Larry Fink Says Dark Clouds for U.S. Economy Aren’t Waning

In World Economy News 18/07/2017

Laurence D. Fink, chief executive officer of BlackRock Inc., said the U.S. economy is growing more slowly than expected and will expand modestly at 2.4 percent in the second quarter.

“There are still dark clouds we have to face,” said Fink, in an interview with Bloomberg News on Monday. While corporate earnings have been good, “we aren’t seeing that rise in personal income we would have thought,” he said.

Fink reiterated his concern that a risk to the market is the White House’s ability to quickly pass key reforms. “Are we going to see tax reform in the U.S.?” said Fink.

The U.S. economy will expand 2.8 percent in the second quarter and 2.2 percent this year, according to a Bloomberg News survey.

In contrast to the U.S. outlook, “it is very positive in Europe,” Fink said. “Because of the political environment in Europe and because of [French President Emmanuel] Macron, I haven’t seen it this strong in 10 or 12 years. ”

Fink made his comments after BlackRock issued second-quarter earnings and reported total assets under management reached $5.7 trillion. Investors have begun to put more assets to work, even as “significant cash remains on the sidelines,” Fink said in a statement.

Revenue missed expectations for the fourth consecutive quarter, according to data compiled by Bloomberg.

Source: Bloomberg

This Magic Formula Reveals How the ECB Might Taper

In World Economy News 18/07/2017

Louis Harreau of Credit Agricole CIB may have cracked the code for how the European Central Bank will end its quantitative easing program.

It’s contained in a simple equation, which he has dubbed the “new generation” Taylor rule, a reference to a tried-and-tested central bank model for setting interest rates based on how much inflation and growth are deviating from their target rates.

His formula goes like this:

Monthly net injection from the ECB in billions of euros (QE +TLTROs) = 120 x (1.5 – core inflation).

How does it work? Harreau observed that before price pressure began to falter in the euro area around 2013, the core inflation would average 1.5 percent a month. So at that level, conventional monetary policy should be enough, he reasons. Harreau then looked closer at three episodes of the ECB’s massive easing program:

• From March 2015 to March 2016, when the ECB began buying assets at a rate of 60 billion euros ($69 billion) per month and carried out a series of targeted long-term refinancing operations, essentially offering cheap three-year loans to euro-area banks.
• From April 2016 to March 2017, when the monthly purchases jumped to 80 billion euros and more funds were loaned to banks, while some of the previous ones were paid off.
• And finally, the current period that runs until the end of this year, when the Governing Council pledged to continue its QE at an average monthly pace of 60 billion euros.

Harreau crunched the numbers and came up with an “A factor” that solves the equation for these three periods: the number 120.

After plugging in his forecast for core inflation, the formula suggests the ECB will reduce its monthly pace of asset purchases to 35-40 billion euros at the beginning of next year, then to 20 billion from July and wrap up the program at the end of 2018.

A classic disclosure obviously applies: past performance is no guarantee of future results. Harreau’s forecast may turn out to be wrong. But he could be on to something.

The euro-area recovery is clearly gathering pace and some policy makers have signaled the decision on how to end the bond buying is getting near. Draghi said in in a speech in Sintra last month that “the central bank can accompany the recovery by adjusting the parameters of its policy instruments – not in order to tighten the policy stance, but to keep it broadly unchanged.”

How that will come about is for Draghi and his colleagues to decide. Their next decision is already this Thursday.

Source: Bloomberg

Global cyberattack could spur $53 billion in losses: Lloyd’s of London

In World Economy News 18/07/2017

A major, global cyber attack could trigger an average of $53 billion of economic losses, a figure on par with a catastrophic natural disaster such as U.S. Superstorm Sandy in 2012, Lloyd’s of London said in a report on Monday.

The report, co-written with risk-modeling firm Cyence, examined potential economic losses from the hypothetical hacking of a cloud service provider and cyber attacks on computer operating systems run by businesses worldwide.

Insurers are struggling to estimate their potential exposure to cyber-related losses amid mounting cyber risks and interest in cyber insurance.

A lack of historical data on which insurers can base assumptions is a key challenge.

“Because cyber is virtual, it is such a difficult task to understand how it will accumulate in a big event,” Lloyd’s of London Chief Executive Inga Beale told Reuters.

