OF ECB, S&P 500 Dramatic Rise and I
Thu Sep 6, 2012 3:19pm EDT
* Draghi gets ECB backing for open-ended bond-buying
* Data on service sector, labor market bullish
* Semiconductor companies rally, lifting Nasdaq
* Indexes up: Dow 1.7 pct, S&P 1.9 pct, Nasdaq 2 pct
By Ryan Vlastelica
NEW YORK, Sept 6 (Reuters) – The S&P 500 jumped to a more than four-year high on Thursday as a new bond-buying program in Europe was hailed as an effective way to contain the region’s debt crisis.
Positive sentiment was also lifted by bullish data on the U.S. services sector and labor market, the latter especially notable ahead of Friday’s non-farm payrolls report.
The rally was broad, with materials, financials and industrials– all groups tied to the pace of economic growth– leading the way with gains of more than 2 percent. Advancers outnumbered decliners by a ratio of more than 4 to 1 while the Dow had its biggest gain in two months and the Nasdaq advanced to its highest level since 2000.
ECB President Mario Draghi, seeking to back up his July pledge to do whatever it takes to preserve the euro, said the central bank’s new plan of potentially unlimited bond-buying would address bond market distortions and “unfounded” fears of investors about the survival of the euro.
“We think this is a credible plan to addressing the issue, and while there are still political hurdles we expect those will be addressed,” said Alec Young, global equity strategist at S&P Equity Research in New York.
U.S. companies added staff in August at the fastest clip in five months, according to the better-than-expected ADP report, while a gauge of employment in the service sector also improved more than had been anticipated. Another report showed new claims for jobless benefits fell last week to the lowest level in a month.
Even with Thursday’s encouraging numbers, economists think the payroll report will show only modest hiring of 125,000 jobs and the unemployment rate holding steady at 8.3 percent. Investors will scrutinize the details for clues as to when the Federal Reserve may provide more stimulus to prop up economic growth.
“ADP doesn’t correlate perfectly with payrolls, but people are feeling better about the jobs market these days,” Young said. “There was confidence we would see jobs in the mid-100′s even before this.”
The Dow Jones industrial average was up 217.11 points, or 1.66 percent, at 13,264.59. The Standard & Poor’s 500 Index was up 26.43 points, or 1.88 percent, at 1,429.87– its highest level since May 2008 as the financial crisis began to gather pace. The Nasdaq Composite Index was up 62.52 points, or 2.04 percent, at 3,131.78 — its highest level in 12 years.
The ECB’s program, which Germany’s Bundesbank is known to have opposed, would focus on bonds maturing within three years and was strictly within the ECB’s mandate. Draghi said only one member of the ECB Governing Council had dissented.
The ECB also announced that it will keep its main interest rate at a record low of 0.75 percent, holding fire after a pick-up in inflation last month offset pressure to breathe life into the flagging euro zone economy by easing borrowing costs.
Tech shares helped lift the Nasdaq to its best daily performance since July 27. SanDisk Corp climbed 8.3 percent to $43.97 and Micron Technolgy Inc added 7 percent to $6.63. The Dow was lifted by Walt Disney Co, which advanced to an all-time high of $51.75.
In company news, Supervalu Inc said it would close about five dozen stores as it works to turn around its grocery business, which lags Kroger Co and Wal-Mart Stores Inc . The stock was up 2.2 percent at $2.33.
Realty Income Corp plans to acquire American Realty Capital Trust Inc for about $1.93 billion as it looks to diversify its portfolio outside of the retail industry. Shares of Realty Income slipped 0.05 percent to $42.46 and Capital Trust rose 1.9 percent to $12.19.
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Mario Draghi: stand and deliver
The imaginative and astute ECB leader has lived up to his side of the bargain, but his plan is wrong-headed and insufficient
On Thursday afternoon the fate of the entire 17-member eurozone rested on the shoulders of one man: Mario Draghi. That such an assertion can be made – without the umistakable smack of hyperbole – surely shows what trouble the euro project is now in. Because no matter how innovative or bold Mr Draghi’s response – and it was undoubtedly both – the success or failure of a currency, a single market, and a political project should never be in the gift of an unelected central banker and his equally unelected colleagues.
