steeped in the conservative culture of the Bundesbank, would rather let the euro go up in smoke than compromise its principles. But policy makers do not see the choice in those terms.

To them, the best way to address the crisis is to stick to principles, the most important of which is preserving price stability. That is set out in the first sentence of the statute that defines the E.C.B.’s tasks. “The primary objective” of the European system of central banks “shall be to maintain price stability,” the statute reads.

E.C.B. policy makers also believe that their charter forbids them from using bank resources to finance governments. If they expanded the money supply to provide debt relief to Italy, policy makers believe, they would be breaking the law. They would also effectively be transferring the debt burden from countries like Greece and Italy to countries like Germany or the Netherlands.

The E.C.B. has been buying Italian government bonds and debt from other troubled countries, but in relatively modest amounts and always on the ground that intervention was needed to maintain control over interest rates and prices.

Mr. González-Páramo argued this week that the restriction on E.C.B. action, far from a handicap, was a good thing. It helps policy makers resist the temptation to print money rather than make painful changes.

Article source: http://www.nytimes.com/2011/11/26/business/global/as-crisis-deepens-ecb-stands-firm.html?partner=rss&emc=rss

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Europe’s Banks, Squeezed for Credit, Borrow From E.C.B.

November 23, 2011 by Leave a Comment

Indebted governments among the 17 members of the European Union that use the euro are also finding it harder to borrow at affordable rates as investors lose confidence in their creditworthiness.

In a Tuesday auction, the Spanish treasury, for example, was forced to sell three-month bills at a price to yield 5.11 percent, more than double the 2.29 percent interest rate investors demanded at a sale of similar Spanish securities on Oct. 25. Spain also sold six-month debt at 5.23 percent Tuesday, up from 3.30 percent in October.

Italy’s 10-year bond yield, meanwhile, edged up once again — to nearly 6.8 percent Tuesday — as foreign investors withdrew their money from that debt-staggered country.

Together, the commercial banks’ heavy reliance on the central bank to finance their everyday business needs, along with the growing borrowing burden for Spain and Italy, raise the risk of failure for some banks within the countries that use the euro and the danger that nations much larger than Greece could eventually seek a bailout or be forced to leave the euro currency union.

European stocks were down broadly on Tuesday’s gloomy news. In the United States, stocks closed lower, too, but were not down as much as they had been before the International Monetary Fund announced at midday that it would extend a six-month lending lifeline to nations that might seek it in response to the euro zone crisis.

At the same time, though, the central bank continued to resist calls that it stretch its mandate and expand the money supply, as the United States Federal Reserve and the Bank of England have done.

The European debt crisis has crimped the flow of funds to banks by raising doubts about the solvency of institutions with a large exposure to European government debt. In particular, American money market funds have severely cut back their lending to European banks in recent months, leading many institutions to turn to Europe’s central bank.

Compounding the problem, many banks using the euro have also had trouble selling bonds to raise money that they can lend to customers. That raises the specter of a credit squeeze that could amplify an impending economic slowdown. In addition, some banks may fail if they are unable to raise short-term cash.

The central bank said Tuesday that commercial banks had taken out 247 billion euros, ($333 billion), in one-week loans, the largest amount since April 2009. And the 178 banks borrowing from the central bank on Tuesday compared with the 161 banks that borrowed 230 billion euros ($310 billion) last week.

Since 2008, the central bank has been allowing lenders to borrow as much as they want at the benchmark interest rate, which is now 1.25 percent. Banks must provide collateral. But the central bank is not supposed to prop up banks that are insolvent, only those that have a temporary liquidity problem.

And while the central bank has been buying bonds from countries like Spain and Italy to try to hold down their borrowing costs, the amount —195 billion euros ($263 billion) so far — is modest compared with the quantitative easing employed by other central banks like the Fed.

A growing number of commentators say the European Central Bank should be authorized to buy government bonds at levels sufficient to stimulate the economy.

“It is essential to have a central bank free to use all the levers, including variants of quantitative easing,” Adair Turner, chairman of Britain’s bank regulator, the Financial Services Authority, told an audience in Frankfurt late Monday. The audience included Vítor Constâncio, vice president of the central bank.

Richard Koo, chief economist at the Nomura Research Institute, wrote in a note Tuesday that “the E.C.B. should embark on a quantitative easing program similar in scale to those undertaken by Japan, the U.S. and the U.K.”

