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Fewer Americans Than Forecast File Unemployment Claims
Fewer Americans filed first-time claims for unemployment insurance payments and companies added more workers than forecast, easing concern the labor market is faltering further.
Applications for jobless benefits fell 14,000 in the week ended June 30 to 374,000, Labor Department figures showed today. Private employers expanded payrolls by 176,000 last month, according to figures released today by Roseland, New Jersey- based ADP Employer Services, exceeding the most optimistic estimate in a Bloomberg News survey of economists.
“Before today it was pretty clear the labor market had softened over the past few months,” said Daniel Silver, an economist at JPMorgan Chase & Co. in New York. “Today’s reports show a little bright spot. The fear of a much weaker payroll number has been reduced.”
Labor Department data tomorrow may show the pace of hiring accelerated in June while remaining at less than half the average for the first quarter of the year. The report covers both private and government employers. Other figures today showed service industries expanded at a slower pace in June, underscoring Federal Reserve concern that economic growth isn’t strong enough to reduce unemployment.
U.S. stocks fell, snapping a three-day advance for the Standard & Poor’s 500 Index, as disappointment over the European Central Bank’s efforts to tame the debt crisis overshadowed improving American employment data.
The S&P 500 declined 0.4 percent to 1,368.56 at 12:33 p.m. in New York. Treasuries gained, pushing the yield on the 10-year note down to 1.59 percent from 1.63 percent late on July 3.
Central Banks
The ECB today cut its benchmark interest rates to a record low, joining counterparts in the U.K. and China in taking action against a global economic slowdown. The ECB lowered the benchmark and deposit rates by 25 basis points to 0.75 percent and zero respectively.
ECB President Mario Draghi said the cuts may have only a limited impact on the euro-area economy as it slides toward recession.
“It’s clear that when demand is weak the transmission of price signals to the aggregated economy is muted,” Draghi said at a press conference in Frankfurt.
The Bank of England began today’s stimulus push, announcing it would restart buying bonds two months after stopping. The People’s Bank of China cut its key interest rate for the second time in a month and allowed banks to offer bigger discounts on their own lending costs.
Global Growth
Slowing global growth is curbing demand for U.S. exports and rippling through the rest of the economy, limiting sales at companies from Family Dollar Stores Inc. to FedEx Corp. and restraining hiring.
The Institute for Supply Management said its non- manufacturing index dropped to 52.1, less than projected, from 53.7 in May, according to a report from the Tempe, Arizona-based group today. The median forecast of 70 economists surveyed by Bloomberg News called for 53. Readings above 50 signal expansion.
The report follows July 2 data that showed the ISM factory index fell to 49.7 in June, the first contraction in almost three years and worse than the most-pessimistic forecast in a Bloomberg survey.
Family Dollar, the owner of more than 7,200 discount shops in the U.S., narrowed its profit forecast for fiscal 2012 after third-quarter sales trailed analysts’ average estimate.
‘Economic Headwinds’
“It is clear that consumers continue to face difficult economic headwinds,” Chief Executive Officer Howard Levine said on a June 28 conference call with analysts. Discretionary purchases like home goods and apparel continue to be “challenged,” he said.
Demand remains soft, according to FedEx, which is considered an economic bellwether because it carries everything from mobile devices to pharmaceuticals. The Memphis, Tennessee- based company, operator of the world’s largest cargo airline, pledged “significant cost reductions” as slowing economic growth pressures profits.
“We now realize we’ve got to adjust the networks that we built for higher gross domestic product growth than we’re actually seeing,” Chief Financial Officer Alan Graf said on an earnings call last month.
Slower job growth and unemployment that’s exceeded 8 percent for 40 straight months are damping sentiment. Consumer confidence dropped last week from a two-month high as fewer Americans considered it a good time to spend and their views of the economy languished.
Consumer Confidence
The Bloomberg Consumer Comfort Index decreased to minus 37.5 in the week ended July 1 from minus 36.1 in the previous period. Even with the drop, the measure averaged minus 37.6 in the second quarter, the best showing since the first three months of 2008, helped in part by lower gasoline prices.
Retailers’ June same-store sales about matched analysts’ estimates, with luxury chains such as Saks Inc. and discounters like TJX Cos. topping expectations and stores targeting middle- income consumers trailing projections, according to another report today.
Same-store sales at the more than 20 companies tracked by Retail Metrics Inc. rose 0.3 percent, compared with the 1 percent average estimate of analysts surveyed by the research firm. The results follow a 7.2 percent increase last year.
Payroll Forecast
Fewer firings help pave the way for faster job creation when companies grow more confident about the economic outlook. Tomorrow’s Labor Department report may show employers added 95,000 jobs in June, up from 69,000 the prior month that was the least in a year.
Unemployment claims were forecast at 385,000, according to the median estimate in a Bloomberg News survey of 46 economists. Projections ranged from 371,000 to 400,000. The Labor Department revised the prior week’s figure to 388,000 from an initially reported 386,000.
“Claims offer some encouragement on the labor market front,” said Millan Mulraine, a senior U.S. strategist at TD Securities in New York, who forecast a drop in jobless applications. “I would caution by saying this series is notoriously volatile. We would hope this is sustained for the coming months.”
From bloomberg
Applications for jobless benefits fell 14,000 in the week ended June 30 to 374,000, Labor Department figures showed today. Private employers expanded payrolls by 176,000 last month, according to figures released today by Roseland, New Jersey- based ADP Employer Services, exceeding the most optimistic estimate in a Bloomberg News survey of economists.
“Before today it was pretty clear the labor market had softened over the past few months,” said Daniel Silver, an economist at JPMorgan Chase & Co. in New York. “Today’s reports show a little bright spot. The fear of a much weaker payroll number has been reduced.”
Labor Department data tomorrow may show the pace of hiring accelerated in June while remaining at less than half the average for the first quarter of the year. The report covers both private and government employers. Other figures today showed service industries expanded at a slower pace in June, underscoring Federal Reserve concern that economic growth isn’t strong enough to reduce unemployment.
U.S. stocks fell, snapping a three-day advance for the Standard & Poor’s 500 Index, as disappointment over the European Central Bank’s efforts to tame the debt crisis overshadowed improving American employment data.
The S&P 500 declined 0.4 percent to 1,368.56 at 12:33 p.m. in New York. Treasuries gained, pushing the yield on the 10-year note down to 1.59 percent from 1.63 percent late on July 3.
Central Banks
The ECB today cut its benchmark interest rates to a record low, joining counterparts in the U.K. and China in taking action against a global economic slowdown. The ECB lowered the benchmark and deposit rates by 25 basis points to 0.75 percent and zero respectively.
ECB President Mario Draghi said the cuts may have only a limited impact on the euro-area economy as it slides toward recession.
“It’s clear that when demand is weak the transmission of price signals to the aggregated economy is muted,” Draghi said at a press conference in Frankfurt.
The Bank of England began today’s stimulus push, announcing it would restart buying bonds two months after stopping. The People’s Bank of China cut its key interest rate for the second time in a month and allowed banks to offer bigger discounts on their own lending costs.
Global Growth
Slowing global growth is curbing demand for U.S. exports and rippling through the rest of the economy, limiting sales at companies from Family Dollar Stores Inc. to FedEx Corp. and restraining hiring.
The Institute for Supply Management said its non- manufacturing index dropped to 52.1, less than projected, from 53.7 in May, according to a report from the Tempe, Arizona-based group today. The median forecast of 70 economists surveyed by Bloomberg News called for 53. Readings above 50 signal expansion.
The report follows July 2 data that showed the ISM factory index fell to 49.7 in June, the first contraction in almost three years and worse than the most-pessimistic forecast in a Bloomberg survey.
Family Dollar, the owner of more than 7,200 discount shops in the U.S., narrowed its profit forecast for fiscal 2012 after third-quarter sales trailed analysts’ average estimate.
‘Economic Headwinds’
“It is clear that consumers continue to face difficult economic headwinds,” Chief Executive Officer Howard Levine said on a June 28 conference call with analysts. Discretionary purchases like home goods and apparel continue to be “challenged,” he said.
