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News, Politics, Government

Europe eases the austerity whip _ a little

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Three and a half years into its government-debt crisis, there are signs that Europe is adopting a gentler approach toward austerity.

Political leaders aren’t backing away aggressively from budget cuts and higher taxes, but they are increasingly trying to temper these policies, which have stifled growth and made it harder for many countries to bring their deficits under control.

The European Union is relaxing its enforcement of deficit limits until the region’s economy turns around; countries that were bailed out by their European neighbors are being given more time to repay loans, easing the pressure to cut budgets further; and financial leaders, including the head of the European Central Bank, say it’s time to place more emphasis on reviving growth.

“There has clearly been a shift in thinking,” says Christian Schulz, economist at Berenberg Bank in London.

After the crisis broke out in late 2009, governments dramatically slashed spending — either to meet conditions for bailout loans, or to reassure jittery bond markets that they were trustworthy borrowers. This fiscal belt-tightening was introduced to help countries reduce their deficits and pave the way for critical financial aid.

Promises of austerity gave the ECB political breathing room to get more aggressive. The bank’s pledge last summer to buy unlimited amounts of government bonds is largely responsible for taming Europe‘s financial crisis.

But austerity also inflicted severe economic pain in places like Greece, Ireland, Portugal, Spain and Italy. Over time — as the economy of the 17 European Union countries that use the euro descended into recession — evidence grew that slashing spending and raising taxes were less effective at reducing deficits than initially thought, and perhaps counter-productive.

Why? Because as economies shrink, so do tax revenues, making it harder to close budget gaps.

The latest eurozone recession, which began last year, is forecast to end in the second half of this year and was the main focus of Thursday’s summit of European Union leaders in Brussels.

“We are all fully conscious of the debate, the mounting frustrations and even despair of people,” said Herman Van Rompuy, president of the European Council, after the meeting ended.

“We also know there are no easy answers.”

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Source: FULL ARTICLE at Fox World News

News, Politics, Government

ECB: banks to repay early $183 billion in loans

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The first banks stepped forward Friday to make €137.2 billion ($183 billion) in early repayments on the European Central Bank‘s cheap, three-year emergency loans, in a sign of easing market conditions in the euro area.

The ECB launched the unprecedented €1 trillion ($1.3 trillion) loan operation in two tranches at the end of 2011 and again in February 2012 in an attempt to relieve stress on banks at the height of the debt crisis in the group of the 17 European Union countries that use the euro.

The repayments announced by the ECB Friday were slightly higher than expected by most analysts, whose estimates ranged around €100 billion.

“This is a sign of easing tensions in the eurozone,” said Holger Schmieding, an economist with Berenberg Bank in London. “It’s a vote of confidence by the banks in themselves and in the euro.”

When it launched the loans, known as the Long-Term Refinancing Operation, the ECB‘s aim was to ensure lenders had enough funding to do business so that the flow of credit to the wider economy wasn’t squeezed. The loans have been credited with easing the region’s debt crisis by tackling fears that one or more of its shaky banks might fail.

At the time the program was launched, banks were given the option to pay back the loans early, with the repayment window opening at the end of January. Analysts have been eager to see how many banks would join the scheme, as it would give an indication whether parts of the eurozone’s financial system were returning to health.

“The patients no longer need that much medicine,” said Ulrich Kater, an economist with DekaBank in Frankfurt. “That was a voluntary dosage reduction, so this is a step back on the road to normalcy,” he added.

The euro, used by some 330 million people across the 17-nation bloc, rose against the dollar by 0.5 percent to above $1.34, its highest level in several months.

As well as helping banks, the loans also provided indirect relief to heavily indebted countries, such as Spain and Italy, which were facing high borrowing costs in bond markets. Flush with cheap credit from the ECB, banks started buying government debt. That raised bond prices and lowered bond interest rates, which equates to lower borrowing costs for the struggling countries.

Overall, the eurozone is experiencing a lull in its three-year-old debt crisis, with bullish financial markets and further decreasing borrowing costs for weaker eurozone nations. Many analysts say that’s because fears of a eurozone break-up have almost vanished since the ECB last year announced that it was prepared to buy up unlimited quantities of bonds of countries struggling with their borrowing costs.

The central bank said 278 lenders will make the early repayments on Jan. 30. In keeping with the ECB‘s usual practice, the central bank identified neither the lenders involved nor the countries they come from.

