Central Banks in Europe Move to Support Economy
Published: October 6, 2011
BERLIN — The European Central Bank increased aid to cash-strapped financial institutions Thursday, but disappointed those expecting more drastic measures to combat slowing growth and address a deepening bank emergency.
The E.C.B.’s restraint came in contrast to the action of the Bank of England, which announced another round of bond buying to support the slowing British economy. The pound fell against all major currencies after the announcement; the euro rose against the dollar.
As a slump in German factory orders provided the latest sign of a looming recession, the E.C.B. left its benchmark rate unchanged, at 1.5 percent. The Bank of England also left its main rate unchanged, at 0.5 percent.
During his last news conference as E.C.B. president, Jean-Claude Trichet said that members of the central bank’s governing council had discussed a rate cut before concluding “by consensus” that inflation in the euro area — at 3 percent — was still too high. The statement, and a subdued assessment of the euro zone economy, suggested the bank will be open to cutting rates in coming months, as many analysts expect.
Mr. Trichet said the central bank expected “very moderate” growth ahead in “an environment of particularly high uncertainty.”
Janet Henry, chief European economist at HSBC, wrote in a note to clients that the E.C.B. “has clearly left the door open to a cut, possibly as soon as November.” She said that Mr. Trichet may have been reluctant to send any stronger signals on E.C.B. intentions that might constrain his successor, Mario Draghi, now governor of the bank of Italy. Mr. Draghi will take office Nov. 1.
Mr. Draghi brings a similar outlook and background as Mr. Trichet and is not expected to radically alter monetary policy. But he may find it hard to move boldly at the beginning of his term, given that he may feel it necessary to establish his anti-inflation credentials. He has kept an extraordinarily low profile in the final months of Mr. Trichet’s tenure and his intentions are largely a mystery.
The E.C.B. did respond to signs that banks are reluctant to lend to each other because of fears about their exposure to shaky government debt.
Those fears were intensified by the woes of the French-Belgian bank Dexia, which is seeking its second taxpayer-financed bailout in three years and said Thursday that it was close to selling its Luxembourg unit.
The central bank will spend €40 billion, or $53.6 billion, in the coming year buying so-called covered bonds, a form of debt secured by payments received on assets like packages of loans.
Covered bonds are one of the main ways that European banks raise money. The E.C.B. also bought covered bonds in 2009 to alleviate the bank financing squeeze that followed the collapse of the U.S. investment firm Lehman Brothers in 2008.
The E.C.B. measure, however, was dwarfed by the Bank of England’s plans to widen its so-called quantitative easing program to £275 billion from £200 billion.
“Vulnerabilities associated with the indebtedness of some euro area sovereigns and banks have resulted in severe strains in bank funding markets and financial markets more generally,” the Bank of England’s governor, Mervyn A. King, wrote in a letter to the British Treasury explaining the bank’s decision.
The E.C.B. does not have the power to save ailing banks like Dexia or address deeper problems in the banking system, officials insist, caused by banks’ exposure to sovereign debt and reserves that are too thin to absorb potential losses. That task belongs to governments.
Angela Merkel, the chancellor of Germany, suggested Thursday that Europe was moving closer to a coordinated effort to bolster European banks and address the longer-term problems.
While cautioning that more expert advice was needed, she said, “If the conditions are there we shouldn’t hesitate.” Mrs. Merkel appeared at a news conference in Berlin that also included Christine Lagarde, president of the International Monetary Fund, and Robert B. Zoellick, president of the World Bank.
Her comments were similar to what she said Wednesday during a visit to Brussels and in line with remarks made Thursday by José Manuel Barroso, president of the European Commission, the executive arm of the European Union.
A coordinated bank recapitalization is “not only obvious but indispensable,” Mr. Barroso said in Brussels. “I don’t think anyone in Europe is opposed to coordination in such a sensitive area.”
But he declined to put any figure on the euro zone’s bank recapitalization needs or to say whether he would propose the use of the euro zone’s common bailout fund to help with the task.
The E.C.B. also said it would resume offering banks unlimited loans at the benchmark interest rate for about one year. Previously the maximum loan term was six months. Banks must put up collateral like bonds or other securities, but otherwise are allowed to borrow as much as they want.
Mr. Trichet said the E.C.B. would continue the unlimited lending “for as long as needed” and at least through mid-2012.
While calling on European leaders to implement an expanded bailout fund for Greece and other countries with severe debt problems, Mr. Trichet sought to dash hopes that the E.C.B. could be used as a vehicle to leverage borrowing by the fund, and increase its firepower. Analysts like Daniel Gros at the Center for European Policy Studies have suggested that the bailout fund register as a bank so that it could borrow from the E.C.B.
The British move came about a month earlier than some economists had expected but was no surprise.
The Bank of England’s rate-setting committee had hinted last month that it might have to inject more money into financial markets to support an increasingly threatened economic recovery.
The decision shows that “they believe an already difficult outlook for the economy has deteriorated,” said Howard Archer, chief economist for Britain and the euro zone at IHS Global Insight.