Demand remains soft, according to FedEx, which is considered an economic bellwether because it carries everything from mobile devices to pharmaceuticals. The Memphis, Tennessee- based company, operator of the world’s largest cargo airline, pledged “significant cost reductions” as slowing economic growth pressures profits.
“We now realize we’ve got to adjust the networks that we built for higher gross domestic product growth than we’re actually seeing,” Chief Financial Officer Alan Graf said on an earnings call last month.
Slower job growth and unemployment that’s exceeded 8 percent for 40 straight months are damping sentiment. Consumer confidence dropped last week from a two-month high as fewer Americans considered it a good time to spend and their views of the economy languished.
Consumer Confidence
The Bloomberg Consumer Comfort Index decreased to minus 37.5 in the week ended July 1 from minus 36.1 in the previous period. Even with the drop, the measure averaged minus 37.6 in the second quarter, the best showing since the first three months of 2008, helped in part by lower gasoline prices.
Retailers’ June same-store sales about matched analysts’ estimates, with luxury chains such as Saks Inc. and discounters like TJX Cos. topping expectations and stores targeting middle- income consumers trailing projections, according to another report today.
Same-store sales at the more than 20 companies tracked by Retail Metrics Inc. rose 0.3 percent, compared with the 1 percent average estimate of analysts surveyed by the research firm. The results follow a 7.2 percent increase last year.
Payroll Forecast
Fewer firings help pave the way for faster job creation when companies grow more confident about the economic outlook. Tomorrow’s Labor Department report may show employers added 95,000 jobs in June, up from 69,000 the prior month that was the least in a year.
Unemployment claims were forecast at 385,000, according to the median estimate in a Bloomberg News survey of 46 economists. Projections ranged from 371,000 to 400,000. The Labor Department revised the prior week’s figure to 388,000 from an initially reported 386,000.
“Claims offer some encouragement on the labor market front,” said Millan Mulraine, a senior U.S. strategist at TD Securities in New York, who forecast a drop in jobless applications. “I would caution by saying this series is notoriously volatile. We would hope this is sustained for the coming months.”
From bloomberg
European Stocks Drop as Draghi Sees Risks; Banks Retreat
European stocks retreated as European Central Bank President Mario Draghi said downside risks to the economy remain, offsetting monetary policy easing by countries from China to the U.K.
Spanish and Italian banks fell as bond yields climbed after the ECB refrained from announcing new measures to support growth. Volkswagen AG (VOW) jumped 5.1 percent after reaching an agreement with Germany’s tax authorities to buy the 50.1 stake in Porsche SE that it doesn’t already own. GKN Plc jumped 13 percent after buying Volvo AB (VOLVB)’s aircraft-engine unit.
The Stoxx Europe 600 Index (SXXP) lost 0.2 percent to 256.93 at the close in London after earlier falling as much as 0.8 percent and rising as much as 0.8 percent. The equity benchmark is still headed for a fifth-straight week of gains, which would be its longest winning streak since January. The Stoxx 600 has climbed 9.9 percent from this year’s low on June 4 amid speculation that central banks would ease monetary policy.
“A lot of today’s announcements were largely anticipated,” said Edmund Shing, an equity strategist at Barclays Capital in London. “You could argue that over the last few days, markets have been pricing in increasing expectation of central-bank action.”
The ECB cut interest rates to a record low and said it won’t pay anything on overnight deposits. The central bank reduced its main refinancing rate to 0.75 percent from 1 percent and cut its deposit rate to zero from 0.25 percent.
Draghi, the central bank’s president, said some “downside risks to the euro-area economic outlook have materialized. The main downside risks relate to weaker-than-expected economic activity.”
Rates Decision
The Stoxx 600 earlier climbed as China cut its interest rates for the second time in a month and allowed banks to offer bigger discounts on their lending costs. The one-year lending rate will fall by 31 basis points and the one-year deposit rate will drop by 25 basis points with effect from tomorrow, the People’s Bank of China said. Lenders can offer 30 percent discounts on loans, the central bank said.
In the U.K, the Bank of England restarted bond buying two months after halting its asset-purchase program. The Monetary Policy Committee led by Governor Mervyn King raised its target by 50 billion pounds ($78 billion) to 375 billion pounds, matching the estimates of the majority of economists in a Bloomberg News survey.
National benchmark indexes fell in 14 of the 18 western- European markets. Germany’s DAX declined 0.5 percent and France’s CAC 40 retreated 1.2 percent. The U.K.’s FTSE 100 gained 0.1 percent.
Lenders Retreat
European banks posted the biggest slide of the 19 industries in the Stoxx 600 as Spanish and Italian bonds dropped after the ECB refrained from announcing more measures to cap borrowing costs in so-called peripheral nations. Spanish securities also declined after the nation’s borrowing costs increased at a debt sale today.
UniCredit SpA (UCG) and Intesa Sanpaolo SpA (ISP), Italy’s largest banks, slumped 5.1 percent to 2.81 euros and 4.4 percent to 1.04 euros, respectively. Italy’s 10-year government bonds extended their decline, pushing the yield on the securities above 6 percent earlier today. Yields on two-year notes advanced 27 basis points to 3.70 percent.
In Spain, Banco Bilbao Vizcaya Argentaria SA (BBVA) plunged 4.8 percent to 5.46 euros and Banco Santander SA (SAN), the country’s largest lender, fell 3.9 percent to 5.10 euros.
Volkswagen Gains
VW climbed 5.1 percent to 134.50 euros after Europe’s largest carmaker agreed to buy the controlling stake in Porsche’s automotive business for 4.46 billion euros ($5.5 billion), ending a seven-year takeover saga that has divided two of Germany’s most powerful families.
The transaction enables VW to fully incorporate Porsche’s automotive business into its stable of brands. The cash deal has an equity value of 3.88 billion euros and also includes what Porsche’s holding company would have received in dividend payments and half of the forecast synergies from the combination. Porsche slipped 1.2 percent to 41.46 euros.
GKN (GKN) rallied 13 percent to 211 pence, its biggest rally in more than three years. The British maker of parts for Airbus SAS airplanes agreed to buy the Volvo unit for 633 million pounds. GKN said it will raise 140 million pounds in a share sale to help pay for the purchase. For Volvo, the deal marks its biggest structural shift since the company split off its car unit in 1999. The shares slid 0.4 percent to 81.25 kronor.
Robert Walters Plc (RWA) led a selloff by U.K. recruitment companies, tumbling 6.9 percent to 194.5 pence. The business reported a 3 percent decline in second-quarter net fee income, missing some analysts’ estimates. Shore Capital had predicted total net fee income to increase 11.1 percent.
Michael Page International Plc (MPI) dropped 4.5 percent to 363 pence after Bank of America Corp. reduced its earnings-per-share estimate for the company, citing the risk of a relative derating. Hays Plc (HAS) slid 3.5 percent to 73.7 pence, even as the brokerage reiterated its buy recommendation.
From Bloomberg
Spanish and Italian banks fell as bond yields climbed after the ECB refrained from announcing new measures to support growth. Volkswagen AG (VOW) jumped 5.1 percent after reaching an agreement with Germany’s tax authorities to buy the 50.1 stake in Porsche SE that it doesn’t already own. GKN Plc jumped 13 percent after buying Volvo AB (VOLVB)’s aircraft-engine unit.
The Stoxx Europe 600 Index (SXXP) lost 0.2 percent to 256.93 at the close in London after earlier falling as much as 0.8 percent and rising as much as 0.8 percent. The equity benchmark is still headed for a fifth-straight week of gains, which would be its longest winning streak since January. The Stoxx 600 has climbed 9.9 percent from this year’s low on June 4 amid speculation that central banks would ease monetary policy.
“A lot of today’s announcements were largely anticipated,” said Edmund Shing, an equity strategist at Barclays Capital in London. “You could argue that over the last few days, markets have been pricing in increasing expectation of central-bank action.”
The ECB cut interest rates to a record low and said it won’t pay anything on overnight deposits. The central bank reduced its main refinancing rate to 0.75 percent from 1 percent and cut its deposit rate to zero from 0.25 percent.
Draghi, the central bank’s president, said some “downside risks to the euro-area economic outlook have materialized. The main downside risks relate to weaker-than-expected economic activity.”
