July 17 2012

Fed chair says UK failed to heed US Libor warnings, Bank of England chief Mervyn King says Libor fixing was ‘fraud’, New emails pile pressure on deputy BoE boss Paul Tucker, Belgium bond yields hit record low, plus: How Germany weakened the Stability and Growth pact…

Powered by Guardian.co.ukThis article titled “Global financial crisis live: Bernanke ‘can’t guarantee’ reliability of Libor” was written by Graeme Wearden, for guardian.co.uk on Tuesday 17th July 2012 06.54 UTC


And that’s it, the hearing is over, after two and half hours of testimony. Stay tuned for a quick summary.


What will History’s verdict be if Congress cannot resolve the Fiscal Cliff?

Bernanke says that the US will “probably be knocked back into recession” unless the tax rises and spending cuts that are already scheduled to hit in 2013 can be postponed.

In the long term, though, the US deficit needs to be cut. Fail to do that, Bernanks warns, and America could suffer the kind of austerity measures that are now being imposed in the eurozone.


Bernanke: Libor fixing looks like fraud to me

Senator Jeff Merkley of Oregon reads out some of the Libor emails that were
uncovered during the investigation, showing Barclays staff telling each other what Libor rates they

Doesn’t this sound like fraud?

Bernanke agrees, saying:

Based on what I’ve read about it, it looks like it, yes.

Sir Mervyn King of the Bank of England made a similar point to the British parliament this morning, saying that deliberately rigging the Libor rate for personal gain was “my definition of fraud”.


Bernanke clarifies exactly what the Federal Reserve knew about Libor in 2008. At that stage, it had become aware that some banks were reporting artificially low borrowing rates, in an attempt to calm fears over their financial stability.

The other half of the scandal — that some people were conspiring among themselves to ‘tweak’ the Libor rate for their own gains, only came to the Fed’s attention “recently”.


Senator Warner (Democratic member for Virginia) turns to the world economy, asking Bernanke how the actions of the European Central Bank, or the Bank of England, influences the Fed.

Bernanke replies that the world economy is slowing – largely due to developments in Europe, but also due to developments in Asia. Efforts in both regions to stimulate economic growth should help America.

The world, he warns, “is in an easing cycle”.

The Federal Reserve chair also seems keen to point out that other central banks are also operating unconventional policies – the Fed is not alone here.

But he also warns that the current stimulus measures are small beer compared to the co-ordinated action we saw during the rocky days of the crisis in 2008.


And another question on Libor.

Herb Kohl, Democratic senator for Wisconsin, reads out a quote from a “chief
executive of a multinational bank” in the Economist who called it “the banking industry’s tobacco moment,” (a reference to the lawsuits and settlements that cost America’s tobacco industry more than $200bn 14 years ago).

Does Bernanke agree?

Bernanke won’t be lured into speculating, but does say that the Fed would play a role in any international settlement over the issue.


The Senate committee is clearly very concerned about Libor. Another question about the scandal – this time, asking Ben Bernanke what he knew, and when.

Bernanke explains that he was aware that there were problems with the system in April 2008, following phone conversations between relatively junior staff at Barclays and officials at the Fed (one of whom, the Fed chair revealed, didn’t initially understand how Libor was calculated). Whatever was said on these calls alerted the Fed.

So why did the Fed not sort Libor out? Bernanke sends the buck flying back across the Atlantic, explaining:

Because the Federal Reserve has no ability to change it.

He repeats his point that the British Banking Association did not go anywhere near as far as the New York Fed wanted, when it raised its concerns in 2008.


Are US banks “too big to manage, and too big to regulate”, asks Sherrod Brown, Democratic senator for Ohio, after rattling off a list of scandals within America’s financial sector.

Bernanke concedes that plenty has gone wrong in US banking [Libor is not a one-off], but insists that the key problem is whether banks are “too big to fail”.

Solve that problem, through measures such as living wills, and banks will improve their behaviour … and maybe break themselves up.

Brown is not too impressed, joking grimly that bankers only show interest in living wills “when they’re close to the deathbed”.


Senator Mike Johanns, Republican senator for Nebraska, looks back to the fiscal cliff issue. What does he think Congress should do about the spending cuts and tax rises that will land on the US in 2013.

The Fed chair declines to dabble in politics (heck, he has enough on his plate as it is). His message is simple – the fiscal cliff is bad news. So fix it:

The choice between spending and taxes… is an issue for Congress. I’m just pointing to the affect of all those changes hitting at the same time.

No I don’t have a specific recommendation.

Resolving the issue, even it was just a set of guidelines that Congress agreed to, would go a long way to restoring confidence the markets.

He also reminds the senators that last year’s shock credit rating downgrade from S&P occured following the deadlock over the debt ceiling talks.

That sounded like a subtle hint that the US credit rating could be threatened if Washington is dragged into a pitched battle over the fiscal cliff.