Many economists have argued that the E.C.B. erred when it raised rates twice this year, most recently in July.
A bigger-than-expected drop in German factory orders in August, according to data released Thursday, provided the latest evidence that the euro zone economy is headed for a downturn caused by severe austerity programs in countries like Spain, as well as the uncertainty created by the European government debt crisis.
Recent figures showed inflation in the euro zone rose to an estimated 3 percent in September, well above the E.C.B. target of about 2 percent. Hard liners on the governing council are likely to have argued that the E.C.B. would violate its mandate to preserve price stability if it cut rates now.
The E.C.B. governing council, in one of its occasional forays from Frankfurt, met at the Berlin offices of the Bundesbank, the German central bank, which remains Europe’s bastion of price stability.
Finland’s prime minister, Jyrki Katainen, who was visiting the European Commission, underlined how such proposals for bank recapitalization are likely to encounter opposition.
The first step, he said, was for national governments to encourage their banks to raise capital from the financial markets. Failing that, “the government is responsible for recapitalization,” he added.
The European Banking Authority, which coordinates national regulators, is reviewing the results of the last banking stress tests, which took place in July, in light of the slump in the value of Greek and other bonds.
The value of the tests has been called into question by Dexia, which passed easily because those tests did not have to take into account the market valuation of holdings of Greek debt. The banking authority underlined in a statement that it had not announced new tests.
So far the E.C.B. has followed a more conservative course than the U.S. Federal Reserve or the Bank of England. The E.C.B. has bought government bonds in an effort to hold down borrowing costs for countries like Spain and Italy, but has avoided the wholesale asset purchases made by its peers.
With governments struggling just to approve a relatively modest aid package for Greece, the E.C.B. may eventually be faced with a choice of letting the country fail — an event that could threaten the whole euro zone — or making huge bond purchases even though such a move would enrage many north Europeans and split the governing council.
Like their European peers, British leaders are under mounting pressure to act amid criticism from some economists and lawmakers for holding on to far-reaching spending cuts that were introduced before the recent economic slowdown.
Prime Minister David Cameron has been adamant that he was sticking to his austerity plan, but he acknowledged Wednesday that the economic slowdown was worse than he had expected. The government suggested this week that it could sell government bonds to finance loans for struggling companies.
The Office for National Statistics said Wednesday that Britain’s economic output rose 0.1 percent from the first quarter, half the 0.2 percent it had said earlier. The I.M.F. last month cut its growth forecast for Britain for this year to 1.1 percent from 1.5 percent.
Consumers have started to curb spending, feeling squeezed by rising prices and unchanged salarie
Published: October 6, 2011
BERLIN — The European Central Bank increased aid to cash-strapped financial institutions Thursday, but disappointed those expecting more drastic measures to combat slowing growth and address a deepening bank emergency.
The E.C.B.’s restraint came in contrast to the action of the Bank of England, which announced another round of bond buying to support the slowing British economy. The pound fell against all major currencies after the announcement; the euro rose against the dollar.
As a slump in German factory orders provided the latest sign of a looming recession, the E.C.B. left its benchmark rate unchanged, at 1.5 percent. The Bank of England also left its main rate unchanged, at 0.5 percent.
During his last news conference as E.C.B. president, Jean-Claude Trichet said that members of the central bank’s governing council had discussed a rate cut before concluding “by consensus” that inflation in the euro area — at 3 percent — was still too high. The statement, and a subdued assessment of the euro zone economy, suggested the bank will be open to cutting rates in coming months, as many analysts expect.
Mr. Trichet said the central bank expected “very moderate” growth ahead in “an environment of particularly high uncertainty.”
Janet Henry, chief European economist at HSBC, wrote in a note to clients that the E.C.B. “has clearly left the door open to a cut, possibly as soon as November.” She said that Mr. Trichet may have been reluctant to send any stronger signals on E.C.B. intentions that might constrain his successor, Mario Draghi, now governor of the bank of Italy. Mr. Draghi will take office Nov. 1.
Mr. Draghi brings a similar outlook and background as Mr. Trichet and is not expected to radically alter monetary policy. But he may find it hard to move boldly at the beginning of his term, given that he may feel it necessary to establish his anti-inflation credentials. He has kept an extraordinarily low profile in the final months of Mr. Trichet’s tenure and his intentions are largely a mystery.
The E.C.B. did respond to signs that banks are reluctant to lend to each other because of fears about their exposure to shaky government debt.
Those fears were intensified by the woes of the French-Belgian bank Dexia, which is seeking its second taxpayer-financed bailout in three years and said Thursday that it was close to selling its Luxembourg unit.
The central bank will spend €40 billion, or $53.6 billion, in the coming year buying so-called covered bonds, a form of debt secured by payments received on assets like packages of loans.
Covered bonds are one of the main ways that European banks raise money. The E.C.B. also bought covered bonds in 2009 to alleviate the bank financing squeeze that followed the collapse of the U.S. investment firm Lehman Brothers in 2008.
The E.C.B. measure, however, was dwarfed by the Bank of England’s plans to widen its so-called quantitative easing program to £275 billion from £200 billion.