“Doubling the current supply of liquidity,” Mr. Koo said, “would not trigger inflation and would enable the E.C.B. to buy that much more euro zone government debt.”

But there has been no sign the central bank will budge from its position that it is barred from financing governments, and that purchases of government bonds are justified only as a way of keeping control over interest rates and fulfilling the bank’s main task to keep prices stable.

“By assuming the role of lender of last resort for highly indebted member states, the bank would overextend its mandate and shed doubt on the legitimacy of its independence,” Jens Weidmann, president of the German Bundesbank and a member of the central bank’s governing council, said Tuesday in Berlin.

“To follow this path would be like drinking seawater to quench a thirst,” he said.

Lucas D. Papademos, the new prime minister of Greece and a former vice president of the central bank, met with Mario Draghi, the central bank’s president, when he visited the bank on Monday. The bank did not disclose details of their discussions, but Greece’s fate is to a large extent in the central bank’s hands. Because of its bond purchases, the central bank is the Greek government’s largest creditor, and the bank is one of the institutions that determines whether Greece will continue to receive aid from the 17 European Union members that use the euro.

Article source: http://www.nytimes.com/2011/11/23/business/global/banks-seek-emergency-funds-from-ecb.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Stocks and Bonds: Markets Rise on Effort to Help Europe

September 19, 2011 by Leave a Comment

The European Central Bank, the United States Federal Reserve and three other central banks said Thursday they would provide European banks with unlimited dollar loans. The aim is to fend off worries that the banks could be weakened by their holdings of government bonds from Greece and other struggling European countries.

“It’s a pretty powerful action,” said Brian Gendreau, senior investment strategist at the Cetera Financial Group. “And it’s another piece of news that leads you to think the crisis in Europe could be on the road to resolution.”

The Dow Jones industrial average rose 186.45 points, or 1.7 percent, to close at 11,433.18.

The Standard Poor’s 500-stock index rose 20.43 points, or 1.7 percent, to 1,209.11. The index has jumped 4.8 percent this week but is still 10 points short of where it started the month.

Gold plunged $45, or 2.5 percent, to settle at $1,778 an ounce. Treasury prices fell, pushing their yields up. The Treasury’s benchmark 10-year note fell 26/32, to 100 12/32, and the yield rose to 2.08 percent from 1.99 percent late Wednesday.

The Nasdaq rose 34.52 points, 1.34 percent, to 2,607.07. The index has jumped 5.6 percent so far this week and is up 1.1 percent in September. The Dow is down 1.6 percent this month, the S. P. 0.8 percent.

Daniel Alpert, managing partner at Westwood Capital in New York, said the stock market had been overreacting to Europe’s debt crisis, swinging in response to each new development.

“Every time there’s news out of Europe that’s not bad, the market reacts positively, and that’s occurring on almost a nightly basis,” he said. “You’d think the U.S. economy might be part of what the market trades on, but the fact of the matter is, today and recently, it’s all been about Europe.”

Bank stocks led the market higher. The Goldman Sachs Group rose 3 percent to $107.97. Bank of America rose 4 percent to $7.33. Morgan Stanley jumped 7 percent to $16.59 after reporting that its chairman, John J. Mack, would step down at the end of the year.

The stock market’s gains were tempered by a mixed batch of economic reports. First-time claims for unemployment benefits rose by 11,000 last week, to 428,000. The New York and Philadelphia branches of the Federal Reserve also reported weak manufacturing in their regions.

On the positive side, factory output rose 0.5 percent in August, after increasing 0.6 percent in July. Autos and related products increased 2.6 percent, evidence that supply chain disruptions stemming from the Japan earthquake continued to ease.

Among stocks making big moves, HCA Holdings, a hospital chain, rose 12 percent to $20.84 after it said it would buy back more than $1 billion of its stock from Bank of America.

Research in Motion fell sharply in after-hours trading after falling less than 1 percent and closing at $29.54 in regular trading. The maker of BlackBerry mobile devices reported earnings and sales that came in far below Wall Street’s estimates.

The Swiss bank UBS fell 10 percent to $11.41 on news that a trader could cost the bank as much as $2.2 billion. The bank warned that it could post a loss for the quarter as a result of the unauthorized trade.

Netflix fell almost 19 percent to $169.25, the biggest drop among stocks in the S. P. 500 index, after the company said it expected fewer people to subscribe to its DVD-by-mail service as well as its streaming movie service.

Article source: http://feeds.nytimes.com/click.phdo?i=02812bdbc75367785a554681cdf8bf8f

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