Senator David Vitter then asks whether the Fed should impose higher capital requirements on US banks – effectively giving them more resources in case of future heavy losses.

Berkanke remains non-committal, saying the US’s strategy is to work in line with international standards (such as Basel 3).

He adds:

We’re always open to discussions, and we’ll see how the requirement for higher capital requirements affects the credit system.

(ie: banks can’t lend money to consumers and small businesses if they’re being forced to stash it away to cover potential losses on, for example, European bonds)


And another question on Libor. Have US banks also been fiddling the figures, or is this mainly a British affliction (like the rain)?

Bernanke gives a long answer, but in summary he says that “two US banks” have been asked to submit detailed information into the ongoing US inquiry into Libor.

After four years, is that really good enough? Bernanke’s questioner, Senator David Vitter, says not – suggesting that the Fed has been asleep at the wheel, just like regulators in the City.


Another question on Libor – how much did the scandal cost the US public, and what should be done to reform the system?

Bernanke points out that some people will have actually benefited from banks reporting artificially low rates into the Libor system [for background, each bank reports how much it is having to pay to borrow from rivals, and thus the overall cost of borrowing between banks is calculated].

But other people will have lost out through this “unacceptable behaviour”, said Bernanke, who added that the various lawsuits that are already being filed will eventually show just how much damage was caused.

On fixing Libor, the Fed chair says it needs to be an “international effort”.


Wall Street extended its losses as Bernanke’s session has continued, with the Dow now down 48 points at 12,680.

Not a major move, but a sign that the testimony has left traders a little blue.

Michael Hewson of CMC Markets explains:

Not unexpectedly investors were left
disappointed as the Fed Chairman simply reiterated last week’s FOMC
minutes stating that the Fed remained prepared to act, but declined to
say how.


Senator Charles Schumer of New York warns Bernanke not to expect too much help from Washington, suggesting that Democrats and Republicans can be trusted not to agree on resolving the fiscal cliff.

Schumer rattles through a list of issues on which the two sides couldn’t reach a deal, concluding with a plea to Bernanke to “do everything he can from an economic perspective” to protect the US economy, and not worry about the political element.

Bernanke appeared to smile quietly to himself at this point – perhaps he’s already reached his own conclusions about our elected leaders.


Senator Corker queries Ben Bernanke’s claim that the fiscal cliff could shunt the US recovery off track (see details here).

Surely it would be more damaging for the US to simply ignore fiscal responsibility?

argues not – saying the US economy simply won’t be strong enough to
cope with the impact of several tax rises and spending cuts at the same


Ouch. A second question on Libor — can Ben Bernanke reassure the American people that the Libor rate is accurate today?

No he cannot. Bernanke says he cannot say “with full confidence” that Libor is reliable, because:

…the British Bankers’ Association did not adopt most of the recommentations made by the New York Fed.


Senator Mike Crapo homes in on the issue of quantitative easing. With some in the financial markets keen to see QE3, is there any proof that the existing programmes have worked?

Bernanke explains that the Fed turned to QE (buying bonds with newly created electronic money) after cutting interest rates to record lows.

He adds:

My own assessment is that the quantitative easing, and Operation Twist, have helped to stimulate the economy.

Bernanke says the Fed will closely watch the US jobless figure, and the inflation rate, before deciding whether to launch QE3.


The US economy is losing pace, so what will the Federal Reserve do about it?

Bernanke doesn’t really say anything new – just that the Fed is looking at “a range of possible tools”, such as changes to its balance sheet.


Senators begin questioning Bernanke

The first question for Ben Bernanke is on the Libor scandal. What does he know about it, and when was he first aware that banks were misreporting their lending rates?

Bernanke responds that the allegations are “very troubling in themselves”, and also undermine public confidence in the banking sector.

He says that the Fed was alerted to the issue in April 2008, when a Barclays employee told it of concerns about Barclay’s Libor reporting.

The Fed began an investigation, and it became clear that the Libor system was “structurally flawed”.

He confirms that the Fed liased with the FSA in London, and the Bank of England, to pass on its concerns.

Bernanke adds that the Fed also released a set of suggested changes to the Bank of England, and the British Banking Association, in May 2008.

The Federal Bank of New York took the lead here.

In short, Bernanks argues, the Fed did not drop the ball on this one.


Bernanke’s testimony includes a warning that the US faces two key threats – the eurozone crisis, and the “fiscal cliff”.

On the eurozone, he says:

Euro-area authorities have responded [to the crisis] by announcing a number of
measures, including funding for the recapitalization of Spain’s troubled
banks, greater flexibility in the use of the European financial
backstops (including, potentially, the flexibility to recapitalize banks
directly rather than through loans to sovereigns), and movement toward
unified supervision of euro-area banks.

Even with these announcements,
however, Europe’s financial markets and economy remain under significant
stress, with spillover effects on financial and economic conditions in
the rest of the world, including the United States. Moreover, the
possibility that the situation in Europe will worsen further remains a
significant risk to the outlook.