Rates Decision
The Stoxx 600 earlier climbed as China cut its interest rates for the second time in a month and allowed banks to offer bigger discounts on their lending costs. The one-year lending rate will fall by 31 basis points and the one-year deposit rate will drop by 25 basis points with effect from tomorrow, the People’s Bank of China said. Lenders can offer 30 percent discounts on loans, the central bank said.
In the U.K, the Bank of England restarted bond buying two months after halting its asset-purchase program. The Monetary Policy Committee led by Governor Mervyn King raised its target by 50 billion pounds ($78 billion) to 375 billion pounds, matching the estimates of the majority of economists in a Bloomberg News survey.
National benchmark indexes fell in 14 of the 18 western- European markets. Germany’s DAX declined 0.5 percent and France’s CAC 40 retreated 1.2 percent. The U.K.’s FTSE 100 gained 0.1 percent.
Lenders Retreat
European banks posted the biggest slide of the 19 industries in the Stoxx 600 as Spanish and Italian bonds dropped after the ECB refrained from announcing more measures to cap borrowing costs in so-called peripheral nations. Spanish securities also declined after the nation’s borrowing costs increased at a debt sale today.
UniCredit SpA (UCG) and Intesa Sanpaolo SpA (ISP), Italy’s largest banks, slumped 5.1 percent to 2.81 euros and 4.4 percent to 1.04 euros, respectively. Italy’s 10-year government bonds extended their decline, pushing the yield on the securities above 6 percent earlier today. Yields on two-year notes advanced 27 basis points to 3.70 percent.
In Spain, Banco Bilbao Vizcaya Argentaria SA (BBVA) plunged 4.8 percent to 5.46 euros and Banco Santander SA (SAN), the country’s largest lender, fell 3.9 percent to 5.10 euros.
Volkswagen Gains
VW climbed 5.1 percent to 134.50 euros after Europe’s largest carmaker agreed to buy the controlling stake in Porsche’s automotive business for 4.46 billion euros ($5.5 billion), ending a seven-year takeover saga that has divided two of Germany’s most powerful families.
The transaction enables VW to fully incorporate Porsche’s automotive business into its stable of brands. The cash deal has an equity value of 3.88 billion euros and also includes what Porsche’s holding company would have received in dividend payments and half of the forecast synergies from the combination. Porsche slipped 1.2 percent to 41.46 euros.
GKN (GKN) rallied 13 percent to 211 pence, its biggest rally in more than three years. The British maker of parts for Airbus SAS airplanes agreed to buy the Volvo unit for 633 million pounds. GKN said it will raise 140 million pounds in a share sale to help pay for the purchase. For Volvo, the deal marks its biggest structural shift since the company split off its car unit in 1999. The shares slid 0.4 percent to 81.25 kronor.
Robert Walters Plc (RWA) led a selloff by U.K. recruitment companies, tumbling 6.9 percent to 194.5 pence. The business reported a 3 percent decline in second-quarter net fee income, missing some analysts’ estimates. Shore Capital had predicted total net fee income to increase 11.1 percent.
Michael Page International Plc (MPI) dropped 4.5 percent to 363 pence after Bank of America Corp. reduced its earnings-per-share estimate for the company, citing the risk of a relative derating. Hays Plc (HAS) slid 3.5 percent to 73.7 pence, even as the brokerage reiterated its buy recommendation.
From Bloomberg
Draghi Says Rate Cuts May Have ‘Muted’ Impact on Economy
European Central Bank President Mario Draghi said today’s cut in interest rates to a record low may have only a limited impact on the euro-area economy as it slides toward recession.
“It’s clear that when demand is weak the transmission of price signals to the aggregated economy is muted,” Draghi said at a press conference in Frankfurt after lowering the benchmark and deposit rates by 25 basis points to 0.75 percent and zero respectively. The cuts will reduce the cost of central bank loans for struggling banks, Draghi said.
China also lowered rates today and the Bank of England restarted its asset purchases, adding to a new round of global monetary stimulus. With Europe’s debt crisis curbing growth across the continent and damping the outlook for the world economy, the ECB was under pressure to ease monetary conditions, even though Draghi last month voiced misgivings about the effectiveness of a rate reduction.
“The impact of today’s decision on the euro area will not be large” and “there is now little left for the ECB to do in terms of lowering interest rates,” said Julian Callow, chief European economist at Barclay’s Capital in London. “If the economy does not turn around during the second half, the Governing Council will have to address the case for outright large-scale asset purchases.”
Stocks Drop
The euro fell more than half a cent to a one-month low and traded at $1.2381 at 4:40 p.m. in Frankfurt. European stocks declined. The Stoxx Europe 600 Index (SXXP) fell 0.3 percent after earlier rallying as much as 0.8 percent. Germany’s DAX Index was down 0.4 percent.
The 17-nation euro economy is heading for recession. Unemployment rose to a record 11.1 percent in May, economic confidence slumped to the lowest in more than 2 1/2 years in June, and data yesterday confirmed that services and manufacturing output contracted for a fifth month. The economy will shrink 0.3 percent this year, according to the European Commission.
“We still expect a gradual, slow recovery around the end of the year,” Draghi said. “The baseline scenario hasn’t changed, although the downside risks are now materializing.” Inflation may drop below the ECB’s 2 percent before the end of the year, sooner than previously expected, he said.
Third Cut
Today’s rate cut, predicted by 49 of 64 economists in a Bloomberg News survey, is the first since December and the third since Draghi took office on Nov. 1. Twelve of 22 forecasters in another survey predicted the ECB would lower the deposit rate to zero.
Cutting the benchmark rate will reduce the cost of ECB loans. The ECB has lent banks more than 1 trillion euros ($1.24 trillion) for three years in its so-called Longer Term Refinancing Operations, with the interest determined by the average of the benchmark rate over the period of the loans.
The deposit-rate move may encourage banks to lend to other institutions, companies or households instead of parking excess cash in the ECB’s overnight deposit facility. About 800 billion euros is currently being deposited with the ECB each day.
“It is difficult to foresee what banks will do,” Draghi said. “I don’t expect banks’ behavior to change dramatically in any way.”
The deposit rate has steered market borrowing costs since the ECB started to provide banks with unlimited liquidity after the collapse of Lehman Brothers Holdings Inc. in 2008. That policy removed the need for banks to lend to each other to meet their reserve requirements, pushing down interest rates. Today’s cut may therefore lower the euro overnight index average, or Eonia, which currently stands at 0.33 percent.
What Next?
“The ECB’s decision effectively implements a zero-rate policy in the euro zone,” ABN Amro economists wrote in a note to clients. “Speculation may build that the central bank will follow” the Federal Reserve and the Bank of England “with a quantitative easing program.”
Central Banks around the globe are easing policy in response to Europe’s debt crisis, which has pushed at least seven euro nations into recession and forced five of them to seek bailouts.
The Bank of England, which has been drawn into the scandal over Barclays Plc’s rigging of Libor rates, today raised its target for bond purchases by 50 billion pounds ($78 billion) to 375 billion pounds. China cut rates today and the U.S. and Australian central banks eased monetary policy last month.
No Coordination
Draghi said there was no ECB coordination with the Bank of England or People’s Bank of China on today’s policy decisions “beyond the normal exchange of views.”
In Europe, bond and equity markets rallied last week after euro-area leaders opened the way to recapitalizing banks directly with bailout funds once a single banking supervisor is established. They also dropped the requirement that taxpayers get preferred creditor status on aid to Spain’s crippled lenders.
Yields on Spanish 10-year bonds fell to 6.25 percent yesterday from 6.94 percent on June 28. They rose to 6.77 percent after Draghi’s press conference, and the Italian equivalent jumped to 5.96 percent.
“Although the euro zone is the epicentre of the current global uncertainties, the ECB is still reacting less forcefully to the European risks than many other central banks,” said Holger Schmieding, chief economist at Berenberg Bank in London.
‘Cycle of Fear’
“The ECB neither announced new liquidity initiatives nor dropped any hint that it may intervene again in sovereign bond markets to break the cycle of fear that is engulfing Spain and Italy,” Schmieding said.
