U.S. raises pressure for euro zone crisis action
08/01/2012
The United States raised pressure on euro zone leaders to take decisive action to solve the region's debt crisis, notably by lowering troubled members' borrowing costs, on the eve of a crucial European Central Bank meeting
U.S. Treasury Secretary Timothy Geithner said the euro zone must take steps including "bringing down interest rates in the countries that are reforming and making sure those banking systems can provide the credit those economies need".
He made the comments in an interview with Bloomberg Television recorded in Los Angeles on Tuesday, a day after he flew to Germany to meet Finance Minister Wolfgang Schaeuble and ECB President Mario Draghi. They were broadcast on Wednesday.
Italy and Spain, the euro zone's third and fourth largest economies, could lose access to credit markets as the risk premium that investors demand to hold their bonds rather than safe-haven German debt has spiraled to levels considered unsustainable in the long term.
Italian Prime Minister Mario Monti said Draghi's pledge last week to do whatever it takes to preserve the euro were "bold and appropriate", and said European leaders were weighing joint intervention by the ECB and the euro zone's rescue funds.
He predicted that the future permanent rescue fund, the European Stability Mechanism (ESM), would "in due course" be granted a banking license so it could tap ECB funds to buy almost unlimited amounts of bonds.
However, German Vice-Chancellor Philipp Roesler rejected pressure for the ECB to step in and cap the borrowing costs of troubled euro zone states, saying the central bank should stick to fighting inflation and not ease market incentives for reform.
"If you take away the interest rate pressure on individual states, you also take away the pressure on them to reform," Roesler, economy minister and leader of the Free Democrats, junior partners in Chancellor Angela Merkel's centre-right coalition, told reporters in Berlin.
He also reasserted Germany's firm opposition to letting the ESM borrow from the central bank, dubbing that "the road to an inflation union".
Draghi's comments last week stirred speculation that the ECB might take more radical steps when its policy-setting Governing Council holds its monthly meeting on Thursday.
Geithner said Schaeuble and Draghi had walked him through plans they were putting in place to try to solve the crisis, but he cautioned against expecting immediate action.
Past financial crisis showed that the longer it took to address the issues, the more they cost.
"I believe they understand that. That's why they've signaled they are prepared to move further. Now again, this is going to take time," he added.
Market expectations of a major ECB move this week have faded somewhat after a spike following Draghi's comments last week. Those traders and investors who expect action on Thursday would sell the euro and European shares and drive up Spanish and Italian bond yields if the ECB did nothing.
Nick Parsons, head of markets strategy at nabCapital in London, said the euro could fall a couple of U.S. cents from current levels, while bond market analysts expect Spanish yields to reach new euro-era highs if the ECB does not act.
MONTI ON TOUR
Monti, touring Europe to press for action to bring down Rome's borrowing costs, made his pitch to euro zone hardliner Finland on Wednesday, saying Italy did not need an assistance program but might in future need "a breathing break" from high interest rates.
"We have in mind a possible intervention through EFSF, ESM and the ECB," Monti was quoted as saying by Finnish daily Helsingin Sanomat before he met Prime Minister Jyrki Katainen.
Katainen told a joint news conference that interest rates were too high in some European countries such as Italy, and that sovereign bond markets were not properly assessing their economic situation.
Central bank sources have told Reuters that intervention could be at least five weeks away because Draghi's comments had not been agreed in advance with the Governing Council, and other elements must first fall into place.
The sources said the ECB could revive its mothballed sovereign bond-buying program in tandem with the euro zone's rescue funds, but Spain would first have to request assistance, which it has resisted so far.
Credit ratings agency Standard & Poor's affirmed Spain's sovereign BBB+/A-2 rating on Wednesday, citing its commitment to economic and fiscal adjustments, but warned it risks losing investment grade if euro zone support fails to boost confidence.
Euro zone leaders would have to agree to the rescue funds buying up government bonds, and the German Constitutional Court would have to uphold the legality of the bloc's permanent rescue fund in a ruling due on September 12.
The leaders have spent the past week issuing statements promising to take whatever steps are necessary to rescue the currency, but none has raised expectations as high as Draghi, who heads the only federal European institution able to act swiftly and decisively.