Economic costs in the hypothetical cloud provider attack dwarf the $8 billion global cost of the “WannaCry” ransomware attack in May, which spread to more than 100 countries, according to Cyence.

Economic costs typically include business interruptions and computer repairs.

The Lloyd’s report follows a U.S. government warning to industrial firms about a hacking campaign targeting the nuclear and energy sectors.

In June, an attack of a virus dubbed “NotPetya” spread from infections in Ukraine to businesses around the globe. It encrypted data on infected machines, rendering them inoperable and disrupted activity at ports, law firms and factories.

“NotPetya” caused $850 million in economic costs, Cyence said.

In the hypothetical cloud service attack in the Lloyd’s-Cyence scenario, hackers inserted malicious code into a cloud provider’s software that was designed to trigger system crashes among users a year later.

By then, the malware would have spread among the provider’s customers, from financial services companies to hotels, causing all to lose income and incur other expenses.

Average economic losses caused by such a disruption could range from $4.6 billion to $53 billion for large to extreme events. But actual losses could be as high as $121 billion, the report said.

As much as $45 billion of that sum may not be covered by cyber policies due to companies underinsuring, the report said.

Average losses for a scenario involving a hacking of operating systems ranged from $9.7 billion to $28.7 billion. Lloyd’s has a 20 percent to 25 percent share of the $2.5 billion cyber insurance market, Beale said in June.

Source: CNBC

Big Banks Continue Winning Streak, With Street at Least

In World Economy News 18/07/2017

U.S. bank earnings have kicked off without any tumult. Investors should be grateful for that increasing sense of dependability, though they appear to be looking for more.

JPMorgan Chase & Co., Wells Fargo & Co., Citigroup Inc. and PNC Financial Services Group Inc. each delivered second-quarter results on Friday that topped Wall Street’s expectations. On a measure of earnings per share, each bank has improved its respective streaks of beating or meeting analysts’ estimates:

The business of fixed-income trading, which has been a bright spot over the past year, has received outsize attention as it has fallen from grace after a long stretch of low volatility and tepid volumes, as expected. Instead, its quarterly gyrations should be accepted by shareholders just as they withstand changes in the weather, according to JPMorgan’s chairman and CEO Jamie Dimon. He has a point — the diversity of JPMorgan combined with the size of its overall corporate and investment bank, which houses the fixed-income trading business, gives the bank a level of flexibility.

That defense might not stick if JPMorgan’s other businesses weren’t performing, but they are. The bank posted quarterly net income of $7 billion in the three months ended June 30. That was its biggest haul ever, driven in part by a significant jump in net interest income, a direct result of the Federal Reserve’s rate increases. Its efforts to bulk up asset and wealth management, where revenues have roughly doubled since 2006, have borne fruit. Net income for the business climbed 20 percent compared with results in the same period last year to a record $624 million. And for now, despite broad concerns about auto and credit card loans, there’s no need to worry about widespread cracks. The bank’s so-called net charge-off rate, which measures delinquencies, remains minimal.

Overall, there’s little doubt that earnings per share at JPMorgan and its rivals will climb in coming quarters. While a lot of that growth can be attributed to capacious buybacks, it’s heartening to see that other levers such as continued loan growth and the impact of higher interest rates are helping each bank justify their respectively rich valuations. For JPMorgan specifically, its credit card business has gained momentum, illustrated by an uplift in both sales volume and card revenue.

Investors, however, didn’t seem entirely satisfied, punishing bank shares in early trading. That could set an ominous tone for next week, when Bank of America Corp., Goldman Sachs Group Inc. and Morgan Stanley round out earnings season for the big banks.

While the same stability and dependability demonstrated on Friday should carry over, potential negative surprises can never be ruled out. One possible culprit is Goldman, if only because fixed-income, currencies and commodities trading accounts for roughly a quarter of the firm’s revenues. The fact that the bank is reviewing the direction of its commodities business after a weak start to the year indicates that it understands that shareholders won’t be able to continually swallow strings of future swings and misses quite as easily as they can accept the weather.

Source: Bloomberg

ECB considers special assessment of Deutsche Bank shareholders – paper

In World Economy News 18/07/2017

Europe’s top banking regulator, the European Central Bank (ECB), is considering carrying out a special assessment of Deutsche Bank’s two largest shareholders, a German paper reported on Sunday, citing regulatory sources.