Asked if the ECB may implement more non-standard measures, Draghi said: “I can’t see that there are measures that are effective in a highly fragmented market.”
Today’s ECB easing “amounts to little more than a tweaking at the edges as far as the euro zone’s ailing peripheral economies are concerned,” said Nicholas Spiro, head of Spiro Sovereign Strategy in London. “The most salutary effect of the ECB’s rate cuts lies in its impact on the single currency itself. A weaker euro is just what the doctor ordered to help the sickly euro-zone economy in the absence of bolder measures to help stimulate activity.”
“It’s clear that when demand is weak the transmission of price signals to the aggregated economy is muted,” Draghi said at a press conference in Frankfurt after lowering the benchmark and deposit rates by 25 basis points to 0.75 percent and zero respectively. The cuts will reduce the cost of central bank loans for struggling banks, Draghi said.
China also lowered rates today and the Bank of England restarted its asset purchases, adding to a new round of global monetary stimulus. With Europe’s debt crisis curbing growth across the continent and damping the outlook for the world economy, the ECB was under pressure to ease monetary conditions, even though Draghi last month voiced misgivings about the effectiveness of a rate reduction.
“The impact of today’s decision on the euro area will not be large” and “there is now little left for the ECB to do in terms of lowering interest rates,” said Julian Callow, chief European economist at Barclay’s Capital in London. “If the economy does not turn around during the second half, the Governing Council will have to address the case for outright large-scale asset purchases.”
Stocks Drop
The euro fell more than half a cent to a one-month low and traded at $1.2381 at 4:40 p.m. in Frankfurt. European stocks declined. The Stoxx Europe 600 Index (SXXP) fell 0.3 percent after earlier rallying as much as 0.8 percent. Germany’s DAX Index was down 0.4 percent.
The 17-nation euro economy is heading for recession. Unemployment rose to a record 11.1 percent in May, economic confidence slumped to the lowest in more than 2 1/2 years in June, and data yesterday confirmed that services and manufacturing output contracted for a fifth month. The economy will shrink 0.3 percent this year, according to the European Commission.
“We still expect a gradual, slow recovery around the end of the year,” Draghi said. “The baseline scenario hasn’t changed, although the downside risks are now materializing.” Inflation may drop below the ECB’s 2 percent before the end of the year, sooner than previously expected, he said.
Third Cut
Today’s rate cut, predicted by 49 of 64 economists in a Bloomberg News survey, is the first since December and the third since Draghi took office on Nov. 1. Twelve of 22 forecasters in another survey predicted the ECB would lower the deposit rate to zero.
Cutting the benchmark rate will reduce the cost of ECB loans. The ECB has lent banks more than 1 trillion euros ($1.24 trillion) for three years in its so-called Longer Term Refinancing Operations, with the interest determined by the average of the benchmark rate over the period of the loans.
The deposit-rate move may encourage banks to lend to other institutions, companies or households instead of parking excess cash in the ECB’s overnight deposit facility. About 800 billion euros is currently being deposited with the ECB each day.
“It is difficult to foresee what banks will do,” Draghi said. “I don’t expect banks’ behavior to change dramatically in any way.”
The deposit rate has steered market borrowing costs since the ECB started to provide banks with unlimited liquidity after the collapse of Lehman Brothers Holdings Inc. in 2008. That policy removed the need for banks to lend to each other to meet their reserve requirements, pushing down interest rates. Today’s cut may therefore lower the euro overnight index average, or Eonia, which currently stands at 0.33 percent.
What Next?
“The ECB’s decision effectively implements a zero-rate policy in the euro zone,” ABN Amro economists wrote in a note to clients. “Speculation may build that the central bank will follow” the Federal Reserve and the Bank of England “with a quantitative easing program.”
Central Banks around the globe are easing policy in response to Europe’s debt crisis, which has pushed at least seven euro nations into recession and forced five of them to seek bailouts.
The Bank of England, which has been drawn into the scandal over Barclays Plc’s rigging of Libor rates, today raised its target for bond purchases by 50 billion pounds ($78 billion) to 375 billion pounds. China cut rates today and the U.S. and Australian central banks eased monetary policy last month.
No Coordination
Draghi said there was no ECB coordination with the Bank of England or People’s Bank of China on today’s policy decisions “beyond the normal exchange of views.”
In Europe, bond and equity markets rallied last week after euro-area leaders opened the way to recapitalizing banks directly with bailout funds once a single banking supervisor is established. They also dropped the requirement that taxpayers get preferred creditor status on aid to Spain’s crippled lenders.
Yields on Spanish 10-year bonds fell to 6.25 percent yesterday from 6.94 percent on June 28. They rose to 6.77 percent after Draghi’s press conference, and the Italian equivalent jumped to 5.96 percent.
“Although the euro zone is the epicentre of the current global uncertainties, the ECB is still reacting less forcefully to the European risks than many other central banks,” said Holger Schmieding, chief economist at Berenberg Bank in London.
‘Cycle of Fear’
“The ECB neither announced new liquidity initiatives nor dropped any hint that it may intervene again in sovereign bond markets to break the cycle of fear that is engulfing Spain and Italy,” Schmieding said.
Asked if the ECB may implement more non-standard measures, Draghi said: “I can’t see that there are measures that are effective in a highly fragmented market.”
Today’s ECB easing “amounts to little more than a tweaking at the edges as far as the euro zone’s ailing peripheral economies are concerned,” said Nicholas Spiro, head of Spiro Sovereign Strategy in London. “The most salutary effect of the ECB’s rate cuts lies in its impact on the single currency itself. A weaker euro is just what the doctor ordered to help the sickly euro-zone economy in the absence of bolder measures to help stimulate activity.”
Economic gloom seen pushing ECB to cut rates
(Reuters) - The European Central Bank is widely expected to cut borrowing costs to a record low on Thursday to support a deteriorating euro zone economy and complement measures agreed by government leaders last week to tackle the bloc's debt crisis.
Economic surveys released on Wednesday suggested even euro zone powerhouse Germany is entering a modest downturn and investors want the ECB to take action. The consensus forecast is for a 1/4-percentage point cut in its main interest rate.
The ECB's policymaking Governing Council began meeting at 3 a.m. EDT, with financial markets steady ahead of the decision on interest rates, which the bank will announce at 7.45 a.m. EDT. ECB President Mario Draghi then holds a news conference at 8.30 a.m. EDT.
The central bank is under pressure from investors and even the International Monetary Fund to take bold measures, with IMF Managing Director Christine Lagarde urging the bank to resume its purchases of government bonds - an unlikely scenario.
The ECB's main refinancing rate is already at a record low of 1.0 percent, and 48 of 71 economists in a Reuters poll expect the bank to cut it further, most of them by 25 basis points to 0.75 percent. Some others see a larger decrease.
An interest rate cut is not seen as a panacea for the euro zone's problems, which stem from a loss of confidence in state and bank finances, but a reduction in borrowing costs would show the ECB is ready to breathe life into the flagging economy.
"It's not so much about the real effect that (a rate cut) will have," said Nordea analyst Aurelija Augulyte. "It's more a psychological game, a game of trying to be supportive of sentiment."
There is only a slim chance the ECB will offer a repeat of the twin 3-year ultra-cheap loans with which it funneled over 1 trillion euros to banks in December and February. But the ECB could cut the deposit rate it pays banks for parking money with it overnight and which acts as a floor for the money market.
IMF ADVICE
The IMF on Tuesday publicly questioned the wisdom of cutting rates further and urged the ECB to buy the bonds of distressed euro zone countries. ECB policymakers are unlikely to heed this advice, however, with Executive Board member Peter Praet having offered the clearest signal that the bank will cut rates.
"There is no doctrine that interest rates cannot fall below 1 percent," he said on June 27. Rate cuts "are justified if they contribute to guaranteeing price stability in the medium term."
Furthermore, a core of ECB policymakers feel the bank's bond buying program - dormant for four months - amounts to monetary financing of governments, which is beyond the ECB mandate.
Easing price pressures give the ECB far clearer cover to cut interest rates, backing up the summit deal last week when government leaders agreed to let the euro zone's rescue fund inject aid directly into banks and intervene on bond markets.
