July 5 2012

In the broadcast today: What’s Next for the EUR and GBP after ECB and BOE Decisions? In the aftermath of the European Central Bank and the Bank of England’s decisions to offer additional easing, we examine the impact of the monetary policies of the two central banks and explore what might be next for the EUR and the GBP, we analyze the bearish breakout in the EUR/USD currency pair, we take a close look at the GBP/USD pair as it targets an important price level, we continue to monitor the USD/JPY pair’s attempt to break above a steep resistance area, we highlight the market’s reaction to the European Central Bank and the Bank of England interest rate announcements, the German Factory Orders, the U.S. Jobless Claims, ADP Employment report and ISM Non-Manufacturing Index, we discuss new forecasts from Deutsche Bank and Bank of Tokyo-Mitsubishi, and prepare for the trading session ahead.

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The European Central Bank cuts the benchmark rate to a new record low at 0.75%, Bank of England offers more quantitative easing for ailing UK economy, the ECB President Mario Draghi paints a grim picture of deteriorating economic conditions in the euro-area…

Powered by Guardian.co.ukThis article titled “Eurozone crisis live: ECB cuts interest rates, as Bank of England boosts QE by £50bn” was written by Graeme Wearden and Josephine Moulds, for guardian.co.uk on Thursday 5th July 2012 13.21 UTC

2.17pm: Mario Draghi wins a laugh from his press conference by saying he hopes that the European Central Bank would not have allowed the Libor scandal to occur on its watch.

Asked about the issue, Draghi said there were clear signs of failure within the system:

It does show that a process that was considered fair….[and important] for the operation of financial markets was not far.

And therefore I think a lot of action ought to be taken to improve the governance of this process at both levels – the level that produces the original figures, and the level that produces the benchmark.

It appear that the governance at both levels was weak, if not faulty.

2.15pm: Does the ECB risk sowing the seeds for the next bubble by cutting interest rates today?

Mario Draghi says not, explaining “We don’t see risks for inflationary pressure on either side – certainly not on the upside.”

2.06pm: The decision to cut eurozone interest rates was unanimous “on all grounds”, Draghi says. That gives it particular impact, he argues (last month’s decision to leave rates unchanged split policymakers).

So every member of the ECB’s governing council agrees that the economic situation is so bleak that a rate cut was needed….

2.01pm: Mario Draghi pays tribute to Ireland, applauding its sale of €500m of short-term bonds today.

The ECB president says that Ireland has returned to the financial markets much earlier than anyone would have thought possible at one stage, and deserves great credit for its “extraordinary efforts”.

1.53pm: What will happen in the scenario when Italy requires financial aid in the future, but Spain has already been bailed out – mopping up all the available resources, Mario Draghi is asked.

Smiling grimly, he replies:

What if everyone needs one [a bailout]? It’s a big question.

1.45pm: Did the ECB liaise with the Bank of England and the Chinese central bank, ahead of today’s announcements?

Draghie denies that any collaboration took place, just the “usual exchange of views” about economic conditions.

1.42pm: The first question to Mario Draghi refers to the possibility that the ECB might launch another liquidity boost (known as a Long Term Refinancing Operation) – in which it would offer cheap loans to European banks in an attempt to encourage them to lend.

Draghi won’t speculate on the chances of another LTRO. He also points out that the ECB has cut its deposit rate (what it pays banks who leave their money on deposit at the ECB) to zero. That gives them an extra incentive to lend.

1.41pm: Draghi concluded by welcoming the conclusions at the last EU summit, particularly the decision to use the European Stability Mechanism “more flexibly”.

Onto questions…

1.39pm: The euro hit new lows as Draghi read out his official statement (I’ll link to it once its online). It’s now trading at $1.238 against the dollar, down over 1% today.

1.32pm: Mario Draghi, head of the European Central Bank, is painting a pretty grim picture of the state of the Eurozone economy at the start of today’s press conference.

The ECB president warns that there was probably a “renewed weakness in economic growth” in the last three months (translation: the eurozone recession probably got worse), with “heightened uncertainty.

He adds that risks surrounding the outlook continue to be on the downside, with a potential spillover from financial markets to real economy.

There are already signs that this is happening, with a negative monthly loan flows to non financial corporations in May. Draghi said this reflects “ongoing adjustments in households and enterprises”.

1.29pm: The ECB press conference is starting NOW. You can watch it live here.