Yet throughout the panic and denial and firefighting of the past couple of years, two major trends in European policy-making are observable: first, economic power in the continent has shifted away from national governments and towards the European Central Bank; second, and this is surely related, European politicians and policymakers have omitted to make the case for why the euro should exist at all. Instead they assert that the euro must continue – “whatever it takes“, as Mr Draghi said this summer – or they conflate austerity with the euro with Europe, as Angela Merkel repeatedly does. The result is that what has to be a grand, cross-national political project if it is to survive at all is no such thing; it is becoming ever more an elite project that is only able to endure at the costs of those lower down in society, especially in southern Europe. For those at the top: officially granted liquidity. For those at the bottom: unnegotiable austerity.
The announcement by Mr Draghi fits neatly into this pattern. The new plan to rescue the euro sounds complicated, but it really boils down to one thing: a guarantee that nations struggling to raise funds from financial markets will be helped out by the ECB. The scheme even has a name: outright monetary transactions, or OMT, or, as wags dubbed it, on my tab – since that is effectively what Mr Draghi is now offering the rest of the euro club, to put the mother of all credit cards behind the bar. The net result will be to wreck the ECB’s balance sheet, but along the way there will also be strict austerity conditions. Before digging into the problems with this latest solution, one big acknowledgment must be made: this is about as big a step as the ECB could have taken.
The previous boss of Frankfurt, Jean-Claude Trichet, would barely have dreamed up such a scheme, let alone pushed it through. It is clear too that Germany has been forced to go along with this: it was as good as admitted that the Bundesbank opposed this scheme – a rather crucial no vote, given that it is the Germans who will have to act as paymasters-in-chief. In his imaginativeness and political astuteness, Mr Draghi has lived up to his side of the bargain to do “whatever it takes”. Yet the plan, in its insistence on austerity conditions, is wrong-headed and, in total, not enough. The debt problems for Spain and Italy have worsened partly as a result of their economies slowing down: so strong-arming them into making ever more spending cuts will just intensify the death spiral. If you want a parallel, just look at George Osborne’s double-dip recession, created with a very similar mix of “fiscal conservatism and monetary activism”. As the chancellor has found, even after Mervyn King has thrown the best part of £400bn at the economy, a recovery can’t be rustled up to order. Nor can spending cuts: just ask Madrid, which is having to bail out stricken provinces left, right and centre.
This argument should remind us of just how multifaceted the eurozone’s problems are. There is the huge and pressing issue of the financing of Spanish and Italian government (and bank) debt; which Mr Draghi has tried to sort out. But then there is the economic problem of a whole chunk of the continent now heading deep into recession – and taking the rest down with it. There is the political problem of forcing cuts on voters. Finally, there is the biggest issue of all: of why exactly this configuration of the euro should be saved at all. On that last point, certainly, Mr Draghi won’t be able to help.
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- Thursday 06 September 2012
Leading article: A sliver of breathing space from Mr Draghi
The ECB is doing its bit to ease the euro crisis, now Europe’s politicians must do theirs
Friday 07 September 2012
The rhetoric was certainly running high ahead of Mario Draghi’s announcement of the European Central Bank’s latest plans to calm the ructions in the eurozone. Rarely is so arcane a matter as “outright monetary transactions” – the purchase of distressed governments’ debt – awaited with such breathless anticipation. Some hailed the ECB President as the potential saviour of the euro, no less.
Given the frighteningly complex fiscal, political and institutional manoeuvres still needed to resolve the eurozone’s flaws, such expectation is something of an overstatement. But, Mr Draghi’s plans were, when they came, strong stuff nonetheless. In a subtle two-step to negotiate critics’ claims that bond-buying overreaches the ECB’s mandate (which is to maintain price stability, not prop up ailing state finances), the bank will buy sovereign debt only on the secondary market, and only in conjunction with cash injections from eurozone bailout funds, with all the reform conditions that imposes.
For all the caveats, however, Mr Draghi did not pull his punches: the ECB is ready to make unlimited purchases in order to offset investors’ “unfounded fears” that the euro might be allowed to break up. So emphatic a confirmation, with details, of last month’s pledge to do “whatever it takes” produced a sharp bounce in markets across Europe.
The significance of yesterday’s developments is not confined to the practical. Mr Draghi’s programme is also a telling shift in emphasis, away from the more conservative interpretation of the bank’s role traditionally favoured by, in particular, Germany. The Bundesbank President, Jens Weidmann, has voiced concerns in recent weeks. But both Jörg Asmussen, a German former deputy finance minister on the ECB’s governing council, and also the Chancellor, Angela Merkel, have lent tacit support to the plan – a softening stance with considerable implications.
