I don't think we should have actually done that
Irelands being pinned to the collar by the ECB to get rid the bonds they issued as part of their prom note last year due to the fact that the ECB are worried €25 billion of prom notes into sovereign debt equated to monetary financing, something that is forbidden by article 123 of the EU Treaty. The Central Bank of Ireland agreed last year to sell the bonds “but only where such a sale is not disruptive to financial stability”. The weighted average life of the long-term government bonds is 34 to 35 years, compared to seven or eight years for the promissory notes. ECB chief Mario Draghi said at the time that while the ECB had taken note of the transaction it would be reviewing the arrangement as part of its monitoring of monetary financing in euro zone countries.
But our banks are different
The ECB determination to subject the euro zone's largest banks to the same, rigorous checks is being tested, with countries lobbying for their banks to be treated differently and lenders asking for their workload to be eased.
Almost two weeks after the ECB published a 285 page manual spelling out how it will examine banks' trillions of euros of assets, lenders in Germany and Spain are leading the charge for special treatment, while banks across the eurozone have asked for changes to the process to make it less onerous.
The central bank is carrying out the wide-ranging tests so it can start with a clean sheet when it becomes the euro zone's banking supervisor in November. The tests are designed to banish lingering investor doubts about the health of the region's banks that have kept their valuations consistently below U.S. peers.
Give us back the cash lads.You didn't think it was a handout.
Banks will return 18.90 billion euros (£15.79 billion) in crisis loans to the European Central Bank next week, a much larger sum than expected that will keep up the drain of extra cash out of the euro zone financial system.
The amount banks will repay on March 26 is more than this week's repayments of 10.075 billion euros and is also far above the 7 billion forecast in a Reuters poll.
To help lenders ride out funding constraints, the ECB lent banks more than one trillion euros in three-year loans during the euro zone's debt crisis, in December 2011 and February 2012. Since January of last year, banks have repaid more than half of those loans.
The speed with which banks have been repaying the three-year loans has picked up over recent weeks again as confidence returns and banks start to rely less on central bank funding.
Banks seem keen to offload their LTROs to shape up their balance sheets ahead of the ECB's forthcoming asset review.
With banks repaying ECB crisis loans, the amount of excess liquidity - the amount of money banks have beyond what they need for their day-to-day operations - is falling.
It stood at 122 billion euros on Friday. Excess liquidity peaked in early 2012 at around 800 billion euros.
On Friday, the ECB said 12 banks would repay 6.411 billion euros from the first LTRO on March 26, and 15 banks would pay back 12.498 billion from the second LTRO.
(Reporting by Frankfurt newsroom)(Reuters)
Investor confidence up but only because there is more of us to invest in.
The eurozone's current account surplus grew to 25.3 billion euros ($35 billion) in January, European Central Bank data showed Friday, incorporating new eurozone member Latvia for the first time.
The monthly figure compared to a surplus of 20 billion euros for December, according to revised data.
The current account on the balance of payments, which includes payments for imports and exports in both goods and services plus all other current transfers, is a closely tracked indicator of the ability of a country or area to pay its way in the world.
It is crucial for the long-term confidence of investors and trading partners, and an important factor in the value of a currency, in this case the euro, on the foreign exchange market.
Over the 12 months to January, the current account showed a surplus of 227.9 billion euros, compared with a surplus of 135.4 billion euros a year earlier, the data showed.
We are not Japan
Euro-area inflation unexpectedly slowed in February, heaping pressure on the European Central Bank (ECB) to defend the region against falling prices.
The annual inflation rate in the 18 countries sharing the euro slowed to 0.7pc in February from 0.8pc in January, revised data from the EU's statistics office Eurostat showed.
This was the lowest annual rate of growth in four years, slowing down to the same pace that triggered a surprise interest rate cut by the ECB in November.
The latest figures pile yet more pressure on the central bank which has declined, thus far, to act.
A meeting of its Governing Council on March 6 decided to keep the benchmark interest rate at 0.25pc, still a record low, rather than drop it to zero.
Low interest rates encourage consumers to spend rather than save, pushing up demand and thus prices.
Four eurozone countries recorded negative annual inflation rates during the month – Portugal and Slovakia saw deflation of -0.1pc, Greece had -0.9pc and Cyprus saw annual deflation of -1.3pc.
The eurozone's rate of inflation has now been below 1pc for five months.
The ECB aims to keep inflation just below 2pc and has blamed the strength of the euro for helping to keep prices subdued. It expects inflation to only pick up slowly, to 1pc this year and 1.5pc in 2016.
The euro fell in reaction to yesterday's data, dipping against the dollar and paring gains against the yen. Yet the ECB considers the risk of eurozone deflation as "quite limited", its president Mario Draghi said last Thursday.
He rejected comparisons with Japan's experience of deflation which became so entrenched that companies and households held off on spending on expectations of lower prices ahead, leading to two decades of economic stagnation.
Mr Draghi did say, however, that the bank had been preparing additional policy steps to guard against possible deflation, and that the longer inflation remained low, the higher was the probability of deflationary risks emerging.
Also speaking on the matter in recent days was Bundesbank chief Jens Weidmann, who repeated the view that the risk of widespread deflation in the eurozone was very limited, adding that policymakers should not overload monetary policy to haul the bloc out of crisis.
Analysts don't expect action unless the situation deteriorates further.
"The downward revision to the February inflation figures is unlikely to be enough to trigger further near-term monetary easing," said Martin van Vliet, senior economist at ING.
"This will also require a deterioration of the activity and or a further significant strengthening of the euro."
Inflation could be "the new normal", he added.
"Today's CPI figures are a clear reminder that low inflation may have become the new normal for the eurozone – which certainly won't make it easy for some countries to reduce their debt overhangs," Mr Van Vliet said.
(Additional reporting by Bloomberg and Reuters)
German inflation retreats further in February
German inflation dropped further in February as energy costs slumped due to a mild winter. Although the rate fell for the 3rd month, there’s neither reason for upside nor downside inflation worries, economists say.
Economists from Germany's Institute for the Global Economy (IfW) have predicted a sharp rise in inflation for later this year.
Using the European Central Bank's (ECB) so-called Harmonized Index of Consumer Prices (HICP) the German inflation rate came in even lower with just 1 percent. The rate contrasts sharply with a 2-percent inflation goal which the ECB considers as desirable with regard to price stability.
In February, the cost of living in Germany rose by 1.2 percent year-on-year, slumping from an annual rate of 1.3 percent in January and 1.4 percent in December 201the German Federal Statistics Office, Destatis, announced on Friday.
This was the lowest inflation rate in Germany since August 2010, the agency said, caused byretreating prices for oil-based products in the course of a mild winter.
Prices for heating oil, for example, had fallen 8.7 percent compared with February 2013, while car fuels dropped 6.3 percent over the year, Destatis said.
Significantly higher prices had to be paid for food, the data showed, which rose 3.5 percent overall. Butter was a staggering 20 percent more expensive than last year, while fruit and vegetables climbed 3.1 percent and 5.1 percent respectively.
In a growth report released this week, they predicted an inflation surge to 2.5 percent as a nascent economic recovery this year will peak in the first half of 2015.
uhe/hc (AFP, Reuters, dpa)
Banks make hay as the need for debt grows
Bank of Ireland and CaixaBank are among banks selling covered bonds in Europe after yield premiums on the secured debt fell to the lowest point in almost six years.
Bank of Ireland said yesterday it had raised €750 million in five-year debt in an exercise it said was close to three times oversubscribed.
More than 140 international investors took up the debt, the bank said, with the issue priced 80 basis points above five-year mid-swaps
“The covered bond transaction was issued by Bank of Ireland Mortgage Bank under the Irish Asset Covered Securities legislation,” the bank said. The offering, yielding 1.82 per cent, is backed by a pool of Irish residential mortgages.
Separately, Spain’s third- largest lender is selling €1 billion of bonds maturing in 2024, according to people familiar with the deal.
The average extra yield investors demand to hold covered bonds in euros instead of government debt fell to 68 basis points, the narrowest spread since June 2008, according to Bank of America Merrill Lynch index data.
Borrowers are turning to covered bonds as a second year of negative net issuance spurs demand for the debt.
Covered securities are attractive to investors because they will be exempt from European rules requiring bondholders to help absorb bank losses. That favorable regulatory treatment is combining with a second year of negative net supply to suppress the yield premium on the secured notes over government bonds.
Does anyone know what is going on!
European Central Bank president Mario Draghi (centre) with Minister for Finance Michael Noonan and European Economic and Monetary Affairs Commissioner Olli Rehn attend an euro zone finance ministers’ meeting in Brussels on Monday. Photograph: Reuters/Francois Lenoir
The European Central Bank is failing to hit its own target for price stability. The difficulty is that the bank’s governing council may be unable to agree on effective measures, largely because of splits on national lines. That might prove very dangerous.
Give credit where credit is due. The announcement of the ECB’s Outright Monetary Transactions programme in the summer of 2012 – and the statement by Mario Draghi, its president, that the bank would do “whatever it takes” to preserve the single currency – restored confidence.
Bloodless coup
The ECB won the battle without having to fire a shot. After the announcement, yields on Italian and Spanish government bonds fell to far more tolerable levels.
But the ECB has been less successful in securing price stability. True, its target is not as unambiguous or as symmetrical as those adopted by other central banks. Its aim is to achieve inflation “below, but close to, 2 per cent over the medium term”.
Yet in the year to February 2014, headline inflation was 0.8 per cent. This is hardly close to 2 per cent. It is also highly dangerous, as is cogently argued in a blog by senior members of the IMF’s European department.
First, this low inflation has, as is to be expected, coincided with weak demand. In the fourth quarter of last year, eurozone real demand was 5 per cent below levels in the first quarter of 2008.
In Spain, real demand fell 16 per cent. In Italy, it fell 12 per cent. Even in Germany, real demand stagnated from the second quarter of 2011: this is no locomotive. The failure to offset this has made recovery of crisis-hit economies more difficult, lowered investment and created long-term unemployment. All this will deeply scar the euro zone.
Second, there is a risk the euro zone will fall into deflation.
Mr Draghi has described deflation as a situation where price level declines occur in a significant number of countries, across a significant number of goods and in a self-fulfilling way. By this definition, deflation is absent: only three countries have negative inflation and only a fifth of items in the consumer price index have fallen in price. Longer-term inflation expectations are also stable at close to 2 per cent, though short-term expectations have fallen.
Short-term view
As the IMF authors argue: “One should not take too much comfort in the fact that long-term inflation expectations are positive”.
The data indicate that, in the long term, euro zone prices are expected to rise at a healthy 2 per cent a year. But long-term inflation expectations were also positive before three bouts of deflation in Japan. It was nearer-term expectations that turned more pessimistic – leading to falls in prices and wages that enabled deflation to take hold.
Put simply, the eurozone is just one negative shock away from deflation. The cushion is far too small. When negative short-term real interest rates are needed to avoid deflation, the situation is perilous.
Third, ultra-low inflation is itself costly. This is particularly true for countries that have to restore competitiveness. If inflation in core countries is low, then inflation in crisis-hit countries must be close to zero or negative.
Angel Ubide of the Peterson Institute for International Economics notes that average inflation in surplus countries is only 1.5 per cent, against 0.6 per cent in the adjusting economies. While falling prices would improve competitiveness, they would raise the real burden of private and public debt. This might well create another round of financial stresses.
If average inflation stood at 2 per cent, with the surplus countries on (say) 3 per cent and the adjusting countries on 1 per cent, the euro zone would be in far better shape: real interest rates would be lower, the economy would be stronger and internal adjustment would be faster.
If average inflation reached 3 per cent (roughly the level the Bundesbank achieved in Germany from 1980 to 1995), it would be still better.
The ECB has allowed the euro zone to fall into a deep and entrenched slump. The bank has also allowed the supply of money and credit to stagnate. The Bundesbank used to focus on these variables because over time they can put upward pressure on activity, wages and prices. But the ECB seems to be ignoring them. It is failing to do its job.
What can be done? The aim must be to raise demand and inflation in the euro zone as a whole, particularly in surplus countries. The aim must also be to improve credit markets.
The ECB should announce a symmetrical inflation target of 2 per cent, indicating that it will henceforth view excessively low inflation as a problem no less serious than rapidly rising prices. It should implement a programme of quantitative easing, purchasing the bonds of member governments in proportion to shares in the central bank.
