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ekathimerini.com , Saturday Jul 7, 2012 (14:55)
Low on policy options, ECB may face stark choice
By Paul Carrel
The European Central Bank is almost out of conventional policy options and will have to turn to measures it finds deeply unpalatable if the euro zone crisis intensifies, or watch the bloc slide towards the abyss.
By cutting its main interest rate by a 1/4 point to a record low 0.75 percent on Thursday and reducing the rate it pays on overnight deposits to zero, the ECB has almost exhausted its normal ammunition. Beyond that are only options it dislikes.
Some economists expect another cut in the main interest rate to 0.5 percent but after that the ECB must essentially employ its balance sheet to help the euro zone economy.
That means buying government bonds - an option opposed by Germany's Bundesbank, the ECB's biggest stakeholder - or else offering more cheap loans and exposing the bank to risks that many of its policymakers already find worryingly high.
"It is very uncomfortable for markets knowing there is a risk there is no more they can do if data deteriorates in the next couple of months,» said Nomura economist Jens Sondergaard.
He expected the ECB to cut its main interest rate once more - by another 1/4 point - in August and then hope the euro zone economy would pick up towards the end of the year.
Failing that, the ECB could revive its bond-buying program, which Sondergaard said was «the option that is not acceptable to them at this stage but which might be in the fourth quarter if financial market conditions are bad».
Last week's EU summit measures to tackle the euro zone crisis failed to impress markets [ID:nL6E8I62EI], and some economists believe the bloc still faces an existential threat.
Nouriel Roubini, once known as «Dr. Doom» for bearish views predicting the 2008 financial crash, told Germany's Handelsblatt on Friday he would give the euro another three to six months: «Then Italy and Spain will lose access to capital markets."
The euro zone's permanent rescue fund, about to come onstream, can intervene in the bond market to lower borrowing costs but with maximum funds of 500 billion euros, and up to 100 billion of that already earmarked for Spanish banks, its resources could run thin very quickly.ECB President Mario Draghi held out the possibility on Thursday that the bank could employ its balance sheet to greater effect, saying it needed to review its collateral framework.
Such a move could see the ECB further loosen rules on the assets banks offer up to tap its loans, giving them greater access to cheap funding.
If it baulks at buying bonds the ECB could also repeat its long-term liquidity offer. In December and February it unleashed over 1 trillion euros ($1.24 trillion) into the financial system with 3-year loans, or LTROs, a move it said prevented a major credit crunch.
Some policymakers already have concerns about the collateral risks the ECB has taken onto its balance sheet in return for issuing those LTROs, and Draghi said the Governing Council did not discuss any other such «non-standard measures» on Thursday.
"I will also tell you why we did not discuss that - because we have to have non-standard measures which are effective ... it is not obvious that there are measures that can be effective in a highly fragmented area,» he said.
Draghi also poured cold water on a third option - allowing the ESM rescue fund to have access to the ECB's cheap loans, which would dramatically boost its firepower and allow it to intervene with real impact on bond markets, where Spain's benchmark yields have again breached 7 percent.
"I don't think there is anything to gain in destroying the credibility of an institution, asking it to behave outside the limits of its mandates,» he said.
CONSERVATIVE CORE
Many ECB policymakers are nervous about the risks to the bank's balance sheet that came with the collateral it accepted in return for the twin, ultra-cheap loans.
They are putting the onus on governments to tackle the crisis, nervous about taking on any further risks.
"There should be no illusion that the ECB can single-handedly ensure a plain sailing for our economies and the markets,» ECB Executive Board member Joerg Asmussen said on Friday. «There are limits of what we can do, and what we know."
Earlier this week, Dutch ECB policymaker Klaas Knot said the bank could not continue its emergency operations - measures such as the LTROs - forever because of the risks to its balance sheet.
"The bond-buying program is in a deep sleep, and it will remain there,» Knot told Dutch magazine Elsevier.
A core of ECB policymakers feel the bond program - dormant for four months now - amounts to monetary financing of governments, which is beyond the bank's mandate. Last year, Axel Weber, then Bundesbank chief, quit in protest at the plan.Worried about the potential for some of the collateral it holds to turn toxic, the ECB has already taken some steps that suggest it is entering self-preservation mode.
Earlier this week, the bank set a limit on the amount of state-backed bank bonds that banks can use as collateral in ECB lending operations.
Banks in troubled euro zone countries such as Greece have been increasingly borrowing ultra-cheap funds from the ECB using self-issued bonds which are then given a state guarantee by the government which make them eligible at the ECB.
The amounts involved could be over 100 billion euros.