The ECB may launch so-called ownership control procedures to scrutinize both the Qatari royal family and China’s HNA , which each own just under 10 percent of the shares of Germany’s flagship lender, Sueddeutsche Zeitung reported in a prereleased version of its Monday edition.

The ECB and Deutsche Bank declined to comment.

The aim of a such an assessment is to establish whether an investor is trustworthy and financially sound, where the money used for the investment came from, and whether the investor engages in any criminal dealings such as money laundering or terrorist financing.

Normally it is only carried out if a shareholder holds more than 10 percent.

The ECB is, however, for the first time considering using a possible exemption to the rule, which it can activate if it establishes that both Qatar and HNA exert significant influence on the bank despite owning a stake of less than 10 percent, the paper said.

Qatar, which has been a Deutsche Bank shareholder since 2014, and HNA, which acquired its stake this year, have each been granted a Deutsche Bank board seat.

Due to the generally low number of shareholders showing up at annual general meetings the two investors can factually block important decisions.

“It looks like both will be treated as if they held more than 10 percent,” a source told the paper, which also reported that HNA’s investment in Deutsche Bank shares prompted the ECB’s move.

Last week, Germany became the first European Union country to tighten its rules on foreign corporate takeovers, following a series of Chinese deals giving access to Western technology and expertise.

Source: Reuters (Reporting by Arno Schuetze and Balazs Koranyi; editing by Susan Thomas)

BoE’s Carney says Libor should be replaced by ‘transaction rates’

In World Economy News 18/07/2017

Interest rates used to price financial contracts worth trillions of dollars should in future be based on actual market transactions and not banks’ judgements, Bank of England Governor Mark Carney said in minutes of a meeting released on Monday.

The pricing of financial contracts based on the London Interbank Offered Rate (Libor) led the BoE and other central banks to look at alternatives based on actual market transactions.

Libor is based on submissions from banks of interest rates they believe they would be charged by other banks for borrowing money.

Carney told industry representatives attending the BoE’s Roundtable on Sterling Risk-Free Reference Rates on July 6 that controls on Libor rate submissions from banks are now much tighter.

But, according to minutes of the meeting released by the BoE on Monday, Carney said a situation where “a judgement-based benchmark underpinned an estimated $350 trillion-worth of contracts was not desirable.”

“The Governor finished by noting that a shift towards robust, fully transaction-based reference rates was necessary and, over time, would happen,” the minutes said.

The BoE is developing its own “risk free” benchmark known as SONIA, but widespread adoption could only proceed with broad support from benchmark users, Carney said.

Source: Reuters (Reporting by Huw Jones; Editing by Rachel Armstrong)

Brexit Puts Financial-Trade Tax on Ice as Banks Start Moving

In World Economy News 18/07/2017

A six-year push to impose a tax on financial transactions in Europe may have run its course, with Germany and France dragging their feet as they prepare for Brexit and a redrawing of the financial map that has already begun.

French Finance Minister Bruno Le Maire said earlier this month that Brexit could bring “thousands of jobs to Paris,” an opportunity that could be lost if the tax were imposed. His German counterpart, Wolfgang Schaeuble, said that “quite a bit speaks in favor of the French argument to look first at how the Brexit negotiations are going.”

With the heavyweight boosters among the 10 countries pursuing the tax getting cold feet, the plan’s future looks bleak.

“Some had said Brexit could prompt further interest” in the financial-transaction tax, said Dan Neidle, a partner at Clifford Chance in London. “In fact it looks like the opposite is the case. Brexit has prompted impressive efforts from the French and others to attract the financial sector — those efforts would be completely undermined by the FTT.”

The European Commission, the EU’s executive arm, proposed the tax in 2011 to make sure the industry made a “fair contribution” after taxpayers bore the costs of the financial crisis. When some member states opposed the levy, a smaller group sought a compromise under “enhanced cooperation” rules. Austria, Belgium, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain are still at the table.

A decision to impose the tax could benefit Ireland and Luxembourg, which have also actively courted the big banks and are not part of the group pursuing the tax.

