Funds for Greece, New Man at the BoE and a year of Whatever it Takes
Time to close the live blog for today and to thank you for reading and commenting. We will be back next week with more and in the meantime, here is a round-up of today’s main events.
• It’s 12 months to the day since Mario Draghi, European Central Bank president, said “the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” And my colleague Graeme Wearden has details of the speech here as well as top “super Mario” quotes here.
• INSEE, the national statistics office, reported that French consumer confidence rose. Details here from 8.20am.
• Jürgen Stark, the ECB’s former chief economist, marked the first anniversary of Draghi’s ‘whatever it takes’ speech by predicting that the eurozone crisis will worsen in the autumn.
• EU finance officials agreed that Greece has met the conditions to unlock its €2.5bn aid payment. Coverage starts here at 9.44am.
• Portugal’s government pledged to help its battered private sector return to growth with some tax-cuts next year.
• The UK Treasury announced that Sir Jon Cunliffe, career civil servant and key figure in the banking crisis, will take over as Bank of England deputy governor in November. Details here from 2.05pm and a profile by Phillip Inman.
• US consumer sentiment rose to a six-year high
• The IMF reported on the US economy, saying deficit reduction has been “excessively rapid” and at the same time stressed that in order to minimise financial market volatility, the Federal Reserve must be clear about when and how it will exit its loose monetary policy stance.
• The FTSE 100 recorded its first weekly fall in a month while the Dax also fell and the CAC40 rose.
• Markets await a week of central bank meetings.
Some forward guidance
Given the vogue for forward guidance we can’t close this blog for the week without a bit of a look ahead to next week.
It could well be a choppy time for financial markets with policy announcements due from the European Central Bank, the Bank of England and the US Federal Reserve.
First up, on Wednesday, the Federal Open Markets Committee (FOMC) is not expected to make any policy changes. But its statement may have some guidance on tapering its quantitative easing (QE) scheme later this year. Most economists say September is the most likely month for the Fed to properly announce it is cutting its monthly bond purchases. Friday brings the closely watched non-farm payrolls report from the US – the latest data on unemployment and a key measure followed by the Fed.
Similarly, the Bank of England is seen as unlikely to change policy next week but given Mark Carney’s move to issue a statement alongside this month’s no change decision, bank watchers say there may well be one again in August. The bigger news, however, is likely to come from the quarterly inflation report on 7 August, when the Bank is expected to announce it will be embarking on a policy of ‘forward guidance’. Maybe next week will see forward guidance about the prospect of a forward guidance announcement…
Not everyone is ruling out a change in policy next week. Investec is forecasting more QE.
Investec economist Victoria Clarke comments:
For the record, our central case envisages no change in the 0.5% Bank rate and an uplift in the QE total to £425bn from £375bn at the meeting next week, with forward guidance following on 7 August.
We would argue that Dr Carney may not face a better opportunity than he will have, in terms of the inflation projections, next week to give QE one final push to solidify UK recovery momentum. Hence, whilst we see it as a close call, we judge that on balance the MPC could be convinced to back more QE, with a £50bn tranche seen as a sufficient ‘escape velocity’ push. One final point to note, working in favour of QE next month, is that the MPC may also be mindful that the Fed looks set to begin tapering QE3 possibly as soon as September, and it may want to pre-empt any upward pressure to Gilt yields, beyond what might be achieved from forward guidance, with a burst of QE ahead of that time.
So there you have it. If they go for more QE then, you can say you read it here almost first.
And last but not least – especially on Draghi day, as my colleague and eurozone blogmeister Greame Wearden would have it – the ECB’s meeting next week is expected to end with no change in policy. In a Reuters poll, all but one of 70 economists said the ECB will hold refinancing and deposit rates steady.
James Ashley, senior economist at RBC Capital Markets says:
We expect a relatively uneventful ECB press conference next week with no changes in policy. We think President Draghi is unlikely to provide many further specifics on the newly adopted policy of ‘forward guidance’, but there may be more information forthcoming on the plans to ease SME financing conditions.
We remain of the view that the Governing Council is willing to ease policy further (both conventionally and ‘non-conventionally’) if the macro outlook warrants such a move, i.e., we think that the ECB is far from being ‘done’. However, in our view, developments over the past couple of months have generally been supportive of the ECB leaving its current settings unchanged at present. In other words, it is not intransigence that is keeping the ECB on hold, rather it is the (relative improvement in the) economic outlook.