While inflation remains above the ECB's target of just below 2 percent, it has been sliding recently and ECB staff expect it to average 1.6 percent next year, giving room for a rate cut.
Business surveys released on Wednesday strengthened the case for a cut, showing the euro zone's private sector downturn eased only slightly in June and that it remains in recessionary territory.
A cut would be welcomed by the southern European banks that have tapped the ECB heavily for loans. A 25-basis-point cut would decrease annual interest payments from the 1 trillion euros in 3-year loans by about 2.5 billion euros.
"Given the banks' reliance on (such) funds, that will produce a very immediate injection into the financial system," Lena Komileva at G+ Economics said.
DEPOSIT RATE
In addition to the main refinancing rate, analysts are eager to see whether, and by how much, the ECB cuts its deposit rate, which acts as a floor for the money market.
A cut to as low as zero - from 0.25 percent now - could encourage banks to lend to each other rather than simply parking funds of up to 800 billion euros back at the ECB every night.
However, a deposit rate of zero could hamper the functioning of the money market as costs would exceed returns.
And, even with the deposit rate at zero, "good banks don't want to lend to insolvent banks," Nordea's Augulyte said, adding she expected a 15 basis point cut, to 0.1 percent.
In a Reuters poll, money market traders were evenly split between cutting and holding the rate.
The ECB is unlikely to announce any further "non-standard measures" - bond purchases or ultra-long loans - after already loosening its lending rules on June 22. It will want to see the impact of that step before tweaking the framework.
ECB President Mario Draghi will be quizzed on how firm the central bank's opposition is to reactivating its bond buy program, and whether it could change its mind regarding giving the ESM bailout fund the option to tap ECB funds.
While the ECB is not ready to announce that the SMP bond program is officially over, it has become clear that the purchases would be restarted only in an absolute emergency.
"The bond buying program is in a deep sleep, and it will remain there," ECB Governing Council member Klaas Knot said in a magazine interview released on Wednesday.
Less clear is what Draghi will say about giving the euro zone's ESM permanent bailout fund a banking license, which would allow it to exponentially increase its firepower from the planned 500 billion euros.
Some analysts see the ECB changing its course on ESM as the best option to quell the debt crisis.
"I think it's easier for the ECB and the Bundesbank to change their minds regarding the ESM than to reactivate the SMP program," said Natixis economist Sylvain Broyer.
"We will at some point have to buy sovereign debt en masse, and it would be cleverer to let the ESM do it."
From Reuters
Economic surveys released on Wednesday suggested even euro zone powerhouse Germany is entering a modest downturn and investors want the ECB to take action. The consensus forecast is for a 1/4-percentage point cut in its main interest rate.
The ECB's policymaking Governing Council began meeting at 3 a.m. EDT, with financial markets steady ahead of the decision on interest rates, which the bank will announce at 7.45 a.m. EDT. ECB President Mario Draghi then holds a news conference at 8.30 a.m. EDT.
The central bank is under pressure from investors and even the International Monetary Fund to take bold measures, with IMF Managing Director Christine Lagarde urging the bank to resume its purchases of government bonds - an unlikely scenario.
The ECB's main refinancing rate is already at a record low of 1.0 percent, and 48 of 71 economists in a Reuters poll expect the bank to cut it further, most of them by 25 basis points to 0.75 percent. Some others see a larger decrease.
An interest rate cut is not seen as a panacea for the euro zone's problems, which stem from a loss of confidence in state and bank finances, but a reduction in borrowing costs would show the ECB is ready to breathe life into the flagging economy.
"It's not so much about the real effect that (a rate cut) will have," said Nordea analyst Aurelija Augulyte. "It's more a psychological game, a game of trying to be supportive of sentiment."
There is only a slim chance the ECB will offer a repeat of the twin 3-year ultra-cheap loans with which it funneled over 1 trillion euros to banks in December and February. But the ECB could cut the deposit rate it pays banks for parking money with it overnight and which acts as a floor for the money market.
IMF ADVICE
The IMF on Tuesday publicly questioned the wisdom of cutting rates further and urged the ECB to buy the bonds of distressed euro zone countries. ECB policymakers are unlikely to heed this advice, however, with Executive Board member Peter Praet having offered the clearest signal that the bank will cut rates.
"There is no doctrine that interest rates cannot fall below 1 percent," he said on June 27. Rate cuts "are justified if they contribute to guaranteeing price stability in the medium term."
Furthermore, a core of ECB policymakers feel the bank's bond buying program - dormant for four months - amounts to monetary financing of governments, which is beyond the ECB mandate.
Easing price pressures give the ECB far clearer cover to cut interest rates, backing up the summit deal last week when government leaders agreed to let the euro zone's rescue fund inject aid directly into banks and intervene on bond markets.
While inflation remains above the ECB's target of just below 2 percent, it has been sliding recently and ECB staff expect it to average 1.6 percent next year, giving room for a rate cut.
Business surveys released on Wednesday strengthened the case for a cut, showing the euro zone's private sector downturn eased only slightly in June and that it remains in recessionary territory.
A cut would be welcomed by the southern European banks that have tapped the ECB heavily for loans. A 25-basis-point cut would decrease annual interest payments from the 1 trillion euros in 3-year loans by about 2.5 billion euros.
"Given the banks' reliance on (such) funds, that will produce a very immediate injection into the financial system," Lena Komileva at G+ Economics said.
DEPOSIT RATE
In addition to the main refinancing rate, analysts are eager to see whether, and by how much, the ECB cuts its deposit rate, which acts as a floor for the money market.
A cut to as low as zero - from 0.25 percent now - could encourage banks to lend to each other rather than simply parking funds of up to 800 billion euros back at the ECB every night.
However, a deposit rate of zero could hamper the functioning of the money market as costs would exceed returns.
And, even with the deposit rate at zero, "good banks don't want to lend to insolvent banks," Nordea's Augulyte said, adding she expected a 15 basis point cut, to 0.1 percent.
In a Reuters poll, money market traders were evenly split between cutting and holding the rate.
The ECB is unlikely to announce any further "non-standard measures" - bond purchases or ultra-long loans - after already loosening its lending rules on June 22. It will want to see the impact of that step before tweaking the framework.
ECB President Mario Draghi will be quizzed on how firm the central bank's opposition is to reactivating its bond buy program, and whether it could change its mind regarding giving the ESM bailout fund the option to tap ECB funds.
While the ECB is not ready to announce that the SMP bond program is officially over, it has become clear that the purchases would be restarted only in an absolute emergency.
"The bond buying program is in a deep sleep, and it will remain there," ECB Governing Council member Klaas Knot said in a magazine interview released on Wednesday.
Less clear is what Draghi will say about giving the euro zone's ESM permanent bailout fund a banking license, which would allow it to exponentially increase its firepower from the planned 500 billion euros.
Some analysts see the ECB changing its course on ESM as the best option to quell the debt crisis.
"I think it's easier for the ECB and the Bundesbank to change their minds regarding the ESM than to reactivate the SMP program," said Natixis economist Sylvain Broyer.
"We will at some point have to buy sovereign debt en masse, and it would be cleverer to let the ESM do it."
From Reuters
Cyprus plays off EU and Russia as it bids for financial aid
(Reuters) - Cyprus's president played up his close ties with Russia on Thursday, saying he was hoping to secure more financial support from Moscow as well as from the European Union as he bids to keep the island economy from collapsing.
Demetris Christofias, who was educated in Moscow and is the EU's only communist head of state or government, dismissed suggestions that his tight relations with Russia could damage his ties within Europe and said it was perfectly normal for a country to look to all its allies for help.
"We need money to develop our economy and we need money to recapitalize our banks," he told Brussels-based reporters on a visit to Cyprus as it begins its six-month presidency of the EU.
"The Russians, as good friends of Cyprus, want to take care of us," he said, adding that he was prepared to take money from both Moscow and his partners in the euro zone if it would help put the island's small and vulnerable economy back on track.
"We could combine both," he said when asked if he would rather take aid from Russia or the European Union.
Cyprus's banking sector is under severe strain largely as a result of its exposure to the Greek economy, with at least two banks needing to be recapitalized as soon as possible.