Central bank policymakers have become increasingly disgruntled by the practice in recent months, worried it could leave the ECB facing big losses if Greece or other countries with banks doing the same left the euro.
LIMITED FIREPOWER
The ECB could cope with a Greek exit from the euro zone but the losses this would entail would test the depth of its resources and the political will of its 17 national stakeholders.
If Spain or Italy went the same way the subsequent catastrophic losses could sink the ECB, at the same time as dragging the currency union into the abyss, making both countries essentially too big to fail.
The ECB has little paid-in capital but could turn to its national shareholders to recapitalize it if necessary, although some may not be in a position to do so.
However, between them the ECB and national euro zone central banks have funds of differing descriptions that would theoretically put its total firepower up to around 700 billion euros if all stakeholders met their obligations.
The bigger potential problem is an unknown quantity.
Some experts believe the euro zone's cross-border TARGET2 payments system hides potentially colossal losses which could materialize if a country quits the currency area.
The system reflects the imbalance of flows between deficit and surplus countries, meaning mighty Germany could be overwhelmingly on the hook.
Figures compiled by the University of Osnabrueck in Germany show Greece's TARGET2 liabilities amount to about 100 billion euros. Should Greece leave the euro zone, the status of this liability would be unclear.
The tab that Greece, Spain, Italy and other debt-hobbled countries have run up with Germany's Bundesbank now stands at almost 730 billion euros.
In the event of a country leaving the euro zone, its TARGET2 imbalance would become subject to sovereign debt renegotiations, euro zone central bank officials say, which may leave some euro zone central banks needing to seek fresh capital from their governments.
If it were faced with the risk of such a messy and costly scenario, the ECB would likely act first and compromise its principles to hold the euro zone together.
"If you have data pointing a very significant 2008-style contraction in GDP, inflationary pressures collapsing completely and risks of a euro area break-up, then I really expect the ECB to sacrifice some of their more dogmatic views and say 'we will go all in and do what is necessary',» said Nomura's Sondergaard.
[Reuters] |
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ekathimerini.com , Saturday Jul 7, 2012 (09:41)
http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_1_06/07/2012_450957
Greece will speed up reforms, won't ask for change to targets, says PM
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Greece will speed up privatizations, the use of public land and the scrapping of state organizations but will not ask for a change to the targets in its bailout agreement, Prime Minister Antonis Samaras told Parliament on Friday, as European Union officials said Athens would receive no further loans until it has caught up with the program.
Presenting his coalition government’s policy program, Samaras identified bureaucracy, recession, unemployment and lack of investment as key obstacles to Greece recovering from the crisis but said that the initial target must be to promote structural reforms “aggressively” rather than to ask the country’s lenders for changes to the bailout.
“We do not want to change the targets,” he said. “We have to change everything that is standing in the way of us achieving these targets.”
Samaras called for the privatization of the Hellenic Railways Organization (OSE) and the Public Power Corporation (PPC) but said the infrastructure would remain under state ownership. He also proposed the inclusion of the Athens and Thessaloniki water companies in the privatization program. Licenses will also be issued for the operation of regional ports and airports.
The prime minister said a special purpose vehicle would be formed to lease or sell public land in southern Athens, from Faliro to Sounio. Samaras said legal issues relating to this real estate would be cleared up and similar schemes launched in other parts of Greece.
Samaras pledged to shut down or merge dozens of public organizations, mostly within the next five months. He also said that the Development Ministry would take over sole responsibility for projects eligible for EU structural funding with the aim of securing the quick release of up to 12.5 billion euros from Brussels.
The New Democracy leader, however, said that the government would ask for measures in the bailout which it feels feeds the deep recession to be replaced by other costcutting steps. Samaras insisted he would oppose any measures that lead to more job losses in the public or private sector.
He also called on European politicians to stop speculating about whether Greece would leave the eurozone. “We cannot have the situation where we are trying to get privatizations going and foreign officials are speculating about a return to the drachma,” he said.
In Brussels, an EU official told journalists that a Eurogroup meeting of finance ministers on Monday would not take a decision on the disbursement of Greece’s next loan tranche, which would only happen once “the program is back on track.” “It is not a tragedy that the program is off target,” the official told Kathimerini. “This has happened with other programs. We understand that there were elections but the lost ground must be made up.”
The debate on the government’s policy program begins on Saturday afternoon and will end with a confidence vote on Sunday night.
