Euro zone survey data point to robust first quarter, ECB says

In World Economy News 24/03/2017

Economic recovery in the euro zone is gaining ground and some data point to robust momentum in the first quarter despite uncertainty over Brexit, China’s rebalancing and new U.S. policies clouding the outlook, the European Central Bank said on Thursday.

“Incoming data, notably survey results, have increased the Governing Council’s confidence that the ongoing economic expansion will continue to firm and broaden,” the ECB said in its regular economic bulletin. “Surveys point to a robust growth momentum in the first quarter of 2017.”

Global trade, a key contributor to growth, also seems to be picking up momentum and despite increasingly protectionist rhetoric from Washington world trade is expected to expand broadly in line with global activity, the ECB added.

The United States has recently backed away from a pledge for free and open trade, calling for a review of some trade agreements and proposing in import duty tax, arguing for “fair” trade.

Indeed, the ECB said that uncertainty remains elevated, particularly due to the lack of clarity regarding the new U.S. administration’s “America First” policies and their impact on the rest of the world.

But even as growth picks up, the ECB warned that the rise in inflation will be more subdued with oil futures implying a stable crude prices and suggesting only a “very limited” impact from energy prices on inflation.

Having fought ultra low inflation for years, the ECB remains concerned that the recent spike in price growth is only due to rising oil prices and thus temporary, requiring continued stimulus.

The bank noted that wage growth, a key condition for a rise in inflation, remains low by historic standards, suggesting ample slack in the economy and weak productivity growth.

“In contrast to energy inflation, the expected pick-up in (headline) inflation excluding energy and food is likely to be much more gradual,” the ECB said. “There are only weak signs of upward pipeline price pressures.”

Source: Reuters (Reporting by Balazs Koranyi, editing by Jeremy Gaunt)

ECB’s Free Money Has Helped Banks More Than It Aids the Economy

In World Economy News 24/03/2017

When the European Central Bank announced its targeted lending program back in 2014, policy makers including President Mario Draghi held out great hopes that it would finally get financial institutions extending credit to companies and households again.

Based on that narrow measure, it has been a flop.

Since the cash from the first of the Targeted Longer-Term Refinancing Operations landed at euro-area banks in September 2014, lenders have taken hundreds of billions of euros in funds, mostly for free. Yet from that day until now, total outstanding credit to the private sector has increased a mere 0.42 percent.

The outcome doesn’t match the intentions expressed by ECB Executive Board member Benoit Coeure in July 2014, when he said that “the idea is not simply to offer funding relief to banks, but to offer clear incentives for them to allocate new credit to the real economy.”

Yet the Frankfurt-based central bank didn’t introduce just one policy that summer — long before quantitative easing was agreed — but several, including reducing its deposit rate below zero for the first time. With those negative rates adding to the squeeze on banks already suffering from weak profitability, a massive bad-debt pile and regulatory uncertainty, the TLTRO has morphed into a subsidy that prevented an even worse outcome.

“Judged against the criteria of whether it has significantly increased bank lending, the TLTROs haven’t been a success,” said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam. “Judged against the criteria of ‘has it been a worthwhile program to support the banking sector in a period of negative rates?’ then yes, it has been worthwhile.”

The first series of TLTROs was designed in such a way that the more banks lent to the real economy, the more central-bank funding they could get at ultra-low rates. The terms and the price of the offers were substantially watered down in 2016 as the euro area flirted with deflation. As it stands, the ECB might end up actually paying banks to take its cash.

When Draghi announced the program and negative rates in June 2014, it was alongside purchases of asset-backed securities, the extension of fixed-rate full allotment and the end of operations aimed at absorbing liquidity from crisis-era programs.

“The underlying spirit is that we want to enhance lending to the non-financial companies in the private sector,” he said then.

Lending to households for consumption has fared better than corporate funding, increasing 4.2 percent over the period, but spurring a consumer-credit pickup was never the central bank’s core aim. A real economic recovery requires companies to invest, create jobs, and increase production.

Piecemeal Approach

And if anything is bringing the currency bloc to that point it’s the much larger, and much later, program of quantitative easing. The bond-buying plan, now scheduled to total 2.28 trillion euros ($2.5 trillion), was eventually launched in March 2015, demonstrating how schisms in the 25-member Governing Council have forced the ECB to roll out its response to the region’s post-crisis collapse and stagnation piecemeal rather than all at once.

