Eurozone Growth to Deteriorate as Economy Recovers – The Draghi Mystery

Category: ECB-European Central Bank | Eurozone
March 8, 2013 | Comments Off |
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The Eurozone Debt Crisis Facts

The Eurozone Debt Crisis Facts

In addition to his highly contradictory statements during a press conference yesterday, Mario Draghi has today signaled that the stuttering Eurozone Economy will have to get worse before he’ll consider cutting interest rates. To an intellectual mind, this surely is an insult added to an injury caused yesterday. Even as the European Central Bank President yesterday admitted that recent economic data in the euro area has been “disappointing,” he insisted that a recovery will appear later this year, reported Bloomberg. The ECB seems ready to accept an excruciatingly slow recovery and very low inflation. The central bank will continue to sit on its hands. “A clear deterioration in the data going forward would be necessary to push the ECB towards action,” said Nick Kounis, head of macro research at ABN Amro in Amsterdam. Draghi yet insists on continuing the contradiction that, “While latest Eurozone data have been weak, the ECB still anticipates a rebound in the second half of the year.” How much more pain in Eurozone would be worse enough for Draghi remains a mystery yet.

Eurozone Downward Growth & Economy Recovery mysteriously linked:

ECB President Mario Draghi stuck to his view that the Eurozone will gradually recover later this year even as officials trimmed their economic forecasts and considered cutting interest rates. The door to a rate cut was neither opened further, nor was it closed – a mystery. Draghi said a rate cut had been discussed and signaled that some members of the bank’s Governing Council had been in favor of such a move, but gave no strong hint that further easing was on the cards. The Euro surged to a session peak against the US Dollar after seemingly contradictory news out of the ECB – European Central Bank. The ECB kept its key interest rate on hold at 0.75%, but the big news for the day was the tone that ECB President Mario Draghi struck at the accompanying press conference. The ECB downgraded the Eurozone Economic forecast for 2013 and 2014 and yet in the same breath Mr. Draghi said the Eurozone economy “should gradually recover” later this year. Despite the very evident contradiction here – lowering growth forecasts yet claiming growth would rebound – the EUR/USD has found itself bid higher on the news. Also fueling the Euro’s mystery rally has been the ECB’s ardent refusal to cut its key interest rate. Uncertainty caused by the stalemate in last month’s Italian election, where anti-austerity parties won more than half the vote, has renewed concern that the Eurozone may struggle to overcome the sovereign debt crisis and exit recession. The ECB today predicted the 17-nation economy will shrink 0.5% this year, more than the 0.3% contraction forecast three months ago. The estimate for 2014 Eurozone growth was reduced to 1% from 1.2%. The central bank also cut its 2014 inflation projection to 1.3% from 1.4%. The inflation outlook for Eurozone is “broadly balanced,” Draghi said, even though the risks to the economy are on the downside. ECB ambitiously aims to also keep Inflation just below 2%, though how it would achieve this remains another Draghi mystery. Concerns that record-low rates aren’t being properly transmitted in some nations have stoked speculation that the ECB may introduce additional measures to encourage bank lending to small and medium-sized companies. “We always think and study and reflect, but we are not committing to or planning anything special,” Draghi said adding to the mystery. He also said that the ECB’s monetary policy “will remain accommodative for as long as needed.” Sure, we know that. Mysteriously enough, worries about the strength of the Euro, which has fallen from a 14-month high against the US Dollar in February, also dropped out of Draghi’s introductory statement yesterday.

The Bank of England too left its four- year-old bond-purchase program unchanged as policy makers debate more radical measures to aid the recovery & also kept its key interest rate at a record-low 0.5%, where it has been since March 2009. The BoE Monetary Policy Committee maintained its target for Quantitative Easing at 375 billion pounds ($565 billion). “The economy is not quite weak enough to justify more QE, or indeed other forms of monetary easing, just yet,” said Martin Beck, an economist at Capital Economics Ltd. in London. “But with fears that the economy will enter a triple-dip recession still very present, further action by the bank in the next month or two is likely.” While the BOE didn’t expand stimulus, it will still be buying bonds this month as it reinvests 6.6 billion pounds from the maturing March 2013 gilt, which it had bought under the QE program.

Eurozone lending Declines:

Eurozone lending to companies has fallen by €100 Bn over the last six months, and small firms are struggling with a severe credit crunch across the Club Med bloc. Mr Draghi said there were no plans to introduce a variant of the Bank of England’s Funding for Lending to channel money where it is most needed. Critics say the ECB has persistently under-estimated the severity of the downturn, and has failed to offset drastic budget cuts with monetary stimulus. Both levers of policy are set on contraction, with bank de-leveraging compounding the effect. There is a risk that the bank may be caught out again this year. German industrial orders fell 1.9pc in January, dashing hopes of German-led rebound. Draghi also poured cold water on the view that it could take the interest rates on bank deposits at the ECB into negative territory, saying that such a move could have “serious” unintended consequences. Draghi also dampened speculation that the ECB was planning special measures to help small businesses. “We are not at this point in time … committing or planning anything special,” Draghi said when asked about possible moves to boost lending to SMEs, including potential changes to collateral rules. So it seems clear that “Nothing on the Eurozone crisis is actually clear to the ECB” & so it is not committing or planning anything special except keeping all a mystery. After all, if you cannot convince someone, confuse them – is an age old method.