FTSE breaks weekly winning streak
The FTSE 100 has closed down 0.5% on the day, a loss of 33 points, to 6554.8. That compares with 6630 at the start of the week and marks the first weekly fall in a month.
Nicki Lace, senior sales trader at CMC Markets UK comments:
Some reasonable earnings amongst blue chip firms in the UK this morning lent early support to the FTSE100 index, though early optimism gave way to profit taking shortly after the open.
While we are on on the subject of falling stocks, the team at Capital Economics have some sobering words about the general UK outlook:
The succession of sporting achievements, the sizzling summer and the Royal baby have supposedly lifted British spirits and fostered hopes that this improved sentiment will give an extra boost to the economic recovery. But a sober look at the statistics suggests that this economic optimism is unlikely to be justified.
Elsewhere, Germany’s Dax is down 0.65% at 8244.9, France’s CAC40 is up 0.32% at 3968.8 and on Wall Street the S&P 500 is down 0.62% at 1679.7.
BoE appointment: A key figure from the banking crisis
Sir Jon Cunliffe’s appointment as Paul Tucker’s successor at the Bank of England will, according to governor Mark Carney, bring an “important European and international perspective”.
My colleagues Jill Treanor and Phillip Inman have been looking into the appointment of the career civil servant at a time of charged debate over the regulation of the UK’s high street banks and the City, where regulation from Brussels is having an increasing influence.
The Bank of England has recruited one of the most influential figures during the 2008 banking crash to succeed Paul Tucker as head of the central bank’s financial stability arm.
Sir Jon Cunliffe, a career civil servant who worked closely with former chancellor Gordon Brown at the height of the financial crisis, will succeed Tucker as deputy governor. The 60-year-old is currently the UK’s most senior diplomat in Brussels.
Bank of England governor Mark Carney said Cunliffe’s experience during negotiations at G8 and G20 summits will prove invaluable as Threadneedle Street seeks to influence the implementation of European and international financial rules.
The full story is here.
HSBC’s economics team has sent through this reaction to the appointment:
From a policy perspective, Sir Jon’s appointment could further strengthen links between the Treasury and the BoE – he spent the vast majority of his career at the Treasury. It is perhaps unsurprising that Mark Carney wanted someone familiar with the workings of Whitehall. After all, Central Banks are increasingly becoming embroiled in politics. Also, one could argue that more coordination between monetary and fiscal policies is precisely what is required in current times.
But too close a relationship with the politicians may not be a good thing, running the risk of a further erosion of central bank independence.
Sir Jon’s experience at the Treasury means he should fit into the MPC relatively easily, not least because on many occasions between 2005 and 2007
What is less clear is his knowledge of the complexities of large financial institutions and the financial system as a whole. As Deputy Governor for Financial Stability, a key skill is an understanding of the workings of banks and other financial institutions. On this, Sir Jon is perhaps more of an unknown quantity.
IMF urges taper clarity from the Fed
The IMF has wound up its latest inspection of the US economy – the so-called Article IV consultation – and has messages for the Fed and the government.
The International Monetary Fund’s executive board says deficit reduction has been “excessively rapid” and at the same time stresses that in order to minimise financial market volatility, the Federal Reserve must be clear about when and how it will exit its loose monetary policy stance.
The assessment is available here. Highlights (with our own bolding up of key phrases, not the IMF’s) from the Executive Board Assessment:
Executive Directors welcomed the improvement in the underlying conditions of the U.S. economy, which bodes well for a gradual acceleration of growth, while noting that the balance of risks to the outlook remains tilted to the downside.
Directors generally concurred that the fiscal deficit reduction in 2013 is excessively rapid, and that the automatic spending cuts (“the sequester”) not only reduce growth in the short term but could also lower medium-term potential growth. They stressed the importance of adopting a comprehensive and back-loaded medium-term plan entailing lower growth in entitlement spending and higher revenues. Together with a slower pace of deficit reduction in the short run, this fiscal strategy would help sustain global growth, place the U.S. fiscal position on a sustainable path over the medium term, and support the reduction of global imbalances…
Directors broadly agreed that accommodative monetary policy continues to provide essential support to the recovery, but cautioned that its financial stability implications should be carefully assessed…
Directors noted that the Federal Reserve has a range of tools to manage the normalization of monetary policy, but that there are significant challenges involved in unwinding accommodation, including risks of market reactions leading to excessive interest rate volatility that could have adverse global implications. They stressed that effective communication on the exit strategy and a careful calibration of its timing will be critical for reducing these risks.