TLTROs may be one instance where central bankers can’t just conjure up a reality by saying it. The program was always a little like pushing on a string. While the ECB initially calculated a theoretical maximum take-up for TLTRO-2 of 1.6 trillion euros, in the absence of demand for credit the actual volume has been less than half that.

Instead, the program may have helped ameliorate a particularly negative set of circumstances for lenders in the adjustment period after the financial crisis. The banking sector, particularly in Italy, still hasn’t been freed from the burden of 921 billion euros of non-performing loans, according to a separate ECB report published Thursday.

Vicious Cycle

And lenders have to somehow make money in an environment where the official deposit rate of minus 0.4 percent means interest margins are squeezed. For every million euros parked at the ECB each year, banks have to pay 4,000 euros, and that’s a cost they’ve struggled to pass on to customers — though some have tried.

That suggests that the expectations for TLTROs of the ECB’s chief economist, Peter Praet, from July 2014 may have been more realistic. Then, he spoke about the need to “halt the vicious cycle of constrained lending, weak macroeconomic conditions and elevated loan delinquencies.”

The ECB can claim some success on that front. Annual growth rates of credit to the real economy have been modestly positive since the end of 2015. In other words, without the credit-easing measures, things could have been much, much worse.

“Looking at the transmission to the real economy, it’s too early to say whether it was a success,” said Annamaria Grimaldi, an economist at Intesa Sanpaolo SpA in Milan, which took up 12 billion euros in Thursday’s round. “But it was also constructed with a different logic: to give back to the banks what they lost from negative rates.”

Source: Bloomberg

Greece says to support Rome declaration, calls for EU backing on labour reforms

In World Economy News 24/03/2017

Greece will support a declaration marking the European Union’s 60th birthday but needs the bloc’s backing against International Monetary Fund demands on labour reforms, Greek Prime Minister Alexis Tsipras said ahead of a Summit in Rome on Friday.

In a letter addressed to EU Council President Donald Tusk and Commission President Jean Claude Juncker, Tsipras called for a clear statement on whether the declaration would apply to Greece, as talks over a key bailout review hit a snag again.

“We intend to support the Rome Declaration, a document which moves in a positive direction,” Tsipras said.

“Nevertheless, in order to be able to celebrate these achievements, it has to be made clear, on an official level, whether they apply also to Greece. Whether, in other words, the European acquis is valid for all member states without exception, or for all except Greece.”

Earlier this week, Greece threatened not to sign the Rome declaration, demanding a clearer commitment protecting workers’ rights – an issue on which it is at odds with its international lenders who demand more reforms in return for new loans.

The disagreements among Athens, the EU and the IMF – which has yet to decide whether it will participate in the country’s current bailout – have delayed a crucial bailout review.

As leaders prepared for the summit, Greek ministers were negotiating with lenders’ representatives in Brussels pension cuts and labour reforms, including freeing up mass layoffs and on collective bargaining. The latest round of talks ended inconclusively late on Thursday, according to Greek officials.

Athens agreed last month to adopt more measures to help convince the IMF to participate in its third, 86-billion euro bailout, as demanded by EU countries including Germany, which faces a national election later this year.

Greece has cut pensions 12 times since it signed up to its first bailout in 2010. It has also reduced wages and implemented labour reforms to make its market more flexible and competitive.

Tsipras’ leftist-led government came to power in 2015 promising to end austerity but signed up to a new bailout to keep the country in the eurozone. It was later re-elected on a mandate to protect workers’ and pensioners’ rights, but opinion polls show its popularity ratings sagging.

Tsipras said Greece had met its bailout terms on fiscal adjustment and implemented labour reforms, which were not in line with EU best practices.

“I ask for your support in order to protect, together, the right of Greece to return to the standards of the European social model,” he said.

Source: Reuters (Reporting by Renee Maltezou; Editing by Michael Perry)

Euro zone banks take more ultra-cheap ECB loans than expected

In World Economy News 24/03/2017

Euro zone banks took up more ultra cheap long-term cash from the European Central Bank than expected on Thursday, tapping into the last auction of an unconventional tool designed to revive the bloc’s economy.

Some 474 banks took up 233.5 billion euros of four-year loans in the last targeted longer-term refinancing operation (TLTRO), well above the 125 billion euros expected in a Reuters poll, suggesting that banks are keen to stock up on cheap cash in anticipation of a continued rise in lending.

Unveiled a year ago when lending growth hovered near zero, TLTRO provides banks with interest-free funding and even a possibility for a rebate if they lend the cash to the real economy.