Finally, it should announce a longer-term refinancing operation to unblock the flow of credit to SMEs.
Difficulties arise. Large-scale purchases of the bonds of crisis-hit countries are legal but may well trigger hysteria in surplus Europe.
The ECB would probably suffer a deep internal split if it sought to adopt such a policy. That could jeopardise its political legitimacy. The fear is that the ECB may be forced to pretend that low inflation is not a threat because it cannot agree on what to do about it.
The euro zone crisis is not over. Despite the emergence of a degree of stability, the situation remains very fragile. – Copyright The Financial Times Limited 2014
The ECB may wipe out a large part of the Irish Economy
Economist Morgan Kelly’s warning that the European Central Bank is planning a “clean-up” of Irish banks will be taken seriously by government, Minister for Finance Michael Noonan has said.
In a lecture at University College Dublin, Prof Kelly said a clean up of SME bank loans by the European Central Bank may lead to large section of economy being “wiped out”.
Prof Kelly, who was the first economist to predict the likely scale of the Irish banking collapse, said the “real crisis” for the Irish economy may not yet have happened.
Deflation in Europe isn't happening -Consumer spending is up
Consumer prices grew 0.8% in February from a year earlier in the euro zone, the European Union's statistics office Eurostat said Friday, well below the ECB's target of just below 2%. But that was higher than expected, with the consensus forecast of 24 economists surveyed by The Wall Street Journal last week for a reading of 0.7%.
"February's euro-zone consumer prices figures don't change the picture of very weak price pressures in the currency union and hence don't rule out further policy action from the ECB next week," said Jonathan Loynes, chief European economist at Capital Economics.
Those policy makers who are reluctant to provide further stimulus may also be encouraged by figures released by Germany's statistics agency Friday, which showed retail sales in the euro zone's largest member rose at the fastest pace since February 2007, jumping 2.5% from the previous month.
ECB policy makers have repeatedly said they don't expect outright declines in consumer prices, known as deflation. They reject comparisons with Japan, which struggled with deflation for two decades, saying the ECB has acted more decisively than Japan did in the 1990s and that European banks are stronger.
Inflation unchanged- so looks like no ECB rate cut
Inflation is expected to be unchanged at 0.8pc this month, easing the pressure on European Central Bank boss Mario Draghi to take further action.
Economists had expected the rate to dip below 0.7pc, but the fact that it remains stable means it is less likely the ECB will reduce its main interest rate further when it meets next week.
It comes as the unemployment rate in the eurozone also remained stuck at 12pc in January.
Mr Draghi has warned of the risk of inflation getting stuck in a danger zone below 1pc, but said again on Thursday that there was clearly no deflation.
The February inflation rate was stable because lower energy costs were offset by more expensive industrial goods and services, according to Eurostat data.
"It is not a piece of cake. It is going to be hard work."-Merkel in Britain
Following a Downing Street meeting with Prime Minister David Cameron, Angela Merkel said both countries could bring in laws to restrict benefit tourism, as part of "overall European cooperation".
Mr Cameron said changes to the EU were "possible, achievable and doable".
Mrs Merkel addressed Parliament earlier what the full video https://www.youtube.com/watch?v=lmusV-7BMzM
- and later had tea with the Queen.
She also had a meeting with Mr Cameron in Downing Street, with a picture being released of the two of them chatting on the sofa in the Camerons' flat.
David Cameron and Angela Merkel
Mr Cameron is keen to negotiate changes to the UK's treaties with the EU ahead of a promised referendum on whether the country should remain in the organisation, which he wants to hold before the end of 2017.
He regards Mrs Merkel as a key figure in achieving his aim and has organised several events to welcome the German leader during her one-day visit to London, including tea with the Queen at Buckingham Palace.
At the Downing Street press conference, Mr Cameron said he and Mrs Merkel "both want to see changes in Europe".
He added that EU rules on freedom of movement needed to change to ensure people could not move from country to country to sign up for welfare payments.
Angela Merkel addressed both Houses of Parliament during her one-day visit
Mrs Merkel said the UK and Germany could pass laws to limit this problem, saying: "Where there's a will, there's a way."
She said freedom of movement was intended to allow people to work in different countries, not "having immigration into social systems".
However, speaking of changing the EU, she said: "It is not a piece of cake. It is going to be hard work."
Mrs Merkel told assembled political and business leaders: "Some expect my speech to pave the way for a fundamental reform of the European architecture which will satisfy all kinds of alleged or actual British wishes. I am afraid they are in for a disappointment.
"Others are expecting the exact opposite and they are hoping that I will deliver the clear and simple message here in London that the rest of Europe is not prepared to pay almost any price to keep Britain in the European Union. I am afraid these hopes will be dashed."'
Mrs Merkel hailed the peace and stability she said the European Union had brought, saying war between EU member states was now "inconceivable".
Mrs Merkel's speech was well received by the UK parliamentarians
She praised the "unparalleled success" of the EU free market - and the freedoms she said European integration had delivered - but stressed that "we need to change the political shape of the EU in keeping with the times".
She told the UK's gathered political leaders the SU had to become stronger, saying: "In order to attain this goal we need a strong United Kingdom with a strong voice inside the European Union.
"If we have that, we will be able to make the necessary changes for the benefit of all."
The Guardian reported on Wednesday that Berlin was prepared to offer "limited opt-outs" to the UK over its future compliance with existing EU directives and to make sure some other regulations were more flexibly enforced.
The newspaper said it was a sign of the lengths that Germany was willing to go to to ensure the UK remained a member of the EU amid fears in Europe that a referendum could lead to British withdrawal.
But BBC Berlin Correspondent Stephen Evans said sources close to Mrs Merkel were playing down expectations of new proposals for the kind of changes British Conservatives wanted to see.
Although not an official state visit - Mrs Merkel is not head of state - the trip has been planned for months, with both governments aware of its political significance at a time of looming change in Europe.
Mr Cameron has said that if the Conservatives win the 2015 election, he will seek to renegotiate the terms of the UK's membership of the European Union and put the outcome to an in-out referendum of the British people in 2017.
But he faces a battle to convince leaders of other EU member states to agree to the treaty changes he will need, with French President Francois Hollande recently telling the prime minister, on a one-day visit to the UK, that it was "not a priority".
The leader of Mr Cameron's junior coalition partners, the Liberal Democrat Deputy Prime Minister Nick Clegg, and opposition leader Ed Miliband, who both oppose calls for a referendum and who have warned that Conservative calls for a root-and-branch renegotiation will alienate EU leaders, also held separate meetings with Mrs Merkel.
Germany is continuing to rely a lot on its export sector for growth.
+
The Federal Statistical Office confirmed a previous estimate that Europe’s largest economy expanded by 0.4% in the fourth quarter of 2013, compared to the prior three months. Though the economic performance of Germany is better than many of the neighbors, on par 2013 was pretty weak. Full-year growth arrived at 0.4%, the slowest since 2009.
+
Exports, which grew by 2.6% in the fourth quarter, compared to the prior quarter, were a main source of growth. (Imports were up a scant 0.6%.) The agency said exports accounted for 1.1 percentage points of GDP growth. In other words, without exports, the country’s economy would have contracted during the quarter.
+
Graphs http://qz.com/
No QE from the ECB thinks market traders but Japanese Deflation is looming
The European Central Bank will not begin outright quantitative easing (QE) this year, most euro money-market traders polled by Reuters said on Monday.
80% money-market traders said they do not expect an ECB asset-purchase programme to start this year, because the ECB is banned from buying government bonds and assets outright.
"Even if the ECB wants to, it will not be allowed to do so," said a trader at a large dealer.
But the remaining five respondents in the poll said the central bank would undertake QE by ending its sterilisation operations under the Securities Markets Programme (SMP).
The liquidity provided through the SMP is now absorbed by weekly collections of fixed-term deposits - called sterilisation.
Banks have repaid more than half of the over 1 trillion euros in crisis loans made since January of last year. As a result, excess liquidity in the currency bloc has fallen to the lowest level since December 2011.
Economists are divided over whether the Frankfurt-based ECB will increase stimulus to counter the risk of deflation after euro-area inflation slowed to 0.7 percent in January, less than half the bank’s 2 percent target.
Draghi said the council will have “the full set of information needed for deciding whether to act or not” by its next policy meeting on March 6 in Frankfurt, when it will publish a 2016 inflation projection for the first time.
I don't think we should have actually done that
Irelands being pinned to the collar by the ECB to get rid the bonds they issued as part of their prom note last year due to the fact that the ECB are worried €25 billion of prom notes into sovereign debt equated to monetary financing, something that is forbidden by article 123 of the EU Treaty. The Central Bank of Ireland agreed last year to sell the bonds “but only where such a sale is not disruptive to financial stability”. The weighted average life of the long-term government bonds is 34 to 35 years, compared to seven or eight years for the promissory notes. ECB chief Mario Draghi said at the time that while the ECB had taken note of the transaction it would be reviewing the arrangement as part of its monitoring of monetary financing in euro zone countries.
But our banks are different
The ECB determination to subject the euro zone's largest banks to the same, rigorous checks is being tested, with countries lobbying for their banks to be treated differently and lenders asking for their workload to be eased.
Almost two weeks after the ECB published a 285 page manual spelling out how it will examine banks' trillions of euros of assets, lenders in Germany and Spain are leading the charge for special treatment, while banks across the eurozone have asked for changes to the process to make it less onerous.
The central bank is carrying out the wide-ranging tests so it can start with a clean sheet when it becomes the euro zone's banking supervisor in November. The tests are designed to banish lingering investor doubts about the health of the region's banks that have kept their valuations consistently below U.S. peers.
Give us back the cash lads.You didn't think it was a handout.
Banks will return 18.90 billion euros (£15.79 billion) in crisis loans to the European Central Bank next week, a much larger sum than expected that will keep up the drain of extra cash out of the euro zone financial system.
The amount banks will repay on March 26 is more than this week's repayments of 10.075 billion euros and is also far above the 7 billion forecast in a Reuters poll.
To help lenders ride out funding constraints, the ECB lent banks more than one trillion euros in three-year loans during the euro zone's debt crisis, in December 2011 and February 2012. Since January of last year, banks have repaid more than half of those loans.
The speed with which banks have been repaying the three-year loans has picked up over recent weeks again as confidence returns and banks start to rely less on central bank funding.
Banks seem keen to offload their LTROs to shape up their balance sheets ahead of the ECB's forthcoming asset review.
With banks repaying ECB crisis loans, the amount of excess liquidity - the amount of money banks have beyond what they need for their day-to-day operations - is falling.
It stood at 122 billion euros on Friday. Excess liquidity peaked in early 2012 at around 800 billion euros.
On Friday, the ECB said 12 banks would repay 6.411 billion euros from the first LTRO on March 26, and 15 banks would pay back 12.498 billion from the second LTRO.
(Reporting by Frankfurt newsroom)(Reuters)
Investor confidence up but only because there is more of us to invest in.
The eurozone's current account surplus grew to 25.3 billion euros ($35 billion) in January, European Central Bank data showed Friday, incorporating new eurozone member Latvia for the first time.
The monthly figure compared to a surplus of 20 billion euros for December, according to revised data.
The current account on the balance of payments, which includes payments for imports and exports in both goods and services plus all other current transfers, is a closely tracked indicator of the ability of a country or area to pay its way in the world.
It is crucial for the long-term confidence of investors and trading partners, and an important factor in the value of a currency, in this case the euro, on the foreign exchange market.
Over the 12 months to January, the current account showed a surplus of 227.9 billion euros, compared with a surplus of 135.4 billion euros a year earlier, the data showed.
We are not Japan
Euro-area inflation unexpectedly slowed in February, heaping pressure on the European Central Bank (ECB) to defend the region against falling prices.
The annual inflation rate in the 18 countries sharing the euro slowed to 0.7pc in February from 0.8pc in January, revised data from the EU's statistics office Eurostat showed.
This was the lowest annual rate of growth in four years, slowing down to the same pace that triggered a surprise interest rate cut by the ECB in November.
The latest figures pile yet more pressure on the central bank which has declined, thus far, to act.
A meeting of its Governing Council on March 6 decided to keep the benchmark interest rate at 0.25pc, still a record low, rather than drop it to zero.
Low interest rates encourage consumers to spend rather than save, pushing up demand and thus prices.
Four eurozone countries recorded negative annual inflation rates during the month – Portugal and Slovakia saw deflation of -0.1pc, Greece had -0.9pc and Cyprus saw annual deflation of -1.3pc.