Strauss-Kahn faces pimping charges
From consumer sentiment to aggravated pimping. News reaches us now that former IMF boss Dominique Strauss-Kahn is to be tried on charges of pimping.
News wires are quoting DSK’s lawyer and prosecutors following an inquiry into sex parties attended by the man who had his hopes for the French presidency dashed by a spectacular fall from grace.
Prosecutors in the northern city of Lille said investigating judges had determined that Strauss-Kahn, 64, who has been under investigation in the case since 2012, should be judged by a criminal court.
The decision came as a surprise after a public prosecutor had recommended in June that the inquiry be dropped without trial.
“We’re not in the realm of the law, we’re in ideology. We’re sending someone to court for nothing,” said Henri Leclerc, one of Strauss-Kahn’s lawyers.
The so-called Carlton affair, named after a hotel in Lille, involves sex parties that Strauss-Kahn has acknowledged attending. He says he was unaware that the women who participated were prostitutes.
Strauss-Kahn is charged with “aggravated pimping.” Pimping under French law is a broad crime that can encompass aiding or encouraging the act of prostitution. Strauss-Kahn was charged with the more serious form because it allegedly involved more than one prostitute.
The crime carries a maximum term of 10 years in prison and a fine of 1.5 million euros ($2 million).
US consumer sentiment at 6-year high
Some forecast-beating news from America, where consumer confidence has climbed to its highest since before the global financial crisis.
The rise came as consumers in the world’s largest economy felt better about the current economic climate, though they expected to see a slower rate of growth in the year ahead.
The Thomson Reuters/University of Michigan’s final reading on the overall index on consumer sentiment climbed to 85.1 from 84.1 in June, comfortably beating expectations for 84 in a Reuters poll. It was the highest level since July 2007.
Survey director Richard Curtin says:
This high level of confidence points toward a continued expansion of consumer spending in the year ahead.
Wall Street falls at open
US stocks are lower shortly after the opening bell on Wall Street, while in Europe, Germany’s Dax is down as is the FTSE 100 in London, but France’s CAC40 is up.
In the US:
The Dow Jones industrial average is down 0.44% at 15487
The S&P 500 is down 0.36% at 1684
The Nasdaq is down 0.31% at 3594
Analysts highlight that there has been a slew of earnings reports to digest in the US. Andre Bakhos, director of market analytics at Lek Securities in New York tells Reuters:
As investors absorb many earnings reports this morning, they are also questioning, ‘Can we get through the 1,700 (on the S&P 500)? Can we get a push beyond this round number?’
I still think the short-term weakness will just provide more buying opportunities for investors that have missed the boat.
Some austerity warnings from Ireland
Now to Ireland, where our correspondent Henry McDonald has been looking at the Irish Central Bank’s quarterly bulletin. He writes from Dublin:
There is no rest even for the EU’s austerity poster-child, Ireland.
In its latest quarterly bulletin on the Irish economy, the Central
And the Central Bank in Dublin has revised down its growth forecasts for the Irish economy. It is expecting gross domestic product growth of 0.7% for 2013 with a modest pick-up to 2.1% in 2014.
The Central Bank’s warning comes amidst signs of green shoot recovery in Ireland’s economic situation. Hundreds of new jobs were created this week in the hi-tech and pharmaceutical sectors while house prices in Dublin have started to climb – albeit from a very low base following the property crash.
Heather Stewart on our economics team sends us this on Cunliffe:
Sir Jon Cunliffe is a consummate Treasury smoothie, who is very well known to three of the four man selection panel for the deputy governorship – senior mandarins Sir John Kingman, Tom Scholar, and Nick Macpherson.
Getting on with the Treasury is arguably an asset in the financial stability role, since tension between the two institutions were a key failing during the banking crisis; and Cunliffe’s international experience as G8/G20 sherpa will be invaluable in the international negotiations that are critical in reforming financial regulation.
But with an ex-Goldman banker at the helm in Threadneedle Street, it may raise fears that the Bank will take a more emollient line with the City than during Mervyn King’s tenure.
