Bernanke: No Fed Plans to Aid European Banks - Bloomberg

Federal Reserve Chairman Ben S. Bernanke told Republican senators the Fed plans no additional aid to European banks amid the region’s sovereign debt crisis, according to two lawmakers who attended the meeting.
Senator Bob Corker, a Republican from Tennessee, said Bernanke made it “very clear” in closed-door comments today the central bank doesn’t intend to rescue European financial institutions. Lindsey Graham, a South Carolina Republican, said Bernanke told lawmakers that “he doesn’t have the intention or the authority” to bail out countries or banks. Both senators spoke to reporters after leaving the one-hour session at the Capitol in Washington.
In setting boundaries to Fed aid, Bernanke referred to steps beyond the currency-swap lines that were revived in May 2010 to help Europe alleviate its crisis, Corker said. Last month, the Fed led six central banks in announcing a half percentage-point cut in the cost of emergency dollar funding for financial companies overseas through the Fed’s swap lines.
“People walk away knowing he has no intentions whatsoever of furthering U.S. involvement in the crisis,” Corker said.
At the same time, Bernanke said that “obviously what happens in Europe could affect our economy,” Graham said.
Senator Orrin Hatch, a Utah Republican, said Bernanke is “very concerned” about the European turmoil.
“He did say if they can’t get their thing in order it could affect us,” Hatch said. “He said a collapse over there would be detrimental to us.” Hatch said he has confidence in Bernanke’s handling of the situation.

Contain Crisis

The euro fell below $1.30 today for the first time since January as growing funding stress in Europe fueled concern the region is struggling to contain the debt crisis. The Standard & Poor’s 500 Index fell 1.1 percent to close at 1,211.82 at 4 p.m. in New York.
The interest-rate cut on the swap lines triggered a stock and bond rally on Nov. 30, and the following week, the European Central Bank’s three-month dollar lending through the swap lines surged to $50.7 billion from $400 million.
The Fed chairman also said he doesn’t foresee the U.S. providing any more money to the International Monetary Fund to combat Europe’s debt turmoil, Corker told reporters. “People were very glad to hear that,” said Corker, who sits on the Banking Committee.
Corker cited Bernanke as saying that “he doesn’t have the legal authority to loan money to European banks.”

Indirect Funding

While the Fed may not be able to lend directly to banks outside the U.S., it can provide loans to their U.S. branches through the discount window. The Fed’s currency-swap lines also provide indirect dollar funding to overseas banks through the ECB and other central banks who assume the credit risk.
Lending through the swap lines peaked at $586 billion in December 2008. The swaps are separate from Fed emergency loans to banks and other businesses that peaked at $1.2 trillion the same month, including about $538 billion that European financial companies borrowed directly, according to a Bloomberg News examination of available data.
Senator Charles Grassley, speaking after leaving the meeting with Bernanke, said excessive U.S. financial support may enable Europe to avoid enacting necessary measures in fiscal austerity.

Fiscal Challenges

“If there’s too much of an effort on the part of the United States to help Europe, it’s going to impede their fiscal changes that must be made,” Grassley, a Republican from Iowa, said to reporters.
Bernanke, 58, talked with lawmakers a day after Fed officials in a regular policy meeting reiterated that interest rates are likely to stay “exceptionally low” through at least mid-2013. Central bankers are considering further ways to ease policy after two rounds of large-scale asset purchases and three years of near-zero rates.
The Fed lowered its target overnight interest rate to a range of zero to 0.25 percent in December 2008.
Bernanke, appointed Fed chairman in 2006 by Republican President George W. Bush, has fallen out of favor with some members of the party, including those seeking the nomination to challenge President Barack Obama in 2012. Former House Speaker Newt Gingrich said during a debate last month that Bernanke is a “large part of the problem” for the economy and “ought to be fired as rapidly as possible.”
Bernanke won a second four-year term in 2010 over a record number of opposing Senate votes for a Fed chief.