However, the ECB is divided, with Germany's Bundesbank opposed to reviving government bonds or giving the euro zone rescue fund a banking license.
Draghi met Bundesbank chief Jens Weidmann privately earlier on Monday to try to reconcile differences on what action the bank might take. Neither bank would comment on the meeting.
The Bundesbank released on Wednesday a June 29 interview for an in-house publication in which Weidmann said governments expected too much from the central bank, and what they wanted did not always make economic sense.
"Politicians overestimate the central bank's capacity and place too many demands of it," he said.
"Whether it's about interest rates or any sort of special measures, in the end it always comes down to the same thing: trying to rope the central bank into meeting fiscal policy objectives."
Weidmann said the Bundesbank would continue to defend its positions firmly "so that the (European) monetary union remains a stability union".
With the economy slowing and inflation under control, other options on the ECB's radar screen include a possible further cut in interest rates and a further loosening of rules on the collateral it will accept to lend funds to banks.
Discuss This Article
Add your comment below! Sharf 2012-09-11 07:49:29 Report Offensive Post it is using clearly point that it sulohd be slashing interest rates and buying up covered bonds and corporate bonds to get inflation expectations and employment higher. If that doesn't work it sulohd buy every single piece of corporate paper and introduce negative interest rates on reserves and if that doesn't work either, Draghi it could even hold the next ECB conference from Christiania, CPH, where dressed in a hawaian shirt and holding a marijuana pipe he announces that the ECB will fly helicopters throwing cash at random times and places and will continue doing so until inflation expectations start rising to levels consistent with its mandate. This is not an option that the ECB might or might not pursue, it is the ECBs job. There are plenty of policies that the ECB can pursue to make sure that 1. and 2. above are always true. THAT would give them credibility, because if us, market participants, knew that the ECB will stick to its mandate no matter what, we would carry out its mandate for it. If we knew that the ECB will buy up corporate bonds to pursue full employment, we would buy them ourselves because anything else would lose us money. The ECB and Draghi wouldn't have to put on hawaian shirts or even lift a finger. If we trusted that the ECB would stick to its mandate (all of it, not just the inflation bit) we would bid up corporate bonds and crush the lending costs of european corporations without the ECB having to take on any credit risk. But no, the ECB has decided to ignore half its mandate and then come out and say we are credible, inflation 2%, INFLATION 2% I TELLS YA!!! . Well, If we have a deal that I will not kick you or punch you and when I see you I start punching you while screaming I AM CREDIBLE, I AM NOT KICKING , I am not credible, period. The ECB has done a bunch of scary things lately. It has effectively told us, market participants that it don't give a damn about its mandate, and will only honor the part of the mandate that the Germans and the French want it to honor (i.e. full deflation course and buying up the stuff that the ballance sheets of BNP and SocGen are stuffed with). Moreover, the fact that the rate cut was not unanimous shows that the ECB has voting members that either don't get monetary economics or that they get monetary economics but they will ignore it anyway. This is scary stuff. So no, most market participants, myself included, won't be buying corporate bonds or do anything that our NK toy models tell us to do. The ECB has decided to ignore economics and so will I. I think this is a much better explanation of the reaction of the market, it's not about right wing or left wing but about the ECB deciding to ignore half their mandate and thinking that they can get away with it as long as they keep yelling that they didn't ignore the other half. And since I learned to trade on a Copenhagen trading floor, I imagine this interpretation sulohd be pretty consistent with what you hear from my ex-colleagues over there.Bottom line, the NK models that we used in order to determine investment decisions no longer apply for the euro zone. They still apply for Sweden because we know the Riksbank will stick to its mandate and reintroduce negative interest rates if things go south, they still apply for the BoE because we know that they will buy up every single gild out there as long as the risks of deflation are higher than the risks of inflation, but the fact remains that the ECB cannot be trusted anymore that they will stick to their mandate, they are simply doing what the Germans and the French want. Moreover, half the ecb's board