Home' Trinidad and Tobago Guardian : February 1st 2015 Contents FEBRUARY 1 • 2015 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
INTERNATIONAL FINANCE | SBG15
depressed by the mias-
ma in Athens might
cheer up a bit if they
focused on news from
The recent unveiling by the European
Central Bank of a US$1.25 trillion package
of "quantitative easing"---the printing of
money to purchase vast quantities of bonds-
should be as heartwarming for them as the
Greek-driven resurgence of the euro crisis
Cynics might be forgiven for thinking of
QE as a policy designed purely to aid fin-
anciers. Banks, after all, borrow vast sums
of money from bond markets, depositors
and other creditors to acquire financial assets
such as corporate bonds, say, or the promise
to repay a loan with interest. Looser mon-
etary policy helps the banks on both counts:
On the one hand it is cheaper for them to
borrow money, because interest rates are
pushed lower, while on the other, to drive
down bond yields the ECB will have to drive
up bond prices. Banks, which own lots of
them, will be the biggest sellers.
Without QE, bankers would have been
fretting about the prospect of deflation by
now. A fall in prices would inflate the real
value of borrowers debts, nudging some of
them into default. More broadly, if con-
sumers defer spending in the hope that the
items they want to buy will soon be cheaper,
all businesses, including banks, will suffer.
Those threats now have eased.
The ECB s move will have other benefits,
too, in particular if it helps pep up the mori-
bund European economy. QE has prompted
a swift fall in the value of the euro, which
is good news for exporters. Some of them
might decide that, thanks to rising foreign
demand, now is the time to take out a loan
to expand. Exports account for more than
a quarter of the euro zone s output, a higher
proportion than in other parts of the rich
world, so even a small increase would have
a sizable impact.
QE is also a threat to banks margins,
however. The most basic measure of a
lender s profitability is the gap between what
it charges borrowers and the interest it has
to pay depositors. Few depositors are now
getting any interest at all on their savings,
however, and it is difficult for banks to offer
them negative rates. Borrowers, however,
will expect cheaper loans. The result is a
The assumption in the markets is that
the ECB will keep interest rates low for an
extended period. That undermines another
lucrative trick, whereby banks borrow money
repeatedly for short periods, while lending
it out for long ones. Such "maturity trans-
formation" earns a good return in normal
times, when interest rates for long-term
borrowing are much higher than those on
short-term loans. The expectation now,
however, is that interest rates will stay "lower
for longer." That has dramatically reduced
the difference in rates for loans of different
maturities, and with it banks opportunity
Those depressed earnings might endure:
In Japan and America long spells of QE have
left interest margins at their lowest levels
Moreover, European lenders start from a
tricky position. As well as Greece s afflictions,
which may yet metastasise, many banks
face harm from soured loans to Russia or
to faltering oil companies. Many banks have
stretched balance sheets after enduring both
the financial crisis and the euro-zone deba-
cle.If QE helps preserve them from further
upheaval, that will be at least some comfort
to finance-weary citizens.
@2015 The Economist Newspaper Ltd.
Distributed by the New York Times Syn-
A fund to bolster investment in Europe should be
up and running by September, an EU official said
on Friday, outlining the timetable for a highly leveraged
scheme to bolster growth in a moribund EU econ-
The European Fund for Strategic Investments,
which can invest in projects from infrastructure
building to expansion of small businesses, is the
European Union s flagship scheme to help address
Jyrki Katainen, vice president of the European
Commission responsible for jobs and growth, told
journalists that its set-up could be finalised by Euro-
pean Union leaders in June, with a start date some
"I expect that the fund itself will be up and running,
let s say, in September," he said, on a whistle-stop
tour of Europe to drum up investor and government
interest in the scheme.
Katainen said, however, that it was unclear which
governments would invest money in the scheme,
intended to be a 315-billion-euro (£237.42 billion)
investment vehicle based on modest financial guar-
antees given by states.
"There has been quite a lot of interest towards
the fund but nothing has been realised yet," he told
journalists. "We built the fund so that it can operate
even without any additional commitments. We don t
have any expectations."
The late start-date may disappoint some. European
Central Bank President Mario Draghi, for example,
recently urged EU leaders to speed up the project.
The dire economic outlook prompted Draghi to
unveil last week a roughly one-trillion-euro plan to
print fresh money, chiefly to buy government bonds.
He has told governments to do their part, by pur-
suing economic reforms.
But finding agreement among the 19 countries in
the euro zone, from Germany to Greece, is difficult.
This also slows progress on broader EU schemes
such as the joint investment fund. Reuter
Eurozone consumer prices fell by a record 0.6 per cent in
January, confirming deflation could be taking hold for the long
term, EU data showed Wednesday.
The drop from minus 0.2 per cent in December appears to
back the European Central Bank s decision last week to launch
a bond-buying spree to drive up prices.
Plummeting world oil prices were largely to blame for the
fall in the 19-country eurozone, already beset by weak economic
growth and high unemployment, the EU s data agency Eurostat
The -0.6 inflation rate matches the same record drop in
prices the eurozone set in July 2009 at the worst of the global
But there was better news on the unemployment front as
the jobless rate fell to at 11.4 per cent in December, its lowest
level since August 2012.
"Falling prices today and alarmingly pessimistic expectations
of where prices are heading in the future proves beyond all
reasonable doubt it was high time to act," Richard Barwell,
senior European economist at Royal Bank of Scotland Group
But he added it was "risky starting QE this late in the deflation
With fears of deflation increasing, the ECB last week finally
decided to embark on a quantitative easing programme involving
the purchase of 1.14 trillion euros (US$1.29-trillion) in sovereign
In a deflationary spiral, businesses and households delay
purchases, throttling demand, triggering recession and causing
companies to lay off workers.
The move comes as the eurozone faces renewed worries
from Greece, after the anti-austerity Syriza party came to
power in elections with a promise to renegotiate Greece s foreign
Energy prices in the eurozone, which added Lithuania on
January 1, sank a huge 8.9 per cent in December, greater than
an already steep fall of 6.3 per cent a month earlier.
Oil prices have plummeted in recent weeks, as OPEC maintains
its production levels despite weak demand.
The fall in unemployment to 11.4 per cent from 11.5 per cent
in November and 11.8 per cent a year before gave some cheer,
even if it still higher than before the eurozone debt crisis.
There were 18.13 million unemployed across the eurozone
in December, 157,000 less than in November and 693,000 less
than a year before.
But sharp contrasts between northern and southern EU
Unemployment in Germany remained at a super low 4.8
per cent, with Austria just behind with 4.9 per cent.
But debt crisis countries fared far worse, with Greece at 25.8
per cent in October, the latest data available, and Spain at 23.7
However, in heavily indebted Italy unemployment fell to 12.9
per cent from a record high of 13.3 per cent, offering a much
needed sign of recovery to reform minded Prime Minister
At 23 per cent in December, youth unemployment remained
a huge problem in the eurozone, though lower than the 23.9
per cent of a year ago.
Last month, Germany had the fewest job seekers under the
age of 25, at 7.2 per cent.
Youth unemployment in Spain stood at a huge 51.4 per cent,
50.6 per cent in Greece and 42 per cent in Italy. AFP
set for Sept start
Eurozone deflation accelerates to record low in January
Easing means squeezing
The dire economic outlook
prompted the European Central
Bank Governor to unveil last week
a roughly one-trillion-euro plan to
print fresh money, chiefly to buy
Links Archive January 31st 2015 February 2nd 2015 Navigation Previous Page Next Page