Nomura analyst Nick Matthews said the lion’s share of Friday’s payback most likely came from banks in the eurozone’s stronger countries including Germany, France or the Netherlands. Nomura estimates, however, that about two-thirds of the ECB‘s loan offering was taken by lenders in the bloc’s more troubled members, including Spain, Italy, Portugal and Greece.

When the ECB lent €489 billion to 523 banks in late December 2011 and another €529.5 billion to 800 banks at the end of February, it was charging its main interest rate of 1 percent. Since then, the ECB‘s benchmark interest rate has been lowered to 0.75 percent — meaning banks can now get short-term funding from the central bank at an even cheaper rate.

DekaBank’s Kater said the fact that banks are giving back part of their secure long-term funding to return to cheaper — but riskier — short-term operations is a further sign of healthier financing conditions in the eurozone.

Several analysts forecast that banks will also use a redemption date next month to start paying back the second tranche of emergency loans, bringing the total repayment to about €300 billion — or a third of the total amount.

When the ECB offered the loans, there were concerns — particularly in Germany — that the increased supply of money in the economy would push up inflation. Analysts now say that the early repayments back to the ECB should reduce the risk of prices rising too quickly.

“As a side effect, the repayment shows that the German fear of the ECB‘s big balance sheet causing inflation is irrational,” said Berenberg Bank‘s Schmieding.

“It shows that it’s easy for the ECB to scale down its operations again when it’s the appropriate time.”

Source: FULL ARTICLE at Fox World News

News, Politics, Government

ECB expected to leave rates at record low

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Europe‘s stalled economy won’t get more help Thursday from the European Central Bank, which is expected to hold off cutting interest rates as it waits for financial markets to heal so that its already low benchmark rates get through to businesses and consumers.

Most analysts say the bank will leave its key refinancing rate at a record low of 0.75 percent when the 23-member ECB governing council meets at its headquarters in Frankfurt, Germany. The bank decides rates for the 17 European Union countries that use the euro currency, affecting the finances of 333 million people.

Some experts say the bank may have already pulled all the levers it can to get Europe out of its recession.

“The ECB is facing the uncomfortable reality that it has almost run out of options to provide additional stimulus for the economy,” said analyst Carsten Brzeski at ING in Brussels.

Still, the economy needs help from somewhere.

The ECB has forecast the eurozone economy will shrink 0.3 percent in 2013, with a gradual recovery kicking in later in the year. Some indicators of business sentiment have risen recently, although they remain at levels indicating the eurozone is still in recession at the start of 2013 — just not shrinking as fast. Unemployment has hit 11.8 percent, the highest since the euro was introduced in 1999.

The ECB‘s key weapon recently has been not interest rates but its offer to buy unlimited amounts of bonds issued by indebted countries, on condition that they tap a European financial aid program that would demand budget cuts in return.

No country has requested that aid so far. But the mere announcement of the program pushed borrowing rates down for two of the most troubled governments, Italy and Spain, easing the risk they might be unable to handle their massive debts.

The refinancing rate is what banks pay to borrow from the ECB. That in turn should influence how much banks charge businesses and consumers to borrow. The problem now is banks hurt during the financial crisis are not passing on those lower rates to customers, but charging significantly more to lend money. Under such conditions, another cut to the refinancing rate by the ECB would do little to help the economy.

Bank President Mario Draghi and Yves Mersch, the newest member of the bank’s six-member executive committee, have said that unconventional measures such as the bond purchases offer were doing more to lower borrowing rates in the real economy than a rate cut would. As the bond-buying offer boosted confidence in financial markets, some banks felt more comfortable charging less for loans.

In fact, the bond-buying program — called Outright Monetary Transactions, or OMT — has been so effective in lowering governments’ high bond market borrowing costs that some economists are now seeing a chance it may not be used for months, if ever. That’s a drastic shift from expectations on Sept. 6, the day the program was announced. Then, Spain was expected to seek a bailout within weeks.

Richard Barwell and Xinying Chen, analysts at Royal Bank of Scotland, wrote in a note to investors that there was a “distinct possibility that we could go through the whole of 2013 without the OMT being activated.”

Holger Schmieding, chief economist at Berenberg Bank, said that the chance the ECB will never buy bonds is less than 50 percent “but is rising every month.”

He warned against complacency, however: “Normally something happens in life — experience tells us things don’t always stay calm.”

Europe‘s expected economic recovery is far from guaranteed, especially with governments slashing spending to reduce debt and raising taxes. The help will have to largely come from eurozone governments making their economies more business friendly by cutting excess regulation. That can take years to have an effect.

Source: FULL ARTICLE at Fox World News