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Tags: Euro | central | Bank | Crisis

Euro Leaders Turn to Central Bank for Help to Tackle Crisis

Monday, 02 July 2012 10:09 AM

European leaders turn to the European Central Bank this week, seeking assistance from monetary policy makers to reinforce gains following euro-area leaders’ moves to calm markets and accelerate the currency bloc’s integration.

The Frankfurt-based ECB may offer help on July 5, with economists expecting an interest rate cut. The bank has a track record of action following political progress, including bond purchases that followed bailout programs and unlimited three- year loans on the heels of pledges supporting fiscal discipline.

European Union leaders ushered in the strongest rally in the single currency and in Spanish bonds this year after agreeing at their June 28-29 summit to loosen bailout rules, lay the foundations for a banking union and break the link between sovereign and banking debt through the direct recapitalization of lenders. EU leaders will try to maintain the muscle-flexing by seeking to convince investors that the euro area will do everything it can to end the three-year crisis.

“The summit produced several tangible outcomes that will help us address the challenges,” ECB Executive Board member Joerg Asmussen told Greek newspaper Kathimerini in an interview. The comments were confirmed by the ECB on June 30.

Economists expect the ECB to lower its benchmark interest rate by at least 25 basis points to a record low of 0.75 percent, according to the median of 57 estimates in a Bloomberg survey, as a worsening economic outlook dampens price pressures.

Yields Slide

Spanish and Italian notes rose for a second week running last week, with Italian two-year yields sliding 30 basis points to 3.5 percent last week and similar Spanish securities declining 16 points to 4.27 percent. The euro jumped 1.8 percent June 29, falling 0.3 percent to $1.2636 at 9:29 a.m.in Frankfurt. The Stoxx Europe 600 Index climbed 0.3 percent.

The so-called troika of international creditors to Greece is due to arrive in Athens this week to oversee the bailout, with the ECB’s Asmussen saying that implementation has “virtually stalled” in the last three months. The new government must make kick-starting the program its “first priority,” Asmussen said today in the Greek capital.

In Brussels, Euro-area leaders agreed after 13 1/2 hours of talks last week to drop the preferred status of taxpayers over bondholders in Spanish banks given government aid, clear the path for direct bank funding using bailout funds and to establish a single bank supervisor.

‘Quite Pleased’

The decisions will add to the ECB’s powers, under clauses in existing EU treaties that could allow it to exercise prudential oversight of banks and other non-insurance financial companies. The central bank will now be at the center of Spain’s efforts to separate its government from the European rescue of its banking industry.

“I am actually quite pleased with the outcome of the European council,” ECB President Mario Draghi told reporters in Brussels June 29. “It showed the long-term commitment to the euro by all member states of the euro area.”

Draghi will chair the ECB’s policy meeting this week when any rate move will be announced. In addition to the benchmark rate, policy makers may also cut the deposit rate to discourage banks from parking excess liquidity at the central bank.

Rate Cut

The ECB may also continue to exercise restraint on borrowing costs as it aims to maintain pressure on governments to act, said Michael Schubert, an economist at Commerzbank AG in Frankfurt.

A rate cut would work as a fillip to the euro-area’s 17- nation economy, which the European Commission expects to contract by 0.3 percent this year. Lower interest rates would also help embattled lenders in debt-burdened parts of the bloc by making the central bank’s emergency loans cheaper.

Euro-area leaders may hesitate to declare victory prematurely, with favorable post-summit response from markets in the past proving short-lived. A report last week by Valentin Marinov, head of European and Group of 10 currency strategy at Citigroup Inc. in London, showed that the euro weakened against the dollar in the seven days following four previous such meetings.

The process for establishing a euro-area bank supervisor and thus allowing the permanent bailout fund, the European Stability Mechanism, to recapitalize banks directly could take “several months or perhaps a year,” Chancellor Angela Merkel told Germany’s lower house of parliament in Berlin on June 29.

Borrowing Costs

Spanish Economy Minister Luis de Guindos said swift adoption of the summit’s decisions would help reduce his country’s borrowing costs.

“Decisions were taken that will have a fundamental role in the short term to lower spreads,” de Guindos said during a conference in Navacerrada, near Madrid, yesterday. “It is fundamental that these decisions be concretely implemented in the next weeks and months to show the fiscal policy is more and more coordinated and more compatible with the monetary policy.”

The shuttling among euro leaders will continue this week as Merkel travels to Rome on July 4 for a summit with Italian Prime Minister Mario Monti. They’ll plot the bloc’s next steps in a crisis that claimed the eastern Mediterranean island nation of Cyprus as its fifth victim last week.

EU Financial Services Commissioner Michel Barnier called on all the bloc’s nations to draft financial regulations in the coming weeks as a “cornerstone” of the banking union, he said in a June 29 interview in Brussels.

German Lawsuits

Another hazard may be a delay to the ESM, the 500 billion- euro ($633 billion) permanent bailout fund that was scheduled to be operational this month. It was approved by Germany’s parliament along with the fiscal pact governing EU budget rules on June 29, though it awaits the signature of German President Joachim Gauck.

Gauck has agreed to withhold approval pending lawsuits seeking to challenge the new laws, as requested by the Federal Constitutional Court. Lawsuits by groups including “Europe Needs More Democracy,” which represents 12,000 people, and Germany’s Left Party, were filed immediately after passage.

The issue of public support was also underscored by a TNS Emnid poll published in Focus that showed a majority of Germans favoring a referendum on transferring national sovereignty to the EU as part of a fiscal union. Some 73 percent of Germans want such a referendum, while 21 percent see a decision by the lower house of parliament as sufficient, the poll in the German magazine showed.

Britain’s Prime Minister David Cameron wrote in a Sunday Telegraph article yesterday that he’s not opposed to a popular vote on Britain’s membership of the European Union and a plebiscite may be needed to gain the support of Britons to stay in.

Pressure for a U.K. vote is building as the quest to end Europe’s debt turmoil pushes the euro area toward closer political and fiscal union, leaving Britain increasingly isolated.

© Copyright 2022 Bloomberg News. All rights reserved.

Monday, 02 July 2012 10:09 AM
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