Draghi Considers Plan B

Yet more proposals that won’t work.

The problem remains:
Deficits are too small while they all think they are too large.

Draghi Considers Plan B as Sentiment Dims After Cyprus Fumble

By Jeff Black and Jana Randow and Stefan Riecher

April 4 (Bloomberg) — European Central Bank President Mario Draghi is under pressure to reveal Plan B.

A botched attempt to rescue Cyprus last month sent bank shares tumbling across the euro area and rattled confidence in policy makers’ ability to tame the sovereign debt crisis. With doubts growing about Draghi’s forecast for a second-half economic recovery, he’s considering his options.

They range from an interest-rate cut to a new round of long-term loans to banks, to a plan to encourage lending to companies, three officials with knowledge of the deliberations said. They stressed that such action may not be announced today.

“They have to start thinking about a plan for unconventional measures if the recovery does not materialize,” said Martin van Vliet, senior euro-area economist at ING Bank NV in Amsterdam. “It may be too early for them to do that this month, but I’d expect Draghi to acknowledge that the economy is not improving and the chances of a surprise are bigger than they were.”

With Europe entering a second year of recession and fragmented financial markets preventing the ECB’s record-low borrowing costs from reaching the countries that need them most, Draghi may prefer to use so-called non-standard measures. He is particularly concerned about a lack of credit being extended to small and medium-sized companies in countries such as Italy and Spain, two of the officials said on condition of anonymity.

Rates on Hold

The Frankfurt-based ECB will leave its benchmark rate at a record low of 0.75 percent today, according to 54 of 56 economists in a Bloomberg News survey. Two predict a cut. The decision is due at 1:45 p.m. and Draghi holds a press conference 45 minutes later.

The Bank of England will hold its key rate at a record low of 0.5 percent and maintain bond purchases at 375 billion pounds ($568 billion), separate surveys of economists show. That decision is due at noon in London.

The Bank of Japan (8301) decided today to increase monthly bond purchases to 7 trillion yen ($74 billion) in a bid to reach 2 percent inflation in two years. At the first meeting led by Governor Haruhiko Kuroda, it also temporarily suspended a cap on some bond holdings and dropped a limit on the maturities of debt it buys.

Economists from ABN Amro Bank NV to Nordea Bank AB say Draghi needs to give reassurance he still has policy options at his disposal as evidence mounts that the recovery is faltering.

The ECB’s measure of bank lending to the private sector fell for a 10th month in February, dropping 0.9 percent from a year earlier, and manufacturing activity, measured by a survey of purchasing managers, contracted more than economists forecast in March.

Case for Action

“If you look at the world around you, with the economy weak, inflation falling to low levels, the disparities between countries and the credit mechanism not getting any better, you can’t conclude that no further action from the ECB is necessary,” said Nick Kounis, head of macro research at ABN Amro in Amsterdam. “The case for further action from the ECB remains very strong.”

Still, ECB officials haven’t provided clear guidance on what that further action might be. A rate reduction has been discussed since December, with Draghi saying last month that the “prevailing consensus” was against such a move.

That may be because lower ECB interest rates aren’t being fully passed on to the parts of the euro economy that really need them. A cut would also raise the issue of whether to take the deposit rate — the rate the ECB pays banks to park cash with it overnight — below zero.
Rates ‘Disconnect’

The ECB may be more concerned with what Executive Board member Benoit Coeure on March 12 called the “disconnect” between official lending rates and those that businesses are actually charged.

More than four times as many small businesses in Spain were rejected for loans in the second half of last year than in Germany, or walked away from an offer because it was too expensive, research published by Barclays Plc shows.

While the ECB is studying ways to ease that fragmentation, such as the Bank of England’s Funding for Lending Scheme, Draghi said at last month’s press conference on March 7 that it isn’t “planning anything special.”

‘Expectations’

An asset-purchase plan targeted at small- and medium-sized business lending is far from straightforward, said Jan von Gerich, chief fixed-income analyst at Nordea Bank in Helsinki.

“There are a lot of expectations but they’re quite limited in what they can do,” he said. “It’s most likely for them to ease collateral requirements and make it easier to package SME loans. But it gets messy quickly and hawkish members are probably not comfortable with it.”