ECB's Draghi Tells Euro Zone Leaders It's Up To Them - Investor's Business Daily

The European Central Bank dashed hopes Thursday for massive sovereign bond purchases, telling euro zone politicians that it's up to them to take action.
On Dec. 1, ECB President Mario Draghi seemed to hint at such buying, if stricter fiscal rules came first. But Thursday, he ruled out imminent action, questioning the legality of central banks providing money to the International Monetary Fund for debt buys.
Draghi claimed to be "surprised" that markets interpreted his Dec. 1 comments as hinting at big bond buys. He said a euro zone "fiscal compact" is the "most important precondition" for normalizing markets. While the ECB has "collaborated" in solutions, he stressed that "the responsibility is with the leaders."
But leaders, holding yet another crisis summit, remain divided. Germany quickly rejected some new European proposals.
U.S. stocks, which had rallied recently on European optimism, sold off. Italian debt yields, which had dived recently from above 7% to below 6%, spiked higher.
Yet some analysts said Draghi was not ruling out greater ECB bond buying, but was stressing that politicians must act first.
"The ECB is leaving the ball in the court of sovereign nations," said Richard DeKaser, Parthenon Group's deputy chief economist.
European leaders must come up with a believable promise for long-term fiscal sustainability to obtain a short-term stopgap to head off a financial meltdown.
A possible Standard & Poor's credit downgrade also looms. S&P this week issued negative outlooks on 15 of the 17 euro zone states, the European rescue fund, the entire European Union and most major regional banks. No deal this weekend would likely trigger ratings cuts.
The ECB's reluctance to take the lead was apparent in Thursday's split decision to cut rates to 1% from 1.25% after a quarter-point easing last month.
The ECB is inclined to support the sovereign bond market but must appease German desires for stricter budget rules and inflation worries, said Nariman Behravesh, chief economist at IHS.
"(Draghi is) playing to different audiences," Behravesh said. "He's walking a very fine line."
While the central bank didn't fire its "bazooka" at the debt market, it did increase liquidity aid to commercial banks struggling to obtain short-term financing.
The ECB lengthened a credit line for banks from one to three years, and eased rules on collateral. It also halved the money that banks must keep in reserve.
It already offers seven-day liquidity to nearly 200 banks each week, with the most recent round totaling 252.1 billion euros. Overnight emergency borrowing has hit a nine-month high.
The ECB's incremental sovereign debt buys aren't insubstantial, now totaling 206.9 billion euros. Most of that has been since August, when it started buying Spanish and Italian debt.
But such measures are meant to prevent a market collapse rather than resolve the problem.
German Chancellor Angela Merkel and French President Nicolas Sarkozy have proposed treaty fixes to promote fiscal discipline.
But at best, approval would take months. Member states must give a credible commitment now to convince the ECB, analysts say. What that might be is unclear.

Merkel Again Rejects Euro-Zone Bonds - The Wall Street Journal

BERLIN—German Chancellor Angela Merkel said the path toward a fiscal union in Europe was irrevocable, and reiterated her rejection of common euro-zone-wide bonds and an increase to the euro zone's bailout facilities.
Euro-zone bonds "aren't suitable as a rescue measure," she told lawmakers Wednesday.
She spoke as the euro-debt crisis raged on, with Italy's borrowing costs at an auction Wednesday reaching a euro-era high on fears about the country's ability to raise funds at sustainable levels. In currency markets, the euro dipped as low as $1.2994—its lowest point since January.

Italy managed to sell its bonds off at auction but at record yields. Greece's economy is worse than expected and a deal with the IMF is becoming harder to achieve. Costas Paris and Matina Stevis discuss the politics of the crisis.

