Italy Bond Rating Cut by Moody’s on Contagion Risks

Italy’s bond rating was cut and its negative outlook reiterated by Moody’s Investors Service as the euro area’s third-biggest economy faces higher funding costs, slower growth, and contagion risk from Greece and Spain.

The ratings company lowered Italy’s government bond rating by two steps to Baa2 from A3 and said further downgrading is possible, according to a statement released in Frankfurt today. That’s two levels above junk and one above Spain, according to data compiled by Bloomberg.

“Italy’s near-term economic outlook has deteriorated, as manifest in both weaker growth and higher unemployment, which creates risk of failure to meet fiscal consolidation targets,” Moody’s said. “Failure to meet fiscal targets in turn could weaken market confidence further, raising the risk of a sudden stop in market funding.”

While Italy is on track to bring its budget deficit within the European Union limit this year, its 10-year bond yield has risen above 6 percent in recent weeks after Spain sought a bailout, fueling concern that Italy might be next. Italy had enjoyed a respite from the crisis after Prime Minister Mario Monti’s government took office in November and passed 20 billion euros ($24.4 billion) in austerity measures and overhauled the country’s pension system.
Currency Falls

The euro hovered near a two-year low after the downgrade. The 17-nation currency bought $1.2202 as of 2:57 p.m. in Tokyo, from $1.2203 yesterday in New York, when it touched $1.2167, the least since June 2010.

Moody’s also cited “increasingly fragile market confidence, contagion risk emanating from Greece and Spain and signs of an eroding non-domestic investor base.” The rating “could be downgraded further in the event there is additional material deterioration in the country’s economic prospects or difficulties in implementing reform,” it said.

Investors are paying less attention to the views of rating companies and relying more on their own analysis. After Moody’s downgraded the biggest Nordic banks in May, bond and share prices rose. Italian and Spanish borrowing costs plunged to the lowest in at least 11 months earlier this year as investors ignored Moody’s downgrades.

Italy, bearer of the euro’s second-biggest debt load relative to gross domestic product, yesterday sold 7.5 billion euros of Treasury bills. The country is scheduled to auction securities due between 2015 and 2023 today.
Reform Program

“The current government’s strong commitment to structural reforms and fiscal consolidation has moderated the downward pressure on Italy’s government bond rating,” Moody’s said. “Moody’s recognizes that the government has proposed, and is legislating, a reform program that has the potential to materially improve Italy’s longer-term growth and fiscal prospects.”

Italy will record a structural budget surplus, net of the economic cycle’s effects and one-time measures, of 0.5 percent of GDP in 2013, the International Monetary Fund said in a July 10 report. Still, with debt set to rise to 125.8 percent of GDP this year before peaking at 126.4 next year, Italy is struggling to shake off the risk of contagion.
Longer Contraction

The nation, whose growth has trailed the euro region average for more than a decade, “is expected to continue contracting through the year owing to tight financial conditions, the global slowdown and the needed fiscal consolidation,” the IMF said in the report, confirming its previous forecast of a 1.9 percent contraction this year and 0.3 percent in 2013.

Monti has been lobbying European partners to agree on a plan to give the region’s permanent bailout fund, or ESM, more leeway to buy the bonds of countries meeting their fiscal goals, such as Italy and Spain, in order to lower their borrowing costs.

Moody’s said that “the sovereign’s current Baa2 rating is supported by significant credit strengths relative to other euro-area peripheral economies.”

Italy’s unemployment rate exceeded 10 percent for a third straight month in May and retail sales in April dropped 6.8 percent from a year earlier, the biggest decline since at least January 2001, recent government reports have showed.

Italy’s long-term debt is rated A- by Fitch Ratings and BBB+ by Standard & Poor’s, according to data compiled by Bloomberg.

“Should Fitch cut Italy’s rating, it may trigger massive selling of the nation’s bonds by investors, including conservative Japanese pension funds and overseas money managers that have to sell based on credit ratings,” said Shinji Kunibe, chief portfolio manager for fixed-income investment in Tokyo at Nissay Asset Management Corp.

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Analysis: Penn State report may increase university's liability

A devastating report blaming Penn State and its top officials for covering up the sexual abuse of children by former assistant football coach Jerry Sandusky could increase the university's exposure to potentially huge civil damages, legal experts say.

Penn State, which reported $4.6 billion of revenue in its fiscal year ended in June 2011 and has an endowment topping $1.8 billion, has already been sued by at least one of Sandusky's accusers and others are expected to initiate litigation as well.

The 267-page report, overseen by former FBI Director Louis Freeh, will give them new ammunition to hold the university liable, said Andrew Stoltmann, a civil litigator based in Chicago. In other sex abuse scandals, notably the one that rocked the Catholic Church, such damning evidence of efforts to cover up wrongdoing has been hard to come by.

