The European Central Bank is moving centre stage and here, in two
articles, A.E-P. turns the spotlight on it. This crisis might
deepen considerably before the juggernaut changes direction.
Those Bundesbank dorectors who opposed the euro did so for exactly
the right reasons, namely that as the continent’s leading economic
power, Germany, would end up picking up the bills in any crisis. How
right they were - as far as that view went. What is new is that the
continent’s leading economic power would itself be in severe
difficulties too.
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TELEGRAPH 24.2.09
1. ECB's Trichet sounds alarm over Europe's credit contraction
The eurozone's financial system is under "severe strain" and risks
setting off a downward spiral as the banking crisis and economic
recession feed on each other, according to European Central Bank
president Jean-Claude Trichet.
By Ambrose Evans-Pritchard
"What has become increasingly clear since the intensification of the
crisis in mid-September is that strains in the financial sector are
spilling over into the real economy," he said. "This has set in
motion a process of negative feedback."
Mr Trichet said the bank was disturbed by signs of an fully-fledged
credit crunch as banks shut off lending to healthy borrowers. Credit
has contracted in absolute terms for the first time in recent weeks.
"There are indications that falling credit flows reflect tight
financing conditions associated with a phenomenon of deleveraging. If
such behaviour became widespread across the banking system, it would
undermine the raison d'etre of the system as a whole" he said.
The ECB has been caught off guard by the ferocity of the recession,
which is now ravaging Europe's steel, car, aeronautics and chemical
industries. The bank's hard line has led to criticisms from trade
unions and business leaders as the eurozone's economy contracted at
an annual rate of 6pc in the fourth quarter of 2008.
Mr Trichet's warning is a clear sign that the ECB will cut interest
rates below 2pc at its next meeting in March. It has stood aloof in
recent weeks as central banks worldwide tore up rulebooks and
explored extreme measures.
In recent days a string of ECB governors have [hinted? -cs] at some
form of quantitative easing, although the ECB is constrained by EU
law from buying bonds issued by eurozone states.
Mario Draghi, the Bank of Italy's governor, said the lesson of the
1930s was to take pre-emptive action to head off debt deflation early
in a crisis, adding it was an error to resist cutting rates to zero
should it be necessary.
Professor Tim Congdon from the London School of Economcs said the
contraction of eurozone credit was "extremely disturbing" but
inevitable after moves in October to force banks to raise their
capital ratios. "It was a catastrophic decision," he said.
=-=-=-=-=-=-=-=-=-=-=-=-=-
AND
2. ECB faces mutiny from national bank governors as recession deepens
The European Central Bank is capitulating.
By Ambrose Evans-Pritchard
For months the ECB held sternly to the high ground of orthodoxy as
the US, Japanese, British, Canadian, Swiss and Swedish central banks
slashed rates towards zero and embraced quantitative easing, but a
confluence of fast-moving events is now forcing it to move.
The credit default swaps that measure bankruptcy risk on the debts of
Ireland, Austria and a clutch of Latin Bloc states have vaulted to
dangerous levels. In the case of Ireland, the slump is spilling on to
the streets. Some 120,000 marched through Dublin over the weekend to
protest austerity measures.
The slow fuse on Eastern Europe's banking crisis has detonated,
leaving Austrian, Belgian, Italian and other West European banks with
$1.5 trillion (£1 trillion) in exposure.
It is happening just as industrial output collapses in the eurozone's
core states. Germany's economy contracted at 8.4pc annualised in the
fourth quarter. ECB president Jean-Claude Trichet said on Monday that
"a process of negative feedback" has set in where the banks and the
real economy are pulling each other down in a self-reinforcing
spiral. Eurozone credit is contracting. Banks are rationing credit as
deleveraging gathers pace.
Rob Carnell, global strategist at ING, said the ECB has been
painfully slow to acknowledge the global deflation tsunami sweeping
across Europe.
"It seems divorced from reality. It is clearly nonsense to talk about
inflation now: it has been negative on average for six months. The
eurozone purchasing managers' index has fallen twice as fast as in
the US, so the ECB should be acting even faster than the Fed," he said.