The eurozone's rate of inflation has now been below 1pc for five months.
The ECB aims to keep inflation just below 2pc and has blamed the strength of the euro for helping to keep prices subdued. It expects inflation to only pick up slowly, to 1pc this year and 1.5pc in 2016.
The euro fell in reaction to yesterday's data, dipping against the dollar and paring gains against the yen. Yet the ECB considers the risk of eurozone deflation as "quite limited", its president Mario Draghi said last Thursday.
He rejected comparisons with Japan's experience of deflation which became so entrenched that companies and households held off on spending on expectations of lower prices ahead, leading to two decades of economic stagnation.
Mr Draghi did say, however, that the bank had been preparing additional policy steps to guard against possible deflation, and that the longer inflation remained low, the higher was the probability of deflationary risks emerging.
Also speaking on the matter in recent days was Bundesbank chief Jens Weidmann, who repeated the view that the risk of widespread deflation in the eurozone was very limited, adding that policymakers should not overload monetary policy to haul the bloc out of crisis.
Analysts don't expect action unless the situation deteriorates further.
"The downward revision to the February inflation figures is unlikely to be enough to trigger further near-term monetary easing," said Martin van Vliet, senior economist at ING.
"This will also require a deterioration of the activity and or a further significant strengthening of the euro."
Inflation could be "the new normal", he added.
"Today's CPI figures are a clear reminder that low inflation may have become the new normal for the eurozone – which certainly won't make it easy for some countries to reduce their debt overhangs," Mr Van Vliet said.
(Additional reporting by Bloomberg and Reuters)
German inflation retreats further in February
German inflation dropped further in February as energy costs slumped due to a mild winter. Although the rate fell for the 3rd month, there’s neither reason for upside nor downside inflation worries, economists say.
Economists from Germany's Institute for the Global Economy (IfW) have predicted a sharp rise in inflation for later this year.
Using the European Central Bank's (ECB) so-called Harmonized Index of Consumer Prices (HICP) the German inflation rate came in even lower with just 1 percent. The rate contrasts sharply with a 2-percent inflation goal which the ECB considers as desirable with regard to price stability.
In February, the cost of living in Germany rose by 1.2 percent year-on-year, slumping from an annual rate of 1.3 percent in January and 1.4 percent in December 201the German Federal Statistics Office, Destatis, announced on Friday.
This was the lowest inflation rate in Germany since August 2010, the agency said, caused byretreating prices for oil-based products in the course of a mild winter.
Prices for heating oil, for example, had fallen 8.7 percent compared with February 2013, while car fuels dropped 6.3 percent over the year, Destatis said.
Significantly higher prices had to be paid for food, the data showed, which rose 3.5 percent overall. Butter was a staggering 20 percent more expensive than last year, while fruit and vegetables climbed 3.1 percent and 5.1 percent respectively.
In a growth report released this week, they predicted an inflation surge to 2.5 percent as a nascent economic recovery this year will peak in the first half of 2015.
uhe/hc (AFP, Reuters, dpa)
Banks make hay as the need for debt grows
Bank of Ireland and CaixaBank are among banks selling covered bonds in Europe after yield premiums on the secured debt fell to the lowest point in almost six years.
Bank of Ireland said yesterday it had raised €750 million in five-year debt in an exercise it said was close to three times oversubscribed.
More than 140 international investors took up the debt, the bank said, with the issue priced 80 basis points above five-year mid-swaps
“The covered bond transaction was issued by Bank of Ireland Mortgage Bank under the Irish Asset Covered Securities legislation,” the bank said. The offering, yielding 1.82 per cent, is backed by a pool of Irish residential mortgages.
Separately, Spain’s third- largest lender is selling €1 billion of bonds maturing in 2024, according to people familiar with the deal.
The average extra yield investors demand to hold covered bonds in euros instead of government debt fell to 68 basis points, the narrowest spread since June 2008, according to Bank of America Merrill Lynch index data.
Borrowers are turning to covered bonds as a second year of negative net issuance spurs demand for the debt.
Covered securities are attractive to investors because they will be exempt from European rules requiring bondholders to help absorb bank losses. That favorable regulatory treatment is combining with a second year of negative net supply to suppress the yield premium on the secured notes over government bonds.
Does anyone know what is going on!
European Central Bank president Mario Draghi (centre) with Minister for Finance Michael Noonan and European Economic and Monetary Affairs Commissioner Olli Rehn attend an euro zone finance ministers’ meeting in Brussels on Monday. Photograph: Reuters/Francois Lenoir
The European Central Bank is failing to hit its own target for price stability. The difficulty is that the bank’s governing council may be unable to agree on effective measures, largely because of splits on national lines. That might prove very dangerous.
Give credit where credit is due. The announcement of the ECB’s Outright Monetary Transactions programme in the summer of 2012 – and the statement by Mario Draghi, its president, that the bank would do “whatever it takes” to preserve the single currency – restored confidence.
Bloodless coup
The ECB won the battle without having to fire a shot. After the announcement, yields on Italian and Spanish government bonds fell to far more tolerable levels.
But the ECB has been less successful in securing price stability. True, its target is not as unambiguous or as symmetrical as those adopted by other central banks. Its aim is to achieve inflation “below, but close to, 2 per cent over the medium term”.
Yet in the year to February 2014, headline inflation was 0.8 per cent. This is hardly close to 2 per cent. It is also highly dangerous, as is cogently argued in a blog by senior members of the IMF’s European department.
First, this low inflation has, as is to be expected, coincided with weak demand. In the fourth quarter of last year, eurozone real demand was 5 per cent below levels in the first quarter of 2008.
In Spain, real demand fell 16 per cent. In Italy, it fell 12 per cent. Even in Germany, real demand stagnated from the second quarter of 2011: this is no locomotive. The failure to offset this has made recovery of crisis-hit economies more difficult, lowered investment and created long-term unemployment. All this will deeply scar the euro zone.
Second, there is a risk the euro zone will fall into deflation.
Mr Draghi has described deflation as a situation where price level declines occur in a significant number of countries, across a significant number of goods and in a self-fulfilling way. By this definition, deflation is absent: only three countries have negative inflation and only a fifth of items in the consumer price index have fallen in price. Longer-term inflation expectations are also stable at close to 2 per cent, though short-term expectations have fallen.
Short-term view
As the IMF authors argue: “One should not take too much comfort in the fact that long-term inflation expectations are positive”.
The data indicate that, in the long term, euro zone prices are expected to rise at a healthy 2 per cent a year. But long-term inflation expectations were also positive before three bouts of deflation in Japan. It was nearer-term expectations that turned more pessimistic – leading to falls in prices and wages that enabled deflation to take hold.
Put simply, the eurozone is just one negative shock away from deflation. The cushion is far too small. When negative short-term real interest rates are needed to avoid deflation, the situation is perilous.
Third, ultra-low inflation is itself costly. This is particularly true for countries that have to restore competitiveness. If inflation in core countries is low, then inflation in crisis-hit countries must be close to zero or negative.
Angel Ubide of the Peterson Institute for International Economics notes that average inflation in surplus countries is only 1.5 per cent, against 0.6 per cent in the adjusting economies. While falling prices would improve competitiveness, they would raise the real burden of private and public debt. This might well create another round of financial stresses.
If average inflation stood at 2 per cent, with the surplus countries on (say) 3 per cent and the adjusting countries on 1 per cent, the euro zone would be in far better shape: real interest rates would be lower, the economy would be stronger and internal adjustment would be faster.
If average inflation reached 3 per cent (roughly the level the Bundesbank achieved in Germany from 1980 to 1995), it would be still better.
The ECB has allowed the euro zone to fall into a deep and entrenched slump. The bank has also allowed the supply of money and credit to stagnate. The Bundesbank used to focus on these variables because over time they can put upward pressure on activity, wages and prices. But the ECB seems to be ignoring them. It is failing to do its job.
What can be done? The aim must be to raise demand and inflation in the euro zone as a whole, particularly in surplus countries. The aim must also be to improve credit markets.
The ECB should announce a symmetrical inflation target of 2 per cent, indicating that it will henceforth view excessively low inflation as a problem no less serious than rapidly rising prices. It should implement a programme of quantitative easing, purchasing the bonds of member governments in proportion to shares in the central bank.
Finally, it should announce a longer-term refinancing operation to unblock the flow of credit to SMEs.
Difficulties arise. Large-scale purchases of the bonds of crisis-hit countries are legal but may well trigger hysteria in surplus Europe.
The ECB would probably suffer a deep internal split if it sought to adopt such a policy. That could jeopardise its political legitimacy. The fear is that the ECB may be forced to pretend that low inflation is not a threat because it cannot agree on what to do about it.
The euro zone crisis is not over. Despite the emergence of a degree of stability, the situation remains very fragile. – Copyright The Financial Times Limited 2014
The ECB may wipe out a large part of the Irish Economy
Economist Morgan Kelly’s warning that the European Central Bank is planning a “clean-up” of Irish banks will be taken seriously by government, Minister for Finance Michael Noonan has said.
In a lecture at University College Dublin, Prof Kelly said a clean up of SME bank loans by the European Central Bank may lead to large section of economy being “wiped out”.
Prof Kelly, who was the first economist to predict the likely scale of the Irish banking collapse, said the “real crisis” for the Irish economy may not yet have happened.
Deflation in Europe isn't happening -Consumer spending is up
Consumer prices grew 0.8% in February from a year earlier in the euro zone, the European Union's statistics office Eurostat said Friday, well below the ECB's target of just below 2%. But that was higher than expected, with the consensus forecast of 24 economists surveyed by The Wall Street Journal last week for a reading of 0.7%.
"February's euro-zone consumer prices figures don't change the picture of very weak price pressures in the currency union and hence don't rule out further policy action from the ECB next week," said Jonathan Loynes, chief European economist at Capital Economics.
Those policy makers who are reluctant to provide further stimulus may also be encouraged by figures released by Germany's statistics agency Friday, which showed retail sales in the euro zone's largest member rose at the fastest pace since February 2007, jumping 2.5% from the previous month.
ECB policy makers have repeatedly said they don't expect outright declines in consumer prices, known as deflation. They reject comparisons with Japan, which struggled with deflation for two decades, saying the ECB has acted more decisively than Japan did in the 1990s and that European banks are stronger.
Inflation unchanged- so looks like no ECB rate cut
Inflation is expected to be unchanged at 0.8pc this month, easing the pressure on European Central Bank boss Mario Draghi to take further action.
Economists had expected the rate to dip below 0.7pc, but the fact that it remains stable means it is less likely the ECB will reduce its main interest rate further when it meets next week.
It comes as the unemployment rate in the eurozone also remained stuck at 12pc in January.
Mr Draghi has warned of the risk of inflation getting stuck in a danger zone below 1pc, but said again on Thursday that there was clearly no deflation.
The February inflation rate was stable because lower energy costs were offset by more expensive industrial goods and services, according to Eurostat data.
"It is not a piece of cake. It is going to be hard work."-Merkel in Britain
Following a Downing Street meeting with Prime Minister David Cameron, Angela Merkel said both countries could bring in laws to restrict benefit tourism, as part of "overall European cooperation".
Mr Cameron said changes to the EU were "possible, achievable and doable".
Mrs Merkel addressed Parliament earlier what the full video https://www.youtube.com/watch?v=lmusV-7BMzM
- and later had tea with the Queen.
She also had a meeting with Mr Cameron in Downing Street, with a picture being released of the two of them chatting on the sofa in the Camerons' flat.
David Cameron and Angela Merkel
Mr Cameron is keen to negotiate changes to the UK's treaties with the EU ahead of a promised referendum on whether the country should remain in the organisation, which he wants to hold before the end of 2017.
He regards Mrs Merkel as a key figure in achieving his aim and has organised several events to welcome the German leader during her one-day visit to London, including tea with the Queen at Buckingham Palace.
At the Downing Street press conference, Mr Cameron said he and Mrs Merkel "both want to see changes in Europe".
He added that EU rules on freedom of movement needed to change to ensure people could not move from country to country to sign up for welfare payments.
Angela Merkel addressed both Houses of Parliament during her one-day visit
Mrs Merkel said the UK and Germany could pass laws to limit this problem, saying: "Where there's a will, there's a way."
She said freedom of movement was intended to allow people to work in different countries, not "having immigration into social systems".