"You don't typically see a road map like this provided," said Stoltmann, who is not involved in the case.

Sandusky, 68, was convicted last month of sexually abusing 10 boys over 15 years and faces up to 373 years in prison. He filed his intent to appeal the conviction on Thursday.

The Freeh report, commissioned by Penn State, concluded that the school's leaders, including former President Graham Spanier and the late famed football coach Joe Paterno covered up years of abuse by Sandusky in an effort to preserve the university's reputation.

In response to the Freeh report, Karen Peetz, chair of Penn State's board of trustees, said the board "accepts full responsibility for the failures that occurred."

The report expanded on grand jury findings released in November that led to prosecutors filing sex abuse charges against Sandusky, as well as charges of perjury and failure to report suspected child abuse against former athletic director Tim Curley and finance official Gary Schultz.

One of Sandusky's accusers, Travis Weaver, used those grand jury findings as the basis for his November lawsuit against the university. Many of the claims were for negligence, which is a relatively easy claim to prove in court, and the Freeh report could help bolster stronger claims, said Marci Hamilton, a lawyer for Weaver.

"Intentional and reckless torts are harder to prove, but this report seems to indicate that the university engaged in both intentional and reckless disregard for the welfare of children," said Hamilton.

Hamilton cautioned that the report was not the final chapter of Penn State's liability. She noted that the report did not address the years between 1977, when Sandusky established the Second Mile, a charity he allegedly used to find his victims, to 1998.

"Pedophiles don't start abusing midlife," said Hamilton.

Nevertheless, she said the strong conclusions and evidence included in the Freeh report could open the university up to huge punitive damages, which juries can grant plaintiffs in an effort to deter others from similar conduct. Punitive damages can be multiples of compensatory damages that a jury awards.

SEVEN-FIGURE SETTLEMENTS?

Allowing a victim's case against Penn State to reach a jury would be dangerous for the university, suggested Paul Neale, CEO for DOAR Litigation Consulting, which provides litigation consulting services to universities. He said juries hold universities to high standards of care when victims are harmed on their premises.

"My sense is that Penn State would have to consider a valid settlement strategy," said Neale.

It is difficult to know exactly what Penn State's exposure is. Based on previous settlements involving the Catholic Church, Stoltmann said the university would have to shell out more than $100 million.

"For the credible claims, I think they'll be paying out seven-figure amounts," said Stoltmann.

After Sandusky was convicted last month, Penn State issued a statement indicating its plans to invite victims of Sandusky's abuse to participate in settlement discussions.

Some experts in sex abuse cases have suggested that Penn State should set up a victims' compensation fund that would be administered by an independent party and allow plaintiffs to settle claims quickly and privately. John Culhane, a professor at the Widener law school, said the Freeh report gave the university more incentive to settle cases privately.

"The alternative would be getting slammed not only with compensatory damages but also punitive damages," said Culhane.

Penn State has not announced the creation of a victims' compensation fund. It is also not clear if any of the victims would participate in it.

Hamilton, an attorney for victims, said that victims' funds had historically been inadequate. She also noted that any settlement discussions would have to take into account each victim's circumstances.

"There are varying degrees of abuse and the length of time of the harm," said Hamilton.

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ECB zero rate slashes banks' overnight deposits

The European Central Bank's move to cut its deposit rate to zero has had an instant impact with banks more than halving the amount of cash parked there overnight.

The central bank hopes its unprecedented move, which means banks will now get nothing if they park spare cash there, will nurture a return of more significant interbank lending by encouraging banks to look for more profitable options beyond the ECB.

Wednesday was the first day under the new set-up and figures published by the ECB on Thursday showed banks held 325 billion euros in the facility overnight, well down on both the 800 billion they left there the previous day and the 700 billion they deposited at the same point of the last reserves period in June.

The latter comparison is probably the best. At the start of monthly reserves cycles banks have more options to juggle their funding so their deposits at the ECB tend to dip before building back up through the month.

The decision by the ECB to cut its main refinancing rate to 0.75 percent and stop paying interest on overnight deposits - before the cut banks got 0.25 percent - is also one factor driving the euro to this week's two-year lows against the dollar. That weakness will aid euro zone firms by making their goods cheaper for foreign buyers.

ECB President Mario Draghi has said he expects the zero rate to have little impact on what banks and other investors do with their spare cash.

But last month the ECB's money market contact group -- a mix of around 20 top traders and a handful of top ECB experts -- warned that the move could hurt interbank trading, push banks out of Europe and further damage their profitability.

Some top money market funds have also said they have been rejecting new business since the cut, worried that they cannot provide returns for investors given the lack of a base premium on funds held with the euro zone's central bank.

