Europe - ECB & BOE 01 (May 08 - Nov 11)

[kennynah]

1% unchanged

if euzone is not careful with her monetary policies and eu nations their fiscal policies....they are in for a hyperinflationary and negative growth scenarios 9-15 months ahead

[winston]

This Greece crisis is starting to make me lose confidence in Trichet.

[kennynah]

a lower euro is not that bad for EU....for the same arguments we had about a weaker USD 15months ago...

whereas USD is a reserve currency for many nations...EU is only for the EU nations...in this sense, the euro is less likely to be defended against drops...

[millionairemind]

ECB paralysis rattles markets as debt costs hit new highs
Debt costs surged to fresh highs across the eurozone periphery after the European Central Bank ruled out using its "nuclear option" to stabilise the bond markets, with worrying signs of contagion to Italy.

By Ambrose Evans-Pritchard, International Business Editor
Published: 9:40PM BST 06 May 2010

Jean-Claude Trichet, the ECB's president, said the bank's governing council had not even talked about a possible purchase of eurozone government debt at a meeting in Lisbon, despite pleas from economists that this may be the only way to prevent the crisis spiralling out of control.

"We did not discuss the matter. I have nothing more to say on it," he said. He stressed that the ECB is "inflexibly attached to price stability", even though core inflation is near record lows at just 0.9pc.

"Governor Trichet came very close to saying that the current mess is not the ECB's problem," said Lars Rasmussen from Danske Banke.

The ECB's paralysis in the face of severe credit stress rattled credit, equity, and currency markets across Europe. The euro crumbled to a 14-month low of $1.27 against the dollar and BNP Paribas said the currency to reach parity by early next year.

Spreads on 10-year Portuguese bonds rose to a post-EMU high of 329 basis points (bps) over German Bunds, and rose to 296bps for Ireland, 150bps for Italy, and 148bps for Spain.

It is the first time in this crisis that Italy has started to flash warning signs. Bank shares plummeted in Milan, with falls of 10pc for Unicredit and 8.6pc for Mediobanca.

Gabriel Stein from Lombard Street Research called Mr Trichet's remarks "embarrassingly meaningless" and said it was hard to believe that the ECB had not discussed a move to quantitative easing. "Either the governing council is guilty of gross dereliction of duty, or the ECB is treating journalists and analysts as ignorant children," he said, echoing a view widely held in Europe's financial centres.

Mr Stein said the ECB had allowed the M3 money supply to contract over the last year, raising the risk of a slide into deflation. "It is no coincidence that the Greek crisis really took off when the ECB announced the end of its emergency liquidity measures in early December. Failure to tackle the crisis early and decisively has brought to the fore the risk of a sovereign default and the risk that one or more countries will leave the euro area. This is a lesson markets will not forget," he said.

German Chancellor Angela Merkel accused the financial industry of playing dirty. "First the banks failed, forcing states to carry out rescue operations. They plunged the global economy over the precipice and we had to launch recovery packages, which increased our debts, and now they are speculating against these debts. That is very treacherous," she said. "Governments must regain supremacy. It is a fight against the markets and I am determined to win this fight".

Marco Annunziata from Unicredit said EU leaders were losing the plot. "The threat that contagion might eventually morph into panic and spiral out of control is very real, and the reaction of policymakers remains dangerously counterproductive. Demonising markets, implicitly casting investors as heartless speculators against the tragic background of the Greek riots, is irresponsible," he said.

Mr Annunziata said rising debt yields were an entirely rational response to the state of public finances. Indeed, the anomaly is that spreads for Greece and others ever fell as far as they did. "Policymakers should act quickly to address the fundamental imbalances, as these cannot be regulated away. They should act immediately," he said.

Giulio Tremonti, Italy's finance minister, rebuked Germany for letting the crisis drag on, saying "no country is immune from the risk just because they are travelling with a first-class ticket".

The spike in Italian yields appears was triggered by a false reports that Standard & Poor's would downgrade the country, although markets were unsettled by Rome's revision of deficit figures. Public debt will reach 118.7pc of GDP next year instead of 116.5pc.

Italy holds the world's third-largest stock of debt after Japan and the US at €1.76 trillion so any hint of credit problems has global ramifications. While the country has weathered the credit crisis remarkably well so far, it seems unable to pull itself out of near perma-slump.

The ECB is not allowed to buy eurozone government bonds directly because that would blur the line between monetary and fiscal policy, favouring big debtors. But it can buy the bonds on the secondary markets, and may in any case break the rules in an emergency.

The German press has reported that the ECB's two German members are adamantly resisting such a move, deeming the start of a slippery slope towards outright "monetisation" of Club Med deficits.

[millionairemind]

US faces same problems as Greece, says Bank of England

By Edmund Conway Economics Last updated: May 13th, 2010

Mervyn King, Governor of the Bank of England, fears that America shares many of the same fiscal problems currently haunting Europe. He also believes that European Union must become a federalised fiscal union (in other words with central power to tax and spend) if it is to survive. Just two of the nuggets from one of the most extraordinary press conferences I have been to at the Bank.

http://blogs.telegraph.co.uk/finance/ed ... f-england/

[millionairemind]

May 26, 2010
UK ‘must raise interest rate this year’
Susan Thompson, Rebecca O’Connor

The Bank of England must raise interest rates by the end of this year to keep inflation in check, the Organization for Economic Cooperation and Development warned today.