All well and good. But it would be wise to retain a degree of caution. The history of the euro crisis is littered with lurches from optimism to despair with each new policy initiative. It also remains to be seen how the details will work in practice; whether, for example, the ECB can react quickly enough, and whether the likes of Spain or Italy would be willing or able to accept the conditions imposed.
But even if Mr Draghi’s efforts are wholly successful, there is so much more to do. In fact, yesterday’s show-stopping plan is only one small step forward. There is still a mountain to climb and the next dangerously precipitous passes must be negotiated within days.
On Monday, officials from Greece’s “troika” of lenders will give their verdict on whether Athens’ latest €12bn cuts programme is sufficient to secure the next tranche of desperately needed aid. Two days later, German lawmakers will decide whether plans to boost the eurozone bailout fund and move towards closer fiscal union are constitutionally possible. On the same day, a general election in the Netherlands will be, to a large extent, a referendum on, as some see it, eurozone northerners paying for the profligacy of the south. Next month, Spain faces a major refinancing that may yet, for all Madrid’s denials, test the ECB’s outright monetary transactions programme. There is, clearly, no room for complacency.
While Mr Draghi is no single-handed saviour, he has now done his bit. But he has, at best, only bought Europe’s politicians some breathing space. Now they must use it. That means pressing ahead with structural reforms, with proposals for eurozone-wide banking union, with the long-term challenge of closer fiscal, and political, union. The crisis is far from over.
European Central Bank
|European Central Bank|
|Headquarters||Frankfurt am Main, Hesse, Germany|
|Established||1 June 1998|
|Central bank of|
|ISO 4217 Code||EUR|
526 billion euro in total[show]
|Base borrowing rate||0.75%|
|Base deposit rate||0%|
17 national banks[show]
The European Central Bank (ECB) is the institution of the European Union (EU) that administers the monetary policy of the 17 EU Eurozone member states. It is thus one of the world’s most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt am Main, Germany. The current President of the ECB is Mario Draghi, former governor of the Bank of Italy.
The primary objective of the European Central Bank is to maintain price stability within the Eurozone, which is the same as keeping inflation low. The Governing Council defined price stability as inflation (Harmonised Index of Consumer Prices) of around 2%. Unlike, for example, the United States Federal Reserve Bank, the ECB has only one primary objective with other objectives subordinate to it.
The key tasks of the ECB are to define and implement the monetary policy for the Eurozone, to conduct foreign exchange operations, to take care of the foreign reserves of the European System of Central Banks and promote smooth operation of the financial market infrastructure under the TARGET2 payments system and the technical platform (currently being developed) for settlement of securities in Europe (TARGET2 Securities). Furthermore, it has the exclusive right to authorise the issuance of euro banknotes. Member states could issue euro coins, but the amount must be authorised by the ECB beforehand (upon the introduction of the euro, the ECB also had exclusive right to issue coins).
On 9 May 2010, the 27 member states of the European Union agreed to incorporate the European Financial Stability Facility. The EFSF’s mandate is to safeguard financial stability in Europe by providing financial assistance to Eurozone Member States.
The bank must also co-operate within the EU and internationally with third bodies and entities. Finally it contributes to maintaining a stable financial system and monitoring the banking sector. The latter can be seen, for example, in the bank’s intervention during the 2007 credit crisis when it loaned billions of euros to banks to stabilise the financial system.
Although the ECB is governed by European law directly and thus not by corporate law applying to private law companies, its set-up resembles that of a corporation in the sense that the ECB has shareholders and stock capital. Its capital is five billion euro which is held by the national central banks of the member states as shareholders. The initial capital allocation key was determined in 1998 on the basis of the states’ population and GDP, but the key is adjustable. Shares in the ECB are not transferable and cannot be used as collateral.
The bank is based in Frankfurt, the largest financial centre in the Eurozone (although not the largest in the European Union). Its location in the city is fixed by the Amsterdam Treaty along with other major institutions. In the city, the bank currently occupies Frankfurt’s Eurotower until its purpose-built headquarters are built.
The owners and shareholders of the European Central Bank are the central banks of the 27 member states of the EU. The ECB should not be confused with the European Investment Bank (EIB), the development bank owned by the EU member states.