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Stocks Fall on Growth Concern as Euro Drops; Bonds Rally

Global stocks slid for a seventh day, the longest slump since November, amid concern a faltering economic recovery will hurt corporate profits. The euro fell to a two-year low, the yen and dollar gained and government bond yields from Germany to South Korea fell to records.


The MSCI All-Country World Index lost 1 percent at 4 p.m. in New York and the Standard & Poor’s 500 Index slipped 0.5 percent, while rallies in Procter & Gamble Co. and Merck & Co. limited the Dow Jones Industrial Average’s drop. German two-year note yields fell to minus 0.042 percent and 10-year U.S. yields were within four basis points of the lowest ever. The yen rose against all 16 major peers and the dollar gained versus 13. Corn and wheat led commodities up as a drought threatens U.S. crops. Oil erased losses as the U.S. added sanctions against Iran.

Bank of America Corp. strategists reduced earnings estimates for S&P 500 companies for this year and next, citing Europe’s debt crisis and slowing economic growth in China. Investors are bracing for what’s projected to be the first drop in U.S. corporate profits in almost three years, while China’s growth is forecast to fall below 8 percent for the first time since 2009, according to the median estimate of economists in a survey.

“There’s a worldwide slowdown,” Nick Sargen, chief investment officer at Fort Washington Investment Advisors in Cincinnati, said in a phone interview. The firm oversees $40 billion. “Wall Street analysts have been reducing their second- quarter earnings estimates as companies have guided them lower. Profit growth, which has been a main driver for the market, will be less supportive going forward.”
Losses Pared

The S&P 500 pared losses today after dropping as much as 1.2 percent to 1,325.41, dipping below its average price from the past 50 days for a third straight day. The index closed at 1,334.76, compared with its 50-day moving average of 1,334.546, according to Bloomberg data.

“Short term, the market got oversold,” Michael James, a managing director of equity trading at Wedbush Securities Inc. in Los Angeles, said in a phone interview. “There is at least a willingness of buyers to step in today given the weakness that we’ve seen over the last several days. You have some potential market-moving news tomorrow, with earnings from JPMorgan and Wells Fargo.”

The S&P 500 has retreated almost 3 percent over the last six days. Stocks fell today even after applications for U.S. jobless benefits last week decreased by 26,000 to 350,000, the fewest since March 2008, Labor Department figures showed. Economists forecast 372,000 claims, according to the median estimate in a Bloomberg News survey. The decrease reflected the volatility of claims during the annual auto-plant retooling period.
Import Prices

Prices of goods imported into the U.S. decreased more than forecast in June as declining energy costs curbed inflation. The 2.7 percent plunge in the import-price index was the biggest since December 2008 and followed a 1.2 percent drop in May, Labor Department figures showed. Prices excluding fuel fell 0.3 percent, the most in almost two years.

Among the 10 main industry groups in the S&P 500, technology and financial companies lost more than 1 percent for the biggest declines. Intel Corp., Cisco Systems Inc. and Microsoft Corp. dropped more than 2.2 percent to lead losses in 22 of 30 stocks in the Dow.
Supervalu Sinks

Supervalu Inc. (SVU) sank 49 percent after the third-largest U.S. grocery chain said it will review strategic alternatives for the business and suspended its dividend. Marriott International Inc., the biggest publicly traded U.S. hotel chain, dropped 6.4 percent after cutting its forecast for growth outside North America.

Procter & Gamble and Merck rallied 3.8 percent and 4.1 percent respectively, helping the Dow recover from a drop of as much as 112 points to close down 31.26 points at 12,573.27. P&G climbed the most since 2009 after the Federal Trade Commission cleared William Ackman’s hedge fund company to take a stake in the maker of household products. Merck rallied to a four-year high after reporting an osteoporosis drug worked well in a trial.

JPMorgan Chase & Co. slipped 1.6 percent. Investors will look for Chief Executive Officer Jamie Dimon to restore confidence when the company releases second-quarter results tomorrow, the first major U.S. bank to report. The bank may say profit fell 40 percent to 76 cents a share, excluding accounting adjustments, according to the average estimate from analysts in a Bloomberg survey. JPMorgan shares have dropped 16 percent since May 10, when the company disclosed a loss on credit derivatives of at least $2 billion.
JPMorgan Puts

Bearish options on JPMorgan are the cheapest in two years on speculation the shares already reflect the bank’s multibillion-dollar trading loss. Puts protecting against a 10 percent drop in the New York-based lender cost 1.15 times more than calls betting on a 10 percent gain, according to data on 30-day options, lowest so-called skew since January 2010.