The Bank of England is struggling to curb inflation which is currently 3.7 per cent — far above the Government’s inflation target of 2 per cent.

“The authorities face the challenge of preserving credibility, with headline inflation and some measures of inflation expectations exceeding the targeted rate,” the Paris-based group of 30 developed economies said in its twice-yearly report today.

“The gradual drift up of some measures of inflation expectations implies a need to increase interest rates earlier than previously thought and no later than the last quarter of 2010.”
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The interest rate has been at a historic low of 0.5 per cent since March last year.

The Bank of England predicts that the inflation spike will be short lived, as one-off effects such as higher prices for food and for clothing, are gradually outweighed by weak growth and high unemployment, which limit the ability of firms and workers to raise prices and wages.

The Bank’s Governor Mervyn King said earlier this month that inflation was likely to fall back to its 2 per cent target “within a year”, but that inflation had been “somewhat higher than expected over the past year”.

The OECD also called for Britain’s coalition government to push through a credible medium-term plan to cut the country’s record budget deficit or risk driving up inflation and damaging the recovery.

The think tank said that the public deficit — currently 11.1 per cent of GDP — was likely to remain above 10 per cent for 2010-2011, while total national debt was put at 86 per cent for next year.

The economy should grow 1.3 per cent this year and 2.5 per cent in 2011 after shrinking to 4.9 per cent last year, the OECD said.

Britain’s economy expanded by 0.3 per cent in the first quarter, according revised figures released yesterday, as a weaker pound helped to boost exports but there were concerns that any drastic spending cuts could jeopardise the gains and tip the country back into recession.

The coalition government this week announced £6.25 billion of initial cuts and promised more tough measures in the Budget on June 22.

The OECD said that the “fragile state of the economy should be weighed against the need to maintain [policy] credibility when deciding the initial pace of consolidation, but a concrete and far-reaching consolidation plan needs to be announced upfront”.

The report emerged as global stock markets recovered this morning after yesterday’s falls across the globe, prompted by eurozone debt fears and increasing tensions between North and South Korea.

The FTSE 100 rose by 99 points, bringing the index back above 5,000 to 5,039 and prompting questions over whether the previous day’s slump, which took the index to its lowest level since October, had been an over-reaction.

A late recovery in New York and a subsidence of fears about military problems in Korea boosted confidence among traders. Hong Kong’s Hang Seng index rose 210.95 points to 19,196.45 today.

Lloyds Banking Group and Royal Bank of Scotland, two of the worst-hit stocks in the UK yesterday, both rose this morning, by 6 per cent and 5 per cent respectively.

The euro and the pound continued to slip against the dollar. The pound fell against the dollar to $1.4344 from $1.44 at the close. The euro lost 0.43 per cent against the dollar to $1.23.

Ben Potter, an analyst at IG Markets, the trading platform, said: “Remorse almost looks to be the watchword as dealers take stock of the recent sell-off and are perhaps left wondering if the whole thing is now looking a little overdone.”

[kennynah]

Looking at gbp/usd, market isn't convinced yet that BoE will raise rates anytime soon

[millionairemind]

If the European climate turns nasty, the ECB could suffer from exposure
Here's an interesting statistic which brings home the rather tricky state of Europe's finances, not to mention its politics.
By Damian Reece, Head of Business
Published: 10:59PM BST 03 Jun 2010


The European Central Bank (ECB), that one-time paragon of sound money, has capital and reserves of €77.3bn (£66bn).

But thanks to events in Greece, it is now supporting lending to Hellenic banks of €88.4bn, or at least it was at the end of April. Quite where that has got to by now is anybody's guess. And that April figure is a €17.8bn increase on the March total, according to Simon Ward, chief economist at Henderson Global Investors.

On top of that exposure, the ECB has also taken on an extra €25bn through its buying of Greek government bonds.

So the ECB's Greek exposure is bigger, by some margin, than its own capital and reserves. You will be reassured to learn that the Frankfurt-based central bank has taken Greek collateral to back these loans and insisted that collateral suffers a suitable discount, or haircut, in value to reflect the risk of default.

What we don't know is what that haircut is, and how realistic it is, given the sensitive politics surrounding EU-Greece relations.

So far the ECB has yet to make a call for more capital to support its lending operations to distressed European financial systems. But if a run on banks, as witnessed recently in Greece, is repeated in countries such as Italy, Portugal and Spain because confidence in institutions wavers further, this situation will change as a full scale banking bail out gathers pace.

[winston]

Trichet mentioned that the Money Markets are not functioning properly and liquidity programs will continue for a few more months.

( I have no intention and time to investigate this issue further ).

[kennynah]

why would you investigate this further?

you seem to think ECB is really an extra spray organization that performs practically no useful function....