1.23pm: The National Association of Pension Funds has added its voice to the criticism of the Bank of England over its decision to create another £50bn of electronic money.

NAPF chief executive Joanne Segars said people close to retirement, and those with final salary pension schemes, would suffer:

QE worsens the yield on gilts, which increases the deficits of final salary pension funds and means people get a worse rate on their annuity. Those who are retiring could be locked into a weaker pension for the rest of their days.

Pension funds are deeper in the red than ever, and this extra dose of QE is only going to make things tougher. Businesses will be forced to divert more money from jobs and investment into filling black holes in their pension funds. Our fear is that many will choose to close these pensions altogether, further weakening the UK’s ability to save for its old age.

Here’s the full statement.

1.06pm: While we wait for Mario Draghi to explain the European Central Bank’s decision to cut interest rates, here’s news from Germany about a backlash against Angela Merkel.

A group of German economists have denounced decisions made by last week’s European Union summit, arguing that taxpayers, retirees and savers shouldn’t be liable for the debts of struggling banks.

AP reports:

EU leaders agreed European bailout funds could in future pump money directly into banks, rather than via governments, once an effective supervisor is established.

Dozens of economists including Hans-Werner Sinn, the head of the prominent Ifo think-tank and a vocal critic of leaders’ rescue policies wrote in an open letter published by the daily Frankfurter Allgemeine Zeitung Thursday: “We view the step toward a banking union, which means collective liability for the debts of the banks of the eurosystem, with great concern.”

They said the decisions Chancellor Angela Merkel “saw herself forced to take were wrong.”

12.51pm: The euro has tumbled against other currencies following the news that eurozone borrowing costs have been cut to new record lows (see last post)

Against the dollar, it’s down half a cent at $1.2455, and also hit its lowest ever level against the Australian dollar and the Swedish crown.

12.45pm: Breaking news – the European Central Bank has cut interest rates across the eurozone by 25 basis points.

That brings its main rate down to 0.75%, from 1%. A new record low.

In 45 minutes, ECB president Mario Draghi will explain the decision at a press conference in Frankfurt….

12.41pm: The backlash against the Bank of England has begun.

John Walker, the chairman of the Federation of Small Businesses, has criticised the £50bn increase in quantitative easing, arguing that it simply fails to get money to the real economy. Walker said:

The point of quantitative easing is to get more money to businesses so they can invest and grow. But it is clear this money isn’t getting through. The banks say there is insufficient demand for loans. However, that is completely at odds with our own research showing four-in-10 small firms are refused credit.

And William Hunter, director of Hunter Wealth Management, pointed out that it was a blow to savers, especially older ones:

The economy may may need more QE, but pensioners need it like a hole in the head.

This is another bitter pill for the UK’s pensioners to swallow….Unfortunately, given the size of the threat from the Eurozone and the problems in the domestic economy, there could be more printing yet.

12.28pm: Here’s a quick round-up of early reaction to the Bank of England’s move (see 12pm onwards):

Dr Neil Bentley, CBI deputy director-general, said additional quantitative easing would only have a limited benefit, and urged the BoE to buy a wider range of assets with its newly printed electronic money (rather than even more UK government bonds).

Howard Archer, economist at IHS Global Insight, said the Bank had voted for more QE because policymakers are now more worried about growth than inflation.

James Knightley, economist at ING said it will take longer to carry out the new QE programme (four months, rather than three), because the London Olympics will disrupt the UK bond markets.

12.21pm: Chancellor George Osborne has confirmed that he has given the Bank of England authorisation to increase its quantitative easing programme by another £50bn.

Osborne (who has repeatedly blamed the eurozone for Britain’s economic ills), gave Sir Mervyn King his approval in a letter released at noon.

The chancellor said:

As you note, in spite of the progress made at the latest European Council, concerns remain about the indebtedness and competitiveness of several euro-area economies, and that it weighing on confidence here. The corresponding weaker outlook for UK output growth means that the margin of economic slack is likely to be greater and more persistent.

You can see the whole letter online (as a pdf file).

12.17pm: Shares have rallied in London since the Bank of England’s announcement (and the news of interest rate cuts in China).

The FTSE 100 is now up 31 points at 5714, a gain of 0.55%.

12.15pm: China’s central bank also announced new monetary stimulus measures, at the same moment as the Bank of England.