Bank of America strategists reduced earnings forecasts for S&P 500 companies by 1.4 percent for this year and next year. Strategists Dan Suzuki, Savita Subramanian and Jill Carey now project earnings of $102 per share for 2012 and $109 for 2013, according to a note to clients today.
`Drift Lower'

“Although the bottom-up consensus forecasts have continued to drift lower since last summer, they still appear too optimistic in light of the ongoing European crisis, the looming fiscal cliff and the slowdown in China,” the strategists wrote. “The recent weakness in earnings revision and guidance trends may be a sign that consensus expectations are in the early stages of being reset lower.”

Analysts surveyed by Bloomberg project that earnings at S&P 500 companies decreased 1.8 percent in the second quarter, the first drop since 2009, and will increase 7.2 percent for all of 2012. At this time last year, they predicted profit growth of 13 percent for 2012. Congress has yet to resolve the so-called fiscal cliff, which represents more than $600 billion in higher taxes and reductions in defense and other government programs in 2013 that will take place without action.

The yield on 10-year U.S. Treasury notes fell four basis points, or 0.04 percentage point, to 1.4760 percent, approaching the June 1 all-time low of 1.4387 percent.

The government’s sale of $13 billion in 30-year bonds today was the second consecutive U.S. auction to attract a record low yield. The long bonds were sold at a yield of 2.580 percent, down from the previous record of 2.72 percent at a June 14 sale. Yesterday’s 10-year note auction drew a yield of 1.459 percent.

Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc., told CNBC that economic growth in the U.S. is slowing even as the housing market shows signs of rebounding.
‘Tempered Down’

“The general economy in the United States has been more or less flat, and so the growth has tempered down,” he said today in an interview with the television station from Sun Valley, Idaho.

Buffett’s remarks contrast with his comment a year ago to Bloomberg Television’s Betty Liu in Sun Valley that the economy and jobs will “come back big time” when residential construction recovers. U.S. unemployment has exceeded 8 percent for more than three years. Economists on average predict the U.S. economy will expand 2.1 percent in 2012, down from a projection of 3.3 percent in February 2011.
Builders Rally

Shares of builders advanced, with Standard Pacific Corp., Lennar Corp. and KB Home climbing at least 3.6 percent to pace an advance in 10 of 11 stocks in the S&P Supercomposite Homebuilding Index.

The Federal Reserve yesterday signaled that a further economic slowdown would bring growing support among policy makers for additional steps to spur the three-year expansion. A few members of the Federal Open Market Committee said the Fed should ease policy to move the economy toward its targets for full employment and stable prices, according to minutes of the June 19-20 meeting released yesterday. Several others said more action could be warranted if growth slows, risks intensified or inflation seemed likely to fall “persistently” below their goal.

The Stoxx Europe 600 Index fell 1.1 percent for its biggest drop of the month. Temenos Group AG plunged 28 percent to a three-year low after the Swiss maker of banking software cut its revenue-growth forecast and said Chief Executive Officer Guy Dubois will leave. Aegis Group Plc surged 45 percent as the U.K. advertising company agreed to be bought by Japan’s Dentsu Inc. in a 3.16 billion-pound ($4.9 billion) deal.

The MSCI Emerging Markets Index (MXEF) sank 1.9 percent, its biggest decline since May 23 The Kospi Index fell 2.2 percent and the won weakened 1.1 percent versus the dollar after the Bank of Korea unexpectedly cut borrowing costs. Chinese stocks listed in Hong Kong slid 2.2 percent and benchmark indexes fell more than 1 percent in India, Hungary, the Czech Republic, Taiwan and Thailand.
European Yields

The yield on Australia’s one-year note touched a record low and rates South Korea’s debt due March 2017 slid to the lowest level since Bloomberg started compiling Korean bond yields in 2000. Austrian and French five-year yields also slid to records. Spanish 10-year yields increased six basis points to 6.64 percent after plunging 48 points in the previous two days after European governments moved to quicken emergency loans to the country’s banks.

The European Central Bank said overnight deposits of financial institutions dropped to 324.9 billion euros, the lowest level in almost seven months after policy makers said last week they would no longer pay interest for the funds.
’Risk Off’

The euro fell 0.3 percent to $1.2199 and reached $1.2167, the lowest since June 30, 2010. It weakened 0.9 percent against the yen. The dollar lost 0.6 percent versus the yen, while strengthening against 13 of 16 major peers.

“With the currency market in full risk off mode this morning, lets be clear that this is a move driven by deleveraging and not relative balance sheet expansion,” Kathy Lien, managing director of foreign-exchange strategy at BK Asset Management in New York, wrote in a note to clients. “With no major economic data or news catalyst, investors had been gradually swapping euros and other risky currencies for the U.S. dollar and Japanese yen throughout the European trading session.”
Commodities

Oil in New York rose 0.3 percent to $86.08 a barrel, recovering from a drop of as much as 1.9 percent. The U.S. said it will target Iran’s weapons proliferation networks and “front companies” helping to evade international sanctions.