And on the fiscal cliff (a set of tax rises and spending cuts that are due to kick in from 2013), Bernanke insists that while the US fiscal position is unsustainable, now is not the time to fix it:

He said:

That recovery could be endangered by the confluence of tax increases and
spending reductions that will take effect early next year if no
legislative action is taken. The Congressional Budget Office has
estimated that, if the full range of tax increases and spending cuts
were allowed to take effect – a scenario widely referred to as the fiscal
cliff – a shallow recession would occur early next year and about 1-1/4
million fewer jobs would be created in 2013.


Bernanke is now reading his testimony to the committee.

The US stock market has already turned negative since the text hit the wires, with the Dow Jones industrial average now down 18 points at 12,708.

European markets are also in the red, with the FTSE 100 down 20 points, or 0.35%, at 5641.

That is because the Fed Chair has not given any suggestion that QE3 is imminent.


Before Bernanke actually reads his testimony, two members of the Senate banking committee read their own prepared remarks. Both cited Britain’s Libor scandal as an example of problems in the banking sector.

As senator Mike Crapo put it:

Allegations that banks manipulated the Libor rate are being investigated, and questions are being asked whether international regulators such as the US Federal Reserve took enough action.

Earlier this morning in London, MPs in the House of Commons heard that the Fed had flagged up concerns about Libor in 2008 (see details here.) UK politicians fear that the Bank of England did not pay enough attention to Tim Geithner’s fears.


Bernanke’s prepared testimony to the Banking committee is now online here.

In it, he warns that the US jobless rate has recently levelled out at just over 8%.

Bernanke also blames the eurozone crisis for dragging back the US economy, saying:

Financial strains associated with the crisis in Europe have
increased since earlier in the year, which…are
weighing on both global and domestic economic activity.

The recovery in
the United States continues to be held back by a number of other
headwinds, including still-tight borrowing conditions for some
businesses and households, and–as I will discuss in more detail
shortly–the restraining effects of fiscal policy and fiscal


Federal Reserve chair Ben Bernanke begins his session on Capitol Hill by repeating something he has said before – the Fed is prepared to take further actions, as appropriate, to promote a stronger recovery within the US.

He concedes that the economic recovery in the US is slowing, predicting that growth in the second quarter of 2012 was slower than in the first quarter.


Ben Bernanke has begun testifying to the Senate banking committee. You can watch it live here.


One central banker down, one to go! It’s nearly time for Ben Bernanke, head of the Federal Reserve, to start delivering his latest monetary policy report to the US Senate.

Bernanke’s testimony will be eagerly watched across Wall Street, and the City, for signs that the Fed might be poised to launch new economic stimulus measures.

And with the presidential election just a few months away, his views on issues such as unemployment and the fiscal cliff will also be very interesting …


There worrying signs today that the Greek government may be struggling to implement the next round of spending cuts and tax rises demanded by international lenders.

Kathimerini.com reports that prime minister Antonis Samaras has issued an ultimatum to his ministers, urging them to hurry up and find €11.5bn in savings for 2013 and 2014.

Athens agreed to make such savings during the negotiations for its second bailout, back in March. The details were not been hammered out then, though. As things stand, only €5.6bn of cuts have been agreed.

Samaras warned that unless ministers find more savings, he and finance minister Yannis Stournaras will do it themselves.

More here.


Back in the eurocrisis … the Irish government is about to launch a €2bn stimulus package later today, in a bid to kickstart the Republic’s economy

From Dublin, Henry McDonald reports:

The money will come from the country’s Pension Reserve Fund, the sale of some state assets and public/private partnerships financed by the European Investment Bank.

Roads, schools and hospitals are among the areas likely to be funded and including the building of a new technology institute in North Inner City Dubloin.

The Taoiseach Enda Kenny said that the stimulus package will be a “realistic and achievable package of investment and spending”.

He said the aim was to restore a sense of confidence in the economy and provide a measure of extra work in the construction sector in different parts of the country.

The Fine Gael-Labour coalition will be hoping that the construction projects will particularly boost the building industry which has been in the doldrums since the collapse of the property market. The country continues to have one of the highest unemployment rates in the EU with almost 15% of the working population out of work.


The Telegraph’s Jeremy Warner has put his finger on it – Sir Mervyn King remains as unrepentant as ever. He writes:

Denial of culpability in the libor scandal – basically on the grounds
that the Bank of England was not the responsible regulator – mirrors a
similar more general refusal to accept the Bank did anything wrong
either in the lead up to or during the banking crisis.

I’m sure the governor has many fine qualities, but he’s never shown much appetite for taking his share of the blame. Today was no different – indeed, he even turned the fire back on the committee at one stage by pointing out that politicians had shown precious little interest in bank regulation before the credit crunch.


A summary of today’s Libor hearing

Here’s a summary of the main developments from the Treasury committee hearing over the Libor scandal.