After some confusion, it appears that China is cutting its deposit and lending rates. That follows concerns that its economic growth has slowed in recent months, as the eurozone crisis hits the world economy.

12.11pm: The £50bn of extra quantitative easing announced in the last few minutes will be used to buy UK government bonds from UK banks (the idea being that the banks then put this money into the real economy).

The Bank of England expects to take around four months to carry out the QE injection – which will take us until November. That’s the month when we’ll get another quarterly inflation report from the BoE.

12.02pm: The Bank of England has released a statement, explaining why its Monetary Policy Committee voted to increase its electronic money-printing programme by another £50bn to £375bn, but left interest rates unchanged.

One key factor is the weak UK economy. The Bank points out that output has “barely grown for a year and a half and is estimated to have fallen in both of the past two quarters”.

The Bank also blamed the eurozone, saying:

In spite of the progress made at the latest European Council, concerns remain about the indebtedness and competitiveness of several euro-area economies, and that is weighing on confidence here. The correspondingly weaker outlook for UK output growth means that the margin of economic slack is likely to be greater and more persistent.

12.00pm: The Bank of England has boosted its quantitative easing budget by £50bn, in its latest attempt to stimulate the UK economy.

Interest rates remain unchanged at 0.5%.

More to follow!

11.45am: Just 15 minutes until the Bank of England announces its decision on monetary policy.

More economists expect another increase in the Bank’s quantitative easing programme (the nine-strong MPC was split 5-4 last month, voting narrowly against QE3). The most likely decision today is a £50bn boost to QE, but £75bn can’t be ruled out….

11.27am: As promised, here’s full details of the situation in Greece today as the long awaited meeting between the country’s new prime minister Antonis Samaras and debt auditors from EU, ECB and IMF begins.

From Athens, Helena Smith reports:

After a morning of “feverish” negotiations according to the state-run news channel ERT, the Greek prime minister Antonis Samaras will finally meet with visiting inspectors from the debt-stricken country’s “troika” of creditors.

Getting here has been a long haul. After weeks of political high drama and paralysis following inconclusive general elections in May, and then the sudden illness of Samaras following his conservative party’s narrow electoral victory last month, both the EU and IMF have made it clear that they want to see Greece’s greatly derailed fiscal consolidation program put back on track – pronto. Samaras, of course, has a different agenda. Now, as the head of a three-party coalition government, he wants more than ever to renegotiate the bailout agreement propping up the moribund Greek economy. At a grassroots level pressure is building – after more than two years of grueling austerity Greeks have got ever closer to being pushed over the edge.

On both the left and right there is widespread agreement that mired in a fifth year of recession, with the economy at a standstill, Greece has reached an “untenable point.”

Helena continues:

Samaras, who will be joined at the meeting by his finance minister Yiannis Stournaras (sworn in barely three hours earlier) is expected to appeal for leeway urging creditors to cut Athens some slack. Prolonging the program by extending the time frame of reaching deficit targets will top Greece’s list of demands. Persuading lenders to drop their insistence that Greece makes further cuts – including further reducing the minimum wage — will be another.
But Samaras is also acutely aware that the troika want to see some forward-motion and aides say at today’s meeting he will present monitors with a detailed list of privatizations that the government will immediately push ahead with as well as plans to streamline the bloated public sector.

“State coffers are almost empty and it is essential that there are no delays in receiving the next tranche of aid next month. We’ve worked hard to come up with a comprehensive and convincing plan,” said one insider. “We are very aware that they want to see action but the program has to be relaxed.”
Meanwhile, banks are reporting that an estimated €4 bn has returned to the system in the two weeks since political uncertainty was halted with the formation of Samaras’ coalition government.

10.55am: Ireland’s first bond auction since its bailout has been completed, and the Dublin government is calling it a success.

The Irish debt agency sold €500m of three-month bills,at an average yield of 1.8%. That’s a higher rate of return than the UK and Germany are paying for 10-year bonds, but much lower than the 2.4% paid by Spain for a similar auction last week.

Finance minister Michael Noonan called it an “important milestone” on Ireland’s path to recovery, adding:

The markets have reacted positively to our strong program implementation to date.

And here’s some comment from Nicholas Spiro of Spiro Sovereign Strategy:

Irish sovereign debt has been on a roll. The rally dates back to the middle of last year when foreign investors started taking a much more favourable view of Ireland’s adjustment programme.