However, speaking of changing the EU, she said: "It is not a piece of cake. It is going to be hard work."
Mrs Merkel told assembled political and business leaders: "Some expect my speech to pave the way for a fundamental reform of the European architecture which will satisfy all kinds of alleged or actual British wishes. I am afraid they are in for a disappointment.
"Others are expecting the exact opposite and they are hoping that I will deliver the clear and simple message here in London that the rest of Europe is not prepared to pay almost any price to keep Britain in the European Union. I am afraid these hopes will be dashed."'
Mrs Merkel hailed the peace and stability she said the European Union had brought, saying war between EU member states was now "inconceivable".
Mrs Merkel's speech was well received by the UK parliamentarians
She praised the "unparalleled success" of the EU free market - and the freedoms she said European integration had delivered - but stressed that "we need to change the political shape of the EU in keeping with the times".
She told the UK's gathered political leaders the SU had to become stronger, saying: "In order to attain this goal we need a strong United Kingdom with a strong voice inside the European Union.
"If we have that, we will be able to make the necessary changes for the benefit of all."
The Guardian reported on Wednesday that Berlin was prepared to offer "limited opt-outs" to the UK over its future compliance with existing EU directives and to make sure some other regulations were more flexibly enforced.
The newspaper said it was a sign of the lengths that Germany was willing to go to to ensure the UK remained a member of the EU amid fears in Europe that a referendum could lead to British withdrawal.
But BBC Berlin Correspondent Stephen Evans said sources close to Mrs Merkel were playing down expectations of new proposals for the kind of changes British Conservatives wanted to see.
Although not an official state visit - Mrs Merkel is not head of state - the trip has been planned for months, with both governments aware of its political significance at a time of looming change in Europe.
Mr Cameron has said that if the Conservatives win the 2015 election, he will seek to renegotiate the terms of the UK's membership of the European Union and put the outcome to an in-out referendum of the British people in 2017.
But he faces a battle to convince leaders of other EU member states to agree to the treaty changes he will need, with French President Francois Hollande recently telling the prime minister, on a one-day visit to the UK, that it was "not a priority".
The leader of Mr Cameron's junior coalition partners, the Liberal Democrat Deputy Prime Minister Nick Clegg, and opposition leader Ed Miliband, who both oppose calls for a referendum and who have warned that Conservative calls for a root-and-branch renegotiation will alienate EU leaders, also held separate meetings with Mrs Merkel.
Germany is continuing to rely a lot on its export sector for growth.
+
The Federal Statistical Office confirmed a previous estimate that Europe’s largest economy expanded by 0.4% in the fourth quarter of 2013, compared to the prior three months. Though the economic performance of Germany is better than many of the neighbors, on par 2013 was pretty weak. Full-year growth arrived at 0.4%, the slowest since 2009.
+
Exports, which grew by 2.6% in the fourth quarter, compared to the prior quarter, were a main source of growth. (Imports were up a scant 0.6%.) The agency said exports accounted for 1.1 percentage points of GDP growth. In other words, without exports, the country’s economy would have contracted during the quarter.
+
Graphs http://qz.com/
I don't think we should have actually done that
Irelands being pinned to the collar by the ECB to get rid the bonds they issued as part of their prom note last year due to the fact that the ECB are worried €25 billion of prom notes into sovereign debt equated to monetary financing, something that is forbidden by article 123 of the EU Treaty. The Central Bank of Ireland agreed last year to sell the bonds “but only where such a sale is not disruptive to financial stability”. The weighted average life of the long-term government bonds is 34 to 35 years, compared to seven or eight years for the promissory notes. ECB chief Mario Draghi said at the time that while the ECB had taken note of the transaction it would be reviewing the arrangement as part of its monitoring of monetary financing in euro zone countries.
But our banks are different
The ECB determination to subject the euro zone's largest banks to the same, rigorous checks is being tested, with countries lobbying for their banks to be treated differently and lenders asking for their workload to be eased.
Almost two weeks after the ECB published a 285 page manual spelling out how it will examine banks' trillions of euros of assets, lenders in Germany and Spain are leading the charge for special treatment, while banks across the eurozone have asked for changes to the process to make it less onerous.
The central bank is carrying out the wide-ranging tests so it can start with a clean sheet when it becomes the euro zone's banking supervisor in November. The tests are designed to banish lingering investor doubts about the health of the region's banks that have kept their valuations consistently below U.S. peers.
Give us back the cash lads.You didn't think it was a handout.
Banks will return 18.90 billion euros (£15.79 billion) in crisis loans to the European Central Bank next week, a much larger sum than expected that will keep up the drain of extra cash out of the euro zone financial system.
The amount banks will repay on March 26 is more than this week's repayments of 10.075 billion euros and is also far above the 7 billion forecast in a Reuters poll.
To help lenders ride out funding constraints, the ECB lent banks more than one trillion euros in three-year loans during the euro zone's debt crisis, in December 2011 and February 2012. Since January of last year, banks have repaid more than half of those loans.
The speed with which banks have been repaying the three-year loans has picked up over recent weeks again as confidence returns and banks start to rely less on central bank funding.
Banks seem keen to offload their LTROs to shape up their balance sheets ahead of the ECB's forthcoming asset review.
With banks repaying ECB crisis loans, the amount of excess liquidity - the amount of money banks have beyond what they need for their day-to-day operations - is falling.
It stood at 122 billion euros on Friday. Excess liquidity peaked in early 2012 at around 800 billion euros.
On Friday, the ECB said 12 banks would repay 6.411 billion euros from the first LTRO on March 26, and 15 banks would pay back 12.498 billion from the second LTRO.
(Reporting by Frankfurt newsroom)(Reuters)
Investor confidence up but only because there is more of us to invest in.
The eurozone's current account surplus grew to 25.3 billion euros ($35 billion) in January, European Central Bank data showed Friday, incorporating new eurozone member Latvia for the first time.
The monthly figure compared to a surplus of 20 billion euros for December, according to revised data.
The current account on the balance of payments, which includes payments for imports and exports in both goods and services plus all other current transfers, is a closely tracked indicator of the ability of a country or area to pay its way in the world.
It is crucial for the long-term confidence of investors and trading partners, and an important factor in the value of a currency, in this case the euro, on the foreign exchange market.
Over the 12 months to January, the current account showed a surplus of 227.9 billion euros, compared with a surplus of 135.4 billion euros a year earlier, the data showed.
We are not Japan
Euro-area inflation unexpectedly slowed in February, heaping pressure on the European Central Bank (ECB) to defend the region against falling prices.
The annual inflation rate in the 18 countries sharing the euro slowed to 0.7pc in February from 0.8pc in January, revised data from the EU's statistics office Eurostat showed.
This was the lowest annual rate of growth in four years, slowing down to the same pace that triggered a surprise interest rate cut by the ECB in November.
The latest figures pile yet more pressure on the central bank which has declined, thus far, to act.
A meeting of its Governing Council on March 6 decided to keep the benchmark interest rate at 0.25pc, still a record low, rather than drop it to zero.
Low interest rates encourage consumers to spend rather than save, pushing up demand and thus prices.
Four eurozone countries recorded negative annual inflation rates during the month – Portugal and Slovakia saw deflation of -0.1pc, Greece had -0.9pc and Cyprus saw annual deflation of -1.3pc.
The eurozone's rate of inflation has now been below 1pc for five months.
The ECB aims to keep inflation just below 2pc and has blamed the strength of the euro for helping to keep prices subdued. It expects inflation to only pick up slowly, to 1pc this year and 1.5pc in 2016.
The euro fell in reaction to yesterday's data, dipping against the dollar and paring gains against the yen. Yet the ECB considers the risk of eurozone deflation as "quite limited", its president Mario Draghi said last Thursday.
He rejected comparisons with Japan's experience of deflation which became so entrenched that companies and households held off on spending on expectations of lower prices ahead, leading to two decades of economic stagnation.
Mr Draghi did say, however, that the bank had been preparing additional policy steps to guard against possible deflation, and that the longer inflation remained low, the higher was the probability of deflationary risks emerging.
Also speaking on the matter in recent days was Bundesbank chief Jens Weidmann, who repeated the view that the risk of widespread deflation in the eurozone was very limited, adding that policymakers should not overload monetary policy to haul the bloc out of crisis.
Analysts don't expect action unless the situation deteriorates further.
"The downward revision to the February inflation figures is unlikely to be enough to trigger further near-term monetary easing," said Martin van Vliet, senior economist at ING.
"This will also require a deterioration of the activity and or a further significant strengthening of the euro."
Inflation could be "the new normal", he added.
"Today's CPI figures are a clear reminder that low inflation may have become the new normal for the eurozone – which certainly won't make it easy for some countries to reduce their debt overhangs," Mr Van Vliet said.
(Additional reporting by Bloomberg and Reuters)
German inflation retreats further in February
German inflation dropped further in February as energy costs slumped due to a mild winter. Although the rate fell for the 3rd month, there’s neither reason for upside nor downside inflation worries, economists say.
Economists from Germany's Institute for the Global Economy (IfW) have predicted a sharp rise in inflation for later this year.
Using the European Central Bank's (ECB) so-called Harmonized Index of Consumer Prices (HICP) the German inflation rate came in even lower with just 1 percent. The rate contrasts sharply with a 2-percent inflation goal which the ECB considers as desirable with regard to price stability.
In February, the cost of living in Germany rose by 1.2 percent year-on-year, slumping from an annual rate of 1.3 percent in January and 1.4 percent in December 201the German Federal Statistics Office, Destatis, announced on Friday.
This was the lowest inflation rate in Germany since August 2010, the agency said, caused byretreating prices for oil-based products in the course of a mild winter.
Prices for heating oil, for example, had fallen 8.7 percent compared with February 2013, while car fuels dropped 6.3 percent over the year, Destatis said.
Significantly higher prices had to be paid for food, the data showed, which rose 3.5 percent overall. Butter was a staggering 20 percent more expensive than last year, while fruit and vegetables climbed 3.1 percent and 5.1 percent respectively.
In a growth report released this week, they predicted an inflation surge to 2.5 percent as a nascent economic recovery this year will peak in the first half of 2015.
uhe/hc (AFP, Reuters, dpa)
Banks make hay as the need for debt grows
Bank of Ireland and CaixaBank are among banks selling covered bonds in Europe after yield premiums on the secured debt fell to the lowest point in almost six years.
Bank of Ireland said yesterday it had raised €750 million in five-year debt in an exercise it said was close to three times oversubscribed.
More than 140 international investors took up the debt, the bank said, with the issue priced 80 basis points above five-year mid-swaps
“The covered bond transaction was issued by Bank of Ireland Mortgage Bank under the Irish Asset Covered Securities legislation,” the bank said. The offering, yielding 1.82 per cent, is backed by a pool of Irish residential mortgages.
Separately, Spain’s third- largest lender is selling €1 billion of bonds maturing in 2024, according to people familiar with the deal.
The average extra yield investors demand to hold covered bonds in euros instead of government debt fell to 68 basis points, the narrowest spread since June 2008, according to Bank of America Merrill Lynch index data.
Borrowers are turning to covered bonds as a second year of negative net issuance spurs demand for the debt.
Covered securities are attractive to investors because they will be exempt from European rules requiring bondholders to help absorb bank losses. That favorable regulatory treatment is combining with a second year of negative net supply to suppress the yield premium on the secured notes over government bonds.
Does anyone know what is going on!
European Central Bank president Mario Draghi (centre) with Minister for Finance Michael Noonan and European Economic and Monetary Affairs Commissioner Olli Rehn attend an euro zone finance ministers’ meeting in Brussels on Monday. Photograph: Reuters/Francois Lenoir
The European Central Bank is failing to hit its own target for price stability. The difficulty is that the bank’s governing council may be unable to agree on effective measures, largely because of splits on national lines. That might prove very dangerous.
Give credit where credit is due. The announcement of the ECB’s Outright Monetary Transactions programme in the summer of 2012 – and the statement by Mario Draghi, its president, that the bank would do “whatever it takes” to preserve the single currency – restored confidence.
Bloodless coup
The ECB won the battle without having to fire a shot. After the announcement, yields on Italian and Spanish government bonds fell to far more tolerable levels.
But the ECB has been less successful in securing price stability. True, its target is not as unambiguous or as symmetrical as those adopted by other central banks. Its aim is to achieve inflation “below, but close to, 2 per cent over the medium term”.
