|Eurozone bank credit to government surges; credit to business and household plummets - - 1) Data refer to the changing composition of the euro area.|
The European Central Bank (ECB) is expected to keep its benchmark interest rate on hold at 1.0 percent, at the meeting of the governing council in Venice today. The ECB is estimated to be indirectly funding half of Eurozone country deficits in 2009.
In London, the Bank of England is also expected to keep its key rate at 0.5 percent
On Monday, ECB executive board member Gertrude Tumpel-Gugerell, told a conference in her native Austria that the ECB's current monetary policy stance was "appropriate," a code word for no change in the near future.
The Eurozone exited from recession in the third quarter of this year, but a recovery is not risk-free, Bundesbank president and governing council hawk Axel Weber said Tuesday.
"We're only seeing green shoots ... downside risks remain," Weber said at the International Monetary Fund annual meeting in Istanbul.
Both he and Tumpel-Gugerell said measures taken by the ECB to boost growth, including massive supplies of liquidity to Eurozone banks, should remain in place until a recovery was ensured.
As the recovery takes hold, tensions will inevitably rise between the ECB and Eurozone members on reducing the funding of deficits.
European Central Bank President Jean-Claude Trichet has urged political leaders to execute “ambitious” plans to reverse the common currency area's biggest budget deficit since the euro was launched in 1999.
Economists at Goldman Sachs and Barclays Capital have said failure by politicians to devise a plan and then carry it out may fuel debt and inflation, forcing the ECB to raise interest rates faster in the recovery - - a move which could threaten the economic pick-up by driving up the euro and bond yields.
Bloomberg says while lending to households and companies has almost ground to a halt, banks expanded their holdings of government bonds by €241 billion and their loans to the public sector by €34 billion in the first eight months of the year. That will fund almost half the Eurozone’s estimated 2009 budget deficit of €560 billion, Barclays estimates.
Eurozone banks have been able to borrow from the ECB at 1 percent and make a margin on safe lending to the public sector.
The ECB is indirectly funding about a quarter of the Irish Government deficit, according to Central Bank data.
The data shows that Irish banks availed of ECB support to purchase almost €7 billion worth of Irish Government bonds since last November, when the National Treasury Management Agency (NTMA) stepped up its borrowing programme.
Irish banks account for 26 percent of the €26.3 billion in debt issued over the 10 months to last August. The banks are able to use ECB funds to buy Irish bonds which pay rates up to 5 percent per year.
The ECB will also become the principal funder of Irish "bad bank" NAMA.
Last month, Minister for Finance Brian Lenihan said banks will get paid €54 billion for mainly toxic property loans that will be transferred to the State agency.
The Irish banks will use Irish government bonds as collateral for funding from the ECB.
The US dollar is trading at $1.4765 against the euro, on Thursday morning.
Jean-Claude Trichet said on Monday that"other currencies, in particular currencies of the emerging world, should appreciate."
Weber said on Tuesday that there was a need for "greater foreign-exchange flexibility in some emerging economies."
Many Asian nations, including China, keep their currency's exchange rate effectively linked to the the dollar, with central banks managing floats within narrow margins.
Some economists claim that the Chinese renminbi is undervalued by as much as 40 percent.
SEE: Finfacts article Oct 07, 2009: Gold rises to a new record; Premature to expect end soon to dollar dominance
The BoE decision will be announced in London at noon; the ECB decision will be announced 45 minutes later.