Natural gas rose 0.7 percent as forecasts for hotter-than- normal weather in the U.S. Northeast signaled stronger demand from power plants. The fuel reversed a drop of as much as 4.7 percent triggered when U.S. government data showed stockpiles expanded by 33 billion cubic feet to 3.135 trillion. Analyst estimates compiled by Bloomberg showed an expected increase of 27 billion cubic feet.

The S&P GSCI gauge of 24 commodities added 0.4 percent as 12 of its 24 commodities advanced.

Corn climbed 4 percent to $7.3225 a bushel after Goldman Sachs Group Inc. and Citigroup Inc. raised their price forecasts because of tighter supplies because of crop damage amid the worst U.S. drought since 1988. Wheat rallied 2.5 percent and soybeans climbed 0.4 percent.

Most of the U.S. Midwest will get less than 20 percent of normal rain in the next five days, and temperatures will rise above 100 degrees Fahrenheit (35 degrees Celsius) in the four days ending July 18, according to T-storm Weather LLC. As much as 51 percent

Cocoa futures plunged 4.5 percent to lead losses in commodities after European bean usage declined 18 percent to a three-year low in the second quarter.

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Consumer Comfort in U.S. Stagnates Amid Unemployment

Consumer confidence stagnated last week as scant improvement in the labor market left Americans more discouraged about the economy.

The Bloomberg Consumer Comfort Index held at minus 37.5 in the week ended July 8. Some 86 percent of those surveyed said the economy was in bad shape, 21 percentage points higher than the average since 1985.

“Consumers remain generally downbeat about the economy and expectations for the future,” said Joseph Brusuelas, a senior economist at Bloomberg LP in New York. “Given slower job growth and the recent stabilization of oil and gasoline prices near current levels, there is little impetus to support an improvement in overall sentiment in the near term.”

Gasoline prices that are no longer falling along with the labor market’s worst quarterly performance since the first three months of 2010 risk stifling the consumer spending that accounts for 70 percent of the U.S. economy. Flagging sentiment stretches around the globe, according to a Pew Research Center report that showed Europe’s debt crisis is taking a toll.

The public mood about the economy has worsened since 2008 in eight of 15 countries providing comparable data, the Pew report said. Some 16 percent of Europeans said they believe their economy is doing well, the survey showed.

Stocks dropped, sending the Standard & Poor’s 500 Index lower for a sixth day, on growing concern about global economic growth and corporate earnings. The S&P 500 decreased 0.5 percent to 1,334.76 at the 4 p.m. close in New York.
Jobless Claims

Another report today showed fewer Americans than forecast filed first-time claims for unemployment benefits last week, reflecting the volatility of applications during the annual auto-plant retooling period.

Claims for jobless insurance declined 26,000 in the week ended July 7 to 350,000, the fewest since March 2008, the Labor Department said. Economists surveyed by Bloomberg projected 372,000 claims, according to the median projection.

“You can never take claims at face value because of the July shutdowns,” said Jonathan Basile, an economist at Credit Suisse in New York, who projected the number of applications would drop to 355,000. “We are in a period of uncertainty. This makes for a situation where businesses will hold off on taking risks regarding investment and payrolls.”

Prices of imported goods decreased more than forecast in June as declining energy costs curbed inflation, another Labor Department report showed. The 2.7 percent plunge in the import- price index was the biggest since December 2008 and followed a 1.2 percent drop in May. Prices excluding fuel fell 0.3 percent, the most in almost two years.
European Production

Elsewhere, Euro-area industrial production unexpectedly rebounded in May as growth in Germany, Europe’s largest economy, more than offset a decline in France. Output in the 17-nation euro area rose 0.6 percent from April, when it fell 1.1 percent, the European Union’s statistics office in Luxembourg said.

Fuel costs that are creeping higher and limited job opportunities may be giving Americans less to cheer about. After reaching a recent low of $3.33 a gallon on July 1, the average price of gasoline nationwide was $3.38 yesterday, according to AAA, the country’s biggest motoring organization.

Employment at companies increased 84,000 in June after a 105,000 gain a month earlier, the Labor Department said July 7. The so-called underemployment rate -- which includes part-time workers who’d prefer a full-time position and people who want work but have given up looking -- increased to 14.9 percent from 14.8 percent.
Not ‘Robust’

“The job market is a strong correlate of consumer confidence,” Gary Langer, president of Langer Research Associated in New York, which compiles the index for Bloomberg, said in a statement. The jobs report “underscores the public’s long-running economic frustration. While consumer sentiment isn’t worsening, it’s far from the levels associated with a robust economy.”