Carney rings in the changes
Reacting to the Bank of England appointment, Jill Treanor, our City editor, says:
To me Cunliffe’s appointment will raise speculation about the future of Andy Haldane, a long-standing official at the Bank and an outspoken critic of the banking industry. Mark Carney, the new governor of the Bank, is known to have had a say on who would replace Paul Tucker so the appointment of an outsider – albeit an experienced civil servant – will raise speculation that he his keen to instill further change in Threadneedle Street.
The new deputy
We will have more shortly from our team on what this new appointment means for the Bank of England and its financial stability work.
In the meantime a bit more from the Treasury announcement that Sir Jon Cunliffe has been appointed deputy governor.
As the Bank’s Deputy Governor for Financial Stability, Sir Jon Cunliffe will play a crucial role in ensuring the safety and stability of the UK’s financial sector and will sit on the Bank’s Court of Directors, the Financial Policy Committee, the Monetary Policy Committee, the Board of the Prudential Regulation Authority, and will represent the Bank on a number of national and international bodies…
Sir Jon, aged 60, has been appointed for a five year term (renewable once) with effect from November 1 2013.
Sir Jon has been the UK’s Permanent Representative to the European Union since January 2012, covering policy issues including negotiations on the banking union and a number of financial services dossiers.
Between 2007 and 2011, he was the Prime Minister’s Adviser on Europe and Global Economic Issues. As part of this role he was the G20 and G8 ‘Sherpa’, including during the 2009 UK Chairmanship of the G20, where the post-crisis international financial regulation strategy was agreed.
Prior to this, he held a number of positions at HM Treasury and in the UK Government, including Second Permanent Secretary at HM Treasury with responsibility for the directorate that covered macroeconomic, international and financial sector policy, and Managing Director of the Finance Regulation and Industry Directorate at HM Treasury.
Chancellor George Osborne says:
With his extensive experience in economic and financial policy, and very strong record of service at the highest levels of government in this country and internationally, Sir Jon Cunliffe will be an outstanding Deputy Governor of the Bank of England.
Sir Jon will be instrumental in ensuring the success of the Bank’s enhanced responsibilities for financial stability. His deep experience in engaging with the European Union will be instrumental in ensuring Britain’s financial services are well represented and protected. I wish him well in his new role.
Tucker, announced he was stepping down on 14 June after missing out on the governor job to Canadian Mark Carney. Here is how the Guardian covered it.
Sir Jon Cunliffe appointed BoE deputy governor
… and a new role for BoE’s Tucker
And our economics correspondent Heather Stewart highlights where the departing Bank of England deputy governor, Paul Tucker, is headed
New BoE deputy governor?
Good afternoon. Katie Allen here taking over from Graeme Wearden. A quick bit of news from Robert Peston at the BBC on a possible imminent announcement from the Bank of England:
Portugal ‘planning tax cuts’
With its political crisis behind it, Portugal’s government is pledging to help its battered private sector return to growth with some tax-cuts next year.
Portugal’s government on Friday promised gradual cuts in corporate taxes from early 2014 as part of fiscal reform to boost investment and help drag the bailed-out economy out of its deepest recession since the 1970s.
Austerity measures under the 78-billion euro bailout have led to a steep rise in company bankruptcies and pushed unemployment to record levels of around 18 percent.
“The main economic priority is the attraction of local and foreign investment, and the reform of the corporate tax system is crucial,” said Antonio Pires de Lima, Portugal’s new economy minister, told reporters.
Portugal’s turmoil this month has shown the limits of Mario Draghi’s pledge. The threat that its coalition government might collapse, sinking its bailout programme, sent bond yields soaring briefly. Political instability (along with social unrest) is beyond Draghi’s remit.
Also, it’s worth noting that Portugal didn’t appear in the graph of easing bond yields I posted from the WSJ at 9.20am. It’s 10-year bond yield has been more dramatic in recent weeks:
And at that point, I’m handing over to my colleague Katie Allen – have good weekends, all. GW
Draghi’s pledge, what the analysts say (2)
Are we giving Draghi too much credit for dampening the eurocrisis fires?
Stephen Lewis, chief economist at Monument Securities, points out that while the ECB has been talking a good game, the Federal Reserve has actually been acting – with its $85bn per month bond-buying programme.