Estimates from finance officials suggest the country, with an economy that generates a little over 17 billion euros in gross domestic product annually, may need 10 billion euros for its banking and financial sector alone.
Inspectors from the European Central Bank, the European Commission and the International Monetary Fund, together known as the 'troika', are in Cyprus this week to make a first assessment of its needs before any bailout is finalized.
But it is far from certain that Christofias, elected in 2008, will sign up to an EU/IMF package, particularly as it is likely to come with strict conditions, including demands for reforms to pensions policies and labor rules.
Cyprus has already received 2.5 billion euros from Russia, with the 4-1/2-year loans carrying an interest rate of 4.5 percent, but no other apparent conditions.
Loans extended by the EU/IMF to Greece, Ireland, Portugal and in the coming weeks Spain vary in their interest rates and repayment schedules but mostly cost less than 4.5 percent and can be repaid over a longer period of time.
Perhaps to put pressure on the EU and IMF to provide the best terms possible, Christofias is keeping his mind open.
"Both can be combined," he said of lending from Moscow or Brussels, smiling broadly. "Let's just hope we manage both."
SYRIA
Cyprus finds itself taking over the EU presidency, a largely ceremonial role but one that requires it to plan the bloc's agenda and chair many of its meetings, at a difficult time.
Not only is the economy teetering, but there are a range of geopolitical issues that have put the island in the spotlight.
The most pressing is Syria, with concerns among Western diplomats that Cyprus is being used by Russia as a shipment route to supply arms to the government of Bashar al-Assad.
Russia has not denied delivering arms to Syria, where it maintains a military base, but Christofias denied that Cyprus was used as a conduit.
"There are a lot of fairy tales circulating about Cyprus's role in shipments to Syria," he said.
"There is not a trace of truth that Russia is circulating arms through Cyprus in any direction."
During more than an hour of questioning, Christofias was at pains to describe Cyprus as a perfectly normal economy enduring short-term difficulty. Its biggest problem, he said, was the decades-long process of finding a solution to the dispute with the Turkish Cypriot north.
Glossy magazines in Cyprus portray the island as a Mediterranean paradise where the jet-set can invest in beachfront properties and enjoy a low-tax environment. Many Russians and other nationalities have taken up the invitation.
Despite the banking problems and the need for a bailout that is likely to total 60 percent of output, Cypriots appear keen to paint everything as normal. Moreover, the discovery of lucrative gas fields in their territorial waters could dramatically change fortunes in the years ahead.
In its in-flight magazine, Cyprus Airways is even running an item about how the airline is collecting clothes, shoes, blankets and food to help impoverished Greeks.
From Reuters
Demetris Christofias, who was educated in Moscow and is the EU's only communist head of state or government, dismissed suggestions that his tight relations with Russia could damage his ties within Europe and said it was perfectly normal for a country to look to all its allies for help.
"We need money to develop our economy and we need money to recapitalize our banks," he told Brussels-based reporters on a visit to Cyprus as it begins its six-month presidency of the EU.
"The Russians, as good friends of Cyprus, want to take care of us," he said, adding that he was prepared to take money from both Moscow and his partners in the euro zone if it would help put the island's small and vulnerable economy back on track.
"We could combine both," he said when asked if he would rather take aid from Russia or the European Union.
Cyprus's banking sector is under severe strain largely as a result of its exposure to the Greek economy, with at least two banks needing to be recapitalized as soon as possible.
Estimates from finance officials suggest the country, with an economy that generates a little over 17 billion euros in gross domestic product annually, may need 10 billion euros for its banking and financial sector alone.
Inspectors from the European Central Bank, the European Commission and the International Monetary Fund, together known as the 'troika', are in Cyprus this week to make a first assessment of its needs before any bailout is finalized.
But it is far from certain that Christofias, elected in 2008, will sign up to an EU/IMF package, particularly as it is likely to come with strict conditions, including demands for reforms to pensions policies and labor rules.
Cyprus has already received 2.5 billion euros from Russia, with the 4-1/2-year loans carrying an interest rate of 4.5 percent, but no other apparent conditions.
Loans extended by the EU/IMF to Greece, Ireland, Portugal and in the coming weeks Spain vary in their interest rates and repayment schedules but mostly cost less than 4.5 percent and can be repaid over a longer period of time.
Perhaps to put pressure on the EU and IMF to provide the best terms possible, Christofias is keeping his mind open.
"Both can be combined," he said of lending from Moscow or Brussels, smiling broadly. "Let's just hope we manage both."
SYRIA
Cyprus finds itself taking over the EU presidency, a largely ceremonial role but one that requires it to plan the bloc's agenda and chair many of its meetings, at a difficult time.
Not only is the economy teetering, but there are a range of geopolitical issues that have put the island in the spotlight.
The most pressing is Syria, with concerns among Western diplomats that Cyprus is being used by Russia as a shipment route to supply arms to the government of Bashar al-Assad.
Russia has not denied delivering arms to Syria, where it maintains a military base, but Christofias denied that Cyprus was used as a conduit.
"There are a lot of fairy tales circulating about Cyprus's role in shipments to Syria," he said.
"There is not a trace of truth that Russia is circulating arms through Cyprus in any direction."
During more than an hour of questioning, Christofias was at pains to describe Cyprus as a perfectly normal economy enduring short-term difficulty. Its biggest problem, he said, was the decades-long process of finding a solution to the dispute with the Turkish Cypriot north.
Glossy magazines in Cyprus portray the island as a Mediterranean paradise where the jet-set can invest in beachfront properties and enjoy a low-tax environment. Many Russians and other nationalities have taken up the invitation.
Despite the banking problems and the need for a bailout that is likely to total 60 percent of output, Cypriots appear keen to paint everything as normal. Moreover, the discovery of lucrative gas fields in their territorial waters could dramatically change fortunes in the years ahead.
In its in-flight magazine, Cyprus Airways is even running an item about how the airline is collecting clothes, shoes, blankets and food to help impoverished Greeks.
From Reuters
Former IMF-chief Rodrigo Rato faces court probe
Rodrigo Rato, former head of the IMF and once a powerful economy minister, has suffered a steep fall from grace that mirrors Spain's own fate in the euro zone debt crisis.
Rodrigo, an urbane and internationally known official with huge prestige inside the ruling centre-right People's Party, is now under investigation for fraud and other possible crimes in connection with his role during the fall of Spanish bank Bankia (BKIA.MC).
Once seen as a possible prime minister and lauded by conservatives as the pragmatic architect of Spain's economic revival in the mid-1990s when he was economy minister, Rato is now the focus of deep public anger at banks, who are at the core of Spain's economic crisis.
Prime Minister Mariano Rajoy forced Rato, 63, from the helm of Bankia in May, just before the bank was nationalized and became the biggest-ever failed Spanish lender. Bailing it out could cost as much as 23.5 billion euros ($29 billion).
Spain's banks are blamed for the crisis in the euro zone's fourth biggest economy, after a rash of reckless lending during a 10-year property boom that collapsed in 2008.
Spain's High Court on Wednesday opened a judicial investigation into Bankia executives including Rato, who led the bank when it went public last year. Fraud, price-fixing and falsifying accounts are among the accusations.
The face of the once-respected minister is on stickers pasted on cash machines by protesters, and on posters waved at marches demanding accountability after seven lenders were rescued with state funds at a time when the economy is in recession and one in four workers is jobless.
Balding Rato, a yoga enthusiast, is revered within the People's Party for his role in turning a large fiscal deficit into a small surplus during his term as economy minister for the PP government between 1996 and 2004.
It was one of his former juniors in the ministry, current Economy Minister Luis de Guindos, who decided with Rajoy that Rato must leave Bankia.
Even though he was pushed off the stage, political analysts say Rato maintains huge clout in the party, and is still seen as a threat by those now in government because he retains enough support to engineer a comeback.
"SACRED COW"
"Rato is a sacred cow in the PP. He represents a power group within the PP. He is so entrenched that no one would dare go against him, because to destroy Rato would be to destroy the whole myth of the 1996 economic miracle," said Jose Ignacio Torreblanca, head of the European Council on Foreign Relations in Madrid.
