Monday, May 31, 2010

E.C.B. Says Banks at Risk From Slower Growth

Published: May 31, 2010

NY Times-FRANKFURT — Despite recent improvements in the health of European banks, they remain vulnerable to a daunting array of hazards that are expected to produce another round of sizable write-offs during the next couple of years, the European Central Bank said Monday, in a report that catalogued in alarming detail the problems facing the region’s financial institutions.
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Heinz-Peter Bader/Reuters

Ewald Nowotny, left, the Austrian National Bank governor, with the European Central Bank president, Jean-Claude Trichet, before a conference in Vienna on Monday.

The challenges for banks in the euro zone include exposure to a weakening commercial real estate market, hundreds of billions of euros in bad debts, economic problems in East European countries, and a potential collision between the banks’ own substantial refinancing needs and government demand for additional loans, the E.C.B. said.

In its twice-yearly review of risks facing the 16-country euro zone, the E.C.B. expressed particular concern about banks’ need to refinance an estimated €800 billion, or $984 billion, in long-term debt by the end of 2012.

Borrowing costs could rise as the banks compete with governments in the bond market, “making it challenging to roll over a sizable amount of maturing bonds by the end of 2012,” the report said.

The increased demand for credit is likely to further strain banks as well as companies in need of credit. As it is, many European companies are suffering from low profitability as well as too much debt, the report said.

“The financial markets remain fragile and especially the developments in recent weeks have shown the necessity of heightened alertness,” Axel A. Weber, president of the Bundesbank and a member of the E.C.B.’s governing council, said Monday during a speech in Mainz, Germany.

Lucas D. Papademos, the departing vice president of the E.C.B., struck a more upbeat tone at a news conference Monday to present the so-called Financial Stability Review. While attempts by European governments to lower debt will cut demand, he said, growth could ultimately improve as economies became more productive.

“It is possible that the short-term impact will not be as severe as seems to be expected at the moment,” said Mr. Papademos, whose term ended Monday.

European banks will need to set aside an estimated €123 billion in 2010 for bad loans, and an additional €105 billion in 2011, the report said, in addition to the €238 billion they set aside from 2007 to 2009.

The sum for 2010, however, was lower than previous estimates. Banks also benefited from a rebound in securities markets, the report said.

While profitability of larger banks has improved, their shares are likely to fall in the near future, the E.C.B. said, citing an analysis of options that investors use to bet on the direction of stock prices.

The E.C.B. report also noted that some banks remained dependent on the central bank for loans.

Since the advent of the financial crisis, the E.C.B. has granted almost unlimited credit to banks at 1 percent interest to offset a reluctance by banks to lend to each other.

“The continued reliance of some smaller or medium-sized euro-area banks on central bank refinancing continues to be a cause for concern,” the report said.

Mr. Papademos said the number of banks involved was small, but he declined to give details. He also expressed concern about what he called “adverse feedback” between the sovereign debt crisis and the banking system. The E.C.B. report noted that higher risk premiums for government debt fed through into the private sector and raised the cost of credit for companies.

The problems would be exaggerated if growth or unemployment were worse than expected, increasing the chances that companies and individuals would be unable to repay their loans.

The report also noted that some financial markets were still not functioning normally. Issuance of corporate bonds has declined since the end of last year, especially for banks and other financial institutions. In addition, the market for securitizations, in which banks package loans and resell them to investors, is “dysfunctional,” the E.C.B. report said.

Bond issues and securitizations are crucial ways that banks raise money to loan to companies and individuals.

The report, as well as separate statements by E.C.B. officials Monday, also shed light on the central bank’s decision on May 10 to buy government and corporate bonds on open markets. In the days leading up to the decision, trading in some government debt had come nearly to a standstill, the report said. The lack of a market for government bonds endangered the functioning of the whole financial system, in part because banks typically use sovereign debt as collateral in making loans to each other.

“The tensions in the sovereign bond markets spilled over to other market segments, such as the foreign exchange market and equity markets,” the E.C.B. president, Jean-Claude Trichet, said during a speech Monday in Vienna. “Trading volumes and liquidity became erratic, and volatility spiked.

“In view of these exceptional circumstances prevailing in the financial markets, we decided that exceptional intervention was necessary,” he said.

Mr. Weber, in his speech Monday, repeated his criticism of the bond purchases and said that they would remain limited in scope. Some economists see the bond purchases as breaking a taboo and risking inflation, since they amount to the E.C.B. financing governments that have borrowed irresponsibly.