However Ireland is hardly out of the woods. Domestic demand continues to contract, the fiscal deficit was 13% of GDP last year and the economy is expected to more or less stagnate this year.

10.35am: We’re hearing from Athens that Evangelos Venizelos, the leader of Greece’s Pasok party (part of the new coalition government), has called for Greece’s bailout programme to be extended by three years.

We’ll have more details on the situation in Greece shortly….

10.22am: Worrying News. Spain’s borrowing costs jumped at an auction of debt this morning. Anothe sign that the optimism following the EU summit has faded.

Spain sold a total of €3bn of debt, including €747m of 10-year bonds (the main benchmark of invester confidence). Buyers demanded an average yield of 6.43%, up from 6.04% at the last auction a month ago.

So Spanish debt is being seen as riskier, despite European leaders agreeing last week that troubled banks could be recapitalised directly from eurozone rescue funds. Why?

Nicolas Spiro of Spiro Sovereign Strategy explains:

Concerns persist, partly because the decision is conditional on the creation of a eurozone-wide banking regulator which is likely to face significant delays. For the time being, the Spanish sovereign will have to shoulder the burden of the bail-out loans, putting more pressure on Spain’s creditworthiness.

Spiro added that Spain is caught in “a pernicious circle”, with its austerity programme adding to its recession, at a time of weak public finances and a debt-laded banking sector.

10.03am: Back in the heart of the eurocrisis, and Ireland is partway through auctioning €500m of short-term government debt. We should get the results soon….

Henry McDonald reports from Dublin:

The National Treasury Management Agency – the body overseeing Ireland’s national debt – will seek to borrow the same amount for three months when they auction government treasury bills to several international banks.

The auction will last for one hour until 10.30 am today.

It is the first time the NTMA has gone to the markets with a new issue
of Government debt of any kind since September 2010. Today’s auction is seen as a test to gauge if Ireland can go back into the sovereign debt market following in the international bail out of the country.

The Government has argued that last weeks EU summit decision separating Irish sovereign debt from the country’s bank debt paved the way for today’s auction.

The aim is to build on positive market sentiment towards the country, as reflected in the falling yields – or interest rates on Irish Government debt.

9.58am: The Wolfson Prize judges said that Capital Economics had provided “the most credible solution to the question of how an orderly exit from the Eurozone by one or more of its member states could be managed.”

Here’s their summary of the plan:

• A new currency is introduced at parity with the Euro on day 1 of an exit.
• All wages, prices, loans and deposits are redenominated into it 1 for 1.
Euro notes and coins would remain in use for small transactions for up to six months.
• The exiting country would immediately announce a regime of inflation targeting, adopt a set of tough fiscal rules, monitored by a body of independent experts, outlaw wage indexation, and announce the issue of inflation-linked government bonds.

Capital Economics also recommends that government should redenominate its debt in the new national currency and make clear its intention to renegotiate the terms of this debt. This is likely to involve substantial default – perhaps sufficient to reduce the ratio of debt to GDP to 60%.

All very sensible – the key issue is that Capital Economics argues that it is possible (despite the lack of an exit mechanism).

Bootle is one of the UK’s most respected economists, and also writes regularly for the Daily Telegraph. Its Jeremy Warner points out that there is still one hurdle to clear – finding a eurozone country that wants to go it alone:

9.42am: Roger Bootle went on to argue that the real long-term danger to the euro is the possibility that Greece makes a success of leaving it (by benefiting from a new weaker currency, and shedding some of its debt burden).

That would tempt other countries to follow. As Bootle puts it, the “There is no alternative’ argument” won’t cut it anymore.

Bootle argued that the “best outcome” to the crisis would be for the ‘Northern Core” to leave the euro. However, is more likely that weaker members in the South will exit, and revert to individual currencies.

Bootle said it would be “best for them to go to separate currencies…. The Southern euro doesn’t make sense.”

9.28am: Here’s a picture of Roger Bootle accepting his prize:

Bootle explained that his ‘central case’ is that one country will leave the single currency. This would have to happen in secret (capital controls would be needed, to prevent people sending their money out of the country).

The country would then redenominate itself with a new currency, initially valued at a 1 to 1 rate with the euro (but floating, so it could find its own level).