With an MBA from the University of California, Berkeley, and a member of a wealthy, entrepreneurial family in the north of Spain, Rato is an advocate of budgetary discipline.
He openly aspired to head the PP into the 2004 elections, but then-Prime Minister Jose Maria Aznar picked another longtime member of his cabinet, Rajoy, as his successor.
Rato, sharp-tongued and serious, but renowned for a dry sense of humor, swallowed his disappointment and swore allegiance to Rajoy, playing a leading role in the campaign.
After the conservatives' 2004 defeat, Rato, a fluent English speaker, was named managing director of the IMF, where he remained until 2007 when he left citing personal reasons.
Rato was named to head regional savings bank Caja Madrid in 2010, ending an 18-month battle between PP factions over control of the lender. After Caja Madrid was merged with six other savings banks to create Bankia, Rato went on to lead the new institution.
He was at the bank's helm when it completed a stock-market listing in July, 2011, as part of an effort by Spain to overhaul its financial system by forcing unlisted banks to recapitalize by raising private capital.
One of the reasons Rato is so unpopular now is because Bankia aggressively sold shares through its huge branch network around Spain. More than 400,000 small investors, many of them elderly, bought shares that later lost almost all their value.
The bank, formed from the merger of seven regional lenders, raised 3.1 billion euros at an initial price of 3.75 euro per share and Rato applauded the issue's success in the "middle of a real storm in the market."
The share price was 2.375 euros a share by the time he stepped down and fell to just under a euro a share by Wednesday.
Rato, who is married with three children, earned 2.4 million euros last year, according to bank records, and was reportedly deeply upset by the Bankia takeover. He has since rarely been seen in public.
Rodrigo, an urbane and internationally known official with huge prestige inside the ruling centre-right People's Party, is now under investigation for fraud and other possible crimes in connection with his role during the fall of Spanish bank Bankia (BKIA.MC).
Once seen as a possible prime minister and lauded by conservatives as the pragmatic architect of Spain's economic revival in the mid-1990s when he was economy minister, Rato is now the focus of deep public anger at banks, who are at the core of Spain's economic crisis.
Prime Minister Mariano Rajoy forced Rato, 63, from the helm of Bankia in May, just before the bank was nationalized and became the biggest-ever failed Spanish lender. Bailing it out could cost as much as 23.5 billion euros ($29 billion).
Spain's banks are blamed for the crisis in the euro zone's fourth biggest economy, after a rash of reckless lending during a 10-year property boom that collapsed in 2008.
Spain's High Court on Wednesday opened a judicial investigation into Bankia executives including Rato, who led the bank when it went public last year. Fraud, price-fixing and falsifying accounts are among the accusations.
The face of the once-respected minister is on stickers pasted on cash machines by protesters, and on posters waved at marches demanding accountability after seven lenders were rescued with state funds at a time when the economy is in recession and one in four workers is jobless.
Balding Rato, a yoga enthusiast, is revered within the People's Party for his role in turning a large fiscal deficit into a small surplus during his term as economy minister for the PP government between 1996 and 2004.
It was one of his former juniors in the ministry, current Economy Minister Luis de Guindos, who decided with Rajoy that Rato must leave Bankia.
Even though he was pushed off the stage, political analysts say Rato maintains huge clout in the party, and is still seen as a threat by those now in government because he retains enough support to engineer a comeback.
"SACRED COW"
"Rato is a sacred cow in the PP. He represents a power group within the PP. He is so entrenched that no one would dare go against him, because to destroy Rato would be to destroy the whole myth of the 1996 economic miracle," said Jose Ignacio Torreblanca, head of the European Council on Foreign Relations in Madrid.
With an MBA from the University of California, Berkeley, and a member of a wealthy, entrepreneurial family in the north of Spain, Rato is an advocate of budgetary discipline.
He openly aspired to head the PP into the 2004 elections, but then-Prime Minister Jose Maria Aznar picked another longtime member of his cabinet, Rajoy, as his successor.
Rato, sharp-tongued and serious, but renowned for a dry sense of humor, swallowed his disappointment and swore allegiance to Rajoy, playing a leading role in the campaign.
After the conservatives' 2004 defeat, Rato, a fluent English speaker, was named managing director of the IMF, where he remained until 2007 when he left citing personal reasons.
Rato was named to head regional savings bank Caja Madrid in 2010, ending an 18-month battle between PP factions over control of the lender. After Caja Madrid was merged with six other savings banks to create Bankia, Rato went on to lead the new institution.
He was at the bank's helm when it completed a stock-market listing in July, 2011, as part of an effort by Spain to overhaul its financial system by forcing unlisted banks to recapitalize by raising private capital.
One of the reasons Rato is so unpopular now is because Bankia aggressively sold shares through its huge branch network around Spain. More than 400,000 small investors, many of them elderly, bought shares that later lost almost all their value.
The bank, formed from the merger of seven regional lenders, raised 3.1 billion euros at an initial price of 3.75 euro per share and Rato applauded the issue's success in the "middle of a real storm in the market."
The share price was 2.375 euros a share by the time he stepped down and fell to just under a euro a share by Wednesday.
Rato, who is married with three children, earned 2.4 million euros last year, according to bank records, and was reportedly deeply upset by the Bankia takeover. He has since rarely been seen in public.
Obama urges immigration reform at July 4 citizen ceremony
President Barack Obama used an Independence Day ceremony in which immigrants serving in the U.S. military became citizens on Wednesday to renew his election-year call for new immigration laws popular with an important part of his political base.
Wearing a red tie to celebrate the July 4th holiday at the White House, Obama addressed about two dozen foreign-born military personnel who were taking advantage of a program that offers them citizenship in return for their service.
Obama, who is running for re-election in November, seized the opportunity to talk up his recent order lifting the threat of deportation for hundreds of thousands of illegal immigrants who came to the United States as children.
The move appealed to Hispanic voters, a major voting bloc that could swing the election to the Democratic incumbent in battleground states such as Nevada and Colorado.
"What a perfect way to celebrate America's birthday - the world's oldest democracy - with some of our newest citizens," Obama told the group of military members and their families, who came from countries including Mexico, Ghana, the Philippines, Bolivia, Guatemala, and Russia.
"You put on the uniform of a country that was not yet fully your own. In a time of war, some of you deployed into harm's way. You displayed the values that we celebrate every Fourth of July - duty, responsibility, and patriotism," Obama said.
Immigrants must come to the United States legally to enlist in the military.
The issue of immigration has become a flash point in Obama's battle with Republican presidential candidate Mitt Romney to win the White House on November 6.
Romney, the former governor of Massachusetts, has advocated a program of self-deportation for illegal immigrants, a proposal that has not gone over well with Hispanics. He accused Obama of being politically motivated with his move last month to give work permits to children of illegal immigrants, but he declined to say he would repeal the policy if elected.
APPEAL TO HISPANICS
Obama holds a huge lead in polls over Romney among Latinos, though many are disappointed that he has not delivered on a promise to overhaul the U.S. immigration system.
"Just as we remain a nation of laws, we have to remain a nation of immigrants," Obama said.
"That's why as another step forward we're lifting the shadow of deportation ... from deserving young people who were brought to this country as children."
Obama's order, issued on June 15, circumvented Congress after it failed to pass legislation known as the DREAM Act, which would have helped address the issue of children who came to the country with their parents illegally and faced deportation.
"It's why we still need a Dream Act: to keep talented young people who want to contribute to our society and serve our country," he said. "It's why we need - why America's success demands - comprehensive immigration reform."
U.S. Homeland Security Secretary Janet Napolitano, wearing a bright red blazer, administered the oath of allegiance to the men and women standing under glittering chandeliers in the White House East Room.
Similar naturalization ceremonies for active-duty military personnel were held throughout the country.
Back at the White House, the South Lawn was decked out in red-white-and-blue bunting and paper lanterns for an annual Fourth of July picnic honoring military service personnel and their families.
Later Obama, accompanied by his wife, Michelle, addressed the military men and women and their families gathered behind the White House, and he managed to get in another talking point from his re-election campaign: a reference to his promise to end the war in Iraq started by his predecessor, George W. Bush.
"Because of your service and sacrifice, all of our troops are now out of Iraq," Obama said. "Because of your service and sacrifice, we took the fight to al Qaeda and we brought Osama bin Laden to justice."