Finance ministers of the 10 nations haven’t met in months after they hit a snag over the treatment of pension funds. Other open issues include intra-group transfers, tax rates and collection methods, according to an internal document seen by Bloomberg. The scope of the tax also remains to be worked out, the paper states.

Governments have recently grown increasingly wary of pushing the tax while banks in the U.K. are deciding where to move staff to keep servicing clients inside the single market. President Emmanuel Macron’s new French administration has also changed gear and made luring firms to Paris a priority.

“Sure I want the tax, I just want us to take into account this change that is the U.K. exiting the EU,” Le Maire said. “And I want these decisions to be taken collectively.”

Schaeuble said the pause “doesn’t mean a suspension until the end of the Brexit negotiations, but one should be a bit more generous on the time horizon.” German politicians are already pushing to relax the country’s restrictive labor laws to make it more appealing to foreign banks.

Frankfurt has emerged as the biggest winner in the fight for thousands of London-based jobs that will have to be relocated to the EU after Britain quits the bloc. Standard Chartered Plc, Nomura Holdings Inc. and Daiwa Securities Group Inc. have picked the German city for their EU headquarters. Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley are weighing a similar decision, said people familiar with the matter, asking not to be named because the plans aren’t public. HSBC Holdings Plc is the biggest non-French bank so far to opt for Paris.

National elections after Europe’s summer break are creating even more uncertainty. Germans go to the polls in September, followed by Austria a month later. Both have the possibility of bringing a center-right government to power.

So far, the Social Democratic coalition partners of ministers including Schaeuble and Hans Joerg Schelling, his Austrian counterpart who’s leading the talks, have pushed hardest for the tax. Now some socialists in the European Parliament are pointing the finger at France for giving up on the levy.

“France has made a full U-turn from a key ally in the fight for the introduction of an FTT to a foot-dragger — this is really disappointing,” lawmakers Udo Bullmann and Pervenche Beres said in a joint statement. “The financial transaction tax must not be derailed.”

Neidle of Clifford Chance said the momentum has run out for the tax.

“It seemed like people were just letting the FTT talk itself to death, with fundamental design questions still left unanswered after six years of discussions,” he said. “Absent some extraordinary new political development, I see no real future for the FTT.”

Source: Bloomberg

UK Businesses Say ‘Brexit’ Affected Investment Decisions: CBI

In World Economy News 17/07/2017

British firms said ‘Brexit’ has affected their investment decisions, according to a survey from the Confederation of British Industry.

Over 40 percent of respondents said ‘Brexit’ influenced their decision and 98 percent of them said that the impact has been negative.

Companies said that general uncertainty over the UK’s future relationship with the EU has been the negative factor, while the weakness of sterling against the dollar was the only positive contributor.

Almost 60 percent of firms that responded to the survey said that ‘Brexit’ had not affected their investment decisions.

“Across the UK, there are numerous examples of businesses and sectors thriving and providing jobs and growth in local communities,” Rain Newton-Smith, CBI chief economist, said.

“It is reassuring that the majority of businesses that responded to our survey do not feel that Brexit has changed these vital spending plans,” the economist added.

Source: RTT

UK government sees need for phased Brexit: finance minister

In World Economy News 17/07/2017

Senior members of the government are becoming convinced of the need for a phased British departure from the European Union to help protect the economy, finance minister Philip Hammond said on Sunday.

Brexit minister David Davis heads to Brussels on Monday for a first full round of talks, with EU officials hoping the British government, yet to set out detailed proposals on several major issues, begins to show more urgency about doing a deal before Britain leaves the bloc in 2019.

Hammond, who supported remaining in the EU at last year’s referendum, is seen as the voice of a so-called ‘soft Brexit’ within Prime Minister Theresa May’s cabinet, favoring prioritizing trade ties with the EU over curbing immigration.

With May weakened by a failed election gamble last month which saw her Conservatives lose their parliamentary majority, Britain’s weekend papers were full of stories of infighting as cabinet colleagues reportedly vie for her job.

Hammond, regarded as one potential successor to May, has repeatedly talked about the need for a transitional deal, saying such an arrangement would see Britain replicate as much as possible the existing arrangements in order to minimize the impact on business.

Hammond said the majority of his colleagues now recognized this was “the right and sensible way to go”.

