Posts Tagged ‘Euro debt’

Trichet Explains Why Soros Is Wrong About the Euro

Thursday, June 24th, 2010

As German chancellor Angela Merkel prepares to take her austerity message to the G20 in Toronto this weekend, the head of the European Central Bank Jean-Claude Trichet has held her up as an example to the rest of the euro zone.
Merkel’s actions will boost confidence among households, investors and companies and will help consolidate the recovery, Trichet said in an interview with Italy’s La Repubblica.

Jean-Claude Trichet

That view is at odds with what George Soros said Wednesday, when the legendary investor told an audience in Berlin that the euro is a flawed construct.

“By insisting on pro-cyclical policies, Germany is endangering the European Union,” Soros warned. “I realize that this is a grave accusation, but I am afraid it is justified.”

Trichet dismissed this, saying the euro [EUR=X 1.2309 -0.0007 (-0.06%) ] was a very credible currency that has kept its value from its debut and has guaranteed price stability for 11 and a half years, with an annual average inflation of 1.98 percent in the euro-zone in that period.

“A currency that guarantees such stable prices, it’s of value in the eyes of domestic and international investors” Trichet told the Italian paper.

The single European currency fell against the dollar since worries over certain euro zone countries’ ability to pay their debt begun.

On Wednesday, Soros said that “by cutting its budget deficit and resisting a rise in wages to compensate for the decline in the purchasing power of the euro, Germany is actually making it more difficult for the other countries to regain competitiveness.”

Merkel defended her actions over the weekend, saying they will prevend future crises.

Deflation Risks

But Trichet does not believe that austerity measures being put in place by European governments will cause deflation.

Some of the more bearish investors are betting that cuts in government spending across the European Union will add to deflationary pressures at a time when consumers and businesses are de-leveraging.

Growth will fall sharply, with private sector deflation pushing yields on 10-year bonds down to 2 percent, triggering a new wave of quantitative easing, Bob Janjuah, chief markets strategist at RBS told CNBC earlier this month.

“I don’t think that such risks could materialize,” said Trichet, adding that inflation expectations were well anchored. “As regards the economy, the idea that austerity measures could trigger stagnation is incorrect.”

Reforming the real economy in each country in the euro zone is what is needed, according to Trichet.

“We ask all governments to be determined to carry out structural reforms to increase the potential growth,” he said. “I insist on the need to boost work productivity: in the medium- and long-term, growth depends right on this.”

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Spain T-Bill Yields Jump; Doubts Emerge over Rating

Tuesday, June 15th, 2010
by Reuters

Spain’s Treasury raised 5.2 billion euros at its 12- and 18-month T-bill auction on Tuesday, but the substantial premium to the same auction a month earlier raised doubts over the country’s credit rating.

The 12-month bill paid an average yield of 2.303 percent compared to 1.59 percent in the same auction in May, while the 18-month gave 2.837 percent, up from 1.951 percent.

“The bid/cover was respectable and they managed to get the bonds away. But this was hardly a success with about 5.2 billion euros sold, at the bottom end of the target,” said bond strategist at Monument Securities in London Marc Ostwald.

“It also begs the question how Moody’s can rate Spain triple-A when you have an auction result like this. While Spanish 12-month yield was 2.30 percent, France’s equivalent is 0.4 percent and below the ECB’s policy rate of 1.0 percent. This must now put pressure on Moody’s to downgrade Spain.”

Moody’s has kept Spain’s debt rating at its highest level, while Fitch last month cut to one notch below top and S&P’s has Spanish sovereign debt at two steps below it’s highest rating.

On Thursday, the government hopes to raise up to 3.5 billion euros through a 10- and 30-year bond issue.

“(This) comes ahead of the more significant – in terms of Madrid’s ability to raise cash on the open market – 10- and 30- year sale on Thursday,” 4Cast said in an investors note.

Spain must redeem 16.2 billion euros in bonds by the end of July, a payoff the government has said it will have no problem meeting.

The spread of Spain’s 10-year bonds stood at 214 basis points at 0847 GMT from the German 10-year bund after opening at 211 basis points.

The spread jumped on Monday after Spain’s treasury secretary and a banking leader said the liquidity freeze Spain is facing on foreign markets is a problem.

On Tuesday, El Pais newspaper reported the government has asked the European Commission to make results of a European bank stress test public as Madrid fights daily speculation it is preparing to seek aid from the EU.