The Eurozone Debt Crisis – A series of mysteries:

The market move since May 2012 was based on one thing and one thing only: the Fed and ECB promising to pump their brains out with more money printing. Did anything get fixed in Eurozone? Did the US Economy genuinely improve? Is the financial crisis really fixed? Hell – Absolutely no! Eurozone Debt Crisis is beyond anything that anyone has seen in their lifetime. A banking system that is over $46 trillion in size, leveraged at 26 to 1, and chock full of garbage debts. Backstopping this entire mess? Totally bankrupt nations that are starting to look more like 3rd world countries than developed nations. So what happens when one of the bigger players (Spain, Italy, or France) defaults? A Complete Systemic Failure! The ensuing collateral crunch will make 2008 look like a joke. Italians delivered a strong rejection of austerity measures at elections last week and left no party grouping with enough support to form a durable government, raising the prospect of backsliding on economic reforms and debt-cutting measures. Mr. Draghi, an Italian himself, mysteriously yet said there were many signs that market confidence in the Eurozone was returning. Where are they? The ECB has calmed the Eurozone crisis with its pledge to buy government bonds in potentially unlimited amounts but it will only do so if a member country seeks help from the bloc’s rescue fund and agrees to austerity policy conditions, which is again a mystery. The program, dubbed Outright Monetary Transactions (OMT), has not yet been deployed and Italy could find itself outside the ECB’s umbrella if it cannot form a government prepared to adhere to its rules. “OMT remains, is in place,” Draghi said. “It is a very effective backstop, and it is there. But you know the rules.” What rules? Nothing but – A Big Bundle of Mystery.

The Eurozone Debt Crisis Facts:

Christine Lagarde, head of the International Monetary Fund, said it is too early to assume that the worst is over. “Clearly the world economy avoided collapse last year. I am very concerned that, by moving into a semi-complacent mood, people risk a relapse,” she told the Irish Times. The Catholic charity Caritas called for radical change in the Eurozone’s whole crisis strategy, saying the current course was self-defeating and “putting the very legitimacy of the EU at risk”. It said child poverty had reached dramatic levels in Ireland, Spain, Italy, Portugal and Greece, while deep cuts to welfare have left the most vulnerable stripped of a safety net. It said the chief victims bore no responsibility for the crisis, a breach of natural justice. The crisis has engulfed France where a key gauge of the money supply — six-month real M1 — is contracting at an annual rate of 6.6% and flashing graver warning signs than in Italy or Spain. Figures out today showed that French unemployment rose to a Euro-era high of 10.6% in the fourth quarter, with the total looking for work near 3.7m. France’s BVA confidence index plunged 12 points last month. Some 75% of households fear that the economy will deteriorate over the next year. It is the worst reading since President Francois Hollande took power in May with a pledge to kick start growth and break the back of unemployment. The Figaro said the French jobless rate is now higher than at any time in the 1930′s, when farm ties and the empire acted as a safety valve. “France is on the brink economic implosion,” said economist Christian Saint Etienne, warning that a state sector nearing 57% of GDP rendered the country unfit for of EMU. Mr Draghi calmly deflected questions over Italy’s political crisis, leaving it unclear whether the ECB can back-stop the bonds of a country with no functioning government and no likelihood of complying with the rescue conditions.

Draghi downplays Italian Election Implications & risks Deflation Trap:

ECB President Mario Draghi said the tough interest rate stance comes as the Eurozone faces a second year of outright contraction, with the jobless rate reaching a record 11.9%. He decried the “tragedy” of mass unemployment but insisted that monetary policy cannot resolve the problem. “Europe is heading into a deflationary scenario if they don’t do anything to boost the money supply,” said Lars Christensen from Danske Bank. “This already looks very similar to what happened in Japan in 1996 and 1997.” Draghi down played the threat to Eurozone stability posed by Italy’s inconclusive election results. Draghi said many of Italy’s fiscal reforms are set to continue on auto pilot, while financial markets continue to show signs of returning confidence. Draghi said the central bank’s rules governing how it deploys its bond-buying program “are what they are.” The ECB has stipulated that any country who seeks aid from its program, known as outright monetary transactions, must first agree to abide by strict policy conditions. Italy’s election results have led economists to question whether a new government would be capable of agreeing to conditions necessary to access the ECB program in the event Italy’s borrowing costs returned to crisis levels.

ECB President Mario Draghi did his best to sound optimistic and put the best foot forward which he is expected to – But we all do know the drastic conditions & facts about Eurozone. Rest – Time will tell. What we need to know from him is “Just how much more would be worse enough?” 

Interesting:

Russia’s February Inflation Accelerates to 18-Month High – Bloomberg

Draghi comments at ECB news conference – Reuters

Italy’s Bersani on collision course withGermanyand ECB over austerity – The Telegraph


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