But corporate lending growth is at its highest since 2009 and economic growth is relatively robust, so the ECB decided last month not to extend the TLTRO scheme, a move seen by some as small step towards policy normalization.

Indeed, the ECB will cut month asset buys, also a tool to lower funding costs to revive growth, to 60 billion euros per month from 80 billion euros from April.

Even with the end of the four-year TLTRO, banks will continue to have access to weekly loans from the ECB at a zero percent interest rate.

Source: Reuters (Reporting by Andreas Framke; Editing by Francesco Canepa)

London banks need to move key functions to EU to keep access – ECB

In World Economy News 24/03/2017

The European Central Bank expects London-based banks seeking to keep access to the European Union’s single market once Britain leaves the bloc to move key functions, branches and dealing operations, the ECB’s top supervisor said on Thursday.

The ECB, the euro zone’s banking supervisor, has had many inquiries from British-based banks wanting to come under its watch and may give them an expedited entry.

But Daniele Nouy reiterated Frankfurt would not sanction “empty shells” and said bank branches as well as key functions should be attached to the holding company supervised by the ECB.

“We don’t want to authorise empty shells,” Nouy, head of the ECB’s Single Supervisory Mechanism (SSM), told a hearing of the European parliament.

“We want what is needed in the SSM to be domiciliated in the SSM, so internal control, risk management and so forth.”

She said the ECB should be allowed to supervise broker-dealers, too, closing a loophole and giving it authority over a key area of business for investment banks.

“Some investment banks in London can be attracted by countries saying ‘I will give you the status of broker-dealer so you’ll be supervised by me and not by the SSM’,” Nouy said.

“So this will have to be addressed.”

British Prime Minister Theresa May will trigger divorce proceedings with the European Union on March 29, launching two years of negotiations that will help determine the future of Britain and Europe.

Brexit could reshape Europe’s financial landscape if Frankfurt, Paris, Luxembourg and Dublin win business from London.

Source: Reuters (Reporting by Francesco Canepa; Editing by Catherine Evans)

BOE’s Broadbent Says Impact of Pound’s Fall Is Uncertain

In World Economy News 24/03/2017

The strength of U.K. economic growth in coming years will partly depend on whether exporters respond to a weakened currency by investing to increase their capacity, or hold back in response to uncertainty about the future terms of the country’s trade with the European Union and the rest of the world, a senior Bank of England official said Thursday.

The pound shed almost a fifth of its value against the U.S. dollar in the wake of a June 2016 vote to leave the E.U. That depreciation has raised U.K. prices of imported goods and services, and BOE Deputy Gov. Ben Broadbent said there are already signs that is hitting consumer spending.

But the weaker currency has also boosted pound profits for exporters, and that may spur them to invest in new plant and equipment so as to sell more goods and services overseas. In a speech at Imperial College, Mr. Broadbent said exporters are in a “sweet spot,” but have reason to doubt that will last.

Source: Dow Jones

Brexit: Single market benefit ‘largely imaginary’

In World Economy News 24/03/2017

The trade benefits of belonging to the European Union have been “largely imaginary”, according to the social policy think-tank Civitas.

Its analysis argues that exports from non-EU countries to the single market have grown faster than the UK’s, since its creation in 1993.

That lends weight to the argument that no EU deal is better than a bad deal, the author argues.

Other economists say the UK has benefitted from EU membership.

Theresa May will start talks on the UK’s departure from the EU on 29 March.

The prime minister will officially notify the EU of the UK’s intention to leave by triggering “Article 50” and writing to European Council president Donald Tusk.

Civitas, whose research has previously been cited by pro-Brexit campaigners, said the UK’s export growth to the EU had been outstripped by many economies in the last 20 years.

Michael Burrage, the report’s author, said that before joining the single market in 1993, the UK’s exports to the EU grew at a faster rate than major economies such as the US, Canada, Australia, Switzerland, Norway, South Africa and Brazil.

But since joining, export growth from those countries to the EU has now overtaken that of the UK’s – a development he said was counterintuitive.

What is the single market?

This usually refers to the European Union’s single market and is perhaps the most ambitious type of trade co-operation.

That’s because as well as eliminating tariffs, quotas or taxes on trade, it also includes the free movement of goods, services, capital and people.

A single market strives to remove so-called “non-tariff barriers” – different rules on packaging, safety and standards. Many others are abolished and the same rules and regulations apply across the area.

