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European Central Bank shows concern

Stephen Beard Sep 6, 2007

European Central Bank shows concern

Stephen Beard Sep 6, 2007


Kai Ryssdal: No matter what you’ve heard about what the Fed might do in a couple of weeks, it’s not always a good thing when a central bank cuts interest rates. Yes, it makes money cheaper, but when those rates are cut, it usually means an economy’s in trouble. And In the world of interest rate perceptions, sometimes a non-decision’s as telling as an actual cut.

Today, the European Central Bank decided to keep its benchmark interest rate on hold at 4 percent. Expectations had been that it would rise. And the non-move is making bankers and investors anxious that this fall might be worse than the summer was.

From the Marketplace European Desk in London, Stephen Beard reports.

Stephen Beard: Throughout the stock market turmoil last month, optimists clung to a comforting notion: “This is August,” they told themselves, “the heavy hitters in the banks and on the trading floors are on vacation. The juniors left in charge have panicked. Come September, everything will be fine.”

Andrew Hilton of the CSFI think-tank doesn’t buy that rosy scenario.

Andrew Hilton: Now the big boys are back from the beach, everything’s OK again? Not a chance. I think probably we’ve passed through the eye of the storm and we’ve got a lot more to come — and I don’t think any of it is going to be very good.

Also with his weather-eye open is fund manager Justin Urquart-Stewart of Seven Investment. In fact, he’s battening down the hatches.

Justin Urquart-Stewart: We’re now entering the autumn, and this isn’t just the season for meteorological storms. Traditionally, it’s also the season financial ones as well. So be prepared, I think, for some turbulence over the next few months.

The main worry, as ever, is the credit market. Investors that lost a bundle buying American subprime mortgages — sliced, diced and repackaged — are not overly keen to repeat the process. They’re not buying debt. Weighed down with loans that they cannot offload, the banks are growing reluctant to lend — even to each other.

Julian Jessop of Capital Economics:

Julian Jessop: It’s all very well for them not to be willing to lend to less creditworthy investors, perhaps at the fringes of the subprime market. But if the big Wall Street banks don’t trust each other, then there’s clearly a global problem for us all to think about.

So far, says Andrew Hilton, the central banks — most notably the Fed — have contained the crisis by saturating the interbank money market with liquidity. The ECB pumped a further $57 billion in today.

Hilton: They’ve poured huge amounts of money into the market to make it all appear better, to buy us a few more weeks. But really, there’s an underlying problem.

And that is $500 billion worth of loans that the banks cannot get off their books. Hence their reluctance to lend.

In spite of the general gloom, however, there are some optimists around. Like Anatole Kaletsky, chief economics commentator of The London Times.

Anatole Kaletsky: I don’t think we’re out of the woods yet. But I think it’s also very premature to assume that this will continue for more than another few weeks, given the huge amount of effort and the huge amount of money, really, that is being poured into solving it right now.

So far, the crisis has been mainly financial. The biggest European casualties: a couple of small German banks that collapsed. But the worry is that the fear will seep into the world’s most important economy, the U.S., and turn a modest slowdown into a full-blown recession.

Bad news for all of us, says fund manager Justin Urquart-Stewart.

Urquart-Stewart: The U.S. economy will always be vital to the global economy. After all, 20 percent of the global economy is down to the U.S. consumer alone. And so the U.S. economy is absolutely vital to the well-being elsewhere.

Today, the International Monetary Fund said that in the light of the subprime turmoil, it’s revising its global growth forecasts — downwards. It said the market turbulence is going to hit the real economy in many places, including Europe. But the worst affected country is likely to be the United States.

In London, this is Stephen Beard for Marketplace.

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