European Central Bank President Mario Draghi coupled an interest rate cut with a pledge to offer banks unlimited cash for three years as officials try to head off a looming recession and leaders meet in Brussels to hammer out a solution to the debt crisis.
The Frankfurt-based ECB cut its benchmark rate by a quarter percentage point to 1 percent, matching a record low. It introduced new three-year loans for banks and loosened the collateral criteria it imposes when lending by making credit claims such as bank loans eligible and reducing the rating threshold on asset-backed securities.
The measures “should ensure enhanced access of the banking sector to liquidity,” Draghi told reporters in Frankfurt today after chairing a meeting of the ECB’s Governing Council.
The decisions highlight how the central bank is focused on reviving bank lending rather than increasing its government bond purchases to defeat the sovereign debt crisis. Europe’s leaders begin talks in Brussels today to craft another solution for the turmoil, a week after Draghi pushed them to deliver a “fiscal compact” he hinted the ECB may be willing to help support in financial markets.
The ECB also cut banks’ reserve ratios to 1 percent from 2 percent and will stop fine tuning operations at the end of each reserve maintenance period, Draghi said. The 36-month loans will be conducted as a fixed rate with full allotment, Draghi said.
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Jobless Claims in U.S. at Lowest in Nine Months
Fewer Americans than forecast filed applications for unemployment benefits last week, reflecting a pullback following the Thanksgiving holiday and fewer seasonal firings which may signal the labor market is on the mend.
Jobless claims dropped by 23,000 to 381,000 in the week ended Dec. 3, the fewest since February, Labor Department figures showed today in Washington. The median forecast of 47 economists in a Bloomberg News survey called for a drop to 395,000. The number of people on unemployment benefit rolls and those getting extended payments also decreased.
Companies are firing fewer workers yet may be reluctant to ramp up staff until demand picks up and there’s more clarity on tax breaks due to expire at year-end. While the jobless rate last month unexpectedly fell to 8.6 percent, the lowest in more than two years, faster job growth is needed to push the rate lower and spur consumer spending.
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China Banking Crisis Led by Bad Debts Seen by 61% in Global Investor Poll
Most global investors predict China will face a banking crisis within the next five years, paring their appetite for the nation’s shares and eroding confidence in its leadership, a Bloomberg Global Poll indicated.
Sixty-one percent of respondents said they anticipate a crash in the financial industry by late 2016, and only 10 percent were confident China’s banks will escape trouble, according to the quarterly poll of 1,097 investors, analysts and traders who are Bloomberg subscribers conducted Dec. 5-6.
Evidence of slowing growth in China -- including the weakest manufacturing performance in more than two years, falling home sales and ebbing export growth -- has stoked concern that non-performing loans will climb in the world’s second-largest economy. The risk is a legacy of a record 17.6 trillion-yuan ($2.8 trillion) lending boom unleashed by Premier Wen Jiabao in 2009-2010 amid the global recession.
“The deep-seated misallocation of resources, particularly in the real estate and banking sectors, will lead to a combination of political and economic instability,” says Lance Depew, managing director of UPI Management LLC in Santa Barbara, California, and a participant in the poll. “I expect further macroeconomic weakness and sub-par returns in the stock market for the foreseeable future.”
Stocks Slide
The MSCI China/Financials Index of shares has tumbled 22 percent this year, underperforming the broader MSCI China Index of equities, which is down 17 percent. China Life Insurance Co. (2628) has declined 32 percent and Bank of China Ltd. (3988) 30 percent, contributing the most to the financial index’s losses.