Mr Trichet said the ECB has increased its balance sheet by €600bn
(£525bn) since the Lehman collapse in September. The bank is
providing "unlimited liquidity" in exchange for a wide range of
collateral, including mortgage bonds issued for the sole purpose of
extracting ECB funds.
But the ECB's leading voices have adamantly refused to contemplate
going to the next stage: buying bonds and other assets with "printed
money". They see that as the Primrose path to hell. This week the
tone has abruptly changed, suggesting that a majority of the 16
national bank governors on the ECB council are having second thoughts.
The apparent ring-leader is Cypriot member Anastasios Orphanides, a
former Fed official and a world authority on deflation traps. He said
on Monday that the ECB may have to go beyond "zero-bound" rates and
revealed that an "internal discussion" was under way.
Italy's Mario Draghi is in the "activist-easing" camp. "The
experience in the US in the 1930s and Japan in the 1990s suggests
that it is necessary to fight, in the early phases of the crisis, the
tendency for real interest rates to rise," he said.
Finland's Erkki Liikanen is of the same opinion. "We are facing the
worst financial crisis in our time. It is important not to exclude,
ex ante, any measures."
Julian Callow from Barclays Capital said 10 ECB governors are now doves.
This amounts to a mutiny against the Bundesbank-dominated executive
in Frankurt. It is no great surprise. They have to answer to their
democracies. The plot is thickening.
2. ECB faces mutiny from national bank governors as recession deepens
The European Central Bank is capitulating.
By Ambrose Evans-Pritchard
For months the ECB held sternly to the high ground of orthodoxy as
the US, Japanese, British, Canadian, Swiss and Swedish central banks
slashed rates towards zero and embraced quantitative easing, but a
confluence of fast-moving events is now forcing it to move.
The credit default swaps that measure bankruptcy risk on the debts of
Ireland, Austria and a clutch of Latin Bloc states have vaulted to
dangerous levels. In the case of Ireland, the slump is spilling on to
the streets. Some 120,000 marched through Dublin over the weekend to
protest austerity measures.
The slow fuse on Eastern Europe's banking crisis has detonated,
leaving Austrian, Belgian, Italian and other West European banks with
$1.5 trillion (£1 trillion) in exposure.
It is happening just as industrial output collapses in the eurozone's
core states. Germany's economy contracted at 8.4pc annualised in the
fourth quarter. ECB president Jean-Claude Trichet said on Monday that
"a process of negative feedback" has set in where the banks and the
real economy are pulling each other down in a self-reinforcing
spiral. Eurozone credit is contracting. Banks are rationing credit as
deleveraging gathers pace.
Rob Carnell, global strategist at ING, said the ECB has been
painfully slow to acknowledge the global deflation tsunami sweeping
across Europe.
"It seems divorced from reality. It is clearly nonsense to talk about
inflation now: it has been negative on average for six months. The
eurozone purchasing managers' index has fallen twice as fast as in
the US, so the ECB should be acting even faster than the Fed," he said.
Mr Trichet said the ECB has increased its balance sheet by €600bn
(£525bn) since the Lehman collapse in September. The bank is
providing "unlimited liquidity" in exchange for a wide range of
collateral, including mortgage bonds issued for the sole purpose of
extracting ECB funds.
But the ECB's leading voices have adamantly refused to contemplate
going to the next stage: buying bonds and other assets with "printed
money". They see that as the Primrose path to hell. This week the
tone has abruptly changed, suggesting that a majority of the 16
national bank governors on the ECB council are having second thoughts.
The apparent ring-leader is Cypriot member Anastasios Orphanides, a
former Fed official and a world authority on deflation traps. He said
on Monday that the ECB may have to go beyond "zero-bound" rates and
revealed that an "internal discussion" was under way.
Italy's Mario Draghi is in the "activist-easing" camp. "The
experience in the US in the 1930s and Japan in the 1990s suggests
that it is necessary to fight, in the early phases of the crisis, the
tendency for real interest rates to rise," he said.
Finland's Erkki Liikanen is of the same opinion. "We are facing the
worst financial crisis in our time. It is important not to exclude,
ex ante, any measures."
Julian Callow from Barclays Capital said 10 ECB governors are now doves.
This amounts to a mutiny against the Bundesbank-dominated executive
in Frankurt. It is no great surprise. They have to answer to their
democracies. The plot is thickening.
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