European Central Bank

Euro Zone To See A “Mild Recession”

investment newsAccording to a top European Central Bank official, the euro zone is likely to see a “very mild recession” this year. The official also noted that higher oil prices should not have a long term impact on inflation.

Benoit Coeure, an executive board member of the ECB, told the Nikkei newspaper that euro zone growth was low due to the lack of bank credit and certain government budget cutting. The bank did raise its outlook for inflation due to the higher oil prices, but believes inflation will not have a long term impact. [Read more...]

Mario Draghi Talks About What Would Happen In An EU Break-Up

The president of the European Central Bank, Mario Draghi, warns that struggling eurozone countries that quit the EU would face greater economic pain. Those who stay will have seen EU law broken and “you never know how it ends really,” he said. This is the first time a president of the ECB has come out and talked about a scenario where the EU would break up. Former ECB president, Jean-Claude Trichet, used to describe the scenario as “absurd” when asked about it.

In an interview with the Financial Times, Mr. Draghi said that countries that left and devalued their currency would create “a big inflation” and would still have to implement structural reforms “but in a much weaker position.”

Draghi points to measures taken by the ECB to shore up euro zone banks including unlimited three-year loans this week. This is the first time such loans have ever been offered. Most European politicians and economists argue that the only solution to the debt crisis is a massive escalation of the ECB’s government bond purchasing program. There are some in the ECB though who don’t like the bond purchasing program. Jurgen Stark, the bank’s top German executive, is resigning at the end of the year due to his objections of the bond purchasing program. The ECB will continue to use the program.

The ECB also ruled out any U.S style quantitative easing. The bank will continue with large government bond purchases to boost economic growth even if the euro zone fell into a deep recession. “The important thing is to restore the trust of the people – citizens as well as investors – in our continent. We won’t achieve that by destroying the credibility of the ECB.”

European Central Bank Cuts Interest Rates, No Larger Bond Buying Plan

The European Central Bank (ECB) took some steps today to help Europe’s economy and financial system by lowering a key interest rate. The President of the ECB, Mario Draghi, said there is no plan for large-scale government bond purchases, much to the dismay of the markets. The ECB cut the interest rate down to 1%, a quarter point drop.

“The new measures are to ensure enhanced access for the banking sector to liquidity and facilitate the functioning of the euro area money market,” he said.

The ECB will also allow national central banks to accept bank loans as collateral if they meed specific eligibility critera.

“Overall, the ECB tries almost everything it can to prevent a credit crunch in the euro zone,” Carsten Brzeski, an analyst with ING, wrote in a market note.

Other analysts believe the rate cut will have only a small impact. “I thought they’d be more aggressive and cut by 50 basis points because the economy looks like it’s heading for recession and the banking sector is facing big pressures,” said Neil MacKinnon, global macro strategist at VTB Capital.

According to Reuters, a senior euro zone official said euro zone countries will likely agree to lend 150 billion euros to the IMF via bilateral loans from their central banks so the IMF can bail out countries with poor economies.

Draghi is opposed to this as he said it would be against the EU treaty which specifically says member states cannot finance each others’ debt.

“It’s legally complex, but the spirit of the treaty is that one cannot channel money in a way to circumvent the treaty provisions,” Draghi said in a news conference when asked about this proposal.

“If national central banks want to lend to the IMF and then the IMF lends to Indonesia, China, that’s fine. If the IMF were to use this money exclusively to buy bonds in the euro area we think it’s not compatible with the treaty,” he said.

We will see what happens come Friday after the summit ends, but the markets aren’t reacting favorably to news out of Europe so far today with each of the major indices down on the day.

Global Markets Have Best Week Since 2009

Markets around the world had their best week in more than 2 years following a coordinated move early in the week by central banks to cut borrowing costs for banks. The jobs reported late in the week also gave investors confidence that the U.S. economy will avoid another recession. And finally signs that Europe is working hard to get a deal ahead of a December 9 summit, which has been viewed as a make or break summit, also helped the markets.

On Friday, stocks ended the day flat after giving up nearly all of their gains as traders took profits ahead of the weekend. News of the unemployment rate dropping from 9% to 8.6% sent stocks up out of the gates, but soon came back down as investors realize the drop in the unemployment rate came from unemployed workers not looking for jobs anymore not the 120,000 job gain.

The week ahead will be all about Europe as the European Central Bank is expected to cut interest rates again next week. This will weaken the euro and make higher-yielding currencies more attractive.

“People have been playing up the fact that the euro zone is running out of time because their steps have been incremental and not big enough to calm fears,” said Mark McCormick, currency strategist at Brown Brothers Harriman in New York. “They are making progress, but everyone is looking for a game-changer.”

Gold prices rose the past week as well and saw its largest weekly gain in over a month. Gold was up 0.2% at $1,746.

Oil prices moved higher as well as a lower unemployment rates means more demand for oil, and tensions in Iran have increased over its nuclear program raising fears of supply disruptions.

European Crisis Will Take Years To Solve – Angela Merkel

The German Chancellor, Angela Merkel, is urging a long-term approach that will rely on tougher fiscal rules. On Friday, Merkel said the debt crisis can not be solved overnight and could take years to solve.

“The government has made clear that the European debt crisis can’t be solved in one fell swoop overnight. There is no miracle solution. There is no easy, rapid solution,” Merkel told parliament. “Resolving the sovereign debt crisis is a process and this process will take years.”

Her comments come a week before European leaders are set to meet in Brussels with what may are calling a make-or-break summit.