“Five weeks ago the idea of a transition period was quite a new concept, I think now you would find that pretty much everybody around the cabinet table accepts that there will be some kind of transition,” Hammond told BBC TV.

“I think you’ll find the cabinet rallying around a position that maximizes our negotiating leverage and gets the best possible deal for Britain.”

Trade minister Liam Fox, who favors making a cleaner break with the bloc, said he did not have a problem with a transition period as long as it was for a limited duration and gave Britain the freedom to negotiate its own trade deals.

Hammond said the government needed to provide as much clarity as possible, as soon as possible, to restore business and consumer confidence and keep the economy moving.

“It is absolutely clear that businesses, where they have discretion over investment, where they can hold off, are doing so … they are waiting for more clarity about what the future relationship with Europe will look like,” he said.

The length of any transition would depend on how long is needed to get new systems in place in areas such as customs and immigration, but it should be a defined period and was likely to need to be “a couple of years,” Hammond added.

Hammond himself was the subject of a number of damaging newspaper stories over the weekend, including one which said he had called public sector workers “overpaid”. The finance minister said he was being attacked for his Brexit views.

“Some of the noise is generated by people who are not happy with the agenda that I have … tried to advance of ensuring that we achieve a Brexit which is focused on protecting our economy, protecting our jobs and making sure that we can have continued rising living standards in the future,” he said.

Former party leader Ian Duncan Smith told the BBC that there was no appetite among Conservative lawmakers for a leadership contest and said his colleagues should “shut up” and “let everyone else get on with the business of governing”.

Gus O’Donnell, Britain’s former top public official, told the Observer newspaper that the chances of a smooth Brexit were at risk of being derailed by squabbling ministers.

“It appears that cabinet members haven’t yet finished negotiating with each other, never mind the EU,” he said, adding that there was “no chance” all the details of Brexit could be hammered out before the March 2019 deadline.

“We will need a long transition phase and the time needed does not diminish by pretending that this phase is just about ‘implementing’ agreed policies as they will not all be agreed.”

Source: Reuters (Additional reporting by William Schomberg; Editing by Keith Weir)

Eurozone Inflation Slows As Estimated

In World Economy News 17/07/2017

Eurozone inflation slowed to a 6-month low in June as estimated, final data from Eurostat showed Monday.

Inflation eased slightly to 1.3 percent in June from 1.4 percent in May. The rate came in line with the flash estimate published on June 30.

This was the weakest rate seen so far this year. The European Central Bank targets inflation ‘below, but close to 2 percent’.

On a monthly basis, the harmonized index of consumer prices remained flat in June.

Core inflation that excludes energy, food, alcohol and tobacco, increased to 1.1 percent in June, in line with preliminary estimate, from 0.9 percent a month ago.

The largest upward impacts to the euro area annual inflation came from accommodation services, package holidays and tobacco, while telecommunication, social protection and bread & cereals had the biggest downward impact.

Source: RTT

German challenger Schulz accuses Merkel of lacking clear plan

In World Economy News 18/07/2017

German SPD leader Martin Schulz set out plans to boost investment and enhance European unity, accusing Chancellor Angela Merkel of making empty promises.

Schulz, the former European Parliament President, is hoping to beat Merkel in a Sept. 24 election but his center-left Social Democrats (SPD) have lost momentum in the polls after initial gains following his nomination in January.

Presenting a 10-point plan for a modern Germany and a better Europe, Schulz told supporters in Berlin that he would compel the state to raise spending on infrastructure and education.

“Germany can do more,” Schulz said.

“If we do not invest heavily in research and development, in electric vehicles and energy-saving production processes, we’ll fall behind,” Schulz said, adding that Europe’s largest economy was being challenged by countries where the state owned or subsidized firms.

Such an investment push would cost “a lot of money”, Schulz said but it would be better to spend the country’s budget surplus that way than wasting it by promising voters tax cuts — a clear dig at Merkel’s conservatives.

Schulz said he was in favor of sticking to Germany’s fiscal rules, also known as the debt brake, but he added: “In addition to the debt brake, we need a minimum level of investment that preserves the substance of our country and makes it sustainable.”

Schulz gave no specific figures but has previously said he wanted to boost investment by 30 billion euros ($34.4 billion) over the next four years to improve schools and other amenities.