The European Central Bank is the de facto successor of the European Monetary Institute (EMI). The EMI was established at the start of the second stage of the EU’s Economic and Monetary Union (EMU) to handle the transitional issues of states adopting the euro and prepare for the creation of the ECB and European System of Central Banks (ESCB). The EMI itself took over from the earlier European Monetary Co-operation Fund (EMCF).
The ECB formally replaced the EMI on 1 June 1998 by virtue of the Treaty on European Union (TEU, Treaty of Maastricht), however it did not exercise its full powers until the introduction of the euro on 1 January 1999, signalling the third stage of EMU. The bank was the final institution needed for EMU, as outlined by the EMU reports of Pierre Werner and President Jacques Delors. It was established on 1 June 1998.
The first President of the Bank was Wim Duisenberg, the former president of the Dutch central bank and the European Monetary Institute. While Duisenberg had been the head of the EMI (taking over from Alexandre Lamfalussy of Belgium) just before the ECB came into existence, the French government wanted Jean-Claude Trichet, former head of the French central bank, to be the ECB’s first president.
The French argued that since the ECB was to be located in Germany, its President should be French. This was opposed by the German, Dutch and Belgian governments who saw Duisenberg as a guarantor of a strong euro. Tensions were abated by a gentleman’s agreement in which Duisenberg would stand down before the end of his mandate, to be replaced by Trichet, which occurred in November 2003.
There had also been tension over the ECB’s Executive Board, with the United Kingdom demanding a seat even though it had not joined the Single Currency. Under pressure from France, three seats were assigned to the largest members, France, Germany, and Italy; Spain also demanded and obtained a seat. Despite such a system of appointment the board asserted its independence early on in resisting calls for interest rates and future candidates to it.
When the ECB was created, it covered a Eurozone of eleven members. Since then, Greece joined in January 2001, Slovenia in January 2007, Cyprus and Malta in January 2008, Slovakia in January 2009, and Estonia in January 2011, enlarging the bank’s scope and the membership of its Governing Council.
On 1 December 2009, the Treaty of Lisbon entered into force, ECB according to the article 13 of TEU, gained official status of an EU institution.
In 2011, when German appointee to the Governing Council and Executive board, Jürgen Stark, resigned in protest of the ECB’s bond buying programme, Financial Times Deutschland called it “the end of the ECB as we know it” referring to its perceived “hawkish” stance on inflation and its historical Bundesbank influence.
Powers and objectives
The primary objective of the European Central Bank is to maintain price stability within the Eurozone, which is the same as keeping inflation low. The Governing Council in October 1998 defined price stability as inflation of around 2%, “a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%” and added that price stability ”was to be maintained over the medium term”. (Harmonised Index of Consumer Prices) Unlike for example the United States Federal Reserve Bank, the ECB has only one primary objective with other objectives subordinate to it. The Governing Council confirmed this definition in May 2003 following a thorough evaluation of the ECB’s monetary policy strategy. On that occasion, the Governing Council clarified that “in the pursuit of price stability, it aims to maintain inflation rates below but close to 2% over the medium term”. All lending to credit institutions must be collateralised as required by Article 18 of the Statute of the ESCB.
The key tasks of the ECB are to define and implement the monetary policy for the Eurozone, to conduct foreign exchange operations, to take care of the foreign reserves of the European System of Central Banks and promote smooth operation of the financial market infrastructure under the TARGET2 payments system and being currently developed technical platform for settlement of securities in Europe (TARGET2 Securities). Furthermore, it has the exclusive right to authorise the issuance of euro banknotes. Member states can issue euro coins but the amount must be authorised by the ECB beforehand (upon the introduction of the euro, the ECB also had exclusive right to issue coins).
In U.S. style central banking, liquidity is furnished to the economy primarily through the purchase of Treasury bonds by the Federal Reserve Bank. The Eurosystem uses a different method. There are about 1500 eligible banks which may bid for short term repo contracts of two weeks to three months duration.
The banks in effect borrow cash and must pay it back; the short durations allow interest rates to be adjusted continually. When the repo notes come due the participating banks bid again. An increase in the quantity of notes offered at auction allows an increase in liquidity in the economy. A decrease has the contrary effect. The contracts are carried on the asset side of the European Central Bank’s balance sheet and the resulting deposits in member banks are carried as a liability. In lay terms, the liability of the central bank is money, and an increase in deposits in member banks, carried as a liability by the central bank, means that more money has been put into the economy.