Euro bonds have been seen as a popular way to fix the problem, but Merkel has rejected this idea every time it comes up and cautions against any steps that could hurt the credibility of the European Central Bank. Germany has been under increasing pressure to take bolder steps to resolve this crisis before it engulfs the entire euro zone.

Merkel however, likens the crisis to a marathon, warning Europe against rushing out of the gate with fiscal measures that would hurt them later down the road.

“Marathon runners often say that the run becomes especially difficult at the 35 kilometer mark, but they also say that reaching the finish line is possible if you are conscious of the full challenge from the very start and approach it accordingly,” Merkel told lawmakers in the Bundestag lower house. She added, “The one who starts fastest isn’t necessarily the most successful. It is the one who is aware of what is involved in running the full distance.”

Merkel called euro bonds “pointless” and the people who are calling for them have “not understood the nature of the crisis”.

Investors are not concerned by Europe today if the futures are any indications. The stock market is set to open 1% higher today after positive jobs data was released today. The unemployment rate dropped from 9% to 8.6%.

Central Banks To The Rescue..Can They Save Christmas?

The Federal Reserve, European Central Bank and four other central banks unveiled a coordinated action to provide liquidity to “ease strains in financial markets.” The central banks agreed to lower the pricing on existing so-called dollar liquidity swap arrangements by 50 basis points. As a contingency measure, they also plan on establishing “bilateral liquidity swap arrangements.”

“The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity,” the U.S. Federal Reserve said in a statement.

U.S. stock futures and European stock indexes jumped on the news, and the euro rallied against the dollar.

The Fed, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank all agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points. That takes the new rate down to the U.S. dollar overnight index swap, or OIS, rate plus 50 basis points, the Fed said.

The pricing will be applied to all operations conducted from Dec. 5. The authorization of these swap arrangements has been extended to Feb. 1, 2013.

The central banks have also agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant, according to the Fed. “At present, there is no need to offer liquidity in non-domestic currencies other than the U.S. dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise,” the Fed said.

Europe Concerns Continue To Bring Down Stock Futures

Futures on the Dow Jones Industrial Average reversed early gains to fall 66 points to 11,972. S&P 500 Index futures declined 9.40 points to 1,244.70, while Nasdaq 100 futures lost 9 points to 2,350.75.

Although improving economic data in the United States points to better times ahead, the worry over the European sovereign debt crisis continues to drag stock futures down. Investors are jittery, sitting on a wobbly fence, wondering if the whole European mess is going to right itself or all come crashing down.

European equities and U.S. stock futures gave up early gains after the Bank of England’s latest quarterly Inflation Report sent out warning bells that a failure by policy makers to respond adequately and quickly to the euro-zone debt crisis “would have significant, adverse consequences for the world and U.K. economies.” Europe is the Unites States second largest trading partner.

The European Central Bank bought euro zone government bonds to stop a sell-off, traders said. Equities rose on the move but then lost ground as the yield on Italian 10-year bonds continued to hover near 7%. The yield spread of 10-year French government bonds over their German equivalents widened to a euro-era high on fears the debt crisis was starting to move to economies, once thought to be isolated from the debt problems.

Economists are warning if Europe does not get a hold of this crisis immediately, the recession that region is experiencing will grow worldwide. Bank of Japan Governor Masaaki Shirakawa said the crisis was already affecting emerging nations and Japan in multiple ways, while the Bank of England forecast Britain was on the brink of a contraction.

European blue chips rose 0.53% to 2,266, the English FTSE 100 fell 0.13% to 5,510 and the German DAX slipped 0.24% to 5,919.

In Asia, the Japanese Nikkei 225 slid 0.92% to 8,463 and the Chinese Hang Seng plummeted 2% to 18,961.

The benchmark crude oil contract traded in New York fell 14 cents, or 0.14%, to $99.20 a barrel. Wholesale RBOB gasoline climbed 4 cents, or 1.5%, to $2.62 a gallon.

In metals, gold fell $5.90, or 0.31%, to $1776 a troy ounce.

European Banks Reaching Boiling Point

In Europe, the European Central Bank’s (ECB) overnight lending window hit an eight month high on Tuesday making investors in anything European very jittery. Banks borrowed EUR7.735 billion from the marginal lending facility, which charges a punitive rate of 2.0%, up from EUR1.246 billion Monday, ECB data showed Wednesday. This was the highest level since March 1, 2011 when banks borrowed EUR15.104 billion.

When financial markets are functioning properly, banks use the facility to borrow a few hundred million euros. The rise in marginal lending shows an increased strain in the euro-zone banking system.

The level of deposits had remained high, around the EUR200 billion, since late October, as banks favored parking their money with the ECB over lending it to one another. Banks are afraid of lending because they don’t know the extent of exposure other banks have in the euro-zone sovereign debt. According to Marketwatch, overnight deposits with the ECB rose to EUR298.591 billion Monday, the highest level since June 30, 2010, and above the peak of EUR297.424 billion hit Nov. 6, 2008 in the wake of Lehman Brothers’ collapse.

Investors are increasingly worried that the level of use of the European Central Bank’s liquidity facility shows banks are wary of the effect European leaders will have in managing the sovereign debt crisis.

A group of German economists have warned that the European Central Bank is risking losing its credibility by buying the bonds of heavily-indebted euro zone states, and that monetary and fiscal policy are becoming worryingly blurred. Germany strongly objects to the bond-buying strategy of the ECB.

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