ECB's Coeure warns against betting on euro collapse

The euro zone political commitment to the euro should not be underestimated, European Central Bank Executive Board member Benoit Coeure said on Friday in a warning to those doubting the single currency's survival.

In a speech in Mexico City, Coeure said there was a lack of understanding about the euro zone's approach to tackling the debt crisis and that he disagreed with those who said the bloc did not have the right tools to fix the situation.

"I would caution those who have doubts about the euro, that they underestimate the political commitment to it at their own risk," Coeure said.

"The ambition to provide long-term foundations for EMU in less than a decade is a historical step of great significance," he added.

He added that the euro zone would remain a cornerstone of the international economy and that euro zone leaders had "clearly understood that the time of partial solutions and piecemeal reform is over".

He underscored the bloc's decision to give the ESM permanent bailout fund the ability to capitalize banks directly, a move he described as "crucial to break the vicious circle between banks and sovereigns that is at the heart of the crisis".

In addition he said short-term measures were clearly needed to help growth and soften the blow from austerity.

IMF economist accuses Fund of suppressing information

A veteran economist at the International Monetary Fund has accused the global lender of suppressing information on difficulties in dealing with the global financial meltdown and euro zone crisis.

In a resignation letter to the IMF's board and senior staff, dated June 18, Peter Doyle said the IMF's failures in issuing timely warnings for both the 2007-2009 global financial crisis and the euro zone crisis were a "failing in the first order" and "are, if anything, becoming more deeply entrenched."

His letter, a copy of which was seen by Reuters, has brought to light simmering tensions within the IMF over the Fund's credibility, which many worry is threatened by its role in the euro zone crisis.

IMF insiders, who asked not to be identified, told Reuters the concerns are that the Fund has over-stretched by lending to Europe without exercising the same level of independence it would normally apply in bailouts to emerging economies.

Doyle, a division chief for Sweden, Denmark and Israel in the IMF's European Department when he resigned, also accused the Fund's leadership of being "tainted" by a selection process which always ensures that a European is at the helm.

He said the IMF had been "playing catch-up and reactive roles in the last-ditch efforts to save" the euro zone from the "brink." The IMF is part of a "troika" of international lenders, including the European Commission and European Central Bank, involved in rescue loans to Greece, Ireland and Portugal.

Doyle, who has worked for the IMF for 20 years, said the appointments of the Fund's heads over the past decade "have all-too-evidently been disastrous."

"Even the current incumbent is tainted, as neither her gender, integrity or élan can make up for the fundamental illegitimacy of the selection process," Doyle said of Christine Lagarde's appointment last year as first female head of the IMF.

To be fair, the IMF has acknowledged some of the failures cited by Doyle in reports in 2009 and in 2011 that honed in on mistakes in spotting the roots of the global financial crisis and for not going far enough in warnings to policymakers of the impending crisis.

"Peter's remarks are well documented in the public record, including reports issued by the Independent Evaluation Office, via the triennial review of surveillance, and in many statements by the managing director, including on the findings in these various reports," said IMF spokesman William Murray.

"We have no evidence his views were suppressed, nor (that) any views were suppressed," he added.

The last three heads of the IMF have all resigned before the end of their terms. Horst Koehler stepped down suddenly in 2004 to run for president of Germany. His successor and former Spanish finance minister Rodrigo Rato unexpectedly resigned halfway through his term in 2007 to return to Spain.

Dominique Strauss-Kahn, the former French finance minister, quit last year after he was arrested in May 2011 for alleged criminal sexual assault and attempted rape of a hotel maid, which he denied. Charges have since been dropped.

Strauss-Kahn's push for an IMF role in the euro zone, including approval of big bailouts for Greece and Ireland, and more flexible IMF conditions, caused tensions with some members of the IMF board.

Despite their concerns, many acknowledged that the IMF's involvement was necessary to ensure stability of the global financial system.