Merkel’s conservatives and the SPD currently govern in a grand coalition but Schulz is not a minister.

Turning to Merkel, the SPD leader accused the chancellor of “boastfully promising” full employment while not telling voters how she wanted to achieve this.

Merkel’s conservatives promised Germans more police, more homes and full employment within eight years when they presented their program earlier this month.

Schulz also blamed Merkel and Finance Minister Wolfgang Schaeuble for weakening European unity after having led efforts to impose more austerity measures on Greece as part of the euro zone’s bailout programs.

“If you want to be a state leader in Europe, you must acquire the trust of the peoples,” Schulz said.

“And that’s why for me it is a complete scandal when the chancellor says: ‘We have big plans for Europe, but we’ll only tell you after the election’.”

Schulz said he backed French President Emmanuel Macron’s proposals for a joint euro zone budget to boost investment, adding Germany should also be prepared to increase its financial contribution to the bloc’s first post-Brexit budget after 2019.

Germany already makes the largest net contribution to the EU budget at around 15 billion euros each year.

Schulz pointed out that Poland and Hungary were among the countries that are the biggest net recipients of the EU budget, but both rejected taking in refugees as demanded by a jointly agreed EU deal to share the burden of the migration crisis.

“Solidarity is not a one-way street,” Schulz warned, calling for financial sanctions for those countries that violate the spirit of solidarity in the EU.

Source: Reuters (Reporting by Holger Hansen and Michael Nienaber; Editing by Keith Weir)

Merkel tells voters: Brexit, French poll changed my view on Europe

In World Economy News 17/07/2017

German Chancellor Angela Merkel told voters on Saturday that Britain’s decision to leave the European Union and France’s election of President Emmanuel Macron had changed her view on the bloc, adding it was worth fighting for a stronger Europe.

Merkel’s comments, made in a speech in the Baltic Sea resort town of Zingst two months before a federal election, underline her personal determination to deepen European integration if she is re-elected for a fourth term.

Calling European Union membership one of Germany’s biggest strengths, Merkel said last year’s Brexit decision and elections in France and the Netherlands, in which pro-European parties defeated populist candidates, had changed her perspective.

“For many people, including myself, something changed when we saw the Britons want to leave, when we were worried about the outcome of the elections in France and the Netherlands,” Merkel told voters, some of whom wore straw hats with black-red-and-gold hatbands, the colors of the German flag.

The center-right chancellor admitted that the EU was far from perfect and that Brussels sometimes was too bureaucratic.

“But we have realized in the past few months that Europe is more than just bureaucracy and economic regulation, that Europe and living together in the European Union have something to do with war and peace, that the decades of peace after World War Two would have been completely unthinkable without the European Union,” Merkel said to applause.

Many people in the past had taken the EU and its advantages for granted — such as freedom of speech, freedom of religion and freedom to travel, said Merkel who grew up in communist East Germany.

“You don’t have all this in many parts of the world. And that’s why it is worth fighting for this Europe,” Merkel said.

“That’s why one of our election placards is saying: If Europe is stronger, then Germany will be stronger. This is directly related.”

Merkel has said she is open to proposals of strengthening the single currency through the creation of a euro zone finance minister who would oversee a pooled budget for investments and transfers intended to help member states cushion downturns.

Source: Reuters (Reporting by Michael Nienaber, Reuters TV; Editing by Stephen Powell)

ECB Patience Endures as Villeroy Awaits Change of Season

In World Economy News 11/07/2017

European Central Bank policy makers aren’t showing much of a rush to start tweaking their monetary policy as they count the days until their summer holidays.

The Governing Council is likely to decide on the next change in its stimulus settings in the fall, according to comments on Saturday from Francois Villeroy de Galhau, the Bank of France governor. ECB Chief Economist Peter Praet, speaking in a newspaper interview released the same day, insisted that “we still need a long period of accommodative policy.”

With the next policy update scheduled for July 20, and a break from all meetings for more than a month after Aug. 2, the tone of the comments suggest officials are practicing the patience that ECB President Mario Draghi called for at the June decision. He said then that the euro zone economy still needed “very substantial” stimulus.