To qualify for participation in the auctions, banks must be able to offer proof of appropriate collateral in the form of loans to other entities. These can be the public debt of member states, but a fairly wide range of private banking securities are also accepted. The fairly stringent membership requirements for the European Union, especially with regard to sovereign debt as a percentage of each member state’s gross domestic product, are designed to insure that assets offered to the bank as collateral are, at least in theory, all equally good, and all equally protected from the risk of inflation.
The economic and financial crisis that began in 2008 has revealed some relative weaknesses in the sovereign debt of such member countries as Portugal, Ireland, Greece and Spain. These securities are not limited to the countries of issue, but held in many cases by banks in other member states. To the extent that the banks authorised to borrow from the ECB have compromised collateral, their ability to borrow from the ECB—and thus the liquidity of the economic system—is impaired.
This threat has drawn the ECB into rescue operations. But weak sovereign debt is not the only source of weakness in the ECB’s operations, as the collapse of the market in U.S. dollar denominated collateralised debt obligations has also led to large scale interventions in cooperation with the Federal Reserve.
Rescue operations involving sovereign debt have included temporarily moving bad or weak assets off the balance sheets of the weak member banks into the balance sheets of the European Central Bank. Such action is viewed as monetisation and can be seen as an inflationary threat, whereby the strong member countries of the ECB shoulder the burden of monetary expansion (and potential inflation) in order to save the weak member countries. Most central banks prefer to move weak assets off their balance sheets with some kind of agreement as to how the debt will continue to be serviced. This preference has typically led the ECB to argue that the weaker member countries must:
- Allocate considerable national income to servicing debts.
- scale back a wide range of national expenditures (such as education, infrastructure, and welfare transfer payments) in order to make their payments.
European Financial Stability Facility
On 9 May 2010, the 27 member states of the European Union agreed to incorporate the European Financial Stability Facility. The EFSF’s mandate is to safeguard financial stability in Europe by providing financial assistance to Eurozone Member States.
The European Financial Stability Facility is authorised to use the following instruments linked to appropriate conditionality:
- To provide loans to countries in financial difficulties (e.g. Greek Bailout).
- To intervene in the primary and secondary debt markets. Intervention in the secondary debt market will be only on the basis of an ECB analysis recognising the existence of exceptional financial market circumstances and risks to financial stability.
- Act on the basis of a precautionary programme.
- Finance recapitalisations of financial institutions through loans to governments
The EFSF is backed by guarantee commitments from the Eurozone Member States for a total of €780 billion and has a lending capacity of €440 billion. It has been assigned the best possible credit rating (AAA by Standard & Poor’s and Fitch Ratings, Aaa by Moody’s)
Powers and objectives during the European banking crisis
The European Central Bank had stepped up the buying of member nations debt. In response to the crisis of 2010, some proposals have surfaced for a collective European bond issue that would allow the central bank to purchase a European version of U.S. Treasury Bills. To make European sovereign debt assets more similar to a U.S. Treasury, a collective guarantee of the member states’ solvency would be necessary. But the German government has resisted this proposal, and other analyses indicate that “the sickness of the Euro” is due to the linkage between sovereign debt and failing national banking systems. If the European central bank were to deal directly with failing banking systems sovereign debt would not look as leveraged relative to national income in the financially weaker member states.
On 17 December 2010, the ECB announced that it was going to double its capitalisation. (The ECB’s most recent balance sheet before the announcement listed capital and reserves at €2.03 trillion.) The sixteen central banks of the member states would transfer assets to the ledger of the ECB.
In 2011, the European member states may need to raise as much as US$2 trillion in debt. Some of this will be new debt and some will be previous debt that is “rolled over” as older loans reach maturity. In either case, the ability to raise this money depends on the confidence of investors in the European financial system. The ability of the European Union to guarantee its members’ sovereign debt obligations have direct implications for the core assets of the banking system that support the Euro.
The bank must also co-operate within the EU and internationally with third bodies and entities. Finally it contributes to maintaining a stable financial system and monitoring the banking sector. The latter can be seen, for example, in the bank’s intervention during the 2007 credit crisis when it loaned billions of euros to banks to stabilise the financial system. In December 2007, the ECB decided in conjunction with the Federal Reserve under a program called Term auction facility to improve dollar liquidity in the eurozone and to stabilise the money market.