Mr. Trichet repeated that the central bank was “permanently alert and always prepared to act when necessary” in response to crises.

But he made clear that the E.C.B. could do only so much to restore stability to the financial system.

Euro-zone governments must ultimately create a system for disciplining countries that violate treaty limits on debt and deficits, he said.

“I call on euro-area governments in particular to work actively together to reach agreement on a quantum leap of the effectiveness of their collegial surveillance,” Mr. Trichet said.

Sunday, May 30, 2010

Australia May Hold Rate at 4.5% as Increases Start to ’Bite’

By Jacob Greber and Daniel Petrie

May 31 (Bloomberg) -- Australia’s central bank may keep its benchmark interest rate unchanged this week after the most aggressive round of increases in the Group of 20 restrained retail sales and slashed mortgage lending by a quarter.

The central bank will leave the overnight cash rate target at 4.5 percent at 2:30 p.m. in Sydney tomorrow, according to all 22 economists surveyed by Bloomberg News. A separate report this week may show economic growth slowed to 0.6 percent last quarter from 0.9 percent in the previous three months, analysts predict.

The Reserve Bank of Australia’s decision may be echoed across Asia this week as central banks from Indonesia to Thailand and the Philippines are forecast to hold off on rate increases as they gauge fallout on the global economy from Europe’s debt crisis. Investors boosted bets this month that Governor Glenn Stevens will keep Australia’s policy rate unchanged until 2011.

“Uncertainty has increased regarding the global economic outlook,” said Shane Oliver, senior economist in Sydney at AMP Capital Investors, which manages $90 billion in assets. “The rate hikes to date are starting to bite.”

Stevens increased rates six times since early October from a half-century low of 3 percent, citing surging Asian demand for Australian commodities and a jobs boom that has pushed down unemployment to around half that of the U.S. and Europe.

European Rescue

The interest-rate moves helped stoke a 27 percent gain in Australia’s dollar in the 12 months through April 30, making it the second-best performer among the world’s 16 most-traded currencies. The currency has since pared around half of those gains as European Union policy makers scrambled this month to prevent a potential Greek debt default.

Thailand’s central bank will probably maintain its benchmark rate at 1.25 percent on June 2 and Bank Indonesia may keep borrowing costs at 6.5 percent on June 4, according to separate Bloomberg surveys. The key rate in the Philippines is forecast to be held at 4 percent on June 3.

Australia’s economy, which skirted last year’s global recession and surged in the final three months of 2009, shows signs of slowing as higher borrowing costs and the end of government stimulus weigh on domestic demand. First-quarter GDP figures will be published at 11:30 a.m. in Sydney on June 2.

“It’s now clear that the Reserve Bank should have left rates on hold in May and arguably in April,” said Craig James, a senior economist at Commonwealth Bank of Australia in Sydney. “And it’s not just the volatility on global markets. The one common element across businesses is the reluctance to spend.”

‘Rapid Deterioration’

Virgin Blue Holdings Ltd., Australia’s No. 2 carrier, cut its profit forecast last week on a “rapid deterioration” in leisure travel and rising industrywide capacity.

Reports to be released ahead of tomorrow’s rate decision will show retail sales increased 0.3 percent in April, matching the weakest growth rate in a year, and building approvals fell for the third month in four, analysts forecast. Those figures will be published at 11:30 a.m. in Sydney.

The nation’s property market, which surged 20 percent in the year to March 31, is also showing signs of weakening. Home- loan approvals dropped 25 percent in the six months through March to the lowest level in nine years.

“The slowdown in the housing market over the past month is a real concern,” said David Airey, president of the Real Estate Institute of Australia. “Since early April, we’ve seen the market change from buoyant to slow and depressed.”

Consumer Behavior

Australia’s monetary policy is now “well placed” and interest-rate increases so far are “beginning to affect behavior” of consumers, central bank officials said in the minutes of their last meeting on May 4.

Investor bets that Stevens will resume boosting rates in coming months because of faster inflation have all but evaporated this month.

Traders are betting there is no chance of a quarter-point rate increase at central bank monthly meetings until December, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange. There is also a 14 percent chance of a rate cut tomorrow, the futures showed at 11:42 a.m. on May 28.

Keeping rates on hold in coming months may assist Prime Minister Kevin Rudd’s campaign to win an election that is likely to be called this year.

“With rates now broadly neutral and risk aversion so elevated, we see little reason for tightening” soon, said Tim Toohey, chief economist at Goldman Sachs JBWere Ltd. in Melbourne. Still, the “risk of meaningful financial spillovers from European sovereign concerns to the domestic economy is limited,” he said, adding that the bank may resume tightening monetary policy as early as August.