9.25am: After announcing Roger Bootle’s win, Lord Simon Wolfson claimed that the eurozone was moving closer to breakup every day. Partly because it is still too hard for weaker countries (such as Spain and Italy) to rebalance their economies within the single currency:

9.18am: Two other entries for the Wolfson Economics Prize were commended — Jens Nordvig and Nick Firoozye of Nomura, and Jonathan Tepper of Variant Perception.

9.14am: Roger Bootle’s winning entry was called Leaving the Euro, a practical guide.

You can read it online here.

Here’s a summary of Capital Economics’ idea:

Their central focus is how to achieve a fall in real wages and prices with the minimum practical disruption. This essay proposes that government debt and consumer debt be redenominated into euros deploying the ‘lex monetae’ principle – in other words, that each country determines the currency applicable under its laws.

9.11am: Just in — Roger Bootle of Capital Economics has won the Wolfson economics prize, for his ideas for how to break up the euro.

More to follow!

9.03am: The European Central Bank is not certain to cut interest rates today. A poll of 71 economists conducted by Reuters found that 48 expect borrowing costs to be lowered, from 1%.

8.54am: Here’s a picture from Athens of the swearing in of the new Greek finance minister, Yannis Stournaras, this morning:

That’s prime minister Antonis Samaras on the left, with president Karolos Papoulias next to him.

8.41am: Spanish bond yields are inching higher this morning, hitting their highest levels since last week’s EU Summit.

The yield on Spain’s 10-year bond has risen to 6.56%, from 6.44% overnight. That follows poor economic news yesterday (showing that the eurozone’s service sector shrank again in June). There are also signs that the optimism created by last week’s summit has worn off.

Gary Jenkins of Swordfish Research explains:

There are already creeping signs of disharmony following the summit and if this continues then it is going to be very difficult to persuade investors to purchase Italian and Spanish government bonds at the kind of rates that these countries need.

8.24am: In less than one hour’s time, one economist (or a small group) will be £200,000 richer – for coming up with the best way to break-up the euro in an orderly fashion.

The Wolfson Prize for economics will be awarded shortly after 9am. It’s the creation of Lord Simon Wolfson, the Conservative peer. The shortlist of five entries was announced in April (read more here). They are:

A team from Capital Economics led by Roger Bootle; private investor Cathy Dobbs; Jens Nordvig and Nick Firoozye, of Nomura Securities; Neil Record, of Record Currency Management; and Jonathan Tepper, from Variant Perception. Each has already received £1 – are assured a £10,000 share of the £250,000 prize.

Each group has taken a different approach — Dobbs, for example, explains how to split the eurozone in two, while the Nomura team focus on the many, many legal hurdles that would need to be overcome.

Stay tuned

8.00am: Over to Greece, where Pasok leader Evangelos Venizelos, who is part of the coalition government, is also forming a shadow cabinet. The news prompted one Greek commentator to note, that the famously large politician wants the best of both worlds.

7.58am: All eyes will be on the central bank decisions today, but there will also be plenty of news out of Greece where prime minister Antonis Samaras is due to meet troika officials, and the new finance minister is being sworn in.

• Greek finance minister Yannis Stournaras to be sworn in: 8am
• Wolfson economics prize winner announced: 9am
• German factory orders for May: 11am
• Greek prime minister Samaras will meet troika officials: 11am
• Bank of England decision on QE and rates: 12pm
• European Central Bank rate decision: 12.45am
• ECB press conference: 1.30pm
• US ADP employment change for June: 1.15pm
• US ISM non-manufacturing for June: 3pm

In the debt markets, Ireland will come back to the markets for the first time since it asked for a bailout back in 2010. It will auction €500m of three-month treasury bills. France will sell €7bn-€8bn of seven, 10 and 12-year bonds. The US will sell three and six-month bills, three and 10-year notes, and 30-year bonds.

7.27am: Good morning and welcome back to our rolling coverage of the eurozone crisis.

Everyone’s hoping for joint action from the central banks today. The Bank of England is widely expected to boost its quantitative easing programme by £50bn, and there are hopes that the European Central Bank will cut rates by 0.25%.

The winner of the Wolfson economics prize will also be announced at nine this morning. A quarter of a million pounds is on offer for the winning suggestion for how to handle the break-up of the eurozone.

Later on the troika of the ECB, EU and IMF will meet Greek politicians to to assess the country’s progress, or lack of it, in implementing terms of its latest multibillion-euro bailout.

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