In late May 2012, looking ahead to further challenges with Greece, Bundesbank chief and ECB council member Jens Weidmann pointed out that the council could veto “emergency liquidity assistance” (ELA) to, for instance, Greece through a two–third majority of the council. If Greece chose to default on its debts yet wanted to stay in the Euro, the ELA would be one of the ways to accommodate the country’s and its banks’ liquidity needs or, alternatively, to precipitate departure.
Furthermore, not only must the bank not seek influence, but EU institutions and national governments are bound by the treaties to respect the ECB’s independence. For example, the minimum term of office for a national central bank governor is five years and members of the executive board have a non-renewable eight-year term. To offer some accountability, the ECB is bound to publish reports on its activities and has to address its annual report to the European Parliament, the European Commission, the Council of the European Union and the European Council. The European Parliament also gets to question and then issue its opinion on candidates to the executive board.
As result of pressure from France and Greece, independence of ECB has been limited.
Although the ECB is governed by European law directly and thus not by corporate law applying to private law companies, its set-up resembles that of a corporation in the sense that the ECB has shareholders and stock capital. Its capital is five billion euros which is held by the national central banks of the member states as shareholders. The initial capital allocation key was determined in 1998 on the basis of the states’ population and GDP, but the key is adjustable. Shares in the ECB are not transferable and cannot be used as collateral.
This article is part of the series:
Politics and government of
the European Union
Policies and issues[show]
All National Central Banks (NCBs) that own a share of the ECB capital stock as of 1 January 2011 are listed below. Non-Euro area NCBs are required to pay up only a very small percentage of their subscribed capital, which accounts for the different magnitudes of Euro area and Non-Euro area total paid-up capital.
|NCB||Capital Key (%)||Paid-up Capital (€)|
|Nationale Bank van België / Banque Nationale de Belgique||2.4256||180,157,051.35|
|Central Bank of Ireland||1.1107||82,495,232.91|
|Τράπεζα της Ελλάδος (Bank of Greece)||1.9649||145,939,392.39|
|Banco de España||8.3040||616,764,575.51|
|Banque de France||14.2212||1,056,253,899.48|
|Kεντρική Τράπεζα Κύπρου / Kıbrıs Merkez Bankası
(Central Bank of Cyprus)
|Banque centrale du Luxembourg||0.1747||12,975,526.42|
|Bank Ċentrali ta’ Malta||0.0632||4,694,065.65|
|De Nederlandsche Bank||3.9882||296,216,339.12|
|Banco de Portugal||1.7504||130,007,792.98|
|Národná banka Slovenska||0.6934||51,501,030.43|
|Suomen Pankki – Finlands Bank||1.2539||93,131,153.81|
|Българска народна банка (Bulgarian National Bank)||0.8686||3,505,013.50|
|Česká národní banka||1.4472||5,839,806.06|
|Magyar Nemzeti Bank||1.3856||5,591,234.99|
|Narodowy Bank Polski||4.8954||19,754,136.66|
|Banca Naţională a României||2.4645||9,944,860.44|
|Bank of England||14.5172||58,580,453.65|
Decision-making bodies of the ECB
The Governing Council comprises the members of the Executive Board of the ECB (6) and the governors of the NCBs of the euro area countries (17 as of 2012).
The Executive Board is responsible for the implementation of monetary policy defined by the Governing Council and the day-to-day running of the bank. In this it can issue decisions to national central banks and may also exercise powers delegated to it by the Governing Council. It is composed of the President of the Bank (currently Mario Draghi), a vice president (currently Vitor Constâncio) and four other members. They are all appointed for non-renewable terms of eight years. They are appointed “from among persons of recognised standing and professional experience in monetary or banking matters by common accord of the governments of the Member States at the level of Heads of State or Government, on a recommendation from the Council, after it has consulted the European Parliament and the Governing Council of the ECB”.[this quote needs a citation] The Executive Board normally meets every Tuesday.
The General Council is a body dealing with transitional issues of euro adoption, for example fixing the exchange rates of currencies being replaced by the euro (continuing the tasks of the former EMI). It will continue to exist until all EU member states adopt the euro, at which point it will be dissolved. It is composed of the President and Vice President together with the governors of all of the EU’s national central banks.