Yet in the year to February 2014, headline inflation was 0.8 per cent. This is hardly close to 2 per cent. It is also highly dangerous, as is cogently argued in a blog by senior members of the IMF’s European department.
First, this low inflation has, as is to be expected, coincided with weak demand. In the fourth quarter of last year, eurozone real demand was 5 per cent below levels in the first quarter of 2008.
In Spain, real demand fell 16 per cent. In Italy, it fell 12 per cent. Even in Germany, real demand stagnated from the second quarter of 2011: this is no locomotive. The failure to offset this has made recovery of crisis-hit economies more difficult, lowered investment and created long-term unemployment. All this will deeply scar the euro zone.
Second, there is a risk the euro zone will fall into deflation.
Mr Draghi has described deflation as a situation where price level declines occur in a significant number of countries, across a significant number of goods and in a self-fulfilling way. By this definition, deflation is absent: only three countries have negative inflation and only a fifth of items in the consumer price index have fallen in price. Longer-term inflation expectations are also stable at close to 2 per cent, though short-term expectations have fallen.
Short-term view
As the IMF authors argue: “One should not take too much comfort in the fact that long-term inflation expectations are positive”.
The data indicate that, in the long term, euro zone prices are expected to rise at a healthy 2 per cent a year. But long-term inflation expectations were also positive before three bouts of deflation in Japan. It was nearer-term expectations that turned more pessimistic – leading to falls in prices and wages that enabled deflation to take hold.
Put simply, the eurozone is just one negative shock away from deflation. The cushion is far too small. When negative short-term real interest rates are needed to avoid deflation, the situation is perilous.
Third, ultra-low inflation is itself costly. This is particularly true for countries that have to restore competitiveness. If inflation in core countries is low, then inflation in crisis-hit countries must be close to zero or negative.
Angel Ubide of the Peterson Institute for International Economics notes that average inflation in surplus countries is only 1.5 per cent, against 0.6 per cent in the adjusting economies. While falling prices would improve competitiveness, they would raise the real burden of private and public debt. This might well create another round of financial stresses.
If average inflation stood at 2 per cent, with the surplus countries on (say) 3 per cent and the adjusting countries on 1 per cent, the euro zone would be in far better shape: real interest rates would be lower, the economy would be stronger and internal adjustment would be faster.
If average inflation reached 3 per cent (roughly the level the Bundesbank achieved in Germany from 1980 to 1995), it would be still better.
The ECB has allowed the euro zone to fall into a deep and entrenched slump. The bank has also allowed the supply of money and credit to stagnate. The Bundesbank used to focus on these variables because over time they can put upward pressure on activity, wages and prices. But the ECB seems to be ignoring them. It is failing to do its job.
What can be done? The aim must be to raise demand and inflation in the euro zone as a whole, particularly in surplus countries. The aim must also be to improve credit markets.
The ECB should announce a symmetrical inflation target of 2 per cent, indicating that it will henceforth view excessively low inflation as a problem no less serious than rapidly rising prices. It should implement a programme of quantitative easing, purchasing the bonds of member governments in proportion to shares in the central bank.
Finally, it should announce a longer-term refinancing operation to unblock the flow of credit to SMEs.
Difficulties arise. Large-scale purchases of the bonds of crisis-hit countries are legal but may well trigger hysteria in surplus Europe.
The ECB would probably suffer a deep internal split if it sought to adopt such a policy. That could jeopardise its political legitimacy. The fear is that the ECB may be forced to pretend that low inflation is not a threat because it cannot agree on what to do about it.
The euro zone crisis is not over. Despite the emergence of a degree of stability, the situation remains very fragile. – Copyright The Financial Times Limited 2014
The ECB may wipe out a large part of the Irish Economy
Economist Morgan Kelly’s warning that the European Central Bank is planning a “clean-up” of Irish banks will be taken seriously by government, Minister for Finance Michael Noonan has said.
In a lecture at University College Dublin, Prof Kelly said a clean up of SME bank loans by the European Central Bank may lead to large section of economy being “wiped out”.
Prof Kelly, who was the first economist to predict the likely scale of the Irish banking collapse, said the “real crisis” for the Irish economy may not yet have happened.
Deflation in Europe isn't happening -Consumer spending is up
Consumer prices grew 0.8% in February from a year earlier in the euro zone, the European Union's statistics office Eurostat said Friday, well below the ECB's target of just below 2%. But that was higher than expected, with the consensus forecast of 24 economists surveyed by The Wall Street Journal last week for a reading of 0.7%.
"February's euro-zone consumer prices figures don't change the picture of very weak price pressures in the currency union and hence don't rule out further policy action from the ECB next week," said Jonathan Loynes, chief European economist at Capital Economics.
Those policy makers who are reluctant to provide further stimulus may also be encouraged by figures released by Germany's statistics agency Friday, which showed retail sales in the euro zone's largest member rose at the fastest pace since February 2007, jumping 2.5% from the previous month.
ECB policy makers have repeatedly said they don't expect outright declines in consumer prices, known as deflation. They reject comparisons with Japan, which struggled with deflation for two decades, saying the ECB has acted more decisively than Japan did in the 1990s and that European banks are stronger.
Inflation unchanged- so looks like no ECB rate cut
Inflation is expected to be unchanged at 0.8pc this month, easing the pressure on European Central Bank boss Mario Draghi to take further action.
Economists had expected the rate to dip below 0.7pc, but the fact that it remains stable means it is less likely the ECB will reduce its main interest rate further when it meets next week.
It comes as the unemployment rate in the eurozone also remained stuck at 12pc in January.
Mr Draghi has warned of the risk of inflation getting stuck in a danger zone below 1pc, but said again on Thursday that there was clearly no deflation.
The February inflation rate was stable because lower energy costs were offset by more expensive industrial goods and services, according to Eurostat data.
"It is not a piece of cake. It is going to be hard work."-Merkel in Britain
Following a Downing Street meeting with Prime Minister David Cameron, Angela Merkel said both countries could bring in laws to restrict benefit tourism, as part of "overall European cooperation".
Mr Cameron said changes to the EU were "possible, achievable and doable".
Mrs Merkel addressed Parliament earlier what the full video https://www.youtube.com/watch?v=lmusV-7BMzM
- and later had tea with the Queen.
She also had a meeting with Mr Cameron in Downing Street, with a picture being released of the two of them chatting on the sofa in the Camerons' flat.
David Cameron and Angela Merkel
Mr Cameron is keen to negotiate changes to the UK's treaties with the EU ahead of a promised referendum on whether the country should remain in the organisation, which he wants to hold before the end of 2017.
He regards Mrs Merkel as a key figure in achieving his aim and has organised several events to welcome the German leader during her one-day visit to London, including tea with the Queen at Buckingham Palace.
At the Downing Street press conference, Mr Cameron said he and Mrs Merkel "both want to see changes in Europe".
He added that EU rules on freedom of movement needed to change to ensure people could not move from country to country to sign up for welfare payments.
Angela Merkel addressed both Houses of Parliament during her one-day visit
Mrs Merkel said the UK and Germany could pass laws to limit this problem, saying: "Where there's a will, there's a way."
She said freedom of movement was intended to allow people to work in different countries, not "having immigration into social systems".
However, speaking of changing the EU, she said: "It is not a piece of cake. It is going to be hard work."
Mrs Merkel told assembled political and business leaders: "Some expect my speech to pave the way for a fundamental reform of the European architecture which will satisfy all kinds of alleged or actual British wishes. I am afraid they are in for a disappointment.
"Others are expecting the exact opposite and they are hoping that I will deliver the clear and simple message here in London that the rest of Europe is not prepared to pay almost any price to keep Britain in the European Union. I am afraid these hopes will be dashed."'
Mrs Merkel hailed the peace and stability she said the European Union had brought, saying war between EU member states was now "inconceivable".
Mrs Merkel's speech was well received by the UK parliamentarians
She praised the "unparalleled success" of the EU free market - and the freedoms she said European integration had delivered - but stressed that "we need to change the political shape of the EU in keeping with the times".
She told the UK's gathered political leaders the SU had to become stronger, saying: "In order to attain this goal we need a strong United Kingdom with a strong voice inside the European Union.
"If we have that, we will be able to make the necessary changes for the benefit of all."
The Guardian reported on Wednesday that Berlin was prepared to offer "limited opt-outs" to the UK over its future compliance with existing EU directives and to make sure some other regulations were more flexibly enforced.
The newspaper said it was a sign of the lengths that Germany was willing to go to to ensure the UK remained a member of the EU amid fears in Europe that a referendum could lead to British withdrawal.
But BBC Berlin Correspondent Stephen Evans said sources close to Mrs Merkel were playing down expectations of new proposals for the kind of changes British Conservatives wanted to see.
Although not an official state visit - Mrs Merkel is not head of state - the trip has been planned for months, with both governments aware of its political significance at a time of looming change in Europe.
Mr Cameron has said that if the Conservatives win the 2015 election, he will seek to renegotiate the terms of the UK's membership of the European Union and put the outcome to an in-out referendum of the British people in 2017.
But he faces a battle to convince leaders of other EU member states to agree to the treaty changes he will need, with French President Francois Hollande recently telling the prime minister, on a one-day visit to the UK, that it was "not a priority".
The leader of Mr Cameron's junior coalition partners, the Liberal Democrat Deputy Prime Minister Nick Clegg, and opposition leader Ed Miliband, who both oppose calls for a referendum and who have warned that Conservative calls for a root-and-branch renegotiation will alienate EU leaders, also held separate meetings with Mrs Merkel.
I don't think we should have actually done that
Irelands being pinned to the collar by the ECB to get rid the bonds they issued as part of their prom note last year due to the fact that the ECB are worried €25 billion of prom notes into sovereign debt equated to monetary financing, something that is forbidden by article 123 of the EU Treaty. The Central Bank of Ireland agreed last year to sell the bonds “but only where such a sale is not disruptive to financial stability”. The weighted average life of the long-term government bonds is 34 to 35 years, compared to seven or eight years for the promissory notes. ECB chief Mario Draghi said at the time that while the ECB had taken note of the transaction it would be reviewing the arrangement as part of its monitoring of monetary financing in euro zone countries.
But our banks are different
The ECB determination to subject the euro zone's largest banks to the same, rigorous checks is being tested, with countries lobbying for their banks to be treated differently and lenders asking for their workload to be eased.
Almost two weeks after the ECB published a 285 page manual spelling out how it will examine banks' trillions of euros of assets, lenders in Germany and Spain are leading the charge for special treatment, while banks across the eurozone have asked for changes to the process to make it less onerous.
The central bank is carrying out the wide-ranging tests so it can start with a clean sheet when it becomes the euro zone's banking supervisor in November. The tests are designed to banish lingering investor doubts about the health of the region's banks that have kept their valuations consistently below U.S. peers.
Give us back the cash lads.You didn't think it was a handout.
Banks will return 18.90 billion euros (£15.79 billion) in crisis loans to the European Central Bank next week, a much larger sum than expected that will keep up the drain of extra cash out of the euro zone financial system.
The amount banks will repay on March 26 is more than this week's repayments of 10.075 billion euros and is also far above the 7 billion forecast in a Reuters poll.
To help lenders ride out funding constraints, the ECB lent banks more than one trillion euros in three-year loans during the euro zone's debt crisis, in December 2011 and February 2012. Since January of last year, banks have repaid more than half of those loans.
The speed with which banks have been repaying the three-year loans has picked up over recent weeks again as confidence returns and banks start to rely less on central bank funding.
Banks seem keen to offload their LTROs to shape up their balance sheets ahead of the ECB's forthcoming asset review.
With banks repaying ECB crisis loans, the amount of excess liquidity - the amount of money banks have beyond what they need for their day-to-day operations - is falling.
It stood at 122 billion euros on Friday. Excess liquidity peaked in early 2012 at around 800 billion euros.
On Friday, the ECB said 12 banks would repay 6.411 billion euros from the first LTRO on March 26, and 15 banks would pay back 12.498 billion from the second LTRO.
(Reporting by Frankfurt newsroom)(Reuters)
Investor confidence up but only because there is more of us to invest in.
The eurozone's current account surplus grew to 25.3 billion euros ($35 billion) in January, European Central Bank data showed Friday, incorporating new eurozone member Latvia for the first time.
The monthly figure compared to a surplus of 20 billion euros for December, according to revised data.
The current account on the balance of payments, which includes payments for imports and exports in both goods and services plus all other current transfers, is a closely tracked indicator of the ability of a country or area to pay its way in the world.