1) The Bank of England and regulators had lost patience with Barclays by the end of June, when the Libor scandal hit the headlines.

Mervyn King didn’t appreciate being told he had “pulled the trigger” on
Bob Diamond’s career, the governor confirmed that he had concluded that
the CEO’s time was up after a series of incidents in which Barclays had
sailed too close to the wind (see 10.28)

2) There was confusion aplenty on the weekend of 30 June and 1 July.

Turner insists he gave Barclays chairman Marcus Agius a clear message
that Bob Diamond had to go – and was startled to learn that Agius had
terminated his own career instead (see 10.11 and 10.21)

3) The Bank of England, and Mervyn King in particular, will not take the blame for this scandal.

King seemed keen to take some of the credit for getting the Federal Reserve to warn that the system wasn’t working right (see 10.36), while insisting that no one knew the scale of the deception. And, as it said a few times, the BoE was not the responsible regulator.

4) This case is going to end up in court.

King was clear – deliberate manipulation of Libor for personal ends is “fraud” (see 10.44), in his view. That’s a powerful view to express, at a time when the Serious Fraud Office is conducting an investigation.

5) Paul Tucker’s reputation has taken another knock.

who hope to rise to the top of the banking world are advised to refrain
from sending personal emails to bankers, thanking them for being “an
absolute brick” (see 11.56am) It won’t look very good if MPs ever ask you why you didn’t hear alarm bells ringing over potential dishonesty in your sector (see 10.36am).


Catching up quickly – this is another key section from the new emails unearthed by the Bank of England (at John Mann’s request), that will cause Paul Tucker more grief.

Jackie Keating, who works in the Bank’s public information and enquiries group, told Mann yesterday (full email here) that:

On 10 December 2008 it was announced that Mr Tucker would become a Deputy Governor of the Bank of England. The Bank has a note of an e-mail exchange between Mr Diamond and Mr Tucker on 11 December 2008 in which Mr Diamond says, “Paul, Congratulations Wei! done, man. I am really, really proud of you. Talk soon. Bob” and Mr Tucker says “Thanks so much Bob. You’ve been an absolute brick through this. Paul”.

These emails, being of a purely personal nature, were not of a kind that the Bank’s procedures require to be filed, but as we have found some reference to their existence, we have included them here in the interests of full disclosure.

Very good of her. Not very good for Tucker, I suggest, especially combined with the other correspondence from May 2008 showing him discussing Libor with Barclays and other banks (although Tucker insisted this morning that these discussions were above board – see 11.26)


That’s all, folks.

The first portion of the session has now finished (after those cursory questions about the lending scheme). I’ll pull a summary together now.


Paul Fisher adds that the eurozone crisis has helped to depress borrowing in the UK, making banks reluctant to make more loans and deterring companies from taking more credit.

He denies, though, that there’s no demand for the scheme, as he has spoken to “plenty of viable borrowers up and down the country”.


Just when the Libor questioning was getting particularly interesting, John Mann’s questioning is ended (shame!) and handed to Mark Garnier, who starts asking about the Bank of England’s new scheme to get banks to lend more.

Paul Fisher says that almost 100 banks have been accepted to participate in the funding for lending scheme, suggesting it could play a role in driving down lending costs for UK businesses.


John Mann quizzes Paul Tucker over new emails

This is the text of one of the emails uncovered by John Mann, sent from Paul Tucker to Bob Diamond.

From: Paul.Tucker
Sent: Wednesday, May 28,2008 11:24 AM
To: bob,
Subject: Llbor

Have spoken to hsbc and rbs, stuart and johnny. Sense similar across all three of you. I encouraged contact amongst mark dearlove peer group


Mark Dearlove is the head of the money markets desk at Barclays, who received the instruction from Jerry del Messier to lower Barclays’ submissions to the Libor panel. “Johnny” is Johnny Cameron of RBS.

Mann says the email shows that Tucker was “discussing Libor with this level of people at a regular basis.”

Tucker, though, rebuffs the suggestions that his fingerprints are all over the scandal. He says he simply wanted to discuss his concerns about the accuracy of Libor during a time of market disfunctionality to Bob Diamond or John Varley (then Barclays CEO).

John Mann, of course, is furious that he has not been given a place on the new parliamentary inquiry into Libor.

Mann also accused the Bank of England of being in denial over the Libor scandal. Mervyn King denies(!) the charge, saying that the Bank simply had “no evidence of wrongdoing” in 2008.

And, of course, it was not responsible for this section of the financial sector. That’s what the FSA is for.


John Mann takes up the questioning.

Before the inquiry started, he released new emails sent between the Bank of England and Barclays (as mentioned at 10.05am)

You can see them here, and the details of his Freedom of Information request.

Mann demands to know why the Bank didn’t release more information about the Libor inquiry earlier. After an amusing bit of confusion (King thinks he means the new emails, but Mann is actually referring to the details released by the Fed last Friday).

