French Finance Lender

Posted on January 04, 2012 by Admin
French Finance Lender

French Finance Lender

The European Central Bank put an end Tuesday to a bitter battle between France and Germany over a key post within the bank by naming a Belgian to the highly coveted position of chief economist.

  • Germany to 'escape recession' in 2012 (4 Jan 12)
  • Unemployment falls to record low (3 Jan 12)
  • Merkel and Sarkozy prepare next EU summit (2 Jan 12)
The ECB said executive board member Peter Praet of Belgium would be taking over as the head of its economics department, succeeding Jürgen Stark of Germany, who stepped down at the end of 2011.

Praet, who turns 63 later this month and has been a member of the ECB's executive board since June 2011, "will be responsible for economics, human resources, budget and organization" under a redistribution of responsibilities following the changeover of two board seats, the ECB said in a statement.

The decision came as a surprise since two incoming board members, Jörg Asmussen of Germany and Benoit Coeure of France, had been seen as the top rival candidates to take over the key economics portfolio.

Asmussen, however, will be responsible for international and European relations, meaning he will be the ECB's representative at international meetings and attend meetings of the so-called Eurogroup and ECOFIN.

He would also be responsible for legal services and overseeing the building of the ECB's new premises and the central bank's permanent representation in Washington.

Coeure will take charge of information systems and market operations.

The other three members of the six-member board - which is responsible for the day-to-day running of the ECB - are bank president Mario Draghi of Italy, vice-president Vitor Constancio of Portugal and Jose Manuel Gonzalez-Paramo of Spain.

Both Berlin and Paris had laid claim to the coveted economics portfolio in recent months amid deepening differences over the role the ECB should take in the eurozone debt crisis.

Ever since the shock announcement in September that Stark was leaving early - he was the ECB's economist since 2006 and his contract would normally have stayed to May 2014 - Germany had assumed its number two at the finance ministry, Jörg Asmussen, would automatically take over.

But Paris threw its hat into the ring in November in the person of Coeure, chief economist at the French economy and finance ministry and number two at the French treasury.

Ever since the ECB was set up, the position of chief economist has been held by a German - first Otmar Issing and then Stark.

However, the rule is not set in stone and, according to the ECB's statutes, appointments are not made according to nationality, but expertise and competence.

Furthermore, the distribution of the different portfolios on the executive board is not tied to a specific seat, so Asmussen was not guaranteed to assume the position of chief economist automatically.

Nevertheless, Berlin was keen to retain that particular post in order to cement the ECB's strong anti-inflation credentials it inherited from the powerful German central bank, the Bundesbank.

Perhaps significantly, Praet was actually born in Germany, even he if holds Belgian nationality.

Praet holds a doctorate in economics from Brussels university, was chief economist at Fortis Bank and then chief of staff for the Belgian finance minister before serving as executive director of the National Bank of Belgium between 2000 and 2011.

The tug-of-war for the post of chief economist highlights the increasingly diverging views of Paris and Berlin over the ECB's role in fighting the sovereign debt crisis that is threatening to push the world into recession.

France wants the ECB to become a lender of last resort, with the firepower to prevent debt-ridden eurozone members from falling victim to the bond markets.

But Germany is vehemently opposed, scarred by its experiences between the two world wars when its central bank printed unlimited amounts of money to stave off an economic slump, resulting in hyperinflation and the eventual rise of Nazism.

This time around, in addition to inflation concerns, Berlin is worried that allowing the ECB to ride to the rescue will reduce the incentive for fiscally recalcitrant states to take the tough medicine needed to stabilize their public finances.

AFP/bk

Moody's warned France on Monday that a sustained rise in its debt yields coupled with weakening economic growth could harm its ratings outlook, fuelling concern the euro zone's second largest economy might lose its coveted AAA status. Worries about a high fiscal deficit and banks' exposure to other troubled European sovereign debt have drawn France into the firing line of the bloc's escalating crisis, despite the government's insistence it would do everything necessary to protect its top rating. Moody's announced in mid-October it could place France's AAA rating on negative outlook in three months if the costs for helping to bailout French banks and other euro zone members overstretched its budget. The rating agency said that a worsening in the French bond market -- amid fears the sovereign debt crisis was spreading to the euro zone's core -- posed a threat to its credit outlook, though not at this stage to its actual rating. "Elevated borrowing costs persisting for an extended period would amplify the fiscal challenges the French government faces amid a deteriorating growth outlook, with negative credit implications," Senior Credit Officer Alexander Kockerbeck said in Moody's Weekly Credit Outlook. The premium investors charge on French 10-year debt compared to the German equivalent was up around 20 basis points at 163 bps following publication of Moody's report but remained well short of the 202 bps hit last week, a new euro-era high. The news also helped to drive European stocks to six-week lows amid concern over flagging global growth prospects and the United States' finances. Moody's said that at last week's record level, France pays nearly twice as much as Germany for long-term funding, adding that a 100 basis point increase in yields roughly equates to an additional three billion euros in yearly funding costs. Many investors have already discounted a downgrade to France's AAA rating, given expectations its economy will enter recession next year. "When you look at the valuations in the market, France has de facto lost its AAA. If the United States was stripped of its AAA by S&P, one wonders why France still has it," said Raphael Gallardo, economist at asset manager Axa IM. He noted that, unlike the United States, France did not control its national monetary policy: "Right now, we need a lender of last resort." CAUGHT IN A TRAP Finance Minister Francois Baroin said that, despite a recent increase in the spread of French yields over benchmark German debt, France continued to finance itself in the market at "very favorable" levels and modest austerity measures announced last month would not harm economic growth. France's average medium- and long-term financing for the first 11 months of the year stood at 2.78 percent, its second lowest level since the creation of the euro, after hitting 2.53 percent in 2010, national debt agency AFT told Reuters. Economists, however, said that France risked being sucked into a "fiscal trap" where slowing growth necessitated more austerity measures, which in turn slowed growth even further. "If on top of that you have interest rates which are increasing it means you have a vicious cycle where it's almost impossible to stabilize the trajectory of the debt and that could add pressure on the ratings," said Olivier Bizimana of Morgan Stanley, noting it appeared likely Moody's would revise down France's stable outlook if nothing changed. France's government recently cut its growth forecast for next year to 1 percent, from 1.75 percent, but most private economists still consider that far too optimistic. Budget Minister Valerie Pecresse said the government would not take further austerity measures, after announcing a 65 billion euro package of deficit cuts this month, saying a budgetary buffer of 6 billion euros next year would give it breathing room even if growth underperformed. "We must above all avoid taking measures that plunge the country into recession," Pecresse said. But Moody's said that slowing growth combined with rising interest rates would make it hard for France to hit its target of cutting the fiscal deficit from an estimated 5.7 percent at the end of this year to an EU ceiling of 3 percent by 2013. "The French social model cannot be financed if the French economy's potential is not preserved. With further weakening GDP growth the political scope for the government to generate further savings in this case would be tested," Monday's note from Moody's said.