There are EU-wide regulations covering a whole host of industries and products on everything from food standards and the use of chemicals to working hours and health and safety.

For goods, the single market was largely completed in 1992, but the market for services remains a work in progress a quarter of a century later.

Other economists disagree. Jonathan Portes, economics professor at King’s College London, said there was plenty of evidence to suggest that the single market had been good for the UK.

“A lot of industries are dependent on the EU not just for zero tariffs, but also for regulation,” he said, pointing in particular to the car and pharmaceuticals sectors.

After leaving, the two alternatives are either setting up the country’s own regulatory structure, which takes time and is complicated, or using the EU’s, in which case we end up using the same rules as previously but have no say in how they are made, he said.

“It won’t be the end of the world, but it won’t be pain-free either,” said Mr Portes.

‘Vastly exaggerated’

Over the past two decades, 14 economies – including Canada, India and the US – that trade under World Trade Organization (WTO) rules had increased their exports of goods to the 11 founding members of the single market faster than the UK, the study said.

“The evidence shows that the disadvantages of non-membership of the EU and single market have been vastly exaggerated and that the supposed benefits of membership, whether for exports of goods and services, for productivity, for worldwide trade, or for employment, are largely imaginary,” the study said.

“The government appears to have decided to leave the single market on the basis that we should return full control of UK laws to the UK, but trade data also offers strong support for the decision and provides comfort for those worried about relying on WTO rules if no deal emerges,” it added.

Mr Burrage said that UK exports have grown faster to 111 countries with which it trades under WTO rules than to the 14 other early members of the single market.

Source: BBC

Chief EU Brexit Negotiator Warns Britain of ‘Serious Consequences’ if No Deal Is Reached

In World Economy News 23/03/2017

European Union’s chief Brexit negotiator gave the U.K. a stark warning about the serious consequences it would face if it fails to agree to divorce terms with the bloc.

Speaking days before the U.K. is due to trigger its formal exit notification from the bloc, Michel Barnier on Wednesday warned Britain’s government that the U.K. would be “gravely affected” if there was no deal at the end of the two-year negotiation window.

“We have to call a spade a spade, there won’t be any business as usual,” Mr. Barnier said. “This is not a minor event. It’s a serious and exceptional situation.”

He said that in the case of no deal, British businesses would face significant supply-chain problems, the reintroduction of customs controls that could gum up British ports and there would be major challenges for seamless air travel to and from the U.K.

Even the supply of nuclear material to the U.K. would be at risk because the U.K. would be left outside of the EU’s nuclear-research and safety agreement, he said.

“This scenario of a nonagreement, of ‘no deal’, is not ours. We want a deal. We want to succeed,” Mr. Barnier told an assembly of regional and local EU politicians in Brussels.

Prime Minister Theresa May said in a keynote speech on Brexit in January that while the British government also hopes for a Brexit agreement, “no deal is better than a bad deal.” On Monday, she said she plans to trigger Brexit negotiations on March 29.

Mr. Barnier said divorce talks initially would focus on settling the rights of EU citizens in the U.K. and British citizens in the EU, something he said would take at least several months.

The two sides would also need to settle early on the issue of Britain’s Brexit bill — what the U.K. must pay in the future to meet its past legal commitments to the EU budget and other programs.

EU officials have put that figure at around EUR55 billion to EUR60 billion ($59.4 billion to $64.8 billion).

“When a country leaves the Union, there is no punishment. There is no price to pay to leave. But we must settle the accounts. We will not ask the British to pay a single euro for something they have not agreed to as a member,” Mr. Barnier said.

A third priority will be issues around Northern Ireland to avoid the restoration of a hard border with major customs controls between the U.K. territory and the rest of Ireland.

“That is why we will be particularly attentive, in these negotiations, to the consequences of the U.K.’s decision to leave the customs union, and to anything that may, in one way or another, weaken dialogue and peace,” he said.

The French official said these issues around the U.K.’s exit from the bloc would need to be addressed first. Only then could the U.K. and the EU start discussing their future trade and economic relationship.

“The quicker we reach agreement on the principles of an orderly exit, the sooner we will be able to prepare our future relationship,” he said.

U.K. ministers have repeatedly said there is no reason the EU and the U.K. can’t use the two-year negotiation window to set the divorce terms and pave the way for a future trade agreement. Other EU officials have said it would likely take the two sides years to negotiate and ratify a future trade pact.