U.K. Coalition Seeks to Limit Budget, Political Damage After Laws Resigns

By Thomas Penny - May 30, 2010

Leaders of the U.K.’s three-week-old coalition government sought to limit political damage from their first crisis and preserve their deficit-cutting plans after Chief Secretary to the Treasury David Laws resigned over revelations about his parliamentary expenses.

Laws, a Liberal Democrat, stepped down yesterday after the Daily Telegraph reported he’d claimed more than 40,000 pounds ($58,000) in expenses for renting a room from his long-term partner. Laws, 44, was a key negotiator in forming the nation’s Conservative-Liberal Democrat partnership and had been charged with finding cuts to public spending to tackle Britain’s 156 billion-pound fiscal deficit.

Prime Minister David Cameron described Laws as a “good and honorable man” in a letter accepting his resignation. “In your short time at the Treasury, you have made a real difference, setting the Government on the right path to tackle the deficit which poses such a risk to our economy,” Cameron wrote. “I hope that, in time, you will be able to serve again.”

Cameron’s government is seeking to reassure investors it is serious about reducing a deficit that that swelled to 11.1 percent of the U.K.’s gross domestic product in the fiscal year ended in March, the highest since World War II. The government on May 25 promised to accelerate the reduction of the structural deficit, estimated by the previous Labour government to be 69 billion pounds, with spending cuts taking the strain.

Danny Alexander

Laws will be replaced as Treasury Chief Secretary by Scotland Secretary Danny Alexander, 38, a former chief of staff to Liberal Democrat leader and Deputy Prime Minister Nick Clegg. Alexander worked in press relations before being elected to Parliament in 2005.

Alexander will follow the agreement made by the coalition to make spending cuts, Deutsche Bank chief U.K. economist George Buckley said today.

“It’s not going to mean a great deal of difference in what’s going to happen on spending cuts and deficit reduction,” Buckley said. “It’s not like Alexander’s going to change what would have happened under David Laws.”

Conservative Chancellor of the Exchequer George Osborne is “is setting the agenda and these guys are simply looking for where the savings can be made,” Buckley said.

The resignation may have strengthened Osborne’s hand in forcing through cuts, according to Justin Fisher, professor of Politics at London’s Brunel University.

‘Weaker Position’

“The Liberal Democrats are in a weaker position because they’ve done damage to the coalition,” Fisher said in a telephone interview today. “They’re not in a position to say ‘hang on a minute’. It gives George Osborne the upper hand.”

The pound has fallen 11 percent against the dollar this year amid concern the government will struggle to narrow the deficit.

Laws is one of the most hawkish on the deficit in the Liberal Democrat Party, and there is “respect” for him as an economic thinker among Conservatives, said Andrew Russell, who teaches politics at Manchester University and is author of ‘Neither Left Nor Right,’ a history of the Liberal Democrats.

“Laws is one of the few in the Parliamentary Liberal Democrat party for whom the Conservatives would have seemed a natural coalition partner,” Russell said in a telephone interview today. “Both coalition partners need each other so I don’t think it’s about to fall, but Laws was one of the lynchpins holding the thing together, and it does damage the long-term prospects of the coalition.”


The appointment of Alexander as the new Chief Secretary may upset some Conservative lawmakers who think they are better qualified, Russell said. They may think Alexander is being rewarded for his part in the negotiations that formed the coalition rather than his aptitude for the job, Russell said.

In a statement late May 28, Laws, a former head of Dollar and Sterling treasuries at Barclays de Zoete Wedd Ltd., apologized for claiming expenses to share a home with his male partner and said that he will repay the money.

“I’ve been involved in a relationship with James Lundie since around 2001, about two years after first moving in with him,” Laws said in the statement issued through the Press Association after the Daily Telegraph reported that he used public money to pay rent to Lundie. “Our relationship has been unknown to both family and friends throughout that time.”

Laws said “at no point” did he consider himself to be in breach of parliamentary rules that define a partner as “one of a couple” who live together and treat each other as spouses.

Sunday, May 9, 2010

Euro Rises as European Leaders Work to Set Up Emergency Funding Measures

By Yoshiaki Nohara and Candice Zachariahs - May 09, 2010

The euro rose as European leaders moved toward agreement on a loan package worth at least $645 billion to prevent Greece’s fiscal woes from triggering a broader sovereign-debt crisis.