José Manuel González-Páramo, a Spanish member of the Executive Board since June 2004, was due to leave the board in early June 2012 and no replacement had been named as of late May 2012. The Spanish had nominated Barcelona-born Antonio Sáinz de Vicuña, an ECB veteran who heads its legal department, as González-Páramo’s replacement as early as January 2012 but alternatives from Luxembourg, Finland, and Slovenia were put forward and no decision made by May.
European sovereign debt crisis
From late 2009, fears of a sovereign debt crisis developed among fiscally conservative investors concerning some European states, with the situation becoming particularly tense in early 2010. This included euro zone members Greece, Ireland and Portugal and also some EU countries outside the area. Iceland, the country which experienced the largest crisis in 2008 when its entire international banking system collapsed has emerged less affected by the sovereign debt crisis as the government refused to bail the banks out, and has begun to prosecute those involved in the collapse.
In the EU, especially in countries where sovereign debts have increased sharply due to bank bailouts, a crisis of confidence has emerged with the widening of bond yield spreads and risk insurance on credit default swaps between these countries and other EU members, most importantly Germany. To be included in the eurozone, the countries had to fulfill certain convergence criteria, but the meaningfulness of such criteria were diminished by the fact they have not been applied to different countries with the same strictness.
The principal monetary policy tool of the European central bank is collateralised borrowing or repo agreements. These tools are also used by the United States Federal Reserve Bank, but the Fed does more direct purchasing of financial assets than its European counterpart. The collateral used by the ECB is typically high quality public and private sector debt.
The criteria for determining “high quality” for public debt have been preconditions for membership in the European Union: total debt must not be too large in relation to Gross Domestic Product, for example, and deficits in any given year must not become too large. Though these criteria are fairly simple, a number of accounting techniques may hide the underlying reality of fiscal solvency—or the lack of same.
In central banking, the privileged status of the central bank is that it can make as much money as it deems needed. In the United States Federal Reserve Bank, the Federal Reserve buys assets: typically, bonds issued by the Federal government. There is no limit on the bonds that it can buy and one of the tools at its disposal in a financial crisis is take such extraordinary measures as the purchase of large amounts of assets such as commercial paper. The purpose of such operations is to ensure that adequate liquidity is available for functioning of the financial system.
Regulatory reliance on credit ratings
Think-tanks such as the World Pensions Council have also argued that European legislators have pushed somewhat dogmatically for the adoption of the Basel II recommendations, adopted in 2005, transposed in European Union law through the Capital Requirements Directive (CRD), effective since 2008. In essence, they forced European banks, and, more importantly, the European Central Bank itself e.g. when gauging the solvency of financial institutions, to rely more than ever on standardised assessments of credit risk marketed by two non-European private agencies- Moody’s and S&P.
Response to the crisis
There are a variety of possible responses to the problem of bad debts in a banking system. One is to induce debtors to make a greater effort to make good on their debt. With public debt this usually means getting governments to maintain debt payments while cutting back on other forms of expenditure. Such policies often involve cutting back on popular social programs.
Stringent policies with regard to social expenditures and employment in the state sector have led to riots and political protests in Greece. Another response is to shift losses from the central bank to private investors who are asked to “share the pain” of partial defaults that take the form of rescheduling debt payments.
However, if the debt rescheduling causes losses on loans held by European banks, it weakens the private banking system, which then puts pressure on the central bank to come to the aid of those banks. Private sector bond holders are an integral part of the public and private banking system. Another possible response is for wealthy member countries to guarantee or purchase the debt of countries that have defaulted or are likely to default. This alternative requires that the tax revenues and credit of the wealthy member countries be used to refinance the previous borrowing of the weaker member countries, and is politically controversial.
Reluctance in Germany to take on the burden of financing or guaranteeing the debts of weaker countries has led to public reports that some elites in Germany would prefer to see Greece, Portugal, and even Italy leave the Euro zone “temporarily.” Until recently, Greek Euro zone exit was rejected by German Chancellor Angela Merkel. The German government’s current position is, to keep Greece within the euro zone, but not at any cost. If the worst comes to the worst, priority will be given to the euro’s stability.
The ECB could, and through the late summer of 2011 did, purchase bonds issued by the weaker states even though it assumes, in doing so, the risk of a deteriorating balance sheet. ECB buying focused primarily on Spanish and Italian debt. Certain techniques can minimize the impact. Purchases of Italian bonds by the central bank, for example, were intended to dampen international speculation and strengthen portfolios in the private sector and also the central bank.