Mervyn King says that there are masses of emails to be looked through, and that while Mann got special priority with his first request, he can “wait in the queue” in future.


Mervyn King concedes that the British Bankers’ Association didn’t cover itself in glory either during the Libor scandal, saying the BBA had to be nudged into action over Libor.

But the governor isn’t up for retributiion, saying that it was very hard to regulate a bank such as Barclays where the culture was to sail close to the wind.

I don’t want to blame anybody.

That rather startles the excellent Andrea Leadsom (why is she not serving on the new inquiry into Libor?), who points out that Libor figures were being manipulated for seven years.

King, though, sticks to his position that there were deep problems at the heart of Barclays, saying pointedly that:

Libor was not so much the straw that broke the camel’s back at Barclays as a bail


Why have the Barclays chairman, Marcus Agius, and senior non-executive director, Mike Rake, avoided more blame from the failures at Barclays, asks Andrea Leadsom.

King says Agius did the “honorable thing” by resigning (before unresigning), but that it wasn’t fully appropriate, because the issue is about the culture at the bank, and that comes from the chief executive.


Another important question from Andrea Leadsom, this time for Lord Adair Turner.

Why was Jerry del Messier promoted to the high-profile role of COO of Barclays just a few weeks ago, when the final details of Barclays’ fine over the Libor scandal was being agreed?

Turner says Andrew Bailey, the FSA executive responsible, raised the issue with Barclays before the promotion, but the FSA did not block it because del Messier wasn’t really changing his role.

A promotion to be a chief executive would be a different matter, says Lord Turner, but won’t speculate on whether the FSA would have blocked such a move.


Andrea Leadsom MP, one of the sharpest blades in the committee’s cutlery drawer, asks Sir Mervyn King a key question – why did no-one spot that a crucial measure like Libor was being fiddled?

The governor reaches for a sporting reference – the recent scandal of spot-fixing in cricket (in which players colluded to bowl no-balls at certain times):

No-one saw it because the game wasn’t fixed

So, Leadsom asks, how can we be sure that other important rates aren’t being fixed? We can’t, says King, and nor should he be expected to. “We’re not responsible for the regulation of markets”.


Why did the New York Fed take such an active interest in the potential rigging of Libor, but the Bank of England did not, asks Pat McFaddon

King explains that the two central banks are different: “They’re a regulator, we’re not …”, adding that the Bank had to pass the concerns on to the BBA.

So you’re just a postbox, asks McFaddon?

Certainly not, replies an irked governor. The Bank played an important role in the BBA’s inquiry, he adds.


There’s some scepticism in the City about Mervyn King’s claim that he only discovered two weeks ago Libor was deliberately rigged.

Here’s some early reaction from Twitter:


Pat McFaddon wants more details about the little chat which took place in Basel in 2008 between Sir Mervyn King and Tim Geithner (when he was running the New York Fed), where Geithner warned him about Libor.

King explains that Geithner (now the US treasury secretary) was worried about the dollar Libor (the interest rate at which banks lend to each others in dollars).

Thus the decision to ask the British Bankers Association to hold an inquiry, to check that Libor was an accurate measure of the health of the system. King, though, insists that he was still thinking in terms of whether Libor was giving the right picture, rather than if someone was deliberately fixing it.

It’s the difference between bringing a patients’ temperature down, and fiddling with the thermometer.


Mervyn King is insisting that the Bank of England can’t be blamed for the Libor scandal. He says he only learned there had been deliberate misreporting of Libor two weeks ago.

Yes, there were concerns about the accuracy of Libor during the financial crisis. But that is not the same as proof that the figures had been manipulated for private gain, King says, adding:

That’s my definition of fraud.

King’s argument is that the Bank, the FSA, and the media did not know that the rate had been deliberately fixed until recently, even though there had long been suspicions over its trustworthiness.


‘With hindsight, it was dishonest’

Now Michael Fallon asks Sir Mervyn King about the message sent to the Bank of England from the US Federal Reserve back in 2008, expressing concerns over Libor.

replies that he had solicited the email, for starters – asking Tim
Geithner to send over his concerns in writing, after learning of them at
a conversation in Basel.

Once King received it, he “sent a message back to staff, asking them to take a view on it. The next day, we sent it to the BBA”.

conclusion was that the BBA would hold a proper consultation into
Libor, to check whether financial pros across the world had confidence
in the Libor rate.

So what happened next? Not a lot, it seems.

Paul Tucker admits that the Fed’s concerns of “deliberate misreporting” did not set off any alarm bells.

Fallon goes for the jugular, asking:

Is deliberate misreporting dishonest?

Tucker admits that:

With hindsight, it is.

That’s an embarrassing admission from the man responsible for financial stability.


Andrew Tyrie is asking Mervyn King whether he had the legal authority for interfering in the management of Barclays.

King replies that he had consulted the Bank’s legal advisor “to confirm exactly what I can and cannot say”.