EU countries—except for the U.K.—reached an agreement at last week's summit to step up fiscal oversight in the euro zone, introduce automatic sanctions for governments flouting deficit rules and anchor balanced-budget amendments in national constitutions.
In remarks earlier in the day, Italian Prime Minister Mario Monti agreed that fiscal rigor is "essential" and that the deal will boost the credibility of public finances in the region. However, he made it clear he believed that more agreements would be needed, particularly on an agreement to mutualize debt liabilities, for the euro-zone sovereign-debt crisis to dissipate.
"The Italian government insisted heavily on euro bonds, which are not a back-door way to allow fiscal laxity but will boost growth," Mr. Monti said in remarks to the Italian Senate. He added that jointly guaranteed debt would deepen Europe's capital markets.
Mr. Monti added that Germany believed at the summit that the agreement on tougher fiscal-stability rules would be enough to calm financial markets—but not all other countries agreed.
In her remarks, Ms. Merkel said she regretted that the U.K. had declined to support European Union treaty change to allow closer economic policy coordination, but added that the U.K. was valued in many other areas. She warned of expectations for a quick fix to Europe's woes, and said overcoming the crisis may take years.
Despite concerns that the steps taken by last week's summit may not be enough to contain the crisis, Ms. Merkel remained firm in her rejection of collective euro-zone bonds, which she said wouldn't get to the root of the crisis.
The chancellor also reaffirmed that the combined ceiling for the currency area's current and future rescue fund shouldn't exceed €500 billion ($651.2 billion). Summit leaders had agreed to move forward the start date of the planned European Stability Mechanism, or ESM, that is supposed to supplant the temporary bailout facility by mid-2012.
Some countries at the summit wanted the permanent and temporary bailout funds to function side by side and were pushing for the €500 billion cap to be lifted. In the end, while the statement confirmed the two funds should run in tandem, it said the adequacy of the overall ceiling of the two funds would be reassessed in March.


Ms. Merkel said Wednesday that all members states, including Germany, in 2012 will need to start paying for a cash deposit of the ESM. Euro-zone countries are required to put down €80 billion in cash, with Germany providing about €22 billion of that, which it plans to do in yearly installments of €4.3 billion.
Separately, European Commission President José Manuel Barroso said the new "fiscal compact" designed to mend flaws in the single European currency's framework should be completed in the first six months of next year.
"We are going to hopefully conclude negotiations for a new fiscal compact during the Danish presidency," Mr. Barroso told the European Parliament. "The crisis is not yet behind us; there is a lot of work ahead."
Denmark takes over the European Union's six-month rotating presidency from Poland on Jan. 1.

Europe will be a 'catastrophe' without a solution - CNN Money

EW YORK (CNNMoney) -- Europe's debt crisis has dragged on for nearly two years and has only intensified by the day as leaders fail, time and time again, to deliver a credible solution. Yet investors and economists continue to bank on a big breakthrough.
Why? "Because without one, we'll be left with a complete and utter economic catastrophe," said Nick Kounis, head of macro research at ABN AMRO, speaking Wednesday at the annual Capital Link investor forum in New York.

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While experts have prudently crafted contingency plans in case the euro area suffers a breakup, they don't expect that dramatic scene to play out.
"If the euro were to collapse, it would be disastrous for every country in the eurozone," said Kounis, who projects that a euro break-up would trigger a "super crisis" that would cost between 50% and 100% of the region's GDP over three years, along with sovereign defaults, bank failures, investor panic and uncertainty, a deep European recession, and overall wealth losses.

Hey Europe. Breaking up is a foolish risk

On the other hand, strengthening the euro would benefit all of the members of the eurozone, and the necessary bailouts would only amount to about 25% of GDP, said Kounis.
Hopes are high that European leaders will find a way to resolve the region's debt problems at the European Union summit on Thursday and Friday in Brussels.
While nobody knows for certain what will come out of this year's fourth and final major summit aimed at saving the euro, leaders will likely discuss the new fiscal pact cooked up by French President Nicolas Sarkozy and German Chancellor Angela Merkel earlier this week in Paris.
Standard and Poor's has warned that eurozone nations could face a string of downgrades if European leaders don't hammer out a solution by the end of the week.