“What we have to do, and what we started to do, is to adapt the intensity of this accommodative monetary policy to the progress toward our inflation target and toward economic recovery,” Villeroy de Galhau said in a Bloomberg Television interview. “In the future, and this will be our decision next fall, we will go on adapting the intensity of this monetary policy.”

December Blueprint

Villeroy’s remarks add to signs that the ECB intends to pare back stimulus in a way that doesn’t tighten financial conditions. Both the French governor and Executive Board member Benoit Coeure have suggested in recent days that the Governing Council’s action last December could serve as a blueprint for adjusting policy. At the time, they announced the monthly level of bond buying would be cut to 60 billion euros ($68 billion) from 80 billion euros starting in April, arguing the reduction was reflective of a lower risk of deflation.

“We scaled back our asset purchases without undermining the support given to the economy,” Coeure said in an interview published Friday. “If needed, the Governing Council will continue to adjust its instruments both qualitatively and quantitatively.”

Both those officials also stressed the importance of transparently communicating changes to policy, with Coeure warning that otherwise there could be more abrupt adjustments in the markets when decisions are actually taken. Villeroy argued the ECB has been “extremely clear about the visibility, predictability of our monetary strategy.”

Not all of their colleagues on the Governing Council agree that gradualism is the best approach. Dutch Governor Klaas Knot warned on Friday evening that the central bank is “very close to the point” of keeping quantitative easing for too long, noting that the global financial crisis was partly caused by too much money being pumped into the system. In a less urgent tone, his German counterpart Jens Weidmann said last week that the perspective of monetary-policy normalization was opening as the economy continues to recover.

Subdued Inflation

Still, consumer-price growth — currently at 1.3 percent — remains a long way from the ECB’s goal, and isn’t forecast to return toward it until at least late 2019. Subdued inflation pressures are a key concern for Praet, who pieces together the Executive Board’s policy proposals and presents them at each Governing Council meeting, and has been a vocal advocate of patience.

That might augur a quiet summer for the ECB as officials mull their next steps. Key to the Governing Council’s eventual decision on stimulus is how the economy develops, and data due this week is likely to underline the region’s recent upturn. Industrial production is forecast to have risen in May by the most since November after beating expectations in three of its four largest economies.

Data on Monday showed Dutch and Finnish production accelerated in May, and German exports picking up.

“We should be patient and persistent regarding our monetary policy,” said Praet in his interview with Belgian newspaper De Standaard. “Inflation is picking up, but that is a process that is a long way from completion.”

Villeroy de Galhau echoed that in his interview with Bloomberg Television. What matters most is the real economy, and the ECB should not let itself be distracted by political pressures or investor impatience, he said.

“The most influential members of the Governing Council are pragmatists,” he said. “I clearly am a pragmatist.”

Source: Bloomberg

Greece plans to create a state development bank in 2018

In World Economy News 11/07/2017

Greece is eyeing the creation by mid-2018 of a state development bank that would lend to small and medium-sized enterprises (SMEs) to aid the recovery from its long economic crisis, government officials said on Monday.

SMEs account for more than 85 percent of companies in Greece, according to some assessments, meaning they are a key driver of economic growth, but they have been starved of financing by commercial banks, which are loaded with bad loans.

“Our aim is to free up the liquidity which is trapped due to the high load of non-performing loans and to boost the network of partner banks,” a senior government official told Reuters.

Years of austerity have left people and businesses struggling to repay their lenders.

The government council for economic affairs is expected to discuss the development bank’s structure later this month, the official said, and the government aims to submit a draft law to parliament in September.

Greek authorities have sought technical support from the World Bank and European institutions, two officials said.

The bank is likely to be jointly managed by the finance, economy and energy ministries and the government is exploring whether funds from the public investment budget can be transferred to the new lender, one of the officials said.

Foreign development banks have also shown an interest in participating in the project, one government official said.

An initial plan to set up a development bank has already been approved by Greece’s euro zone partners. They last month concluded a crucial review of its reform progress and outlined debt relief measures to be carried out in 2018, when its third international bailout, worth 86 billion euros, expires.

The development bank, which will not take deposits, will bring together existing state bodies such as the Hellenic Fund for Entrepreneurship and Development and partner banks in different Greek regions.

It will also advise potential investors in Greece, the official said.