Europe’s common currency gained against 14 of its 16 major counterparts as European Union government officials said the International Monetary Fund may add money to the emergency facility agreed to by European finance ministers. The yen slid against all 16 major counterparts as prospects the Greek crisis won’t spread damped demand for Japan’s currency as a refuge.

“The fact they’ve been trying to put together something over the weekend is very positive,” said Phil Burke, chief dealer for global foreign exchange and rates at JPMorgan Chase in Sydney. “Risk has been put back on. The market seems to be happy to take back some of the short positions on the euro.”

The euro climbed to $1.2878 as of 8:02 a.m. in Tokyo from $1.2755 on May 10, after falling 4.1 percent last week, the most since the five days ended Oct. 24, 2008. The 16-nation currency rose to 118.69 yen from 116.81 yen. The dollar gained to 92.15 yen from 91.59 yen.

European officials declined to disclose the size of the stabilization fund, to be made up of money borrowed by the EU’s central authorities. The mechanism may be worth 500 billion euros ($645 billion), said a government official familiar with the talks in Brussels.

‘Fortunes of Euro’

“Markets’ assessment of the effectiveness of the package will be critical to the fortunes of the euro, equity markets and risk appetite early in the week,” Mike Jones, a currency strategist at Bank of New Zealand Ltd. in Wellington, wrote in a note to clients.

Futures traders increased bets to a record that the euro will fall against the dollar in the days after the May 2 announcement of a 110 billion-euro bailout package for Greece on speculation the aid wouldn’t be enough to halt the spread of the region’s fiscal woes.

The number of wagers by hedge funds and other large speculators for a decline in the currency rose on May 4 to 103,402 contracts more than those anticipating a gain, up from 89,013 a week earlier, according to Commodity Futures Trading Commission data. It was the second consecutive week that the amount climbed to a record. As recently as December, traders were anticipating gains in the euro.

‘Blood on the Street’

“There was blood on the street,” Samarjit Shankar, a managing director for the foreign-exchange group in Boston at Bank of New York Mellon, the world’s largest custodial bank, with more than $20 trillion in assets under administration, said May 7. “The focus has been on the inability of European policy makers to come up with something coherent to try to calm investor nerves.”

The extra yield that investors demand to hold Greek, Portuguese and Spanish 10-year debt instead of benchmark German bonds rose to the highest last week since before the euro’s 1999 debut as European leaders’ efforts failed to assuage concern that the region’s most-indebted nations will struggle to reduce their budget deficits. The yield on Germany’s 10-year bund fell to a record.

“We will defend the euro, whatever it takes,” European Commission President Jose Barroso told reporters on May 8 after the leaders met in Brussels.

Led by Italy’s $126 billion, Greece, Spain, Portugal, Ireland and Italy have a total of $215 billion of debt coming due in the next three months, according to JPMorgan Chase & Co.

‘Rates Appropriate’

Europe’s common currency posted its biggest intraday decline against the dollar in more than a year on May 6 after European Central Bank President Jean-Claude Trichet said a meeting of policy makers didn’t discuss buying government bonds, an option some economists said would help to contain the region’s debt crisis.

Trichet also said the ECB’s benchmark interest rate, a record-low 1 percent, is “appropriate,” indicating he saw no immediate need to cut borrowing costs.

The euro has lost 6.5 percent this year, based on Bloomberg Correlation-Weighted Indexes. The dollar is up 5.1 percent.

Analysts reduced forecasts every month this year for where Europe’s common currency will trade by June on speculation the region’s expansion will slow as nations from Greece to Portugal are forced to curb spending. The ECB will raise its main refinancing rate from a record low 1 percent in the first quarter of 2011, according to the median estimate of economists in a Bloomberg News survey.

In the U.S., traders are still anticipating a rate increase this year after the Labor Department said May 7 that payrolls jumped 290,000 last month, the biggest increase in four years and more than the median estimate of economists surveyed by Bloomberg News.

Monday, May 3, 2010

Australia Raises Interest Rate for Sixth Time to 4.5% (Update1)

By Jacob Greber

May 4 (Bloomberg) -- Australia’s central bank raised its benchmark interest rate for the sixth time in seven meetings after inflation accelerated and officials judged the nation is insulated from the Greece-sparked sovereign debt concerns.

Governor Glenn Stevens increased the overnight cash rate target to 4.5 percent from 4.25 percent, the Reserve Bank of Australia said in a statement in Melbourne today. The decision was predicted by 18 of 24 economists surveyed by Bloomberg News.