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http://www.athensnews.gr/portal/8/56804
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| Venizelos meets troika ahead of policy discussion |
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 | 7 Jul 2012 |
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| Venizelos once again stressed the need for an extension to the fiscal adjustment period (file photo) |
Pasok, a junior member in Greece's new three-party coalition government, insists on the necessity of determining the framework for the negotiation of the entire economic programme for 2013-2014 in one process and not step-by-step.
This position that was conveyed by party leader Evangelos Venizelos to the representatives of the European Commission (EC), European Central Bank (ECB) and International Monetary Fund (IMF) 'troika' of Greece's international lenders during a meeting at Pasok headquarters.
It is necessary to agree "the general framework of the fiscal adjustment programme and a new, updated mid-term fiscal Strategy Programme so that the individual steps that need to be made will refer to that integrated framework," Venizelos told the troika heads during a one-hour meeting on Saturday.
A Pasok announcement said that "a first useful exchange of views" took place during the meeting, with Venizelos referring particularly to the new policy framework the country was moving in and to the tolerance of the Greek economy and society, putting forward the issue of a revision of the agreement under the procedures if foresees, beginning with an extension of the fiscal adjustment by three years.
He stressed the need for re-assessing the macroeconomic data on a realistic basis and especially the recession for 2012, which is larger than anticipated, and stressed the need also for the entire discussion to take place in the context of the recent European Council decisions, that provided explicitly for development-friendly fiscal adjustment and a new, more dynamic role for the ECB and the EFSF/ESM.
The announcement also said that the discussion extended to the relevant economic and political conditions, especially the financing of the fiscal adjustment extension and maintaining the viability of the Greek debt.
The two sides further discussed acceleration of the structural changes and denationalizations, and the need for Greece's backing by the Commission and the EU member states in developing the absolutely necessary developmental but also social package.
The contacts will resume in about 15 days, when the troika is due to return to Athens. (AMNA)
http://www.athensnews.gr/portal/8/56800
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| Government to come under heavy fire from opposition |
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| 6 Jul 2012 |
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| The coalition government is set to come under heavy fire from opposition parties (Eurokinissi) |
During a closed meeting on Friday, the main opposition Radical Left Coalition (Syriza) party's Parliamentary group agreed to come down hard on the policies that the government is due to announce when Prime Minister Antonis Samaras unveils its policy statement in Parliament on Friday evening, with their speakers "hammering" the government positions during the three-day debate that will precede Sunday night's vote of confidence in the government.
According to sources, Syriza leader Alexis Tsipras will especially emphasise that the government is confirming that it used 'lies' to steal first place in the elections from the radical left and try to "tear apart" the three-party coalition government's policy statement.
Tsipras is due to address the Parliament during the debate on the policy statement on Saturday evening and on Sunday night, while the party will name a total of 30 MPs to speak during the debate.
The same sources said that Syriza's entire Parliamentary group will walk out when Parliament is addressed by the leader of the neo-nazi Golden Dawn (Chryssi Avgi) party.
Meanwhile, the Independent Greeks also lashed out at the coalition government ahead of the presentation of its policy statement.
Party spokesman Christos Zois stated that “the only thing of interest in the presentation will be whether Mr. Samaras will dare to utter the word ‘negotiation’ which he used to steal away the people’s vote.”
The party’s secretary on labour issues Yiannis Manolis underlined that the “haircut” imposed on the social insurance funds, the deep recession the economy is in, 'explosive' rates of unemployment and the hundreds of thousands of private businesses that are being shut down lead the country’s social insurance system to suffocation and to cessation of payments, despite the 50 pct cut in pensions. (AMNA)
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Tsipras to respond to gov't policy program
The debate on the coalition government’s policy program continues on Saturday evening for a second day, starting with the leader of the opposition, Alexis Tsipras.
It followed Friday’s presentation of the policy framework by Prime Minister Antonis Samaras, with a view to the vote of confidence to the government, scheduled for midnight on Sunday.
The other political leaders will follow, as will all the government ministers who will present their detailed plans for their own area of responsibility.
Tsipras, the leader of the Coalition of the Radical Left (SYRIZA), is set to accuse the government that it has already abandoned its election pledge to renegotiate the bailout agreement with Greece’s official creditors.
Among the ministers to speak on Saturday will be Finance Minister Yannis Stournaras and Development Minister Costis Hatzidakis.
Stournaras will likely refer to the new tax bill his ministry will prepare and table in Parliament as soon as possible.
Hatzidakis is expected to say that the main target of his ministry will be the restoration of liquidity in the market, so as to stop layoffs and company closures.
Sources say that SYRIZA deputies are considering to walk out when the leader of Chryssi Avgi (Golden Dawn) is about to speak, “for symbolic purposes”.
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