The world has changed, the governor insists. If the Bank and the regulators has concerns about the captain “on the bridge”, and have lost confidence in a bank’s management, they have a duty to act on those concerns.


Over to Sir Mervyn King — what was his role in this sorry tale?

The governor confirms that there was deep confusion at the heart of the UK financial sector on the weekend of 30 June and 1 July. Apparently, he (along with Lord Turner and others), had learned of Marcus Agius’s resignation “from the BBC’s website”.

That’s particularly odd, as it was a Guardian scoop. But all’s fair in love, war, and banking crises.

King then insists that he did not pull the trigger on Bob Diamond. He simply wanted to make sure that Barclays’ senior independent director (Sir Michael Rake) very clearly understood the depth of the regulators’ concerns over the bank’s executive management.

Rake did not appreciate this, he adds (despite the letters sent by the FSA, expressing concerns over Barclays).


My colleague Jill Treanor points out that Lord Turner’s evidence has shown up a discrepancy in Marcus Agius’s own evidence:

When Agius appeared before the committee he made no mention of this discussion with Turner on the Friday. Instead he talked about how the bank’s shareholders had told the brokers – Credit Suisse – that they did not want Diamond to go, so he decided that weekend to quit himself.

There are already suggestions that Bob Diamond might be recalled to answer issues raised by Jerry del Messier. Perhaps they should get Agius back too


Where is the governance process that the FSA went through before deciding to pull the rug out from under Bob Diamond, asks Andrew Tyrie?

It doesn’t sound like there was one.

Lord Turner concedes that the Barclays debacle “raises questions about future governance of these kind of situations”, but adds that the FSA took “sensible decisions” at the time.

Or, as an unimpressed Andrew Tyrie puts it, “we’re making policy on the hoof”.


Why, Tyrie asks, did the Financial Services Authority (which Lord Turner runs) then turn to the Bank of England to force Bob Diamond out?

Adair Turner argues that the Bank’s role in financial supervision and the stability of the UK financial sector means its governor has every right to put his views to the heads of commercial banks such as Barclays.

Andrew Tyris is not impressed. The Bank of England has no regulatory role over this kind of issue, he points out.

Lord Turner replies that neither the BoE nor the FSA were making a “regulatory instruction” (just a waggle of Merv’s eyebrows?).

Turner’s argument is that it is totally appropriate for the Bank of England to play this kind of role in regulating the City (despite the FSA having the official responsibility). Something of a change of heart, argues the Telegraph’s Jeremy Warner:


Andrew Tyrie starts by asking Lord Adair Turner to continue where he
finished last night – explaining how he had indicated to Marcus Agius at the end of June
that Bob Diamond’s position might be untenable (before the division bell
cut Turner off in his stride).

How, Tyrie asks, could Agius have concluded that he (not Diamond) needed to go?

Turner explains that he had been very clear that he had been flagging up the FSA’s concerns about Diamond, saying his message was:

You have to ask whether Bob, and the brand, is something that is going to work.

Turner added that there can be “no doubt” that we were having a conversation about whether Bob Diamond was the person to lead the bank forward, and whether the public would believe he was.

So how, Tyrie asks, could Agius conclude that he was being handed a revolver to shoot himself, not his chief executive?

Turner says this development came as a surprise to him, and was not something he thought was sensible.


The hearing has begun.


Exciting developments just before the hearing begins. A new set of emails have emerged this morning, which appear to leave the Bank of England, and Paul Tucker in particular, facing more questions about the Libor scandal.

John Mann MP is calling them “explosive”.

They include an email from Bob Diamond to Paul Tucker, congratulating him on his appointment as deputy governor. Tucker’s reply says:

Thanks so much Bob. You’ve been an absolute brick through this, Paul.


Where to watch the Treasury committee hearing

Mervyn King’s appearance at the Treasury committee (starting shortly!) will be streamed live at www.parliamentlive.tv.


Spain just held a solid bond auction – selling €3.56bn of bonds at lower borrowing costs than a month ago.

The Spanish debt office sold 12-month bonds at an average yield of 3.818%, down from 5.074% in June. It also sold 18-month bonds at yields of 4.242%, down from 5.107%.

Higher than Spain would like to pay, but still reassuring.


Here’s some early reaction to the news that UK inflation has fallen (see 9.35am), from Howard Archer of IHS Global Insight.

Very good news for both consumers and the Bank of England as lower petrol prices, markedly reduced annual food inflation and strong early discounting in the summer sales drove inflation down more than expected to a 31-month low of 2.4% in June. This reduces further the squeeze on consumers’ purchasing power and facilitates further Quantitative Easing by the Bank of England later this year should the economy fail to show underlying improvement over the coming months.

Indeed, consumer price inflation is now less than half the peak rate of 5.2% seen in September 2011 and getting much closer to annual earnings growth.

However, Archer added, the UK still faces “serious headwinds”: tighter fiscal policy and ongoing serious problems in the eurozone.