It is crucial for the long-term confidence of investors and trading partners, and an important factor in the value of a currency, in this case the euro, on the foreign exchange market.
Over the 12 months to January, the current account showed a surplus of 227.9 billion euros, compared with a surplus of 135.4 billion euros a year earlier, the data showed.
We are not Japan
Euro-area inflation unexpectedly slowed in February, heaping pressure on the European Central Bank (ECB) to defend the region against falling prices.
The annual inflation rate in the 18 countries sharing the euro slowed to 0.7pc in February from 0.8pc in January, revised data from the EU's statistics office Eurostat showed.
This was the lowest annual rate of growth in four years, slowing down to the same pace that triggered a surprise interest rate cut by the ECB in November.
The latest figures pile yet more pressure on the central bank which has declined, thus far, to act.
A meeting of its Governing Council on March 6 decided to keep the benchmark interest rate at 0.25pc, still a record low, rather than drop it to zero.
Low interest rates encourage consumers to spend rather than save, pushing up demand and thus prices.
Four eurozone countries recorded negative annual inflation rates during the month – Portugal and Slovakia saw deflation of -0.1pc, Greece had -0.9pc and Cyprus saw annual deflation of -1.3pc.
The eurozone's rate of inflation has now been below 1pc for five months.
The ECB aims to keep inflation just below 2pc and has blamed the strength of the euro for helping to keep prices subdued. It expects inflation to only pick up slowly, to 1pc this year and 1.5pc in 2016.
The euro fell in reaction to yesterday's data, dipping against the dollar and paring gains against the yen. Yet the ECB considers the risk of eurozone deflation as "quite limited", its president Mario Draghi said last Thursday.
He rejected comparisons with Japan's experience of deflation which became so entrenched that companies and households held off on spending on expectations of lower prices ahead, leading to two decades of economic stagnation.
Mr Draghi did say, however, that the bank had been preparing additional policy steps to guard against possible deflation, and that the longer inflation remained low, the higher was the probability of deflationary risks emerging.
Also speaking on the matter in recent days was Bundesbank chief Jens Weidmann, who repeated the view that the risk of widespread deflation in the eurozone was very limited, adding that policymakers should not overload monetary policy to haul the bloc out of crisis.
Analysts don't expect action unless the situation deteriorates further.
"The downward revision to the February inflation figures is unlikely to be enough to trigger further near-term monetary easing," said Martin van Vliet, senior economist at ING.
"This will also require a deterioration of the activity and or a further significant strengthening of the euro."
Inflation could be "the new normal", he added.
"Today's CPI figures are a clear reminder that low inflation may have become the new normal for the eurozone – which certainly won't make it easy for some countries to reduce their debt overhangs," Mr Van Vliet said.
(Additional reporting by Bloomberg and Reuters)
German inflation retreats further in February
German inflation dropped further in February as energy costs slumped due to a mild winter. Although the rate fell for the 3rd month, there’s neither reason for upside nor downside inflation worries, economists say.
Economists from Germany's Institute for the Global Economy (IfW) have predicted a sharp rise in inflation for later this year.
Using the European Central Bank's (ECB) so-called Harmonized Index of Consumer Prices (HICP) the German inflation rate came in even lower with just 1 percent. The rate contrasts sharply with a 2-percent inflation goal which the ECB considers as desirable with regard to price stability.
In February, the cost of living in Germany rose by 1.2 percent year-on-year, slumping from an annual rate of 1.3 percent in January and 1.4 percent in December 201the German Federal Statistics Office, Destatis, announced on Friday.
This was the lowest inflation rate in Germany since August 2010, the agency said, caused byretreating prices for oil-based products in the course of a mild winter.
Prices for heating oil, for example, had fallen 8.7 percent compared with February 2013, while car fuels dropped 6.3 percent over the year, Destatis said.
Significantly higher prices had to be paid for food, the data showed, which rose 3.5 percent overall. Butter was a staggering 20 percent more expensive than last year, while fruit and vegetables climbed 3.1 percent and 5.1 percent respectively.
In a growth report released this week, they predicted an inflation surge to 2.5 percent as a nascent economic recovery this year will peak in the first half of 2015.
uhe/hc (AFP, Reuters, dpa)
I don't think we should have actually done that
Irelands being pinned to the collar by the ECB to get rid the bonds they issued as part of their prom note last year due to the fact that the ECB are worried €25 billion of prom notes into sovereign debt equated to monetary financing, something that is forbidden by article 123 of the EU Treaty. The Central Bank of Ireland agreed last year to sell the bonds “but only where such a sale is not disruptive to financial stability”. The weighted average life of the long-term government bonds is 34 to 35 years, compared to seven or eight years for the promissory notes. ECB chief Mario Draghi said at the time that while the ECB had taken note of the transaction it would be reviewing the arrangement as part of its monitoring of monetary financing in euro zone countries.
But our banks are different
The ECB determination to subject the euro zone's largest banks to the same, rigorous checks is being tested, with countries lobbying for their banks to be treated differently and lenders asking for their workload to be eased.
Almost two weeks after the ECB published a 285 page manual spelling out how it will examine banks' trillions of euros of assets, lenders in Germany and Spain are leading the charge for special treatment, while banks across the eurozone have asked for changes to the process to make it less onerous.
The central bank is carrying out the wide-ranging tests so it can start with a clean sheet when it becomes the euro zone's banking supervisor in November. The tests are designed to banish lingering investor doubts about the health of the region's banks that have kept their valuations consistently below U.S. peers.
I don't think we should have actually done that
Irelands being pinned to the collar by the ECB to get rid the bonds they issued as part of their prom note last year due to the fact that the ECB are worried €25 billion of prom notes into sovereign debt equated to monetary financing, something that is forbidden by article 123 of the EU Treaty. The Central Bank of Ireland agreed last year to sell the bonds “but only where such a sale is not disruptive to financial stability”. The weighted average life of the long-term government bonds is 34 to 35 years, compared to seven or eight years for the promissory notes. ECB chief Mario Draghi said at the time that while the ECB had taken note of the transaction it would be reviewing the arrangement as part of its monitoring of monetary financing in euro zone countries.But our banks are different
The ECB determination to subject the euro zone's largest banks to the same, rigorous checks is being tested, with countries lobbying for their banks to be treated differently and lenders asking for their workload to be eased.
Almost two weeks after the ECB published a 285 page manual spelling out how it will examine banks' trillions of euros of assets, lenders in Germany and Spain are leading the charge for special treatment, while banks across the eurozone have asked for changes to the process to make it less onerous.Give us back the cash lads.You didn't think it was a handout.
Banks will return 18.90 billion euros (£15.79 billion) in crisis loans to the European Central Bank next week, a much larger sum than expected that will keep up the drain of extra cash out of the euro zone financial system.
The amount banks will repay on March 26 is more than this week's repayments of 10.075 billion euros and is also far above the 7 billion forecast in a Reuters poll.
To help lenders ride out funding constraints, the ECB lent banks more than one trillion euros in three-year loans during the euro zone's debt crisis, in December 2011 and February 2012. Since January of last year, banks have repaid more than half of those loans.
The speed with which banks have been repaying the three-year loans has picked up over recent weeks again as confidence returns and banks start to rely less on central bank funding.
Banks seem keen to offload their LTROs to shape up their balance sheets ahead of the ECB's forthcoming asset review.
With banks repaying ECB crisis loans, the amount of excess liquidity - the amount of money banks have beyond what they need for their day-to-day operations - is falling.
It stood at 122 billion euros on Friday. Excess liquidity peaked in early 2012 at around 800 billion euros.
On Friday, the ECB said 12 banks would repay 6.411 billion euros from the first LTRO on March 26, and 15 banks would pay back 12.498 billion from the second LTRO.
(Reporting by Frankfurt newsroom)(Reuters)
Investor confidence up but only because there is more of us to invest in.
The eurozone's current account surplus grew to 25.3 billion euros ($35 billion) in January, European Central Bank data showed Friday, incorporating new eurozone member Latvia for the first time.
The monthly figure compared to a surplus of 20 billion euros for December, according to revised data.
The current account on the balance of payments, which includes payments for imports and exports in both goods and services plus all other current transfers, is a closely tracked indicator of the ability of a country or area to pay its way in the world. It is crucial for the long-term confidence of investors and trading partners, and an important factor in the value of a currency, in this case the euro, on the foreign exchange market.
Over the 12 months to January, the current account showed a surplus of 227.9 billion euros, compared with a surplus of 135.4 billion euros a year earlier, the data showed.
We are not Japan
Euro-area inflation unexpectedly slowed in February, heaping pressure on the European Central Bank (ECB) to defend the region against falling prices.
The annual inflation rate in the 18 countries sharing the euro slowed to 0.7pc in February from 0.8pc in January, revised data from the EU's statistics office Eurostat showed.
This was the lowest annual rate of growth in four years, slowing down to the same pace that triggered a surprise interest rate cut by the ECB in November.
The latest figures pile yet more pressure on the central bank which has declined, thus far, to act.
A meeting of its Governing Council on March 6 decided to keep the benchmark interest rate at 0.25pc, still a record low, rather than drop it to zero.
Low interest rates encourage consumers to spend rather than save, pushing up demand and thus prices.
Four eurozone countries recorded negative annual inflation rates during the month – Portugal and Slovakia saw deflation of -0.1pc, Greece had -0.9pc and Cyprus saw annual deflation of -1.3pc.
The eurozone's rate of inflation has now been below 1pc for five months.
The ECB aims to keep inflation just below 2pc and has blamed the strength of the euro for helping to keep prices subdued. It expects inflation to only pick up slowly, to 1pc this year and 1.5pc in 2016.
The euro fell in reaction to yesterday's data, dipping against the dollar and paring gains against the yen. Yet the ECB considers the risk of eurozone deflation as "quite limited", its president Mario Draghi said last Thursday.
He rejected comparisons with Japan's experience of deflation which became so entrenched that companies and households held off on spending on expectations of lower prices ahead, leading to two decades of economic stagnation.
Mr Draghi did say, however, that the bank had been preparing additional policy steps to guard against possible deflation, and that the longer inflation remained low, the higher was the probability of deflationary risks emerging.
Also speaking on the matter in recent days was Bundesbank chief Jens Weidmann, who repeated the view that the risk of widespread deflation in the eurozone was very limited, adding that policymakers should not overload monetary policy to haul the bloc out of crisis.
Analysts don't expect action unless the situation deteriorates further.
"The downward revision to the February inflation figures is unlikely to be enough to trigger further near-term monetary easing," said Martin van Vliet, senior economist at ING.
"This will also require a deterioration of the activity and or a further significant strengthening of the euro."
Inflation could be "the new normal", he added.
"Today's CPI figures are a clear reminder that low inflation may have become the new normal for the eurozone – which certainly won't make it easy for some countries to reduce their debt overhangs," Mr Van Vliet said.
(Additional reporting by Bloomberg and Reuters)
German inflation retreats further in February
German inflation dropped further in February as energy costs slumped due to a mild winter. Although the rate fell for the 3rd month, there’s neither reason for upside nor downside inflation worries, economists say.
Using the European Central Bank's (ECB) so-called Harmonized Index of Consumer Prices (HICP) the German inflation rate came in even lower with just 1 percent. The rate contrasts sharply with a 2-percent inflation goal which the ECB considers as desirable with regard to price stability.
In February, the cost of living in Germany rose by 1.2 percent year-on-year, slumping from an annual rate of 1.3 percent in January and 1.4 percent in December 201the German Federal Statistics Office, Destatis, announced on Friday.
This was the lowest inflation rate in Germany since August 2010, the agency said, caused byretreating prices for oil-based products in the course of a mild winter.
Prices for heating oil, for example, had fallen 8.7 percent compared with February 2013, while car fuels dropped 6.3 percent over the year, Destatis said.
Significantly higher prices had to be paid for food, the data showed, which rose 3.5 percent overall. Butter was a staggering 20 percent more expensive than last year, while fruit and vegetables climbed 3.1 percent and 5.1 percent respectively.
In a growth report released this week, they predicted an inflation surge to 2.5 percent as a nascent economic recovery this year will peak in the first half of 2015.
uhe/hc (AFP, Reuters, dpa)
Banks make hay as the need for debt grows
Bank of Ireland and CaixaBank are among banks selling covered bonds in Europe after yield premiums on the secured debt fell to the lowest point in almost six years.
