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Jul 12, 2012, 08.23 AM IST
In an interview to CNBC-TV18, Robert Parker, vice chairman, Credit Suisse says that while he sees a high probability of LTRO 3 within the next two to three months, he says the ESM, or the ECB intervention could have a significant impact on European markets.
After euro zone leaders agreed in principle at the EU summit to establish a joint banking supervisor for the 17-nation single currency area, the nitty-gritty’s still need to be worked out. The first step towards a banking union could eventually feature a joint deposit guarantee and a bank resolution fund
In an interview to CNBC-TV18, Robert Parker, vice chairman, Credit Suisse expects the pressure on the EU regions banks to go on. While he sees a high probability of LTRO 3 within the next two to three months, he says the European Stability Mechanism (ESM), or the European Central Bank (ECB) intervention could have a significant impact on European markets.
Parker says that bond purchase programmes like LTRO 1 and LTRO 2 were driven by the need to provide liquidity, most notably to Spanish and Italian banks and to some extent the French banks. “, I think in the next two-three months, a further round of long-term refinancing is highly likely,” he says.
Below is an edited transcript of his interview to CNBC-TV18. Watch the accompanying video for more.
Q: How are you reading the data has been coming through from euro zone and the kind of action that the ECB announced as well?
A: The overall theme if you look at the euro zone is that the economic numbers in Germany for the last two months as shown by the IFO index particularly, the German economy has clearly weakened. Whereas earlier in the year annualised growth in Germany was running at close to 2% for the second and third quarter of this year. German growth annualized could be lower than 0.5%.
If one looks at most of the rest of the euro zone obviously the numbers are recessionary and demand remains very weak. Draghi for whom I have extraordinary respect for, the head of the ECB, I think he and his colleagues at the ECB are focusing on firstly the downturn in demand and secondly the decline which is ongoing in bank lending in the stressed countries and most notably Spain and Italy. The third factor is that deflation is more of a threat today than inflation.
Q: There was no mention of a fresh round of long-term refinancing operations (LTRO) or bond purchase programmes. Was the market a big disappointed by that, should it have been?
A: LTRO 1 and LTRO 2 were driven by the need to provide liquidity most notably to Spanish and Italian banks and to some extent the French banks. One main feature of capital markets in the fourth quarter of last year, and the first half of this year has been the withdrawal of lending to those banks and obviously, the economic effect whereby they have not been lending to their end customers. So LTRO 1 and LTRO 2 were very successful in meeting that liquidity gap, which as we know was in excess of a trillion euro.
In terms of whether we need LTRO 3 or not, the pressure on the banks in the euro zone will continue. Although we have not had any explicit mention so far of the LTRO 3, I think in the next two-three months, a further round of long-term refinancing is highly likely. One another aspect which has not been mentioned is whether the ECB or the new ESM could intervene in other markets.
One thing that would be very powerful is if they intervene for example in the credit default swap market. There, a small amount of intervention would have a very significant impact. In terms of the ongoing problems in the euro zone, we are still dealing with the elevated level of Spanish and Italian bond yields and we are obviously still dealing with the issue of tight liquidity in the banking system.
Q: What about the US that remains another pressure point where the recent jobs data have not been very encouraging?
A: After the first quarter when growth was slightly lower than 2% annualised, recent data has been mixed from the US. We have had some data for example, retail spending, which has held up reasonably well but clearly labour markets remain weak, unemployment at 8.2% and the non form payroll number that we had announced last week is clearly much lower than the market expectations.
The improvement in the labour market that we have seen since 2009 clearly has stalled. On current projections, I am assuming that over the balance of this year, unemployment will remain close to 8%. On that basis, probably late August or early September another round of quantitative easing (QE), possibly targeting the mortgage backed securities market is highly likely. In any event, what is already a very easy monetary policy from the Federal Reserve will remain exceptionally easy.
Q: The despondency has been most apparent in the currency market. What is it that you expect to see on the euro-dollar over the near-term?
A: We have been forecasting for sometime, a breakdown in the euro-dollar towards 1.2 and we are nearly there. Clearly, interest rate cuts by the ECB, the weak economic data coming out of Europe are all negative for the euro. The only positive for the euro is that we have a very high short euro position on the foreign exchange market. So everybody, whether it be prop traders, whether it be investors are short the euro and long the US dollar.
Tags: global markets, Euro zone, LTRO 3, QE3, US markets, Indian markets, emerging markets, ESM, LTRO, ECB, Robert Parker, Credit Suisse
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