The Fed’s actions have helped push up eurozone bond prices (and thus pushed down borrowing costs, or yields), as investors look for decent returns on their money.
Lewis points out the IMF warned yesterday that the eurozone crisis could flare up again if the Fed bungles the process of ‘tapering’ QE. He writes:
Mr Draghi’s trick with the OMT has attracted most of the credit for the easing in conditions but the Fed’s action was instrumental in generating the liquidity to drive the compression of yield-spreads in Europe. The IMF’s fear, evidently, is that this process would fizzle out or reverse if the Fed were to cut back on the flow of liquidity.
On the previous occasions when the Fed scaled back or terminated asset-buying programmes, there had been little prior seepage of Fed-generated liquidity into euro zone bonds. Even the quest for yield was not then strong enough motive to overcome investors’ wariness of the zone’s problems. So, what is different this time, at least as far as the euro zone is concerned, is that QE has interacted with the Draghi pledge to propel capital values to levels that the IMF does not believe would be sustainable on the basis of fundamentals alone.
And if those peripheral bond yields do start rising again, countries may consider tapping Draghi’s OMT programme…
Draghi’s pledge, what the analysts say (1)
Jane Foley of Rabobank points out that ‘forward guidance’ has become more fashionable since the ‘whatever it takes’ speech:
Draghi’s pledge has long since been associated with calming the tension in the EMU through the second half of last year and beyond. As a result this brief statement has won a prominent position in the central bankers’ hall of fame and arguably stirred up interest in the use of forward guidance by central banks.
Despite his success, Draghi cannot claim to be an innovator in the use of forward guidance, she adds:
Central banks such as the RBNZ (Reserve Bank of New Zealand), Norges Bank and Riksbank have been very frank in outlining policy expectations for many years. The BoC has employed forward guidance heavily since 2009. The Fed started to use forward guidance explicitly in August 2011, although it had periodically used a less forceful form earlier in the decade. In its purest form forward guidance is aimed at exerting control over the level of short-term market rates, which in turn has a strong implication for currency markets.
To this end the Norges Bank and Riksbank regularly provide guidance on the anticipated path of policy rates. Earlier this week the RBNZ left no one in any doubt about what it meant by the statement that “we expect to keep the OCR unchanged through the end of the year”.
In the City….
Europe’s financial markets are pretty quiet after Japan’s Nikkei took a near 3% tumble overnight.
The Nikkei was hit by a weakening dollar, which pushed up the yen and sparked fresh fretting on the merits and vibrancy of Abenomics.
After a strong few weeks, the FTSE 100 is on track to post a weekly loss.
The biggest riser on the FTSE 100 is publishing giant Pearson, up 8% on the news that it may sell its financial intelligence business:
Rolls-Royce is the biggest faller, down 4.75% after a strong day yesterday, followed by BSkyB which also released results this morning:
• FTSE 100: down 16 points at 6571, – 0.26% [having ended last week at 6630]
• German DAX: down 41 points at 8257, – 0.5%
• French CAC: up 21 points at 3977, +0.5%
• Spanish IBEX: up 76 points at 8358, + 0.9%
• Italian FTSE MIB: down 15 points at 16416, – 0.1%
And in the currency markets, the euro isn’t showing much bumblebee vigour — down 0.02% at $1.3273.
EU Commissioner Viviane Reding has tweeted Mario Draghi a ‘well done’ message, alongside a reminder that politicians need to use the window of opportunity he created:
Just remembered that the Financial Times beat us to the punch, running their piece on the Draghi speech on Monday afternoon. Good stuff too. Here’s a flavour:
The ECB president calls OMT the “most successful monetary policy measure undertaken in recent times” but has kept the finer details of the programme under wraps.
It is reminiscent of an early scene in the classic 1971 film Dirty Harry. The protagonist, played by Clint Eastwood, confronts a wounded bank robber who is reaching for his shotgun and tells him that the .44 Magnum pointed at his head is the world’s most powerful handgun, but then professes to have lost track of whether he had fired all six bullets in the chamber or just five. The question for the bank robber, and market participants tempted to test the ECB’s resolve, is “do you feel lucky, punk?”
So far, like the bank robber, they have not tested their luck.
Five great Mario Draghi quotes of the last year
Mario Draghi is a quotable chap, and has provided a few choice lines over the last 12 months.