Bank of Ireland said yesterday it had raised €750 million in five-year debt in an exercise it said was close to three times oversubscribed.
More than 140 international investors took up the debt, the bank said, with the issue priced 80 basis points above five-year mid-swaps
“The covered bond transaction was issued by Bank of Ireland Mortgage Bank under the Irish Asset Covered Securities legislation,” the bank said. The offering, yielding 1.82 per cent, is backed by a pool of Irish residential mortgages.
Separately, Spain’s third- largest lender is selling €1 billion of bonds maturing in 2024, according to people familiar with the deal.
The average extra yield investors demand to hold covered bonds in euros instead of government debt fell to 68 basis points, the narrowest spread since June 2008, according to Bank of America Merrill Lynch index data.
Borrowers are turning to covered bonds as a second year of negative net issuance spurs demand for the debt.
Covered securities are attractive to investors because they will be exempt from European rules requiring bondholders to help absorb bank losses. That favorable regulatory treatment is combining with a second year of negative net supply to suppress the yield premium on the secured notes over government bonds.
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| European Central Bank president Mario Draghi (centre) with Minister for Finance Michael Noonan and European Economic and Monetary Affairs Commissioner Olli Rehn attend an euro zone finance ministers’ meeting in Brussels on Monday. Photograph: Reuters/Francois Lenoir |
The European Central Bank is failing to hit its own target for price stability. The difficulty is that the bank’s governing council may be unable to agree on effective measures, largely because of splits on national lines. That might prove very dangerous.
Give credit where credit is due. The announcement of the ECB’s Outright Monetary Transactions programme in the summer of 2012 – and the statement by Mario Draghi, its president, that the bank would do “whatever it takes” to preserve the single currency – restored confidence.
Bloodless coup
The ECB won the battle without having to fire a shot. After the announcement, yields on Italian and Spanish government bonds fell to far more tolerable levels.
But the ECB has been less successful in securing price stability. True, its target is not as unambiguous or as symmetrical as those adopted by other central banks. Its aim is to achieve inflation “below, but close to, 2 per cent over the medium term”.
Yet in the year to February 2014, headline inflation was 0.8 per cent. This is hardly close to 2 per cent. It is also highly dangerous, as is cogently argued in a blog by senior members of the IMF’s European department.
First, this low inflation has, as is to be expected, coincided with weak demand. In the fourth quarter of last year, eurozone real demand was 5 per cent below levels in the first quarter of 2008.
In Spain, real demand fell 16 per cent. In Italy, it fell 12 per cent. Even in Germany, real demand stagnated from the second quarter of 2011: this is no locomotive. The failure to offset this has made recovery of crisis-hit economies more difficult, lowered investment and created long-term unemployment. All this will deeply scar the euro zone.
Second, there is a risk the euro zone will fall into deflation.
Mr Draghi has described deflation as a situation where price level declines occur in a significant number of countries, across a significant number of goods and in a self-fulfilling way. By this definition, deflation is absent: only three countries have negative inflation and only a fifth of items in the consumer price index have fallen in price. Longer-term inflation expectations are also stable at close to 2 per cent, though short-term expectations have fallen.
Short-term view
As the IMF authors argue: “One should not take too much comfort in the fact that long-term inflation expectations are positive”.
The data indicate that, in the long term, euro zone prices are expected to rise at a healthy 2 per cent a year. But long-term inflation expectations were also positive before three bouts of deflation in Japan. It was nearer-term expectations that turned more pessimistic – leading to falls in prices and wages that enabled deflation to take hold.
Put simply, the eurozone is just one negative shock away from deflation. The cushion is far too small. When negative short-term real interest rates are needed to avoid deflation, the situation is perilous.
Third, ultra-low inflation is itself costly. This is particularly true for countries that have to restore competitiveness. If inflation in core countries is low, then inflation in crisis-hit countries must be close to zero or negative.
Angel Ubide of the Peterson Institute for International Economics notes that average inflation in surplus countries is only 1.5 per cent, against 0.6 per cent in the adjusting economies. While falling prices would improve competitiveness, they would raise the real burden of private and public debt. This might well create another round of financial stresses.
If average inflation stood at 2 per cent, with the surplus countries on (say) 3 per cent and the adjusting countries on 1 per cent, the euro zone would be in far better shape: real interest rates would be lower, the economy would be stronger and internal adjustment would be faster.
If average inflation reached 3 per cent (roughly the level the Bundesbank achieved in Germany from 1980 to 1995), it would be still better.
The ECB has allowed the euro zone to fall into a deep and entrenched slump. The bank has also allowed the supply of money and credit to stagnate. The Bundesbank used to focus on these variables because over time they can put upward pressure on activity, wages and prices. But the ECB seems to be ignoring them. It is failing to do its job.
What can be done? The aim must be to raise demand and inflation in the euro zone as a whole, particularly in surplus countries. The aim must also be to improve credit markets.
The ECB should announce a symmetrical inflation target of 2 per cent, indicating that it will henceforth view excessively low inflation as a problem no less serious than rapidly rising prices. It should implement a programme of quantitative easing, purchasing the bonds of member governments in proportion to shares in the central bank.
Finally, it should announce a longer-term refinancing operation to unblock the flow of credit to SMEs.
Difficulties arise. Large-scale purchases of the bonds of crisis-hit countries are legal but may well trigger hysteria in surplus Europe.
The ECB would probably suffer a deep internal split if it sought to adopt such a policy. That could jeopardise its political legitimacy. The fear is that the ECB may be forced to pretend that low inflation is not a threat because it cannot agree on what to do about it.
The euro zone crisis is not over. Despite the emergence of a degree of stability, the situation remains very fragile. – Copyright The Financial Times Limited 2014
Economist Morgan Kelly’s warning that the European Central Bank is planning a “clean-up” of Irish banks will be taken seriously by government, Minister for Finance Michael Noonan has said.
In a lecture at University College Dublin, Prof Kelly said a clean up of SME bank loans by the European Central Bank may lead to large section of economy being “wiped out”.
Prof Kelly, who was the first economist to predict the likely scale of the Irish banking collapse, said the “real crisis” for the Irish economy may not yet have happened.
"February's euro-zone consumer prices figures don't change the picture of very weak price pressures in the currency union and hence don't rule out further policy action from the ECB next week," said Jonathan Loynes, chief European economist at Capital Economics.Those policy makers who are reluctant to provide further stimulus may also be encouraged by figures released by Germany's statistics agency Friday, which showed retail sales in the euro zone's largest member rose at the fastest pace since February 2007, jumping 2.5% from the previous month.
ECB policy makers have repeatedly said they don't expect outright declines in consumer prices, known as deflation. They reject comparisons with Japan, which struggled with deflation for two decades, saying the ECB has acted more decisively than Japan did in the 1990s and that European banks are stronger.
It comes as the unemployment rate in the eurozone also remained stuck at 12pc in January.
Mr Draghi has warned of the risk of inflation getting stuck in a danger zone below 1pc, but said again on Thursday that there was clearly no deflation.
The February inflation rate was stable because lower energy costs were offset by more expensive industrial goods and services, according to Eurostat data.
Mr Cameron said changes to the EU were "possible, achievable and doable".
Mrs Merkel addressed Parliament earlier what the full video https://www.youtube.com/watch?v=lmusV-7BMzM
- and later had tea with the Queen.
She also had a meeting with Mr Cameron in Downing Street, with a picture being released of the two of them chatting on the sofa in the Camerons' flat.
Mr Cameron is keen to negotiate changes to the UK's treaties with the EU ahead of a promised referendum on whether the country should remain in the organisation, which he wants to hold before the end of 2017.
He regards Mrs Merkel as a key figure in achieving his aim and has organised several events to welcome the German leader during her one-day visit to London, including tea with the Queen at Buckingham Palace.
At the Downing Street press conference, Mr Cameron said he and Mrs Merkel "both want to see changes in Europe".
He added that EU rules on freedom of movement needed to change to ensure people could not move from country to country to sign up for welfare payments.
Angela Merkel addressed both Houses of Parliament during her one-day visit
Mrs Merkel said the UK and Germany could pass laws to limit this problem, saying: "Where there's a will, there's a way."
She said freedom of movement was intended to allow people to work in different countries, not "having immigration into social systems".
However, speaking of changing the EU, she said: "It is not a piece of cake. It is going to be hard work."
Mrs Merkel told assembled political and business leaders: "Some expect my speech to pave the way for a fundamental reform of the European architecture which will satisfy all kinds of alleged or actual British wishes. I am afraid they are in for a disappointment.
"Others are expecting the exact opposite and they are hoping that I will deliver the clear and simple message here in London that the rest of Europe is not prepared to pay almost any price to keep Britain in the European Union. I am afraid these hopes will be dashed."'
Mrs Merkel hailed the peace and stability she said the European Union had brought, saying war between EU member states was now "inconceivable".
Mrs Merkel's speech was well received by the UK parliamentarians
She told the UK's gathered political leaders the SU had to become stronger, saying: "In order to attain this goal we need a strong United Kingdom with a strong voice inside the European Union.
"If we have that, we will be able to make the necessary changes for the benefit of all."
The Guardian reported on Wednesday that Berlin was prepared to offer "limited opt-outs" to the UK over its future compliance with existing EU directives and to make sure some other regulations were more flexibly enforced.
The newspaper said it was a sign of the lengths that Germany was willing to go to to ensure the UK remained a member of the EU amid fears in Europe that a referendum could lead to British withdrawal.
But BBC Berlin Correspondent Stephen Evans said sources close to Mrs Merkel were playing down expectations of new proposals for the kind of changes British Conservatives wanted to see.
Although not an official state visit - Mrs Merkel is not head of state - the trip has been planned for months, with both governments aware of its political significance at a time of looming change in Europe.
Mr Cameron has said that if the Conservatives win the 2015 election, he will seek to renegotiate the terms of the UK's membership of the European Union and put the outcome to an in-out referendum of the British people in 2017.
But he faces a battle to convince leaders of other EU member states to agree to the treaty changes he will need, with French President Francois Hollande recently telling the prime minister, on a one-day visit to the UK, that it was "not a priority".
The leader of Mr Cameron's junior coalition partners, the Liberal Democrat Deputy Prime Minister Nick Clegg, and opposition leader Ed Miliband, who both oppose calls for a referendum and who have warned that Conservative calls for a root-and-branch renegotiation will alienate EU leaders, also held separate meetings with Mrs Merkel.
Germany is continuing to rely a lot on its export sector for growth.
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No QE from the ECB thinks market traders but Japanese Deflation is looming
The European Central Bank will not begin outright quantitative easing (QE) this year, most euro money-market traders polled by Reuters said on Monday.
But the remaining five respondents in the poll said the central bank would undertake QE by ending its sterilisation operations under the Securities Markets Programme (SMP).Ukraines Credit Rating lowered with uncertainty in Kiev
Ratings agency Standard & Poor’s yesterday cut Ukraine’s sovereign rating for the second time in three weeks, saying the political situation in the country has deteriorated substantially and seeing an increased risk of default.
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| In Ukraine's Capital Kiev |
S&P lowered its long-term foreign currency sovereign credit rating on Ukraine by one notch to CCC and gave it a negative outlook, reflecting the view that Ukraine has yet to secure funding to avoid default.
“The downgrade reflects our view that the political situation in Ukraine has deteriorated substantially. We believe that this raises uncertainty regarding the continued provision of Russian financial support over the course of 2014, and puts the government’s capability to meet debt service at increasing risk,” the ratings agency said in a statement.
S&P said the negative outlook meant that there is at least a one-in-three chance that it could lower Ukraine’s ratings over the next 12 months.
Reuters
Deflation in Europe is no longer a blip in the system
Weakness in euro zone price pressures has extended to the medium-term, the time horizon the European Central Bank looks at when deciding on policy, ECB policymaker
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Peter Praet
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Peter Praet said.
Praet, who holds the powerful economics portfolio on the ECB's Executive Board, told Portuguese newspaper Expresso: "If our mandate is at risk, we will act without hesitation".
The ECB's mandate is to deliver price stability, which it defines as inflation of close to but below 2 percent over the medium-term. Euro zone inflation is running at just 0.7 percent - well below the target.
"We do not see a risk of deflation, but we admit that the pressures on prices are weak, and that this weakness in price development is extending to the medium-term," Praet said in the newspaper interview, conducted on Feb. 18.
The ECB holds its next policy meeting on March 6.
