May 26th, 2010 09:55:34 GMT

ECB Liikanen: Mkt Impact Of Deficits Could Trigger Recession

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HELSINKI (MNI) – The impact on markets of spiraling public deficits
could lead to a new recession and must be addressed, European Central
Bank Governing Council member Erkki Liikanen said here Wednesday.

“We must stop the negative spiral of the public deficit problem
affecting the financial system,” Liikanen told an audience at a seminar
hosted by the Council of Finnish Chambers of Commerce. “This might
trigger a new recession,” he warned.

Liikanen, who heads the central bank of Finland, noted that the
current debt crisis affected the most vulnerable countries first,
particularly Greece. “Greece has a bad history and its statistics
weren’t trusted. That is why it was affected first,” he said.

He warned that under the current circumstances, a “crowding out
effect” in credit markets decreases the possibility for growth.
Nonetheless, “there is a lot of solid data to show the world economy is
in recovery,” Liikanen said, though he noted that it is imbalanced among
different economies with the emerging markets growing fastest and the
U.S., Japan and Europe lagging behind.

He asserted that the overall situation in financial markets has
recovered to the situation that existed prior to the crisis, “when the
last couple of weeks of volatility is excluded.” He warned, however that
global imbalances between surplus and deficit countries “haven’t changed
that much.”

Liikanen repeated in the question and answer session what he had
stressed in his prepared remarks, reported earlier — namely that the
ECB’s current monetary policy stance is “appropriate,” and that “we will
never renounce our main principle of price stability.”

He warned that the safety net that has been cast over the financial
system “generates the problem of moral hazard.” Banks should have more
and better capital to guarantee solvency in times of stress, he said.

He noted that regulatory reform efforts, particularly the
imposition of new bank taxes “is hampered by the conflicting views of
G-20 countries.”

[TOPICS: M$$EC$,M$$CR$,M$X$$$,MT$$$$]

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May 26th, 2010 09:35:34 GMT

ECB Allots E12.163 Bln In 91-Day Refis At 1.00% Fixed Rate

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FRANKFURT (MNI) – The European Central Bank on Wednesday allotted
E12.163 billion in supplemental 91-day refinancing agreements at a fixed
rate of 1.0%.

The ECB said it satisfied all 35 bids in the 91-day operation.

After returning to a variable tender procedures on 3-month tender,
the ECB earlier this month announced that it will hold another 3-month
tender at fixed rate, full-allotment as part of a larger packages “to
address the severe tensions in certain market segments which are
hampering the monetary policy transmission mechanism.”

Today’s operation will settle on May 27 and mature on August 26.

–Frankfurt Newsroom +49 69 72 01 42: email: frankfurt@marketnews.com–

[TOPICS: M$X$$$,M$$EC$]

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May 26th, 2010 09:16:03 GMT

Germany Sells E5.445 Bln In S157 Bobl Top-Up; Bid/Cover 1.1

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FRANKFURT (MNI) – The German federal government sold E5.445 billion
in a top-up of its 2.25% coupon Series 157 five-year Bundesobligationen
(Bobls) at an average yield of 1.47%, down from the 2.19% at the
security’s launch auction April 14, the Bundesbank announced Wednesday.

The bid-cover ratio (excluding retention) was 1.1, down from 1.5 at
the previous auction.

There were a total of E6.12 billion in bids for the auction,
including E3.925 billion in competitive bids and E2.195 billion in
non-competitive bids. The German government accepted 100% of the
non-competitive bids.

The lowest accepted price at the auction was 103.51 and the average
weighted price was 103.62. The government accepted 100% of bids at the
minimum price.

The government retained E1.555 million of the issue for its open
market operations, bringing total tranche volume to E7.0 billion, as
previously announced. Including the E7.0 billion already sold, total
issue volume is now E14.0 billion. Today’s sale will settle on Friday,
May 28.

Germany will top up this Bobl again in Q3, according to the
government’s most recent issuance calendar.

– Frankfurt Newsroom +49 69 72 01 42: email: fftmail@marketnews.com–

[TOPICS: M$$FI$,M$G$$$,MFXBO$,MGX$$$]

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May 26th, 2010 09:16:02 GMT

ECB Allots 5.400 USD Bln In 7-Day USD Liquidity Providing Op

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FRANKFURT (MNI) – The European Central Bank said Wednesday that it
has allotted 5.400 USD billion in its 7-day USD liquidity providing
operation.

The central bank said it received 3 bids. The minimum bid amount is
$5 million

The operation was carried out at a fixed rate of 1.23%. The
Euro/USD rate was set at 1.2286.