Inflation eases to 9.11% on food prices - Financial Express

New Delhi: Moderating prices of essential food items like onions, potatoes and milk pulled down inflation marginally to 9.11 per cent in November, a development that may prompt the Reserve Bank to halt its monetary tightening strategy at its policy review on Friday.
Inflation, as measured by the Wholesale Price Index, stood at 9.73 per cent in October, 2011. It was recorded at 8.2 per cent in November, 2010.
A marginal decline in inflation is good news amid the depressing scenario on the industrial production and rupee front.
While industrial production declined by 5.1 per cent in October, the rupee has fallen to an all-time low below Rs 53 per dollar.
With inflation dropping, all eyes are now on the RBI's monetary policy review scheduled for December 16. The central bank has been hiking interest rates since March, 2010, in its bid to tame inflation, but in the last review, the RBI had indicated it may...

Euro Closes In on Low for the Year - The New York Times

PARIS — The euro hovered near its lowest levels of the year on Wednesday, as an Italian bond auction showed the bloom continuing to fade from Europe’s latest crisis summit meeting and an economic report added to growing evidence that a recession is looming.

European leaders last Friday announced measures to shore up battered market confidence in the currency, trotting out stricter rules governing public finances in the euro zone and more money for a bailout fund. But confusion on just how and when the measures will be implemented and the European Central Bank’s refusal to increase bond-buying have left sentiment close to where it was before a brief burst of hope after the meeting.

In the foreign exchange market, the dollar has been the main beneficiary of the European debt crisis, gaining almost 5 percent against the basket of currencies the Intercontinental Exchange uses to compile its dollar index.
Interest in the euro has also faded among money market managers since the E.C.B. last week cut its main interest rate target, narrowing the differential that short-term euro-based assets enjoy over dollar assets.
In afternoon trading, the euro was at $1.2994 from $1.3037 late Tuesday in New York, not far above its 2011 closing low of $1.2907, set in January. Stocks in Europe were down about 1 percent.
On Wednesday, Italy — the world’s seventh-largest economy, but with the third-largest debt — sold €3 billion, or $3.9 billion, of five-year bonds, paying 6.47 percent, ticking up from 6.30 percent last month.
The German government, meanwhile, sold €4.2 billion of two-year notes priced to yield 0.25 percent, the lowest ever. The result, along with declines in stock markets, suggests investors are fleeing for the assets —   like German government securities — that are perceived as safest.
Even if Europe ultimately dodges a euro disaster, it is still facing a grim economic forecast as the crisis weighs on confidence and markets overseas slow. Industrial production in the 17-nation euro zone fell by 0.1 percent in October from September, following a 2.0 percent decline a month earlier, according to Eurostat , the European Union’s statistical agency in Luxembourg. From a year earlier, production grew by 1.3 percent.
Ben May, an economist in London with Capital Economics, said in a research note that with the fear that the debt crisis will worsen, Europe’s gross domestic product would likely contract in the fourth quarter of 2011, “to mark the beginning of another deep recession,” shrinking by about 1 percent in 2012.
In that respect, a lower euro   — which could help European companies to compete overseas   —  would be something of a boon.

