Bloomberg News

Europe Progressing in Debt Crisis, Investors and Economists Say

January 24, 2012

(For more on Europe’s debt crisis, click on EXT4.)

Jan. 24 (Bloomberg) -- Europe is making progress toward resolving its debt crisis and investor confidence is returning, said panelists at the Bloomberg Sovereign Debt Crisis Conference.

The European Central Bank’s unlimited three-year loans to financial institutions are helping push the region toward a solution, Erik Nielsen, global chief economist at UniCredit SpA, said today at the conference, hosted by Bloomberg Link in New York.

“We have turned the corner,” Nielsen said. ECB policy makers are “doing what they have to do” by providing additional funding.

Italian and Spanish government bonds have rallied since ECB President Mario Draghi said last month that policy makers would lend banks as much money as they needed for three years in tenders held in December and February.

“Mario Draghi has really hit a home run” in helping the economy, John Taylor, the founder and chairman of New York-based FX Concepts LLC, said at the conference. Because of the loans, “I would expect the euro to weaken for no other reason than the fact there are so many euros out there,” he said. The euro may drop to parity with the dollar by year end, Taylor said.

Nielsen forecasts the euro will trade at $1.20, while Julian Callow, head of international economics at Barclays Capital, said it will be worth $1.15. The currency recovered from a 0.5 percent decline to trade little changed at $1.3023 at 2:09 p.m. in New York, near its highest level of the year.

Investor Confidence

ECB Executive Board member Jose Manuel Gonzalez-Paramo said there are signs investor confidence in the euro-area economy is returning and growth may be about to rebound.

“My impression is that, since December, the market psychology has begun to change,” Gonzalez-Paramo said. “Pieces are falling into place, not just for a single country but for the euro zone as a whole.”

European services and factory output strengthened in January, led by Germany, survey data showed today. While the International Monetary Fund today cut its forecast for global economic growth and forecast a recession in the euro area, Gonzalez-Paramo said the region may escape that fate.

There are “good indications” coming “from the real economy suggesting the slowdown is just temporary,” while the ECB’s three-year loans are providing comfort to the banking system, he said. “It’s more likely than not that we will see a rebound in 2012” and “it is not even sure that we will have a recession in the end.”

Monetary Policy

Signs of resilience in the economy have given the ECB room to pause monetary-policy action and assess the effect of its measures to date, which include cutting its benchmark interest rate to a record low of 1 percent, ongoing government-bond purchases and the unlimited lending to banks.

The IMF today lowered its estimate for global growth this year to 3.3 percent from a September forecast of 4 percent. The expansion next year will be 3.9 percent, down from 4.5 percent. The euro area may enter a “mild recession” in 2012 as it shrinks 0.5 percent. The U.S. growth outlook was unchanged at 1.8 percent, the IMF said.

Gonzalez-Paramo said the record 489 billion-euro ($636 billion) adoption of the ECB’s first three-year loan in December bodes well for demand at the next offering in February.

“The big take-up in December took away the stigma effect; we had more than 500 institutions bidding,” he said. “So now there is no stigma, so that should promote more bidding.”

--With assistance from Daniel Moss in New York, Sandrine Rastello in Washington and Jeff Black in Frankfurt. Editors: Vince Golle, Carlos Torres

To contact the reporters on this story: Ian Katz in Washington at ikatz2@bloomberg.net; Paul Dobson in London at pdobson2@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net


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