Surprise drop in UK inflation

UK inflation fell in June, to a lower figure than economists had expected, as retailers cut prices in an effort to encourage consumers to spend.

The Consumer Prices Index came in at 2.4%, year-on-year, last month, its lowest level in two and a half years (and a big drop on June’s 2.8%). On a month-on-month basis, prices fell by 0.4%.

Nice timing for the Bank of England, ahead of this morning’s hearing (which starts in about 30 minutes).

The Office for National Statistics said the fall in inflation was due to a rash of discounts on clothing, footwear, transport and food.

The Retail Price Index also fell, to 2.8% from 3.1% in May.


Sir Mervyn King’s session before the Treasury select committee (see 8.04 for details) was arranged before the Libor scandal broke, engulfing Barclays – but it’s the first time that MPs have had a change to question the governor since.

Our banking expert, Jill Treanor, explains what we should expect on Libor:

King is supposed to be talking about financial stability but it seems likely he will asked about Libor and his role in the departure of Bob Diamond’s resignation as Barclays boss.

FSA chairman Lord Turner appeared before MPs yesterday and explained how his attempts to encourage Diamond to quit had not worked. The division bell was ringing – ending his session – as he recounted he told Marcus Agius, the Barclays chairman on 6 July that the board had to think “very seriously about the scale of the change” which Barclays had to make but that he was surprised that Agius decided to step down as he had expected Diamond to resign instead.

Turner – who described Agius’ decision as “honourable” – then had a meeting with King who then spoke to Agius and was more direct, telling the Barclays chairman that regulators had lost confidence in Diamond, which eventually led to his departure.

MPs should ask for King’s version of events and also take an opportunity to ask his deputy Paul Tucker yet again if he instructed Barclays to cut its Libor submission.


Key event

Spiegel has an detailed article this morning about how, and why, Germany deliberately undermined the stability and growth pact in the early years of the eurozone.

Under the pact, European countries were meant to keep budget deficits below 3%, and total national debt below 60% of GDP. That was proving too tough for Gerhard Schröder’s administration (which was struggling to implement economic reforms in the teeth of a stagnant economy and rising joblessness). So, despite opposition from German finance minister Hans Eichel and some EU officials, Schröder managed to get the targets watered down in 2005.

Here’s a flavour:

The undertaking began in secret in the summer of 2003. The German
economy had been stuck in a chronic slump since the beginning of the new
century with growth stagnating near zero. Unemployment was on the rise
and the budget deficit was consistently growing.

The previous year, Eichel had only narrowly managed to avoid a
deficit warning from the European Commission. But it soon became
apparent that the situation was not going to improve in the near future.
Because Schröder and Eichel shied away from cleaning up the budget by
way of austerity, further warnings from Brussels, or even monetary
penalties, seemed merely a matter of time.

Schröder, though, found a solution. If it wasn’t possible to adjust
the government’s finances to the Stability Pact, then the Stability Pact
would simply have to be adjusted to the state of German finances.

Interestingly, Schröder’s argument was that Germany should be allowed
to run a larger deficit in order to stimulate its economy, rather than
sticking rigidly to the rules [sound familiar?].

Would the Greek crisis have been avoided if Europe had stuck to fiscal discipline? Hard
to say: Greece’s economic figures had already been “massaged” to make
the country appear in stronger health before it joined the single
. But Germany and France’s failure to hit the stability and growth targets in the good year was a poor example to the rest of the
eurozone, and must have meant less pressure on Italy and Spain.


Wolseley, the FTSE 100 building supplies group, warned shareholders this morning that it is suffering from ongoing
“difficult market conditions” in continental Europe.

In an attempt to dodge the worst of the eurozone crisis, Wolseley now plans to sell or restructure its French business. Things don’t look to rosy in Denmark either.

My colleague Dan Milmo has crunched the numbers, and reports:

The world’s
largest supplier of plumbing materials – from kitchen sinks to shower
doors – announced that it is exploring strategic options for its French
arm, raising the prospect of selling the unit, slimming it down or
hiving it off in a joint venture. Wolseley also flagged up problems with
its Danish business, citing “challenging” trading conditions and
warning of an impairment charge against its Denmark assets.

Referring to Europe as a whole, the group said the outlook had not
improved since a third quarter trading statement, when it reported
negative sales numbers for all its European territories in the UK,
Scandinavia, France and central Europe. “We reported difficult market
conditions in Continental Europe [in Q3] and these conditions have
continued,” said Wolseley.

Following Peugeot’s job cuts last week, it’s another sign that the eurozone crisis is now hitting the “real economy” hard.


Another day in the bond markets begins with traders driving up the prices of “safe haven” eurozone government bonds.

Already, the yield (effectively the interest rate) on Belgium’s 10-year debt has hit a euro-era record low of 2.53%. And the yield on Germany’s two-year bonds has hit a new record low of -0.061%. A negative yield means you would not get all your money back if you held the bond until it matured.