Lagarde's appointment just over a year ago followed a hard-fought battle between Europe and emerging economies fed up with the tradition of the head of the IMF always being a European, while the top job at the World Bank has gone to Americans.

"There is certainly a concern that the MD is more a politician than an economist and that she can be swayed by those close to her," one insider said. "But she is certainly seen as a powerful messenger for the Fund's position."

ECB's Coeure says negative bank deposit rate an option

Cutting the deposit rate the European Central Bank offers lenders in the euro zone below zero is an option, ECB Executive Board Member Benoit Coeure said on Friday.

The ECB cut its main interest rate early this month by a quarter percentage point to a record low of 0.75 percent and reduced the deposit rate it pays banks for parking money with it overnight to zero in an effort to boost the flagging euro zone economy.

Speaking in Mexico, Coeure said the bank needed to take the rate down 25 basis points to zero to match its cut in the reference rate.

He said policymakers would need to consider whether it could take the deposit rate below zero, which would mean the central bank would start charging banks for the privilege of parking spare cash in the ECB.

"It's still possible," Coeure told students at an event in Mexico City. "It's true that we are hitting a psychological limit at zero. And it's unclear whether markets can function at negative interest rates. Some of them can."

"Some of them apparently can't. So before making the next step, which would be moving the deposit facility to a negative yield, we'll reflect about it," he added.

Denmark introduced a negative interest rate this month and the ECB is watching closely how the move plays out.

Global markets were roiled on Friday by concerns Spain may need a full-blown sovereign bailout after its heavily indebted eastern region of Valencia said it would need financial help from Madrid.

The euro slumped broadly on Friday, setting a two-year low against the dollar while weakening to record levels against other currencies.

NO SUPER STATE

Asked how far the euro zone would integrate its finances to defend the single currency, Coeure said the bloc would have "more shared sovereignty" in future but would not go all the way toward creating what he termed a "kind of super state."

Coeure was also asked how he regarded the global economic outlook, and offered a downbeat view of events. Europe may be sliding back into its second recession since 2009 and growth is also slowing in the United States and China.

"I don't think we are moving toward a global recession; we are moving toward very low growth or no growth at all," he said.

In an earlier event on Friday, Coeure said there was a lack of understanding about the euro zone's approach to tackling the region's debt crisis and that he disagreed with those who said the bloc did not have the right tools to fix the situation.

"I would caution those who have doubts about the euro, that they underestimate the political commitment to it at their own risk," he said. "The ambition to provide long-term foundations for (the monetary union) in less than a decade is a historical step of great significance."

He added that the euro zone would remain a cornerstone of the international economy and that euro zone leaders had "clearly understood that the time of partial solutions and piecemeal reform is over".

He underscored the bloc's decision to give the region's permanent bailout fund the ability to capitalize banks directly, a move he described as "crucial to break the vicious circle between banks and sovereigns that is at the heart of the crisis."

In addition he said short-term measures were clearly needed to help growth and soften the blow from austerity.

Indebted Valencia asks Spain government for help, markets jolted

Spain's heavily indebted eastern region of Valencia said on Friday it would need financial help from Madrid, spooking financial markets and complicating central government efforts to stave off a full-blown sovereign bailout.

On a tumultuous afternoon, the government also cut its economic forecast for 2013, indicating the country would stay mired in recession well into next year after a contraction expected at 1.5 percent in 2012.

Valencia, Spain's most indebted region alongside its northern neighbor Catalonia, sought help under an 18-billion-euros ($22.1 billion) program passed on Thursday and aimed at helping the autonomous regions which, together with local authorities, account for around half of all public spending.

"Valencia, like in other autonomous regions, is suffering the consequences of the liquidity shortage in markets due to the economic crisis," the regional government said in a statement.

The program is funded by the Spanish Treasury but the regions keep full responsibility over the debt.

The troubled regions, as well as a banking sector beset by a burst property bubble, have pushed Spain's borrowing costs to record highs and pushed the country closer to requiring a full-scale bailout.