Today’s Bloomberg report showed 71 percent of consumers said it was a “bad time” to buy, 7 percentage points worse than the average since weekly surveys began in 1985.

The Bloomberg index of the state of the national economy fell to minus 72.8, the lowest level since Feb. 19, from minus 71.7 the previous period. The measure of whether consumers consider it a good time to buy climbed to minus 41.5 from minus 42.4 the prior week. The index of personal finances was little changed at 1.9 after 1.8.
Wealthier Americans

Confidence dropped for those with incomes of $100,000 or more. The index decreased to minus 8.2, the lowest reading since January. It marked the second straight week of negative readings after 13 weeks above zero.

In a sign higher-income earners are pulling back, Burberry Group Plc reported sales yesterday that missed analysts’ estimates for a second straight quarter, fueling concern that Europe’s debt crisis and slowing growth in China are taking a toll on demand for high-end goods.

Today’s figures also showed Democrats recording higher sentiment than Republicans for a record 16th consecutive week. Republicans’ confidence dropped to the lowest level since the end of February.

Sentiment among independents rose to minus 43 from minus 46.8 last week. Even with the gain, the figure is one of the five lowest this year and 22.6 percentage points lower than the long-term average for the group.
Survey Details

The Bloomberg Consumer Comfort Index is based on responses to telephone interviews with a random sample of 1,000 consumers 18 years old and older. Each week, 250 respondents are asked for their views on the economy, personal finances and buying climate; the percentage of negative responses is subtracted from the share of positive views and divided by three. The most recent reading is based on the average of responses over the previous four weeks.

The survey is in the process of expanding its reach by adding Spanish-language interviews and contacting respondents via mobile phones.

The comfort index can range from 100, indicating every participant in the survey had a positive response to all three components, to minus 100, signaling all views were negative. The margin of error for the headline reading is 3 percentage points.

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ECB can cut interest rates further if needed: Knot

There is nothing to stop the European Central Bank cutting its main interest rate below 0.75 percent if the euro zone's economy continues to deteriorate, ECB policymaker Klaas Knot said in a newspaper interview released on Thursday.

The ECB cut its main interest rate last week by a 1/4 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 breathe life into the flagging euro zone economy.

"Should the situation deteriorate, there is no article of faith preventing us from going below 0.75 percent," Knot told the Financial Times Deutschland in an early release of an interview to run in its Friday edition.

"Currently, we regard 0.75 percent as appropriate," added Knot, a member of the ECB's policymaking Governing Council and chief of the Dutch national central bank.

Turning to the deposit rate, now at zero, he added: "We should learn from the experience of other countries with negative interest rates before we decide whether that is an option for us."

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ECB signals readiness to act as banks sit on cash

European Central Bank policymakers held out the possibility on Thursday of taking further measures to boost the flagging euro zone economy after a cut in their deposit rate to zero showed no sign of jolting banks into lending out more money.

The ECB cut its main interest rate last week by a 1/4 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 breathe life into the flagging euro zone economy.

The unprecedented cut in deposit rates to zero - approved last week and active from Wednesday - means banks now get nothing for parking cash at the ECB. They responded by simply shifting nearly half a trillion euros out of the ECB deposit facility and into their current accounts at the central bank.

Faced with fading inflation pressures and no sign banks are about to funnel more money to business to help the stagnating economy, ECB policymakers signaled they could act again.

"Should the situation deteriorate, there is no article of faith preventing us from going below 0.75 percent," said ECB Governing Council member Klaas Knot.

"Currently, we regard 0.75 percent as appropriate," Knot, who is also chief of the Dutch national central bank, told the Financial Times Deutschland in an early release of an interview to run in its Friday edition.

Knot is widely regarded as belonging to a core of hardline ECB policymakers who take a tough line on inflation. His comments are the clearest signal yet that the ECB could be open to further rate cuts after last week's move to a record low.

Highlighting the euro zone's fragile economic health, the ECB said in its monthly bulletin released earlier on Thursday that growth in the 17-country bloc is weak and "heightened uncertainty" is weighing on confidence.

Another ECB policymaker, Austria's Ewald Nowotny, said in Vienna: "Growth perspectives all over Europe are deteriorating."

"Within the European Union and the euro zone we have an increasing differentiation of growth rates," Nowotny added.

ECB President Mario Draghi also kept the door open on Monday to further interest rate cuts, saying any decision on further action would depend on economic data.

Official data released on Thursday showed euro zone factories unexpectedly stepped up production in May, but output fell in France and the Netherlands in a fresh sign that the bloc's debt crisis is also hurting its stronger economies.