The yield on Austria’s two-year bonds is also below 0%, while the French equivalent has hit a record low of 0.058%*.

* – latest prices via ace Bloomberg economics editor @lindayueh

So what’s happening? In normal times, riskier government bonds command a higher yield, while safer ones offer a smaller return. In the current climate, traders are putting the money into bonds from countries that are likely to ride out the crisis, unbothered that current prices mean they are guaranteed a loss.

Belgium’s bond yields have been dropping steadily in recent months, which the FT’s Stanley Pignal says is partly due to the creation (finally) of its new government:


Here are the details of the five senior Bank of England policymakers who will appear before parliament at 10am:

  • Sir Mervyn King, governor of the Bank of England
  • Paul Tucker, deputy governor of the Bank of England
  • Lord Turner, member of the interim finanancial policy committee
  • Donald Kohn, member of the interim financial policy committee
  • Paul Fisher, executive director, markets, Bank of England

I’ll eat my live-bogger’s hat if the Treasury select committee doesn’t ask Tucker about the claim made yesterday by Del Missier that he believed he was acting on instructions from the Bank of England itself when he told staff to manipulate the Libor rate.

Here’s how some of today’s papers cover the story

Guardian: Barclays boss told me to change Libor, says banker

Daily Telegraph: Libor scandal: Diamond gave fix order, says former right-hand man

Financial Times: Libor testimony puts Diamond under fire


Today’s agenda

Good morning, welcome to our rolling coverage of the eurozone financial crisis, and other important events in the world economy.

The main action will be in parliament this morning when Sir Mervyn King, governor of the Bank of England, is quizzed by the Treasury select committee. King, and four other Bank bigwigs, have been called to answer questions about the latest financial stability report – we expect plenty of questions on the eurozone crisis. The session starts at 10am BST.

King will also be questioned about the latest scandal to grip the City – the fixing of the Libor rate by traders at many of the world’s biggest banks. Yesterday’s testimony from ex-Barclays man Jerry Del Messier set the scene nicely.

King’s fellow central banker, Ben Bernanke, is also facing politicians today – he will deliver the latest monetary policy report to the Senate from 3pm BST (10am EST). Expect plenty of questions about the fiscal cliff, which is looming over the world’s biggest economy.

On the economic front … we get the latest UK inflation data at 9.30am BST. We’ll also get an update on the German economy, with the monthly ZEW economic sentiment data published at 10am BST (11am CEST).

And a few bond sales might catch the eye – with Belgium, Spain and Greece all holding debt auctions this morning.

So I’ll be quite UK-focused this morning, while still watching out for breaking news across the eurozone. As ever, please flag up interesting stories you see yourselves … (and you can get me on @graemewearden on Twitter, and by email at graeme.wearden@guardian.co.uk).

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Cost of living drops to 2.4% in June with UK retailers discounting clothes and shoes to shift summer stock, International Monetary Fund downgrades its forecast for UK growth this year by more than any other developed nation…

Powered by Guardian.co.ukThis article titled “Inflation slides to lowest level since November 2009″ was written by Heather Stewart, for guardian.co.uk on Tuesday 17th July 2012 09.51 UTC

Heavy discounting by retailers struggling to shift summer stock has helped drive inflation to its lowest level since November 2009.

The Office for National Statistics said inflation measured on the consumer price index slipped to 2.4% in June, down from 2.8% in May, with clothing and footwear prices accounting for the largest downward contribution.

Food prices and the cost of transport added to the fall in inflation, the ONS reported, with retailers reporting weaker than usual demand for meat as the torrential rain put paid to barbecue plans.

The price of “miscellaneous goods and services” also fell, said the ONS, driven by personal care products, “notably deodorant and sunscreen”.

Prices across the economy have now fallen for two consecutive months for the first time since early 2009, when the government cut VAT to stimulate the economy during the financial crisis.

The 4.2% fall in clothing prices was twice as large as between any May and June since the ONS began measuring the CPI in 1996. “Downward effects came from across the clothing and footwear sector, with reports of summer sales starting earlier than last year,” it said . Though it added that the price of football shirts had risen during the Euro 2012 championship.

“Today’s release is certainly surprisingly weak. But a large part of that shock looks to be weather related,” said David Tinsley at BNP Paribas.

Cheaper petrol, as the fall in crude oil prices on world markets fed through to forecourts, accounted for part of the decline in inflation, the ONS said. Petrol prices dropped by 4.3p a litre to £1.33.

On the wider retail prices index, inflation also declined, to 2.8%, from 3.1% in May — its lowest level since December 2009.

Falling inflation strengthens the case for the new round of quantitative easing, which the Bank of England announced earlier this month. But it underlines the weakness of consumer demand on the high street.

On Monday the International Monetary Fund sharply lowered its economic forecast for the UK this year to growth of just 0.2%, compared with a previous forecast of 0.8%.

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