Euro zone finance ministers approved the terms of a loan of up to 100 billion euros ($123 billion) for Spain to recapitalize its banks on Friday. The exact size of the support will only be determined in September.

But the Valencia announcement sent the risk premium on Spanish government debt to a euro-era high on Friday as its borrowing costs climbed to a record 7.29 percent, a level considered unsustainable, with little relief likely soon.

The euro fell as low as $1.2175, just above a two-year low of $1.2162 hit last week, while U.S. and European stocks also slid.

Despite its downgraded GDP forecasts the government confirmed its deficit objectives for 2012 and 2013 but did not release the details on how the efforts would be split between the regions and the central government this year.

It will use the new forecasts as a base to draw up the 2013 budget, for which the ceiling has been set at 127 billion euros compared to 119 billion euros in 2012.

FUNDING PRESSURE

Spain's regions, currently shut out of international debt markets, have been pushing for months for a financing mechanism to help them meet their financial obligations.

Jose Ciscar, the deputy regional head who made public Valencia's request, said it would now be in position to meet its financial obligations.

"This liquidity fund thus brings confidence," he said.

Valencia, which already used several government credit lines in the first half of the year to meet debt repayments, still needs to repay 2.85 billion euros by the end of the year.

Treasury Minister Cristobal Montoro said after a weekly cabinet meeting that the regional funding plan carried strict fiscal conditions that beneficiaries must meet while providing regular updates on its finances.

"The Valencian government will have an obligation to meet new conditions to gain access to this liquidity," he said, after first showing his surprise when asked about the request.

Montoro also announced that the costs of funding the country's debt were set to rise by 9.1 billion euros in 2013.

Spain, which on Thursday adopted most of the measures of a new package of spending cuts and tax hikes worth 65 billion euros, will next tap the markets next Tuesday when it sells three- and six-month bills. It will also sell three- to five-year bonds on August 2.

Several Spanish regions - some of them governed by the ruling People's Party - have rebelled against the latest cuts.

Catalonia, the Basques and Andalucia have also said they would not implement all the cuts because it would end up killing the public education and health systems they control.

Analysts believe most of the autonomous regions will miss their deficit target of 1.5 percent of the economic output this year.

The government last week asked at least eight of the 17 to revise their budget plans for 2012 to meet tough deficit goals and is now threatening a handful of them to take over their finances.

There are signs of growing discontent at the economic pain being heaped on the Spanish public. Hundreds of thousands of Spaniards marched against the centre-right government's latest measures on Thursday evening, following more than a week of demonstrations across the country.

Spain has raised 69 percent of its original medium- and long-term debt target of 85 billion euros for the year.

But the new deficit goals and the burden from the regions is expected to increase it by around 20 billion euros, putting more pressure on the country's credit rating which is already just one step away from junk territory.

($1 = 0.8156 euros)

Fed official highlights benefits of flexible QE: FT

An open-ended round of quantitative easing that could be adjusted to suit economic conditions should be considered if the Fed launches a fresh round of monetary stimulus, a top policy official in the Federal Reserve said in an interview with the Financial Times.

There is "pretty significant" downside risks to the U.S. economy from the euro zone crisis, John Williams, president of the Federal Reserve Bank of San Francisco, said in an interview with the Financial Times on Monday.

"The main benefit from my point of view is it will get the markets to stop focusing on the terminal date and also focusing on, ‘Oh, are they going to do QE3?'" he is quoted as saying.

If the Fed launched another round of quantitative easing, Williams said that buying mortgage-backed securities, rather than Treasuries, would be more advantageous.

"There's a lot more you can buy without interfering with market function and you maybe get a little more bang for the buck," he said.

He said the Bank of England's "funding for lending" scheme, which will provide cheap funding for British banks that increase their lending to households and businesses, would not work in the United States.

Williams is regarded as close to the center of gravity on the rate-setting Federal Open Market Committee, of which he is a voting member this year. The FOMC will conclude its next meeting on August 1.