Knot held out the possibility the ECB could cut its deposit rate into negative territory - a move that would mean banks effectively paying the ECB to hold their money overnight.

"We should learn from the experience of other countries with negative interest rates before we decide whether that is an option for us," said Knot.

Another ECB Governing Council member, Jozef Makuch, told reporters in Vienna: "Where necessary, the ECB will use measures already used or new ones."

DEPOSIT PLUNGE

Banks slashed the amount of money they parked at the ECB after it stopped paying interest on overnight deposits on Wednesday, but there was no sign they were using it to lend more or buy the bonds of crisis-hit euro zone states.

Banks are reluctant to lend to each other for fear of not getting all their money back, so they have deposited back with the ECB much of the cash from the central bank's 1 trillion euros cash boost in December and February.

ECB policymaker Josef Bonnici said the plunge in overnight deposits - to 325 billion euros from more than 800 billion a day earlier - was "encouraging" and said he expected to see a rise in loans to firms and consumers as a result.

But Draghi has said he expects little impact on what banks and other investors do with their spare cash - a view reinforced by them simply moving funds from the deposit facility to their current accounts at the central bank.

"It's just a shifting of cash from one place to another and ultimately it's a zero sum game," said Simon Peck, rate strategist at RBS.

The current account facility -- which also gives no return but in some respects is easier to use -- jumped to 540 billion from 74 billion the previous day, almost precisely mirroring the change in the overnight figures.

What banks do with the cash from there hangs in the balance but analysts were not optimistic it would lead to a surge in loans.

"Liquidity will remain ample but will be stuck in the current account," said Patrick Jacq, European rate strategist at BNP Paribas in Paris.

"(For this to change) we need a strong improvement in global conditions, not only in money markets, but in sovereign debt, the economy ... It will take a long time before money market and all market activity is restored to normal conditions."

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ECB zero rate slashes banks' overnight deposits

The European Central Bank's move to cut its deposit rate to zero has had an instant impact with banks more than halving the amount of cash parked there overnight.

The central bank hopes its unprecedented move, which means banks will now get nothing if they park spare cash there, will nurture a return of more significant interbank lending by encouraging banks to look for more profitable options beyond the ECB.

Wednesday was the first day under the new set-up and figures published by the ECB on Thursday showed banks held 325 billion euros in the facility overnight, well down on both the 800 billion they left there the previous day and the 700 billion they deposited at the same point of the last reserves period in June.

The latter comparison is probably the best. At the start of monthly reserves cycles banks have more options to juggle their funding so their deposits at the ECB tend to dip before building back up through the month.

The decision by the ECB to cut its main refinancing rate to 0.75 percent and stop paying interest on overnight deposits - before the cut banks got 0.25 percent - is also one factor driving the euro to this week's two-year lows against the dollar. That weakness will aid euro zone firms by making their goods cheaper for foreign buyers.

ECB President Mario Draghi has said he expects the zero rate to have little impact on what banks and other investors do with their spare cash.

But last month the ECB's money market contact group -- a mix of around 20 top traders and a handful of top ECB experts -- warned that the move could hurt interbank trading, push banks out of Europe and further damage their profitability.

Some top money market funds have also said they have been rejecting new business since the cut, worried that they cannot provide returns for investors given the lack of a base premium on funds held with the euro zone's central bank.

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Fed Signals Support for Further Stimulus If Economy Slows

The Federal Reserve signaled that a further economic slowdown would bring growing support among policy makers for additional steps to spur the three-year expansion.

A few members of the Federal Open Market Committee said the Fed should ease policy to move the economy toward its targets for full employment and stable prices, according to minutes of the June 19-20 meeting released yesterday in Washington. Several others said more action could be warranted if growth slows, risks intensified or inflation seemed likely to fall “persistently” below their goal.

“You have a majority to do a lot more with even a small downward revision in the forecast,” said Joe Gagnon, who worked as an associate director at the Fed Board’s Division of International Finance from 1999-2008. Gagnon, a senior fellow at the Peterson Institute for International Economics in Washington, said the Fed’s next move could come as early as the Sept. 12-13 meeting.

As Chairman Ben S. Bernanke and fellow policy makers extended their Operation Twist program through the end of the year, they debated whether additional steps such as a third round of asset purchases, known as quantitative easing, might be needed. Some said there was a risk that buying more Treasuries might eventually disrupt the government debt market.

The FOMC met before the Labor Department reported last week that employers added 80,000 jobs to payrolls in June, fewer than economists forecast, while the jobless rate was unchanged at 8.2 percent, the 41st consecutive month above 8 percent. Other reports showed manufacturing shrank in June for the first time since the recovery began and consumer spending stalled in May.
‘Poor Results’

“It’s more than just the dovish branch of the voting membership that appears to be signing on to the idea of QE3 if the economy loses momentum,” said Dana Saporta, U.S. economist for Credit Suisse in New York. “We do know that since that meeting, we’ve gotten some poor results, most noticeably the June employment report.”