EU leaders, excluding Mrs. May, will meet in Brussels on April 29 to set the guidelines for the talks. That will set out what issues should be included in the Brexit talks and in what kind of order.

The EU must then agree to a detailed negotiating mandate for Mr. Barnier, meaning substantive discussions between the U.K. and the EU would likely start only in May or June.

On Tuesday, Mr. Barnier said a future free-trade agreement would form the centerpiece of the future EU-U.K. relationship.

However, he also said he hopes there will be close cooperation in areas including climate change, counterterrorism and defense.

However, he warned the British government it shouldn’t use its major contribution to Europe’s defense capabilities as a bargaining chip in the Brexit talks.

“In the negotiations, security can’t be traded off against economic and commercial interests,” the former French foreign minister said.

As a new relationship will take years to negotiate, Mr. Barnier said several transitional arrangements may be necessary, which will be limited in time and won’t open a backdoor to U.K. access to parts of the single market.

Source: Dow Jones

Citi says EU ‘equivalence’ regime no answer to Brexit banking question

In World Economy News 23/03/2017

British-based banks would be foolhardy to expect to retain access to European Union markets in return for sticking closely to the bloc’s rules after Brexit, a senior banking official said.

Banks in Britain can currently trade across the bloc’s single market under European “passporting” rules, but this is expected to end after the UK pulls out of the EU in 2019.

Lawyers have said that entry to EU markets could continue under “equivalence”, a system whereby Brussels grants access to non-EU firms that comply with rules similar to those in the bloc. This argument is now being challenged as Britain prepares to trigger formal EU divorce talks next week.

“I am quite alarmed that so much emphasis is being put on this because equivalence is a very specific concept,” said Alan Houmann, head of European government affairs at Citi bank, and a senior member of TheCityUK, Britain’s main Brexit lobby group for financial services.

Law firm Hogan Lovells had found that access based on “equivalence” is only available for a quarter of all financial services legislation, he said.

“So it is not something ‘an investable proposition.’ You wouldn’t make an investment off the back of an equivalence provision in the directive,” Houmann told a banking conference.

“Secondly, they can be revoked at very short notice, 30 days’ notice….So equivalence is not the answer.”

Citi already has a base in another EU country, Ireland, but other banks must decide how they will continue serving customers inside an EU of 27 countries.

Goldman Sachs said this week it will begin moving hundreds of people out of London before Britain strikes a Brexit deal.

A draft report from law firm Freshields for the TheCityUK – seen by Reuters this month – floated the idea of “mutual recognition”, which is now being looked at more closely by financial sector lobbyists, a person familiar with this thinking said.

Mutual recognition refers to a broad acceptance by two countries of each other’s regulation, avoiding the rule-by-rule approach of equivalence which can get bogged down for years.

Barney Reynolds, a financial services lawyer with Shearman & Sterling, said the scope for using equivalence will be widened considerably from January 2018 when revised EU securities rules come into force.

These rules, known as MiFID II, brings the possibility of equivalence “for the entirety, pretty much” of the investment business, Reynolds told the conference.

“The level of doomster stuff on equivalence I think is way overdone. It is not to say it’s perfect,” Reynolds said.

Equivalence was a good “building block” to being post-Brexit EU market access.

“If we can elevate ourselves above it to some mutual recognition framework that would be fabulous,” Reynolds added.

Source: Reuters (Reporting by Huw Jones; Editing by Keith Weir)

Surplus will shrink with age, Germany says, but don’t blame us for being efficient

In World Economy News 23/03/2017

Germany has launched a two-pronged attack on U.S. President Donald Trump’s charge that its current account surplus is too high — don’t blame us for being good at what we do, and our ageing population is going to eat it all up anyway.

The finance ministry said in its monthly report on Thursday that as Germany’s society ages fast, its swelling senior population will be more inclined to spend at home rather than save abroad, boosting consumption and shrinking the surplus.

“In a society where ageing is growing, savings — including capital invested abroad –- will fall as pensioners use that to finance their consumption in Germany,” it said. “This will probably reduce the current account surplus and could even turn it into a deficit.”

At the same time, it said that the surplus — which irks the International Monetary Fund and many in Europe as well — was the result, frankly, of Germany being better than others at business.

It said it was down to the competitiveness of the German economy over which the government had no influence. “The current account in Germany is not controlled by the state,” the ministry said.

The new U.S. administration has accused Germany of exploiting a weak euro to gain a trade advantage and has called for bilateral discussions to reduce the $65 billion (52 billion pound) U.S. trade deficit with Germany.