Obama leaves for a two day campaign bus tour of Ohio and Pennsylvania on Thursday.
From bloomberg
Wearing a red tie to celebrate the July 4th holiday at the White House, Obama addressed about two dozen foreign-born military personnel who were taking advantage of a program that offers them citizenship in return for their service.
Obama, who is running for re-election in November, seized the opportunity to talk up his recent order lifting the threat of deportation for hundreds of thousands of illegal immigrants who came to the United States as children.
The move appealed to Hispanic voters, a major voting bloc that could swing the election to the Democratic incumbent in battleground states such as Nevada and Colorado.
"What a perfect way to celebrate America's birthday - the world's oldest democracy - with some of our newest citizens," Obama told the group of military members and their families, who came from countries including Mexico, Ghana, the Philippines, Bolivia, Guatemala, and Russia.
"You put on the uniform of a country that was not yet fully your own. In a time of war, some of you deployed into harm's way. You displayed the values that we celebrate every Fourth of July - duty, responsibility, and patriotism," Obama said.
Immigrants must come to the United States legally to enlist in the military.
The issue of immigration has become a flash point in Obama's battle with Republican presidential candidate Mitt Romney to win the White House on November 6.
Romney, the former governor of Massachusetts, has advocated a program of self-deportation for illegal immigrants, a proposal that has not gone over well with Hispanics. He accused Obama of being politically motivated with his move last month to give work permits to children of illegal immigrants, but he declined to say he would repeal the policy if elected.
APPEAL TO HISPANICS
Obama holds a huge lead in polls over Romney among Latinos, though many are disappointed that he has not delivered on a promise to overhaul the U.S. immigration system.
"Just as we remain a nation of laws, we have to remain a nation of immigrants," Obama said.
"That's why as another step forward we're lifting the shadow of deportation ... from deserving young people who were brought to this country as children."
Obama's order, issued on June 15, circumvented Congress after it failed to pass legislation known as the DREAM Act, which would have helped address the issue of children who came to the country with their parents illegally and faced deportation.
"It's why we still need a Dream Act: to keep talented young people who want to contribute to our society and serve our country," he said. "It's why we need - why America's success demands - comprehensive immigration reform."
U.S. Homeland Security Secretary Janet Napolitano, wearing a bright red blazer, administered the oath of allegiance to the men and women standing under glittering chandeliers in the White House East Room.
Similar naturalization ceremonies for active-duty military personnel were held throughout the country.
Back at the White House, the South Lawn was decked out in red-white-and-blue bunting and paper lanterns for an annual Fourth of July picnic honoring military service personnel and their families.
Later Obama, accompanied by his wife, Michelle, addressed the military men and women and their families gathered behind the White House, and he managed to get in another talking point from his re-election campaign: a reference to his promise to end the war in Iraq started by his predecessor, George W. Bush.
"Because of your service and sacrifice, all of our troops are now out of Iraq," Obama said. "Because of your service and sacrifice, we took the fight to al Qaeda and we brought Osama bin Laden to justice."
Obama leaves for a two day campaign bus tour of Ohio and Pennsylvania on Thursday.
From bloomberg
Euro, sterling on defensive as central bank action eyed
The euro wallowed near one-week lows on Thursday, struggling to find any traction ahead of a widely expected interest rate cut by the European Central Bank.
The single currency traded at $1.2522 early in Asia, having fallen around 0.7 percent on Wednesday in trading made subdued by a U.S. holiday. Surveys showing all of Europe's biggest economies are in recession or heading there added to the gloom.
Support is seen around $1.2495, the 76.4 percent retracement of Friday's dramatic rally sparked by an EU deal to tackle the region's debt crisis.
Traders said part of the euro's weakness overnight was due to heavy selling against the Swedish crown, which surged to an 11-1/2 year high after the Swedish central bank kept interest rates on hold at 1.5 percent.
Traders said the absence of stronger hints on future rate cuts by the Riksbank saw the crown squeeze higher, pushing the euro down some 1 percent to as far as 8.6495 crowns, lows not seen since late 2000.
The euro also lost ground on the yen, slipping to 100.06 from Wednesday's session high of 100.65. It hit a fresh all-time low on the New Zealand currency at NZ$1.5541. Softness in the single currency saw the dollar index .DXY bounce to 82.199, off Friday's trough of 81.430.
Against the yen, the greenback held firm at 79.92, continuing to slowly recover from a low of 79.08 set last Friday.
With expectations mounting that the ECB, Federal Reserve and also the Bank of England will have to do more to stimulate their respective economies, the market continued to favor high-beta currencies.
The Australian dollar, already lifted by upbeat retail sales data on Wednesday, was at $1.0270, having climbed as high as $1.0320 -- its best level since early May.
The ECB is due to announce its decision at 1145 GMT, followed by a news conference at 1230 GMT. A Reuters poll of economists showed the majority expect the ECB to cut its main rate by 25 basis points to 0.75 percent. They were evenly split on whether the ECB will lower its deposit rate.
A reactivation of the ECB's bond-buy plan, however, is seen unlikely for now, although it is the tool many investors would like it to use to cap the bond yields of countries embroiled in the euro zone crisis.
Barclays Capital analysts expect the ECB to lower its main rate by a more aggressive 50 basis points and see a quarter point cut as well to the deposit rate to zero.
"We suggest that selling the EUR and buying a relatively 'high beta' currency, such as the AUD, would perform well in light of a more aggressive ECB response to the problems," they wrote in a note.
The BOE is expected to launch a third round of monetary stimulus as it moved to counter a recession and the effects of a worsening debt crisis in the euro zone.
That is weighing on sterling, which has fallen to $1.5592, down more than a full U.S. cent from Friday's peak.
From reuters
The single currency traded at $1.2522 early in Asia, having fallen around 0.7 percent on Wednesday in trading made subdued by a U.S. holiday. Surveys showing all of Europe's biggest economies are in recession or heading there added to the gloom.
Support is seen around $1.2495, the 76.4 percent retracement of Friday's dramatic rally sparked by an EU deal to tackle the region's debt crisis.
Traders said part of the euro's weakness overnight was due to heavy selling against the Swedish crown, which surged to an 11-1/2 year high after the Swedish central bank kept interest rates on hold at 1.5 percent.
Traders said the absence of stronger hints on future rate cuts by the Riksbank saw the crown squeeze higher, pushing the euro down some 1 percent to as far as 8.6495 crowns, lows not seen since late 2000.
The euro also lost ground on the yen, slipping to 100.06 from Wednesday's session high of 100.65. It hit a fresh all-time low on the New Zealand currency at NZ$1.5541. Softness in the single currency saw the dollar index .DXY bounce to 82.199, off Friday's trough of 81.430.
Against the yen, the greenback held firm at 79.92, continuing to slowly recover from a low of 79.08 set last Friday.
With expectations mounting that the ECB, Federal Reserve and also the Bank of England will have to do more to stimulate their respective economies, the market continued to favor high-beta currencies.
The Australian dollar, already lifted by upbeat retail sales data on Wednesday, was at $1.0270, having climbed as high as $1.0320 -- its best level since early May.
The ECB is due to announce its decision at 1145 GMT, followed by a news conference at 1230 GMT. A Reuters poll of economists showed the majority expect the ECB to cut its main rate by 25 basis points to 0.75 percent. They were evenly split on whether the ECB will lower its deposit rate.
A reactivation of the ECB's bond-buy plan, however, is seen unlikely for now, although it is the tool many investors would like it to use to cap the bond yields of countries embroiled in the euro zone crisis.
Barclays Capital analysts expect the ECB to lower its main rate by a more aggressive 50 basis points and see a quarter point cut as well to the deposit rate to zero.
"We suggest that selling the EUR and buying a relatively 'high beta' currency, such as the AUD, would perform well in light of a more aggressive ECB response to the problems," they wrote in a note.
The BOE is expected to launch a third round of monetary stimulus as it moved to counter a recession and the effects of a worsening debt crisis in the euro zone.
That is weighing on sterling, which has fallen to $1.5592, down more than a full U.S. cent from Friday's peak.
From reuters
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