“Vulnerabilities associated with the indebtedness of some euro area sovereigns and banks have resulted in severe strains in bank funding markets and financial markets more generally,” the Bank of England’s governor, Mervyn A. King, wrote in a letter to the British Treasury explaining the bank’s decision.
The E.C.B. does not have the power to save ailing banks like Dexia or address deeper problems in the banking system, officials insist, caused by banks’ exposure to sovereign debt and reserves that are too thin to absorb potential losses. That task belongs to governments.
Angela Merkel, the chancellor of Germany, suggested Thursday that Europe was moving closer to a coordinated effort to bolster European banks and address the longer-term problems.
While cautioning that more expert advice was needed, she said, “If the conditions are there we shouldn’t hesitate.” Mrs. Merkel appeared at a news conference in Berlin that also included Christine Lagarde, president of the International Monetary Fund, and Robert B. Zoellick, president of the World Bank.
Her comments were similar to what she said Wednesday during a visit to Brussels and in line with remarks made Thursday by José Manuel Barroso, president of the European Commission, the executive arm of the European Union.
A coordinated bank recapitalization is “not only obvious but indispensable,” Mr. Barroso said in Brussels. “I don’t think anyone in Europe is opposed to coordination in such a sensitive area.”
But he declined to put any figure on the euro zone’s bank recapitalization needs or to say whether he would propose the use of the euro zone’s common bailout fund to help with the task.
The E.C.B. also said it would resume offering banks unlimited loans at the benchmark interest rate for about one year. Previously the maximum loan term was six months. Banks must put up collateral like bonds or other securities, but otherwise are allowed to borrow as much as they want.
Mr. Trichet said the E.C.B. would continue the unlimited lending “for as long as needed” and at least through mid-2012.
While calling on European leaders to implement an expanded bailout fund for Greece and other countries with severe debt problems, Mr. Trichet sought to dash hopes that the E.C.B. could be used as a vehicle to leverage borrowing by the fund, and increase its firepower. Analysts like Daniel Gros at the Center for European Policy Studies have suggested that the bailout fund register as a bank so that it could borrow from the E.C.B.
The British move came about a month earlier than some economists had expected but was no surprise.
The Bank of England’s rate-setting committee had hinted last month that it might have to inject more money into financial markets to support an increasingly threatened economic recovery.
The decision shows that “they believe an already difficult outlook for the economy has deteriorated,” said Howard Archer, chief economist for Britain and the euro zone at IHS Global Insight.
Many economists have argued that the E.C.B. erred when it raised rates twice this year, most recently in July.
A bigger-than-expected drop in German factory orders in August, according to data released Thursday, provided the latest evidence that the euro zone economy is headed for a downturn caused by severe austerity programs in countries like Spain, as well as the uncertainty created by the European government debt crisis.
Recent figures showed inflation in the euro zone rose to an estimated 3 percent in September, well above the E.C.B. target of about 2 percent. Hard liners on the governing council are likely to have argued that the E.C.B. would violate its mandate to preserve price stability if it cut rates now.
The E.C.B. governing council, in one of its occasional forays from Frankfurt, met at the Berlin offices of the Bundesbank, the German central bank, which remains Europe’s bastion of price stability.
Finland’s prime minister, Jyrki Katainen, who was visiting the European Commission, underlined how such proposals for bank recapitalization are likely to encounter opposition.
The first step, he said, was for national governments to encourage their banks to raise capital from the financial markets. Failing that, “the government is responsible for recapitalization,” he added.
The European Banking Authority, which coordinates national regulators, is reviewing the results of the last banking stress tests, which took place in July, in light of the slump in the value of Greek and other bonds.
The value of the tests has been called into question by Dexia, which passed easily because those tests did not have to take into account the market valuation of holdings of Greek debt. The banking authority underlined in a statement that it had not announced new tests.
So far the E.C.B. has followed a more conservative course than the U.S. Federal Reserve or the Bank of England. The E.C.B. has bought government bonds in an effort to hold down borrowing costs for countries like Spain and Italy, but has avoided the wholesale asset purchases made by its peers.
With governments struggling just to approve a relatively modest aid package for Greece, the E.C.B. may eventually be faced with a choice of letting the country fail — an event that could threaten the whole euro zone — or making huge bond purchases even though such a move would enrage many north Europeans and split the governing council.
Like their European peers, British leaders are under mounting pressure to act amid criticism from some economists and lawmakers for holding on to far-reaching spending cuts that were introduced before the recent economic slowdown.
Prime Minister David Cameron has been adamant that he was sticking to his austerity plan, but he acknowledged Wednesday that the economic slowdown was worse than he had expected. The government suggested this week that it could sell government bonds to finance loans for struggling companies.
The Office for National Statistics said Wednesday that Britain’s economic output rose 0.1 percent from the first quarter, half the 0.2 percent it had said earlier. The I.M.F. last month cut its growth forecast for Britain for this year to 1.1 percent from 1.5 percent.
Consumers have started to curb spending, feeling squeezed by rising prices and unchanged salarie