Everyone remembers the “whatever it takes” pledge (see opening post), so here are a few other favourites, starting with one from the landmark speech a year ago today.
The euro is like a bumblebee.
This is a mystery of nature because it shouldn’t fly but instead it does. So the euro was a bumblebee that flew very well for several years. And now – and I think people ask “how come?” – probably there was something in the atmosphere, in the air, that made the bumblebee fly. Now something must have changed in the air, and we know what after the financial crisis. The bumblebee would have to graduate to a real bee. And that’s what it’s doing.
Because of inflation, my family lost a large part of its savings at that time. You can therefore rest assured that I am personally and not only professionally committed to delivering price stability.
That was not smart, to say the least, and it was quickly corrected the day after in a Eurogroup teleconference.
You have a pecking order, and ideally uninsured depositors should be the very last category to be touched.
Well, not really…
We cannot forget that four or five years ago, when the discussions about the adjustment in Greece were taking place, the climate was, in general, much worse. There was a fear of contagion there and very high volatility. That is, in a sense, where the fragmentation of the euro area really started. So, it is always very hard to pass ex post judgement on what happened four years ago. Having said that, rather than looking backwards, why do we not look forward and take stock of the extraordinary progress made and the positive path that has been taken?
You have been very good at making a dull question a sexy one, but in fact it is not a question that really comes first in our priorities. Rather, the answer to your question is not one of our priorities now.
So when OMT is ready to be activated the documentation will be published.
EC spokesman Simon O’Connor also flags up that several national parliaments need to give their approval to the Greek loans. That should be a formality now that the eurogroup officlals are happy that Greece has hit its targets…
Greece’s struggle to satisfy its lenders isn’t over, either. Kathimerini reports that the troika are demanding further measures.
That includes selling its stake in the country’s third-largest bank, and keeping its unpopular property tax in place for longer.
Here’s the story:
According to documents seen by Kathimerini, Greece will have to keep the emergency property tax next year if the government is unable to create a new, single tax on property by the end of September. If ready in time, the new levy will have to raise 2.7 billion euros in 2014. There is also a reference to the possibility of the property transfer tax being scrapped next year, in which case the government will have to increase revenues from other property taxes. The transfer tax brings in about 200 million euros each year.
The pact between Greece and its lenders also foresees the sale of a substantial share in Eurobank, which has assets of almost €80bn, to a foreign strategic investor by the end of March 2014 at the latest. The government will have to find the investor by the end of October so due diligence can begin the following month.
Autumn is going to be interesting…
Relief in Brussels that EU officials have finally agreed that Greece has qualified for its next aid payment:
In total, this bailout tranche is worth €5.8bn. €2.5bn comes from the European bailout facility (EFSF), and another €1.5bn from the income accrued on Greek bonds held EU institutions.
The International Monetary Fund is due to lend another €1.8bn.
Greece gets green light for bailout tranche
Official confirmation that EU finance officials have agreed that Greece has met the conditions to unlock its €2.5bn aid payment.
European Commission spokesman Simon O’Connor tweets the news:
Those ‘national procedures‘ include clearance by a German parliament committee, I believe.
Relief for Athens.
To win the next slice of bailout money, Antonis Samara’s government had to agree various actions with its Troika of lenders – including the details of tens of thousands of job cuts – and then win a parliamentary vote last week.
MPs were then hauled back to parliament yesterday to overturn various “exemptions” to the layoffs, to ensure Greece hit its targets.
Nothing official from the Eurogroup on the Greek bailout payment yet, though – the press office are promising more details shortly…
The decision on Greece’s bailout payment has been made, Bloomberg reports….
Decision on Greek aid payment due soon
Senior euro-area finance officials are holding a conference call this morning to decide today whether Greece has done enough to receive its next aid payment.
They are expected to give the nod to the €2.5bn loan tranche, after Greek MPs voted through amendments that mean it will hit its targets for civil service layoffs.
As one official put it to Reuters:
All prior actions were implemented. This means we can approve.
Kit Juckes of Société Générale wishes us all a happy “Whatever it takes” anniversary:
The euro has held together, no-one has left, spreads are tighter, PMI is back up, sun is shining and even the Spanish unemployment rate has fallen. Mario gets A* for originality and effort, if nothing else.