Source: Reuters (Reporting by Renee Maltezou; Editing by Catherine Evans)

Italy’s bank rescues raise issue of EU state aid rule changes – Dijsselbloem

In World Economy News 10/07/2017

The head of euro zone finance ministers said on Monday that Italy’s winding-down in June of two banks from the Veneto region had raised the question of whether European Union rules on state aid should be changed.

EU state aid rules for banks were revised in the wake of the 2010-2012 euro zone debt crisis and allow public support for lenders after shareholders and junior bondholders have contributed to the rescue.

The state aid rules are less strict than more recent banking rules, known as the bail-in, which dictate that senior bondholders and uninsured depositors must take losses before taxpayers’ money can be used to help banks.

“The question is if the state aid rules, that apply in any case, should not be adjusted now,” Jeroen Dijsselbloem told reporters in reply to a question on whether Italy’s public rescue of Veneto Banca and Banca Popolare di Vicenza was in line with the spirit of EU banking rules.

Arriving at a regular meeting of euro zone finance ministers in Brussels, Dijsselbloem said EU banking rules were respected by Italy, but that a discussion would be held at the Eurogroup meeting on possible changes to EU competition rules.

“We need to make sure that even if other legal frameworks apply, the state aid rules should be to the same kind of level,” Dijsselbloem said.

EU rules are proposed by the executive European Commission and approved by EU states and the European Parliament. Italy used the state aid framework to wind down the Veneto banks.

Arriving at the same meeting, the European Commission vice president in charge of the issue, Valdis Dombrovskis, said the EU executive “at a certain stage” will discuss whether state aid rules for banks need to be changed.

But he stressed that there would be no proposal for the moment as possible side effects of amending the rules need to be carefully assessed.

As he arrived at the meeting, German Finance Minister Wolfgang Schaeuble said Italy had “done very well” in handling problems with troubled banks and that its actions were a good basis for further improvements.

Source: Reuters (Reporting by Francesco Guarascio @fraguarascio; Editing by Robin Emmott and Catherine Evans)

UBS CEO says Italy bailouts were inevitable after new EU rules

In World Economy News 11/07/2017

UBS Chief Executive Sergio Ermotti believes that the recent state bailout of Italian banks was unavoidable due to new rules on “bail-ins” from European authorities which would have affected retail investors in the country.

“No, it (the state bailout) should not happen that way but it was almost inevitable considering the fact that bail-in-able bonds, so highly risky bonds … were placed with retail investors,” he told CNBC last Thursday in an exclusive interview.

A bail-in is seen as an alternative to a bailout – the use of state funds to help out an ailing bank. A bail-in is the rescue of a financial institution by making its creditors and depositors take a loss on their holdings. The European Union drew up new rules which opted for the use of bail-ins after many years of state bailouts since the euro zone sovereign debt crisis which had left the taxpayer on the hook.

However, this new regime carries big political risks, especially in Italy where bonds of banking institutions are a popular asset for retail investors.

“I think that was a wrong decision to allow this (the bail-in rules) to happen a few years ago. So it was almost inevitable, but politically speaking, and socially speaking (it) was not acceptable in my point of view to have retail bondholders to be bailed in,” Ermotti added.

Despite the new EU rules – known as the Bank Recovery and Resolution Directive – Brussels allowed Italy’s government to bailout Monte dei Paschi with public funds earlier this month.

This controversial move came around 10 days after Italy again received support from the European Commission for its pledge of a state guarantee of up to 17 billion euros ($19.4 billion) as part of a plan to dismantle two troubled Venetian banks.

The use of taxpayer money to resolve problems and therein protect retail bondholders in all three banks has been highly contentious given it flies in the face of the European Commission’s commitment to avoid bailouts and all of the recent legislation.

UBS’ Ermotti suggested the debacle could have been avoided if high-risk bonds had not been passed on to retail investors a few years ago.

“It’s very important to be very careful in this process when you place the bonds to be sure that people understand the risks they are taking and, in my point of view, those kind of instruments should never be placed with retail investors,” Ermotti said.

Italy’s banking sector has been struggling for years under the weight of a mountain of bad debt, and defenders of the state aid say the government’s and the European Commission’s broader aim of lowering systemic risk validates the decision.

Source: CNBC