Many Europeans, meanwhile, reckon Germany’s surplus epitomises the imbalances of the euro zone, in which productive Germany drives ahead of less competitive, primarily southern countries in the bloc.

But Germany’s main new pitch is that the jaw will snap shut when demographics kick in.

OLD AND WEALTHY

Economists say there is some truth — at least in theory — to Germany’s claim that demographics will put negative pressure on the current account surplus.

Some 21 percent of Germany’s 82-million population is aged 65 or more, a figure projected to rise to 27 percent by 2030.

But more active measures like boosting government and corporate spending would give more credibility to German efforts to counter the criticism of its disproportionately strong exports sector.

“All in all, it is a valid argument but falls short explaining the entire story. More investments, both by the private and public sector would make the story much more convincing,” said ING-Diba economist Carsten Brzeski.

He added: “Not only for the U.S. administration but also for the German economy, which would be the main beneficiary from such a policy change.”

Brzeski said that Japan, whose population is older than Germany’s, still has a high current account surplus. This doesn’t bode well for German arguments that demographics will depress the surplus.

The finance ministry said that in addition to demographics, increased private consumption and an eventual normalisation of the European Central Bank’s expansionary monetary policy were also likely to narrow the surplus.

But economists say the government could spend more on education and digital infrastructure, which would in turn prod German companies sitting on billions of euros in savings to invest in factory modernisations and new machineries.

“Raising public spending is one measure to encourage companies to raise investments. We are on the right path but more needs to be done to get companies to invest,” said Simon Junker of the German Institute for Economic Research (DIW).

The finance ministry said the current account, which stood at 8.3 percent of output in 2016, would fall to 8 percent by 2018. It stood at 8.6 percent of gross domestic product in 2015.

In 2016, the German trade surplus hit a fresh record at 252.2 billion euros ($272 billion), according to the Federal Statistics Office.

The wider current account surplus, which measures the flow of goods, services and investments into and out of a country, rose to an all-time high of 261.4 billion euros, Bundesbank data showed.

Source: Reuters (By Joseph Nasr, Additional reporting by Michael Nienaber and Daniel Felleiter; Editing and graphic by Jeremy Gaunt)

Euro zone banks under scrutiny but none in danger watchdog says

In World Economy News 23/03/2017

Several European banks are being closely monitored by the agency responsible for closing lenders which go bust in the euro zone, but none are failing or about to fail, the head of the Single Resolution Board (SRB) said.

Elke Koenig did not mention any EU country by name but told the European Parliament’s economic affairs committee the SRB was studying a number of banks in “shaky waters”.

Since the 2007-09 financial crisis, the EU has adopted rules to shield taxpayers from having to bail out lender again and attention in the single currency bloc has been focussed on Italy’s plans to bail out two regional banks.

This has posed a dilemma for European regulators who are still considering whether another, bigger Italian lender, Monte dei Paschi, qualifies for state aid.

“So far we are in a position that we have to conclude that banks might be having… quite some challenges ahead of them, but they are not failing or likely to fail,” Koenig said.

German Green Party lawmaker Sven Giegold said there were doubts that the European Central Bank (ECB), which supervises euro zone lenders on a day-to-day basis, was being tough enough in dealing with banks struggling with poorly performing loans.

Italian lenders in particular are burdened by large amounts of so-called non-performing loans.

Koenig declined to comment on individual banks, but said:

“There are a number of situations where we have a very close eye on… It’s a number of cases. It’s not just one or two.”

Earlier she said most banks across the sector were not in such a position that their failure would endanger financial stability.

Koenig also called for banks to be given time to issue debt that can be written down to replenish capital that has been burnt out in a crisis, and thus shield taxpayers.

The biggest banks, such as Deutsche Bank, HSBC, and BNP Paribas must begin building up this debt from 2019.

However, the total shortfall for euro zone lenders is between 100 and 200 billion euros, and the bloc’s European Banking Authority has said markets won’t be able to absorb such amounts of new debt issuance quickly.

“There needs to be sufficient time,” Koenig said.

Source: Reuters (By Huw Jones, Editing by Alexander Smith)

Jump in U.S. New Home Sales Defies Expectations

In World Economy News 23/03/2017

U.S. new home sales increased sharply for the second consecutive month in February, an indication that growing demand and a pickup in construction activity could help propel a strong spring selling season for this segment of the market.