Europe's great divorce - The Economist

Europe's great divorce

WE JOURNALISTS are probably too bleary-eyed after a sleepless night to understand the full significance of what has just happened in Brussels. What is clear is that after a long, hard and rancorous negotiation, at about 5am this morning the European Union split in a fundamental way.
In an effort to stabilise the euro zone, France, Germany and 21 other countries have decided to draft their own treaty to impose more central control over national budgets. Britain and three others have decided to stay out. In the coming weeks, Britain may find itself even more isolated. Sweden, the Czech Republic and Hungary want time to consult their parliaments and political parties before deciding on whether to join the new union-within-the-union.
So two decades to the day after the Maastricht Treaty was concluded, launching the process towards the single European currency, the EU's tectonic plates have slipped momentously along same the fault line that has always divided it—the English Channel.
Confronted by the financial crisis, the euro zone is having to integrate more deeply, with a consequent loss of national sovereignty to the EU (or some other central co-ordinating body); Britain, which had secured a formal opt-out from the euro, has decided to let them go their way.
Whether the agreement does anything to stabilise the euro is moot. The agreement is heavily tilted towards budget discipline and austerity. It does little to generate money in the short term to arrest the run on sovereigns, nor does it provide a longer-term perspective of jointly-issued bonds. Much will depend on how the European Central Bank responds in the coming days and weeks.
Some doubt remains over whether and how the "euro-plus" zone will have access to EU institutions—such as the European Commission, which conducts economic assessments and recommends action, and the European Court of Justice, which Germany hopes will ensure countries adopt proper balanced-budget rules—over Britain's objections.
But especially for France, on the brink of losing its AAA credit rating and now the junior partner to Germany, this is a famous political victory. President Nicolas Sarkozy had long favoured the creation of a smaller, "core" euro zone, without the awkward British, Scandinavians and eastern Europeans that generally pursue more liberal, market-oriented policies. And he has wanted the core run on an inter-governmental basis, ie by leaders rather than by supranational European institutions. This would allow France, and Mr Sarkozy in particular, to maximise its impact.
Mr Sarkozy made substantial progress on both fronts. The president tried not to gloat when he emerged at 5am to explain that an agreement endorsed by all 27 members of the EU had proved impossible because of British obstruction. “You cannot have an opt-out and then ask to participate in all the discussion about the euro that you did not want to have, and which you also criticised,” declared the French president.
With the entry next year of Croatia, which will sign its accession treaty today, the EU is still growing, said Mr Sarkozy. “The bigger Europe is, the less integrated it can be. That is an obvious truth.”
For Britain the benefit of the bargain in Brussels is far from clear. It took a good half-hour after the end of Mr Sarkozy's appearance for Mr Cameron to emerge and explain his action. The prime minister claimed he had taken a “tough decision but the right one” for British interests—particularly for its financial-services industry. In return for his agreement to change the EU treaties, Mr Cameron had wanted a number of safeguards for Britain. When he did not get them, he used his veto.
After much studied vagueness on his part about Britain's objectives, Mr Cameron's demand came down to a protocol that would ensure Britain would be given a veto on financial-services regulation (see PDF copy here). The British government has become convinced that the European Commission, usually a bastion of liberalism in Europe, has been issuing regulations hostile to the City of London under the influence of its French single-market commissioner, Michel Barnier. And yet strangely, given the accusation that Brussels was taking aim at the heart of the British economy, almost all of the new rules issued so far have been passed with British approval (albeit after much bitter backroom fighting). Tactically, too, it seemed odd to make a stand in defence of the financiers that politicians, both in Britain and across the rest of European, prefer to denounce.
Mr Cameron said he is “relaxed” about the separation. The EU has always been about multiple speeds; he was glad Britain had stayed out of the euro and out of the passport-free Schengen area. He said that life in the EU, particularly the single market, will continue as normal. “We wish them well as we want the euro zone to sort out its problems, to achieve stability and growth that all of Europe needs.” The drawn faces of senior officials seemed to say otherwise.
The 23 members of the new pact, if they act as a block, can outvote Britain. They are divided among themselves, of course. But their habit of working together and cutting deals will, inevitably, begin to weigh against Britain over time.
Mr Sarkozy and Angela Merkel, the German chancellor, have given notice of their desire for the euro zone to act in all the domains that would normally be the remit of all 27 members—for example, labour-market regulations and the corporate-tax base.
Britain may assume it will benefit from extra business for the City, should the euro zone ever pass a financial-transaction tax. But what if the new club starts imposing financial regulations among the 17 euro-zone members, or the 23 members of the euro-plus pact? That could begin to force euro-denominated transactions into the euro zone, say Paris or Frankfurt. Britain would, surely, have had more influence had the countries of the euro zone remained under an EU-wide system.
It says much about the dire state of the debate on Europe within Britain's Conservative party that, as Mr Cameron set out to Brussels, another Tory MP portentously invoked the memory of Neville Chamberlain, who infamously came back from Munich with empty assurances from Adolf Hitler. Mr Cameron may have made a grievous mistake with regard to Britain's long-term interest. But at least nobody can accuse him of returning from Brussels with a piece of paper in his hand.