Bloomberg News

Summers Says ECB, Governments Must Restore Confidence

June 06, 2012

Former U.S. Treasury Secretary Lawrence Summers said that the European Central Bank and the region’s governments must do more to restore confidence amid the euro-area sovereign debt crisis.

“The situation is very difficult,” Summers said in an interview on Bloomberg Television today. “They are discovering ways in which they did not expect that the single currency is brittle. The risks, it seems to me, are all on the side of lack of confidence and self-fulfilling fear.”

European Central Bank President Mario Draghi said officials are ready to add more stimulus to the euro region’s economy if necessary, while damping expectations that another round of three-year funding for banks is imminent. The ECB is under pressure to lower rates and introduce more liquidity support for banks as governments struggle to fix a crisis that’s engulfing Spain and could force Greece out of the euro.

“A central bank wants to bend over backwards to be reassuring, to reassure people that liquidity is there and that’s the perspective that needs to inform the central bank,” he said. “The overwhelming imperative of the situation is to instill more confidence than there is today, and I certainly hope that’s going to inform the policy makers of Europe.”

Summers reiterated his view that nations with low interest rates should borrow more to finance investments that can spur economic growth and tax revenue later.

Low Rates

“In a country with a 10-year-bond rate that’s now in the 1.5 percent range,” there’s an opportunity “for the government to take advantage of those low rates to make investments that actually will pay off for the budget over the long term,” Summers, 57, said.

Yields on benchmark 10-year Treasury notes climbed to their highest level in four days amid speculation the world’s leading economies may collaborate on a response to Europe’s financial crisis and signs of slower economic growth.

The 10-year yield rose four basis points, or 0.04 percentage point, to 1.61 percent at 10:16 a.m. in New York, according to Bloomberg Bond Trader prices. The 30-year bond yield increased three basis points to 2.68 percent.

Treasury 10-year and 30-year yields reached all-time lows of 1.4387 percent and 2.5089 percent last week after the Labor Department reported the U.S. economy added 69,000 jobs in May, the fewest in a year.

Federal Reserve Bank of Atlanta President Dennis Lockhart said today that extending Operation Twist, the program to lengthen maturities of debt on the central bank’s balance sheet, is an “option on the table.”

Fed Meeting

The policy-setting FOMC meets June 19-20 to consider whether more stimulus is needed to spur job growth. Fed Vice Chairman Janet Yellen will discuss the outlook for the economy and policy tonight in Boston, and Chairman Ben S. Bernanke is due to testify before Congress tomorrow.

Under Operation Twist, which ends this month, the U.S. central bank has been replacing $400 billion of shorter-dated maturities in its holdings with longer-term debt to contain borrowing costs.

The Fed bought $2.3 trillion of bonds in two rounds of so- called quantitative easing from December 2008 to June. Policy makers have said they will probably keep their target for overnight lending between banks at almost zero, where it’s been since December 2008, at least until late 2014.

Summers, a professor at Harvard University’s John F. Kennedy School of Government, was Treasury Secretary under President Bill Clinton from 1999 to 2001 and president of Harvard from 2001 to 2006. He led President Barack Obama’s National Economic Council in 2009-2010.

To contact the reporters on this story: Scott Hamilton in London at shamilton8@bloomberg.net; Ian Katz in Washington at ikatz2@bloomberg.net

To contact the editor responsible for this story: Fergal O’Brien at fobrien@bloomberg.net


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