Purchases of newly built, single-family houses, which account for a small share of overall U.S. home sales, jumped 6.1% from January to a seasonally adjusted annual rate 592,000 last month, the Commerce Department said Thursday. That marked the second-strongest month since the housing-market expansion began in 2012.

Economists surveyed by The Wall Street Journal expected new home sales to increase by 1.4% to 563,000 sales.

“Builders are seeing strong traffic,” said Brad Hunter, chief economist at HomeAdvisor, a home-improvement website. “We are expecting strong sales going into the spring.”

The data were clouded by a margin of error of 17 percentage points, much larger than the reported increase.

Still, momentum appears to be building in the market. New home sales increased in January by 3.7% compared with a month earlier.

February sales jumped by a substantial 12.8% compared with the same month a year ago, according to the Commerce Department.

In a sign that builders are responding to demand, the number of homes for sale at the end of February rose to the highest level since July 2009. At the current sales pace, that is enough supply for 5.4 months, below the six-month level that many economists say is indicative of a balanced market.

The median sale price for a newly built home fell slightly in February to $296,200.

“The pickup in sales coupled with low inventories suggests that single-family starts will rise further in coming months, as home builders attempt to meet increasing demand,” said David Berson, chief economist at Nationwide Insurance.

John Burns, chief executive of John Burns Real Estate Consulting, said the home builders his company surveys reported a 14% increase in sales in February compared with last year. He said expectations for the full year call for roughly 7% sales growth compared with last year.

Mr. Burns said builders got a boost from buyers looking to beat rising interest rates, but that is likely to last only a couple of months.

“We’re having a good spring but not some hockey stick recovery,” he said.

Economists expect new-home sales to continue to increase this year as builders step up construction of single-family homes and more first-time buyers enter the starter-home market. Single-family housing starts rose to a 10-year high in February, thanks to a strengthening economy and unseasonably warm weather.

Still, the housing market picture isn’t entirely rosy. Purchases of previously owned homes, which account for the vast majority of the market, decreased by 3.7% in February from a month earlier, the National Association of Realtors said Wednesday. Economists said rising prices and mortgage rates, along with a shortage of inventory, are keeping many first-time buyers out of the market.

Rates for a 30-year mortgage averaged 4.23% this week, according to mortgage company Freddie Mac, down from 4.3% a week earlier but up from about 3.5% in November.

Source: Dow Jones

Claims for U.S. Jobless Benefits Increase to Seven-Week High

In World Economy News 23/03/2017

Filings for U.S. unemployment benefits rose to a seven-week high, representing a departure from other data showing a solid labor market.

Jobless claims increased by 15,000 to 258,000 in the week ended March 18, a Labor Department report showed Thursday. The median forecast in a Bloomberg survey called for 240,000. On an unadjusted basis, applications jumped in Ohio and Kansas.

Even with the pickup in claims last week, hiring managers have been slow to dismiss workers as the labor market tightens and job vacancies become harder to fill with skilled and experienced employees. Companies also have been adding to payrolls at a healthy pace and gradually increasing wages.

Estimates in the Bloomberg survey ranged from 220,000 to 255,000. The Labor Department revised the prior week’s reading to 243,000 from an initially reported 241,000.

Thursday’s report also included annual revisions for both initial and continuing claims back through 2012. The latest reading marked 80 straight weeks of filings below 300,000, the level economists consider consistent with a healthy labor market. Before the annual revisions, the streak had been at 106 weeks.

No states were estimated last week and there was nothing unusual in the data, according to the Labor Department. In Ohio, applications climbed 4,260 before seasonal adjustment, while jobless claims in Kansas increased by 2,774.

The four-week average for all jobless claims rose to 240,000 from 239,000 in the prior week.

The number of people continuing to receive jobless benefits decreased by 39,000 to 2 million in the week ended March 11. The unemployment rate among people eligible for benefits dropped to 1.4 percent from 1.5 percent. These data are reported with a one-week lag.

Source: Bloomberg

Fed Rate Increase Makes 0% Financing Deals More Pricey for Retailers

In World Economy News 23/03/2017

The Federal Reserve is pushing interest rates higher. Don’t tell that to people who have become accustomed to buying everything at 0%.

Years of rock-bottom interest rates have led to a proliferation of no-interest financing offers for people looking to buy everything from cars to lawn mowers, jewelry and furniture. Manufacturers and retailers have come to lean heavily on these deals, which are an inducement for shoppers considering large or discretionary purchases.