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ECB Faces Grilling on Euro Debt Storm, to Hold Rates

Thursday, June 10th, 2010

The European Central Bank faces a grilling over the euro zone’s debt crisis on Thursday after a torrid month in which it has abandoned resistance to buying government debt and flung its exit strategy into reverse. With the ongoing debt troubles continuing to rattle the euro zone, all 79 economists recently polled by Reuters expect the ECB to keep interest rates at their record low of 1.0 percent again.

European Central Bank in Frankfurt

The ECB’s news conference is set to be dominated by the sudden shift to bond buying. It abandoned a long-held resistance to the tactic on May 10, just 4 days after ECB President Jean-Claude Trichet said buying bonds was not discussed at the ECB’s last meeting.

The ECB had bought and settled 40.5 billion euros worth of bonds as of Friday. But it has still given no hint of how much it is prepared to spend or how long it could buy bonds for.

“This meeting will be the first occasion for the ECB to properly communicate on its bond purchase programme, and it comes at a particularly critical moment,” said Nomura economist Laurent Bilke.

“The market is clearly questioning the determination of the Eurosystem now, as country spreads are back to their widest in some cases — Spain, most noticeably.”

Another key focus of the meeting will be new 2010 and 2011 growth and inflation projections from ECB and euro zone central bank staff.

They are expected to make brighter reading than in March, partly due to better global demand but also to the region’s debt crisis, which has wiped 17 percent off the euro’s value in the last six months on a trade-weighted basis.

“I expect the recent decline in the euro/dollar exchange rate to be reflected in the inflation projections,” said Credit Agricole’s Frederik Ducrozet.

“They will show something like 1.5 percent for 2010 and 1.7 percent in 2011 compared with 1.2 and 1.5 percent 3 months ago.”

Growth forecasts for this year should also be revised up to around 1 percent, he added. A strong second quarter and the euro’s drop should outweighthe negative impact of the debt woes.

As a rule of thumb, a 5 percent drop in the euro tends to boost growth in the 16-country bloc by around 0.4 percentage points, according to economists.

Trichet is expected to stress, albeit with caution, that economic recovery remains on track.

He may sound a little more hawkish on inflation, say economists, although forecasts of 1.5 – 1.7 percent would still leave the ECB, which aims to keep inflation just under 2 percent, some breathing room from rate hikes.

“There’ll be no change in (interest rate) policies,” said Goldman Sachs’ chief European economist, Erik Nielsen.

“Trichet will mention the words “exit strategy” several times, but I very much doubt that he’ll give anything concrete away at this stage – why should he,” he added.

Money Markets

The debt troubles of Greece, Portugal and other financially strained euro zone members have also reignited fears about the health of the region’s commercial banks.

It has hit money market trading, forcing the ECB to reverse its exit strategy and reintroduce dollar lending, inject another round of 6-month cash and extend unlimited 3-month lending.

Markets are also bracing themselves for July 1 when banks have to repay a record 442 billion euros borrowed last year.

The ECB has the option to further extend limitless lending. Another 6-month lending operation would have little impact on the ECB thinking, but analysts appear doubtful.

“There is ample excess liquidity in the banking system at the moment, more than at any time since the ECB put in place its exceptional arsenal,” said Bilke.

“We expect no further liquidity announcement this week, and particularly no additional longer term refinancing operation with full allotment.”

Rift at Top

The ECB inadvertantly published an internal test message on Wednesday saying it would issue three-month debt certificates offering up to a 1 percent interest rate.

An official told Reuters the alert should be disregarded, however the slip up has ignited speculation that the bank plans something similar to offset the inflationary threat of its bond buys.

Analysts say Trichet will also have important repair work to do during Thursday’s news conference.

The controversial step to start buying government debt has opened a deep rift on the ECB’s top table, pitting Trichet against ECB and Bundesbank heavyweight Axel Weber.

Weber has openly criticised the move, arguing it creates “serious stability risks.” Economists warn the split is undermining the ECB’s efforts to stabilise markets and could suck it further into the murky waters of European politics.

“Trichet will be asked to comment on divergent views, if not conflicts within the Governing Council,” said Credit Agricole’s Ducrozet.

“He will likely refuse to react to individual comments while describing himself as the captain of the team. Not sure he will manage to convince the market on this point.”

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