wouldn't pass econ 101. Let me just ask, professor, if you asked your students what sulohd the central bank do in the face of a huge output gap and inflation expectations around 1-1.5% and they responded that interest rates sulohd not be lowered, like the ECB dissenters did, would you give them a passing grade? cjoywc 2012-09-11 08:13:30 Report Offensive Post X47qOl jhiedgphwhwe mzcncd 2012-09-12 07:16:37 Report Offensive Post FIxw6h , [url=http://cljsivnnazaj.com/]cljsivnnazaj[/url], [link=http://tvhfzucqxhmz.com/]tvhfzucqxhmz[/link], http://wpwcmhyadrkv.com/ ykmekgnncl 2012-09-12 08:08:03 Report Offensive Post L6nSiA dkhjobkzjpaz djmbpp 2012-09-13 06:53:22 Report Offensive Post hJWarR , [url=http://typbdmvhbttr.com/]typbdmvhbttr[/url], [link=http://fdbnzkofacsi.com/]fdbnzkofacsi[/link], http://mcttaztcizlm.com/ Nelly 2013-01-18 04:06:26 Report Offensive Post it is using clearly point that it slhuod be slashing interest rates and buying up covered bonds and corporate bonds to get inflation expectations and employment higher. If that doesn't work it slhuod buy every single piece of corporate paper and introduce negative interest rates on reserves and if that doesn't work either, Draghi it could even hold the next ECB conference from Christiania, CPH, where dressed in a hawaian shirt and holding a marijuana pipe he announces that the ECB will fly helicopters throwing cash at random times and places and will continue doing so until inflation expectations start rising to levels consistent with its mandate. This is not an option that the ECB might or might not pursue, it is the ECBs job. There are plenty of policies that the ECB can pursue to make sure that 1. and 2. above are always true. THAT would give them credibility, because if us, market participants, knew that the ECB will stick to its mandate no matter what, we would carry out its mandate for it. If we knew that the ECB will buy up corporate bonds to pursue full employment, we would buy them ourselves because anything else would lose us money. The ECB and Draghi wouldn't have to put on hawaian shirts or even lift a finger. If we trusted that the ECB would stick to its mandate (all of it, not just the inflation bit) we would bid up corporate bonds and crush the lending costs of european corporations without the ECB having to take on any credit risk. But no, the ECB has decided to ignore half its mandate and then come out and say we are credible, inflation 2%, INFLATION 2% I TELLS YA!!! . Well, If we have a deal that I will not kick you or punch you and when I see you I start punching you while screaming I AM CREDIBLE, I AM NOT KICKING , I am not credible, period. The ECB has done a bunch of scary things lately. It has effectively told us, market participants that it don't give a damn about its mandate, and will only honor the part of the mandate that the Germans and the French want it to honor (i.e. full deflation course and buying up the stuff that the ballance sheets of BNP and SocGen are stuffed with). Moreover, the fact that the rate cut was not unanimous shows that the ECB has voting members that either don't get monetary economics or that they get monetary economics but they will ignore it anyway. This is scary stuff. So no, most market participants, myself included, won't be buying corporate bonds or do anything that our NK toy models tell us to do. The ECB has decided to ignore economics and so will I. I think this is a much better explanation of the reaction of the market, it's not about right wing or left wing but about the ECB deciding to ignore half their mandate and thinking that they can get away with it as long as they keep yelling that they didn't ignore the other half. And since I learned to trade on a Copenhagen trading floor, I imagine this interpretation slhuod be pretty consistent with what you hear from my ex-colleagues over there.Bottom line, the NK models that we used in order to determine investment decisions no longer apply for the euro zone. They still apply for Sweden because we know the Riksbank will stick to its mandate and reintroduce negative interest rates if things go south, they still apply for the BoE because we know that they will buy up every single gild out there as long as the risks of deflation are higher than the risks of inflation, but the fact remains that the ECB cannot be trusted anymore that they will stick to their mandate, they are simply doing what the Germans and the French want. Moreover, half the ecb's board wouldn't pass econ 101. Let me just ask, professor, if you asked your students what slhuod the central bank do in the face of a huge output gap and inflation expectations around 1-1.5% and they responded that interest rates slhuod not be lowered, like the ECB dissenters did, would you give them a passing grade? bupbqlmgv 2013-01-18 07:15:02 Report Offensive Post HdexFD wuzzqmwusdqo
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