Now, with interest rates climbing, the cost of these arrangements will rise, pinching profits at companies that derive a large chunk of their sales from shoppers who prefer to pay in bite-size pieces. Most retailers will likely absorb the higher costs to stay competitive because customers may turn elsewhere if they are asked to pony up interest charges.

The cost of providing 0% financing varies from company to company, but generally retailers pay a middleman — usually a bank or finance company — a few percentage points of a product’s purchase price upfront. The practice is known as “buying down the rate to zero” because retailers are in effect footing the financing costs for their customers.

For a shopper buying a $10,000 hot tub with 0% financing over three years, that may translate into the retailer paying a bank or finance company around $1,000 upfront, or around 10% of the purchase price. The consumer then makes monthly payments to the finance company.

The upfront fees retailers pay are often tied to a short-term London interbank offered rate, which tends to rise in tandem with the federal-funds rate. As interest rates climb, banks are likely to increase these fees. The six-month Libor has risen to 1.43% from 0.9% a year ago, according to Bankrate.com, as the fed-funds rate has risen by half a percentage point.

The 0% deals will get more expensive, says Mike Rittler, head of retail card services at TD Bank, which provides no-interest financing to customers of 25 U.S. retailers, including sellers of furniture and tractors. Retailers could limit their costs by providing no-interest financing for shorter terms, he notes.

Companies in many cases say they don’t plan to ditch the offers, which have become a cornerstone of their marketing efforts since the financial crisis. But if profit margins get compressed, analysts say companies may be forced to act.

“Cash has been free for so long that everyone has been able to offer these no-interest deals,” says David Bassuk, a managing director and co-head of the retail practice at consulting firm AlixPartners. “As it becomes more expensive for companies, the game is going to change.”

In general, the longer the no-interest payment term, the higher the cost to the seller. “The offers that were the most generous will become harder to find, because retailers will have to give up more income to provide them,” says Bill McCracken, CEO of Phoenix Synergistics, a consumer research firm.

So far, there are few signs that offers are fading — after all, interest rates, and most companies’ funding costs, remain relatively low. Several retailers say shoppers also have come to expect the deals.

General Motors Co., which has long provided 0% financing for up to 72 months on many new car and truck models, expects to continue the deals. “The beauty of 0% is that it’s pretty easy to understand.” says Jim Cain, a GM spokesman.

In 2002, GM and other auto makers did away with 0% financing deals and moved to other types of sales incentives to woo customers. Roughly a year later, they brought back the deals to counter sluggish sales.

Television shopping network QVC last year started selling a $399 Dyson high-speed hair dryer that many people purchased using a six-month, no-interest installment plan. “The product is a want and a desire, and not a need, and being able to pay in smaller amounts” makes the items more affordable for customers, says Peter Goodnough, QVC’s vice president of Customer Insights & Analytics.

The retailer has no plans to change its offers for no-interest financing. “It would be hard to see a near-term future where the attractiveness of this outweighs the cost of providing it,” Mr. Goodnough adds.

At electronics and furniture chain P.C. Richard & Son, close to a third of shoppers’ purchases are made with store-branded credit cards that automatically let customers pay in interest-free installments, says Chief Financial Officer Tom Pohmer. Shoppers can get 12 to 60 months’ financing on expensive items such as $2,000 mattresses. “The promotions are very important for our customers, and we will offer them when interest rates are high or low,” Mr. Pohmer adds.

Although they acknowledge that rising interest rates will increase their costs, many retailers are hoping the Fed’s rate increase is a sign of an improving economy, which should help their sales grow.

Consumers, meanwhile, can be very sensitive to changes in interest rates. Patrick Williams, senior director of marketing at Jacuzzi Group Worldwide, a Chino Hills, Calif., maker of hot tubs and other bath products, says his company has in the past experimented with 1.99% and 2.99% financing offers, with mixed results. “Consumers have become conditioned to seek out 0% financing,” he says.

In recent years, credit-card issuers also have aggressively used 0% offers to persuade people to transfer their card balances over from rivals.

Of roughly 1.1 billion direct-mail offers for credit cards received by U.S. consumers in the fourth quarter of 2016, some 63% promoted a 0% introductory rate for balance transfers, according to data from Mintel Comperemedia, a market research firm. In the same period two years ago, 73% of the offers had a 0% introductory rate. The decline “has been driven, in part, by the anticipation and subsequent reality of a rising rate environment,” says Andrew Davidson, the firm’s chief insights officer.

Source: Dow Jones