The assumption is that speculative activity will decrease over time and the value of the assets increase. Such a move is similar to what the U.S. federal reserve did in buying subprime mortgages in the crisis of 2008, except in the European crisis, the purchases are of member state debt. The risk of such a move is that it could diminish the value of the currency.
On the other hand, certain financial techniques can reduce the impact of such purchases on the currency. One is sterilisation, wherein highly valued assets are sold at the same time that the weaker assets are purchased, which keeps the money supply neutral. Another technique is simply to accept the bad assets as long-term collateral (as opposed to short-term repo swaps) to be held until their market value stabilizes. This would imply, as a quid pro quo, adjustments in taxation and expenditure in the economies of the weaker states to improve the perceived value of the assets.
When the ECB buys bonds from other creditors such as European banks, the ECB does not disclose the transaction prices. Creditors profit of bargains with bonds sold at prices that exceed market’s quotes.
On 6 September 2012, the ECB announced a new plan for buying bonds from eurozone countries.
Long term refinancing operation
Though the ECB’s main refinancing operations (MRO) are from repo auctions with a (bi)weekly maturity and monthly maturation, the ECB now conducts Long Term Refinancing Operations (LTROs), maturing after three months, six months, 12 months and 36 months.
In 2003, refinancing via LTROs amounted to 45 bln Euro which is about 20% of overall liquidity provided by the ECB.
The ECB’s first supplementary longer-term refinancing operation (LTRO) with a six-month maturity was announced March 2008. Previously the longest tender offered was three months. It announced two 3-month and one 6-month full allotment of Long Term Refinancing Operations (LTROs). The first tender was settled 3 April, and was more than four times oversubscribed. The €25 billion auction drew bids amounting to €103.1 billion, from 177 banks. Another six-month tender was allotted on 9 July, again to the amount of €25 billion.
The first 12 month LTRO in June 2009 had close to 1100 bidders.
On 21 December 2011 the bank instituted a programme of making low-interest loans with a term of 3 years (36 months) and 1% interest to European banks accepting loans from the portfolio of the banks as collateral. Loans totalling €489.2 billion ($640 billion) were announced. The loans were not offered to European states, but government securities issued by European states would be acceptable collateral as would mortgage securities and other commercial paper that can be demonstrated to be secure. The programme was announced on 8 December 2011 but observers were surprised by the volume of the loans made when it was implemented. Under its LTRO it loaned €489 billion to 523 banks for an exceptionally long period of three years at a rate of just one percent. The by far biggest amount of €325 billion was tapped by banks in Greece, Ireland, Italy and Spain. This way the ECB tried to make sure that banks have enough cash to pay off €200 billion of their own maturing debts in the first three months of 2012, and at the same time keep operating and loaning to businesses so that a credit crunch does not choke off economic growth. It also hoped that banks would use some of the money to buy government bonds, effectively easing the debt crisis.
On 29 February 2012, the ECB held a second 36 month auction, LTRO2, providing eurozone banks with further €529.5 billion in low-interest loans. This second long term refinancing operation auction saw 800 banks take part. This can be compared with the 523 banks that took part in the first auction on 21 December 2011. Net new borrowing under the February auction was around €313 billion – out of a total of €256bn existing ECB lending €215bn was rolled into LTRO2.
Foreign exchange operations
On 22 September 2000, the ECB, together with the monetary authorities of the United States, Japan, the United Kingdom and Canada, initiated concerted intervention in the foreign exchange markets; the ECB intervened again in early November 2000.
The bank is based in Frankfurt, the largest financial centre in the Eurozone. Its location in the city is fixed by the Amsterdam Treaty along with other major institutions. In the city, the bank currently occupies Frankfurt’s Eurotower until its purpose-built headquarters are built.
In 1999 an international architectural competition was launched by the bank to design a new building. It was won by a Vienna-based architectural office named Coop Himmelbau. The building will be approximately 180 metres (591 ft) tall (the present building is 148 m/486 ft high.) and will be accompanied with other secondary buildings on a landscaped site on the site of the former wholesale market in the eastern part of Frankfurt am Main. The main construction began in October 2008, with completion scheduled during 2014. It is expected that the building will become an architectural symbol for Europe and is designed to accommodate double the number of staff who operate in the Eurotower.
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