–Frankfurt Bureau tel.: +49-69-720 142, email: frankfurt@marketnews.com

[TOPICS: MT$$$$,M$$EC$,M$$FI$,M$X$$$,MGX$$$]

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May 26th, 2010 09:05:15 GMT

Update: Paramo: Can Grasp ECB Critique, But No Need To Worry

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–Adds on covered bonds, EMU fiscal crisis to story sent at 08:25GMT

FRANKFURT (MNI) – Criticism of the European Central Bank’s decision
to purchase government securities is understandable, but markets have no
need to worry about the bank’s independence, ECB Executive Board member
Jose Manuel Gonzalez-Paramo said Wednesday.

“I think some of these comments are understandable…these
operations are temporary, these operations will be sterilized in the
sense that one euro in means one euro out,” he told delegates at a
conference on credit risk.

The ECB’s recent moves do not weaken the bank’s mandate of
defending price stability and the ECB will “fiercely” defend its
independence, he said.

Drawing a parallel with another ECB move to shore up markets,
Paramo noted the success of the bank’s covered bond purchase program.
“We’ve seen that this program…from the beginning had an impact on the
market,” he assessed.

“We will continue to monitor the situation”, he assured.

He added that global central banks are learning from each other and
are cooperating, as shown by the reestablishment of swap lines.

“The key to the present situation in Europe is the commitment of
governments to undertake what they have to do. We are convinced that the
program in Greece will be effective. In the end it will be able to honor
its obligations,” Paramo said.

Pressed on whether he was worried about the concentration of risk
in the Eurozone, he reminded that “the ECB is not taking on risk…if
you go into the details of [Financial Stability Mechanism]…you see the
conditions are not attractive at all…I am sure we will not see a
massive concentration of risk.”

–Frankfurt bureau; +49-69-720142; tbuell@marketnews.com

[TOPICS: M$$EC$,M$X$$$,M$$CR$,MGX$$$]

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May 26th, 2010 08:55:24 GMT

OECD: BOE Should Start Monetary Tightening In 2nd Half 2010

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London (MNI) – The Bank of England should start tightening monetary
policy in the second half of this year, earlier than markets are
currently anticipating, according to the Organisation for Economic
Co-Operation and Development.

In its latest economic outlook, published Wednesday, the OECD said
the BOE’s current policy stance was appropriate but that the bank should
look to lower the level of quantitative easing and start to normalize
rates in the second half of 2010. Markets recently have sharply scaled
back expectations of higher rates this year, putting little more than a
1 in 10 chance on a single 25-basis-point hike by the end of December.

“With the Bank of England’s policy rate close to zero and
quantitative easing amounting to stg200 billion (14% of GDP), monetary
policy remains highly expansionary. This is appropriate as the large
output gap and falling unit labour costs are expected to underpin a
slowdown in inflation to below the 2% target during 2011,” the OECD
said.

The organization added, however, that “in response to the expected
gradual rise in underlying inflationary pressure as the recovery gathers
pace and to anchor inflation expectations, the normalisation of interest
rates and the scaling back of quantitative easing should start during
the second half of 2010.”

The OECD said that if the pace of fiscal tightening were stepped
up, this would “leave room for a more gradual normalisation of monetary
policy.”

The OECD predicted a pickup in UK growth, projecting it to climb
from 1.3% this year to 2.5% in 2011, and from 2.2% on the year in the
fourth quarter of this year to 2.6% in Q4 2011.

The OECD’s growth projections are softer than the BOE’s, with the
latter forecasting 2.8% growth on the year in Q4 of 2010 and 3.5% in Q4
2012.

Private consumption growth is expected to accelerate sharply in
2011 compared to this year, from 0.3% to 2.2%. Final domestic demand is
expected to rise from +0.7% this year to +2.1% in 2011.

“The recovery is gaining traction, supported by improving financial
conditions, rebounding exports and a temporary surge in stockbuilding,”
the OECD said.

While elevated inflation and the effects of the credit crunch will
keep growth subdued this year, the OECD predicts the recovery will
gather pace next year, bolstered by a acceleration of household
consumption and business investment.

The OECD predicts UK unemployment is already around its peak and
will fall back after the mid-point of this year.

Echoing the BOE’s central view in its recent Inflation Report, the
OECD predicts inflation will drop back below target due to the high
degree of slack in the economy.

It also endorsed the view of the new UK government that further
fiscal consolidation is required, saying that “a concrete and
far-reaching consolidation plan needs to be announced upfront.”

“While monetary policy should remain expansionary over the forecast
period to support activity against the background of low levels of
resource utilisation, the process of normalisation of interest rates
needs to start soon in response to the expected gradual rise in
underlying inflation,” the OECD concluded.

–London newsroom: 4420 7862 7491; e-mail: drobinson@marketnews.com

[TOPICS: M$B$$$,M$BDS$,MT$$$$,M$$BE$]

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