"When we issued our forward guidance last November, we communicated that we will continue to have a very loose monetary policy and we will do whatever is necessary to fulfill our mandate," Praet added.
"We are therefore very aware of what you are referring to, i.e. that low price pressures have extended to the medium term. Let's make this assessment in March."
Bonds are much more fun than loans
Irish corporate borrowers tapped the bond market for €5.5bn of new debt last year,15pc more than 2012.
The increase reflects a strong appetite among bond investors but also banks' reduced role in the lending market, according to rating agency Fitch.
As a class, corporate borrowers exclude the likes of the State and the banks but include trading businesses like Eircom, Ardagh Group and Bord Gais which all tapped the market last year.
Irish corporates raised €5.52bn on the bond market last year, up from €4.793bn in 2012, according to Fitch which cited data from Dealogic.
In Spain the numbers are even more stark, there corporate bond issuance surged by 45pc in 2013, according to the same research.
Across the euro area periphery of Greece, Ireland, Italy, Portugal and Spain corporate bond deals were up 22%.
However in Europe as a whole, corporates raised a total of €446 bn in bonds in 2013, down 6pc on the prior year.
In the peripheral countries, bond deals accounted for 43pc of all new debt raised by corporates in 2013, a market traditionally dominated by the banks.
Stress test of the banks
One factor in that may be the euro-wide stress testing of banks due to take place in the second half of this year.
"ECB stress tests will continue to suppress bank risk appetite for lending," the Fitch agency said.
Investors' hunt for yields in 2013 was also a big factor in the markets. For example Eircom was able to borrow €350m on the bond market by offering a yield or interest rate of 9.25%.
The deal turned heads because it came within a year of the company entering examinership and "burning" previous bondholders.
Unlike bank loans bond debt is generally non-amortising – meaning the debt is repaid on an interest-only basis with a single repayment of principal at the end of the life of the deal.
In many cases it makes bond debt less costly to service on an annual basis than bank loans even if the official interest rate is higher.
Growth in the Eurozone Gains Traction
Growth in the euro zone gained traction, with the bloc expanding by 0.3 per cent in the final quarter, after 0.1 per cent in the previous three months, beating analysts’ forecasts of a 0.2 per cent rise.
Both of the region’s largest economies, France and Germany, expanded by more than analysts had expected, as did the Netherlands, which grew by a brisk 0.7 per cent.
More heartening still were signs the stronger performance of some of the euro zone’s core economies in recent quarters had spread to the region’s crisis-engulfed periphery.
The Italian economy, the euro zone’s third-largest, grew by 0.1 per cent, in line with expectations, recording its first quarterly expansion since the spring 2011. Portugal smashed expectations, expanding by 0.5 per cent against forecasts of a 0.1 per cent rise. Spain grew by 0.3 per cent, according to figures released last month.
Evelyn Herrmann, economist at BNP Paribas, said: “This is the third consecutive quarter of growth in the euro zone, but comes with the additional charm of much broader-based growth spreading beyond the core-countries.
“Effectively, it was the first time since the first quarter of 2011 that all big five euro zone economies posted positive quarterly growth rates.”
– (Copyright The Financial Times Limited 2014)
Growth in the euro zone gained traction, with the bloc expanding by 0.3 per cent in the final quarter, after 0.1 per cent in the previous three months, beating analysts’ forecasts of a 0.2 per cent rise.
The rise of the East
Eastern Europe’s economic growth picked up pace last quarter as a recovery strengthened in the euro area, which buys the bulk of the region’s locally made goods, and consumers spent more.
Romania
Romania’s expansion beat forecasts by the biggest margin as gross domestic product jumped 5.2 percent . On average, GDP growth in Bulgaria, the Czech Republic, Hungary, Poland, Romania and Slovakia quickened to 2.5 percent, the fastest expansion in 18 months, from 1.8 percent in the third quarter.
The better-than-estimated performance prompted Capital to raise its GDP-growth forecasts for the Czech Republic and Hungary, both to 2.5 percent from 2 percent previously, and for Romania by 1 percentage point to 3 percent.
The Romanian leu is the third-best performer against the euro and the dollar in the last month among 24 developing-nation currencies tracked by Bloomberg. The Czech koruna and the Polish zloty are both in the top 10 for that period.
The pace of growth in the European Union’s second-poorest member was the quickest since 2008 on higher orders for cars produced in the country by Renault SA (RNO) and Ford Motor Co
Poland
Poland’s economy also accelerated for a third quarter, though less quickly than economists estimated, the only east European country among six that reported GDP today to trail forecasts.
The central bank’s relaxed monetary policy may help GDP grow at more than twice last year’s 1.6 percent in 2014, according to Cezary Chrapek, an economist at Citigroup Inc.’s Polish unit.
Czech Republic
The Czech economy expanded at the fastest pace in more than six years in the fourth quarter after the central bank intervened to weaken the koruna, with GDP rising 1.6 percent from the previous three months after advancing 0.2 percent between July and September. The country’s two-week-old cabinet is seeking to increase spending to further help the rebound.
Bulgaria
Bulgaria’s economy expanded 1 percent from the previous year.
Hungary
Hungarian GDP rose 2.7 percent from a year earlier in the fourth quarter.
Eastern Europe’s economic growth picked up pace last quarter as a recovery strengthened in the euro area, which buys the bulk of the region’s locally made goods, and consumers spent more.
German's see the OMT as Constitutional
Germany's Constitutional Court will refer a complaint against the European Central Bank's flagship bond-buying plan to the European Court, removing the prospect of it curbing the programme.
The court said there was good reason to think the scheme "exceeds the European Central Bank's monetary policy mandate and thus infringes the powers of the member states, and that it violates the prohibition of monetary financing of the budget".
However, it said in a statement that it "also considers it possible that if the OMT decision were interpreted restrictively" it could conform to the law.
Germany's Constitutional Court will refer a complaint against the European Central Bank's flagship bond-buying plan to the European Court, removing the prospect of it curbing the programme.
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| German Chancellor Angela Merkel and ECB President Mario Draghi |
Legally, the German court has to offer its own preliminary interpretation of the case to the European Court. It in turn will use that interpretation as the initial basis for evaluation.
The ECB's Outright Monetary Transactions (OMT) programme, announced by ECB President Mario Draghi in September 2012 at the height of the sovereign debt crisis and as yet unused, is widely credited with stabilising the euro.
Any potential curb on it would alarm investors.
The OMT's power lies in its promise of potentially unlimited sovereign bond purchases - a prospect that provided the necessary backstop to calm fears the euro would fall apart.
The euro fell to a session low against the dollar in response while German government bond futures rose to day's highs and Italian bond yields reversed earlier falls, suggesting some disquiet about the court's decision.
The central bank has been considering the possibility of suspending operations to soak up money it spent buying sovereign bonds during the euro zone's debt crisis under its now-terminated Securities Markets Programme.
Ending the so-called "sterilisation" operations would inject about 175 billion euros ($237.99 billion) of liquidity into the financial system, which would help ease strains in euro zone money markets.
ECB keeps the taps flowing as it braces itself for Deflation
The European Central Bank left interest rates unchanged, while ECB President Mario Draghi said monetary authorities will not consider loosening policy to stave off deflationary pressures for now.
The ECB voted to leave interest rates across the eurozone unchanged at a record-low 0.25%, but the common currency strengthened after ECB President Mario Draghi did not outline any new measures to shore up slowing inflation.
Draghi said the ECB sees a protracted period of low inflation, not full blown deflation, and reiterated that the bank is “monitoring developments closely" and won't likely make any decisions until the bank reviews more economic indicators, which markets interpreted as March at the earliest.
Deflationary concerns arose last week after data revealed that the annual rate of inflation slowed to 0.7% in January.
The European Central Bank left interest rates unchanged, while ECB President Mario Draghi said monetary authorities will not consider loosening policy to stave off deflationary pressures for now.
Deflation looms as unemployment remains high
Euro zone consumer price inflation dropped in January, bucking market expectations for a rise and providing a possible trigger for further easing by the European Central Bank to sustain a fragile recovery and ward against deflation.
Euro zone consumer price inflation dropped in January, bucking market expectations for a rise and providing a possible trigger for further easing by the European Central Bank to sustain a fragile recovery and ward against deflation.
| Mario Draghi |
Consumer price inflation in the 18-country bloc fell to 0.7 percent year-on-year in the first month of 2014, down from 0.8 percent in December, data from the EU's statistics office Eurostat showed on Friday.
Inflation last touched the 0.7 percent level in October, which was the lowest inflation reading for the single currency area in nearly four years.
The euro, reacting to the data, fell to a 10-day low of $1.35175 from around $1.3540. It fell more sharply against the yen, dropping to a two-month low of 138.53 yen, down from 138.88.
The drop in January was prompted by a 1.2 percent fall in the highly volatile price of energy, which was flat in the previous month. The cost of food, alcohol and tobacco products were up by 1.7 percent on the year.
Although ECB President Mario Draghi said in January deflation was not threatening the euro zone, a number of countries are already suffering deflation and the International Monetary Fund warned deflation was a potential risk.
The ECB, which cut its key interest rate to a record low of 0.25 percent in November, is expected to stay put until mid-2015 unless money market rates rise and the euro strengthens.
In Germany, Europe's largest economy, consumer prices fell by 0.7 percent on the month, keeping the annual inflation rate steady at 1.2 percent, with both figures coming below expectations.
A separate Eurostat data release showed on Friday that the unemployment rate in the euro zone was stuck near a record high at 12 percent for the third month running. It is widely expected to ease only very modestly in the coming quarters.
Some 19 million people are out of work in the euro zone, slowing the uneven recovery as Europeans remains cautious and thrifty, proving only a limited boost to economic growth.
Industry up in Europe but who is buying?
Eurozone seasonally adjusted industrial production rose 1.8% in the month of November 2013 and by 1.5% in the EU28, according to estimates from Eurostat,
In October, industrial production fell by 0.8% and 0.5% respectively.
The highest increases were registered in
- Ireland(+11.7%)
- Sweden (+6.4%)
- Malta (+3.8%)
- Croatia (+3.0%)
- the Netherlands (+2.5%)
- Germany (+2.4%)
- Lithuania (-3.5%)
- Denmark (-3%)
- Greece (-2.2%).
In November 2013, compared with November 2012, industrial production increased by 3% in both the eurozone and the EU28.
However Eurostat also released figures for retail sales in October. They showed a 0.2% drop in volumes from September, itself a month during which sales fell by 0.6%.
On the brighter side the trade surplus for the Eurozone, unadjusted for seasonal swings, was 13.1 billion euros ($17.65 billion) in September, compared with 8.6 billion euro surplus in the same period last year.
ECB get ready to turn on the tap as deflation looms
The European Central Bank last week indicated that it is leaning toward more quantitative easing if the euro-zone recovery shows signs of faltering.
In language that was unusually blunt, ECB President Mario Draghi said at a press conference following a regular monthly meeting that the central bank would maintain its loose monetary policies, in contrast to the Federal Reserve, and was ready to "take further decisive action if required." Although the European Central Bank kept its key lending rate at 0.25%, Draghi's remarks were widely construed as loud verbal intervention.
The euro responded by dipping below $1.36. It traded at $1.359 at midday Friday, down 1.1% since the beginning of 2014. Most currency strategists expect the common currency to lose value against the dollar in 2014.
Observers expect some sort of modest policy easing around the end of the first quarter, triggered by tightening in financial markets or fears of inflation. Any move could come sooner rather than later, as the ECB attempts to decouple euro-area rates from a prospective rally in the U.S., where the Fed announced in December that it would begin tapering its bond-buying in January.
Falling inflation is a huge worry for the ECB. If weak prices begin to tumble further, deflation could become self-fulfilling. What measures the central bank might use remain to be seen, but more long-term refinancing operations or negative interest rates might not be the weapons of choice. Instead, it could opt for some sort of asset purchases that would rekindle bank lending, such as buying securities backed by loans to small businesses. But the central bank is keen to stress that all options are open.
Investors snapped up Irish 10-year bonds last week, sparking a flurry of issues from other countries at the periphery of the euro zone. But the enthusiastic response masks worries about member governments' long-term financial health. In part, the warm welcome reflects the progress made by some troubled euro-zone nations in repairing their economies from the devastating effects of the sovereign-debt crisis. More telling, though, is the volume of investment sloshing around Europe's fixed-income markets and the elusive search for compelling yields.
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