The Standard & Poor’s 500 Index (SPX) fell less than 0.1 percent to 1,341.45 at the close of trading in New York after declining as much as 0.6 percent. The yield on the 10-year Treasury note rose to 1.52 percent from 1.5 percent the day before.

The minutes showed 15 FOMC participants said the risks to the economy were weighted to the downside in June, up from eight in April. Thirteen said the risks to the unemployment rate were weighted to the upside, up from nine in April.
Voting Seats

The Fed’s 19 presidents and governors take part in each FOMC meeting, while only 12 have votes at any given time. The seven governors and New York Fed president have permanent votes, while the other Fed presidents rotate among four voting seats.

Several Fed policy makers said the central bank should “explore the possibility of developing new tools to promote more accommodative financial conditions and thereby support a stronger economic recovery,” without specifying what those tools might be.

“They’ve intensified their concerns about the downside risk, and they’re talking about additional tools,” said Michael Hanson, senior U.S. economist at Bank of America in New York.

The FOMC decided to extend Operation Twist by swapping $267 billion of shorter-term securities with the same amount of longer-term debt. The program is intended to reduce long-term interest rates. The Fed also repeated that its key interest rate was likely to stay near zero at least through late 2014.

Fed Chairman Ben S. Bernanke, at a press conference after the meeting, said policy makers were prepared to “take additional steps” to boost the economy.
‘Modest’ Effect

Several central bankers said that extending Operation Twist was likely to have a “modest” effect on already low interest rates. Richmond Fed President Jeffrey Lacker dissented from the decision, arguing that the move would do little to help growth or employment.

While some policy makers expressed concern excessive purchase of Treasuries could “at some point, lead to deterioration” in the government debt market, members agreed the risk was “low at present” and would be outweighed by the benefits of extending Operation Twist.

“They’re not entirely confident that the options they have are good ones,” said Drew Matus, U.S. economist at UBS AG in Stamford, Connecticut. “They’re being more open about their limitations.”
Opens Door

Lou Crandall, chief economist at Wrightson ICAP LLC, said the committee’s discussion of potential costs to the functioning of the more than $10.5 trillion Treasury market opens the door to renewed purchases of mortgage-backed securities.

“If you want to spread the impact, then you add another market,” Crandall said.

The Fed lowered interest rates to zero in December of 2008 and initiated two rounds of large-scale asset purchases totaling $2.3 trillion. In the first round the central bank purchased Treasuries and housing debt, while it limited purchases to Treasuries in the second round.

San Francisco Fed President John Williams and the Chicago Fed’s Charles Evans this week said that the central bank could add additional stimulus through a third round of asset purchases, this time including housing debt guaranteed by mortgage-finance companies Fannie Mae, Freddie Mac and Ginnie Mae.

“If further action is called for, the most effective tool would be additional purchases of longer-maturity securities, including agency mortgage-backed securities,” Williams said in a July 9 speech in Coeur D’Alene, Idaho. Evans said he would have favored the Fed taking stronger action in June.
Less Supportive

Participants at the meeting said financial conditions had become less supportive of the economy as investors’ concerns about the euro region’s sovereign-debt and banking crisis increased. Policy makers said that strains in Europe could spill over into the U.S. and saw the need of “undertaking adequate preparations to address such spillovers if they were to occur.”

Nearly all policy makers judged uncertainty about economic growth and unemployment to be higher than the normal level during the previous 20 years, the minutes show.

Inflation is also falling below the Fed’s 2 percent goal. Prices rose 1.5 percent from a year earlier in May, as measured by the personal consumption expenditures price index. The inflation gauge is the lowest since January 2011 and has dropped from a 2011 peak of 2.9 percent in September.

“There’s a growing coalition of members who are inclined to do more and who really feel that they’re failing to meet their objectives,” said Jeffrey Greenberg, a U.S. economist at Nomura Securities International LLC in New York. “They see the unemployment rate and read that as a clear indication that they’re not achieving the full employment aspect of the dual mandate.”

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Italy not expected to request bail-out: Fekter

Italy is not expected to request a bail-out from the European Union, Austrian Finance Minister Maria Fekter said on Thursday.

"We have no reason at the moment to believe that Italy will make a request," Fekter told reporters on the sidelines of an International Monetary Fund conference in Vienna.

Fekter said the EU's EFSF rescue fund had sufficient resources to meet Spanish demands and that a decision on Cyprus would be made in the coming days.

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