With excess liquidity in the banking sector halving in the past six months, lenders in some parts of the region might be in need of more central-bank funds. Longer-term refinancing operations, or LTROs, have been the ECB’s signature tool to ease tensions in financial markets and encourage lending, and policy makers may resort to this option again if they can’t find consensus on more complex measures, economists said.

Draghi is also likely to be questioned today on the ECB’s role in Cyprus’s bailout. The ECB was party to and welcomed an initial plan to tax all deposits in Cypriot banks, which the nation’s parliament rejected.

While a revised agreement ditching a tax on deposits under 100,000 euros ($128,580) was negotiated over a week later under threat of the ECB cutting emergency funding to Cypriot banks, capital controls have been introduced for the first time in the euro region to prevent capital flight.

Confidence Damaged

The episode damaged investor confidence across the currency bloc. The Stoxx Europe 600 Banks Index (SX7P) dropped 6.8 percent between March 15 and 27, the day before banks reopened in Cyprus.

The cost of insuring against default on European bank bonds surged 41 percent in that period, with the Markit iTraxx Europe Senior Financial Index of credit-default swaps on 25 lenders jumping 58 points to 201.

Allowing a flawed plan to go to the Cypriot parliament exacerbated the financial reaction to the bailout and harmed trust in Europe’s crisis-fighting abilities, said Ken Wattret, chief euro-area economist at BNP Paribas in London, who predicts a rate cut today.

“The error originated in Cyprus, but the error from finance ministers and the ECB was to support it,” he said. “We saw an increase in stress in financial markets and a drop in economic sentiment. What we’re missing is a policy response.”

Bank of Japan aggressively pretends to ease

After two decades of this, how can anyone believe it makes any difference???

Bank of Japan Unveils Aggressive Monetary Policy

By Dhara Ranasinghe

April 4 (CNBC) — The Bank of Japan (BOJ) on Thursday embarked on an aggressive monetary policy to end years of deflation in the world’s third largest economy, moving its target when setting policy to base money from the current overnight call rate.

The central bank concluded a two-day policy meeting, the first under new Governor Haruhiko Kuroda, with a statement that it would pursue quantitative easing as long as it needed to achieve its 2 percent inflation target.

The BOJ said it would double its holdings of long-term government bonds and exchange-traded funds and purchase Japanese government bonds (JGBs) off all maturities.

It also plans to bring forward the timing of open-ended asset purchases and said it was likely to buy 7 trillion yen in long-term JGBs a month.

Markets welcomed the BOJ’s moves, with the benchmark Nikkei stock index reversing its losses to nudge into positive territory. The yen weakened to about 94.22 per dollar, having traded around 93.50 just before the decision.

Japanese shares have surged since mid-November and the Nikkei on Wednesday enjoyed its biggest one-day rise in two months on expectations for aggressive monetary easing.

Those expectations have also knocked the yen down about 16 percent against the dollar since mid-November, although the currency had risen in recent days on some caution as to whether Kuroda would be able to build a consensus among the nine members of the BOJ policy board for an unorthodox monetary policy.

Significantly then, the BOJ said its decisions were made unanimously.

Tough Task

Japan has suffered from persistent deflation and has slipped in and out of recession in recent years.

Prime Minister Shinzo Abe, whose ruling Liberal Democratic Party returned to power following elections in December, has pledged to revive the Japanese economy and pushing for a much bolder monetary policy than the BOJ has pursued in the past is part of his plan.

Kuroda has pledged to do whatever it takes to achieve the 2 percent inflation target, adopted by the central bank in January, within two years.

There is some skepticism among economists as to whether the target can be achieved. Jesper Koll, head of Japanese equity research at JPMorgan Securities, believes it can be.

“You’ve got credit growth, you’ve got demand for credit and you will find that within 15 to 18 months, consumer price inflation in Japan will be well in excess of 1 percent,” he said.

Latest data shows that Japan’s core consumer prices fell 0.3 percent in February from a year earlier.

Kuroda will hold a news conference later in the day. The BOJ meets again on April 26.