Continued rate increases may pose a danger for Prime Minister Kevin Rudd’s Labor Party, which has seen voter support slump to the lowest level since before taking power in 2007 and faces an election within a year. The government, which presents its annual budget next week, also faces a backlash from mining firms after announcing plans to levy a 40 percent “super tax” on the profits of resources companies.

“If the average voter’s economic prospects deteriorate, that’s when interest rates become a factor in the political cycle,” Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney, said ahead of today’s decision.

The Australian dollar fell to 92.38 U.S. cents at 2.34 p.m. in Sydney from 92.44 cents just before the decision was announced, after Stevens said today that interest rates for most borrowers will now be “around average levels.”

Stevens, unlike counterparts in the U.S. and Europe, is under pressure to extend a world-leading round of rate increases as Australia’s economy accelerates, stoking inflation and property prices, which surged more than 20 percent in the 12 months through March. Stronger growth and higher borrowing costs have pushed the Australian dollar up 26 percent in the past year.

Greek Turmoil

Today’s decision also suggests policy makers are less concerned about factors such as Greece’s debt turmoil, which Stevens cited as a reason for keeping rates unchanged in February. The European Central Bank yesterday said it would indefinitely accept Greek debt as collateral regardless of the credit rating, after European ministers and the International Monetary Fund at the weekend agreed on a 110 billion-euro ($145 billion) bailout plan.

Governor Stevens said last month that “one would expect interest rates to be pretty close to average” given the economy is expanding at or close to “trend” and with inflation near the bank’s target range of 2 percent to 3 percent.

The pace of gains in the consumer price index almost doubled in the first quarter to 0.9 percent from 0.5 percent in the previous three months, a report showed last week. A measure of so-called core inflation, the weighted-median, rose 3.1 percent from a year earlier.

Inflation Outlook

“Even if the Reserve Bank is still comfortable that inflation will stay within the target range in 2010, it should be increasingly concerned about the outlook for 2011,” Kevin Grice, an economist at Capital Economics Ltd. in London, said ahead of today’s decision.

Australia is “likely to be the first of the world’s major economies to move beyond neutral,” pushing borrowing costs “into restrictive territory” with a benchmark rate of 6 percent by the end of next year, Grice said.

Forecasts for higher borrowing costs come as Australia’s political parties prepare for an election, due within the next 11 months. Australian leaders are vulnerable to rate increases as more than two-thirds of the population own homes, compared with less than 50 percent in some European nations.

More than 90 percent of mortgages taken out last year, when the benchmark rate was slashed to a half-century low of 3 percent and Rudd’s government temporarily increased grants to first-time buyers of new dwellings to as much as A$21,000 ($19,500), were on variable rates.

Voter Support

The central bank has increased its benchmark rate by 150 basis points since early October, adding about A$300 a month to repayments on an average A$300,000 mortgage.

Support for Rudd’s government has fallen behind the opposition Liberal-National coalition for the first time since 2006, according to a Newspoll published today by the Australian newspaper.

The so-called two-party preferred vote for Labor dropped to 49 percent in the survey of 1,200 voters taken last weekend from 54 percent in mid April, and 52.7 percent when Rudd won in November 2007. The coalition’s support rose to 51 percent from 46 percent. The margin of error is plus or minus 3 percent.

“Most people are focused towards the end of the year,” Craig James, a senior economist at Commonwealth Bank of Australia in Sydney, said ahead of today’s report. “At some time they’ve got go pause, and there are indications the economy is already starting to slow.”

Consumer Confidence

A measure of consumer confidence published on April 14 by Westpac Banking Corp. slipped 1 percent last month, and separate reports showed retail sales dropped 1.4 percent in February and home-building approvals slumped 3.3 percent.

Woolworths Ltd., Australia’s biggest retailer, cut its annual sales growth forecast on April 30 in the absence of government cash handouts that stoked demand last year.

Still, Stevens is likely to remain among Asia-Pacific policy makers withdrawing monetary stimulus this year. Malaysia and India have boosted borrowing costs, while the New Zealand central bank said last week it expects to begin raising rates “in coming months.”

Australia’s economy, which skirted last year’s recession, is being stoked by increased investment in resources projects such as Chevron Corp.’s Gorgon liquefied-natural-gas project in Western Australia, potentially worsening a shortage of skilled workers that threatens to boost wage growth.

Manufacturing growth accelerated in April to the fastest pace in almost eight years, a report showed yesterday.

Inflation pressures may also intensify as a result of the government’s planned changes to the tax system, announced in Canberra on May 2, which are estimated to increase Australian real wages growth by as much as 1.1 percent.