However, he has two concerns about the impact of Draghi’s speech:
Firstly that by divorcing markets from the Euro Zone’s woes, Mr Draghi tempts politicians into thinking everything is OK. And secondly, like any nuclear deterrent, OMT is fine as long as it remains unused.
It’s a shame Jurgen Stark’s in Handelsblatt saying it WILL be needed in due course.
The Draghi squeeze
This graph, from the Wall Street Journal, shows the gap between the borrowing costs of ‘safe’ countries and ‘risky’ ones has narrowed since Mario Draghi’s speech a year ago today (see opening post).
Former ECB economist sees crisis flaring up again
There’s always a party pooper. Jürgen Stark, the ECB’s former chief economist, has marked the first anniversary of Draghi’s ‘whatever it takes’ speech by predicting that the eurozone crisis will worsen in the autumn.
Stark told Germany’s Handelsblatt newspaper that:
I think the crisis will come to a head in late autumn. We are entering a new phase of crisis management.
Stark dramatically quit the ECB two years ago in (apparent) protest at its early moves to support eurozone governments. He agreed that Draghi’s speech had calmed the crisis, but fears the effect won’t last.
The London speech impressed the markets. .But whether that’s a sustainable reassurance, I doubt.
And for that reason, Stark reckons that the ECB will eventually be forced to pull the trigger on its OMT programme and actually start buying some government bonds — and possibly even support France…
French consumer confidence, the details…
There are signs in today’s consumer confidence data (see also 8.20am) that French households are feeling a little more upbeat.
INSEE reported that households’ opinion about the past general economic situation in France increased by 2 points on its index.
And their view of the general economic situation in the months ahead “noticeably rose” by 6 points, having deteriorated continuously since January:
While this graph shows how the wider consumer confidence reading hit its three month high:
French consumer confidence rises
Some early good news for Mario Draghi to toast as the ECB hangs the bunting up – optimism among consumers in France has risen to a three month high.
INSEE, the national statistics office, reported that Frence consumer confidence rose to 82, beating economist predictions of 79. In another piece of good news for Paris, June’s record low of 78 was revised up to 79.
Morale is clearly low, given the long-term average is 100. But it could add weight to the claims from French ministers that the country is pulling out of recession.
One year on from Draghi’s pledge
Good morning, and welcome to our rolling coverage of the latest events across the eurozone, the financial markets and the global economy.
What a difference a year makes. It’s 12 months to the day since Mario Draghi, European Central Bank president, made perhaps the most telling intervention since the eurozone crisis began.
Just 23 words. That’s all it took to start the process of calming bond yields and strengthening the single currency. And the magic formula, delivered in London, was:
Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.
Out of that pledge came the ECB’s Outright Monetary Transactions (OMT) programme – the promise to buy unlimited quantitites of government bonds from a country struggling to keep borrowing.
Now, OMT may not have been activated (and Draghi remains engagingly evasive about when we’ll actually see the legal tramework for his pet project), but it’s very existence has bought time for eurozone governments.
Whether they’ve spent it wisely enough, we’re yet to learn….
But the impact of Draghi’s statement is clear in the markets today, in the lower borrowing costs enjoyed by the eurozone’s peripheral members.
Spain, for example. It’s 10-year bonds were changing hands at yields (interest rates) of around 7.5% before Draghi dropped his bombshell. Today? Just 4.6%.
As Michael Herzum at fund manager Union Investment, put it to Reuters, Draghi’s speech in London was “the game changer” — allowing investors to stop fretting that the eurozone was about to rip itself apart.
It took the systemic risk out of the market by significantly reducing the likelihood of a break-up of the euro zone.
But there are a problems a mere central banker can’t easily tackle – such as structural economic flaws or record unemploment.
As the Wall Street Journal puts it:
Mr. Draghi’s speech was a game changer for markets, but it did little to restore economic growth or bring jobs to the euro zone. Unemployment is a record-high 12.2% and euro zone GDP hasn’t expanded since late 2011. Spanish and Italian small businesses still pay far higher interest rates on loans than their German counterparts.
“Verbal intervention isn’t enough, you have to do more,” said BNP Paribas economist Ken Wattret. The ECB could purchase large amounts of private-sector assets to stimulate lending but appears reluctant to do so, he said.
Still, with the eurozone hopefully pulling itself out of recession, Draghi can look back on a job well done.
I’ll be tracking all the developments through the day as usual….