Euro strength faces scrutiny

Updated 08 February 2013
0

Euro strength faces scrutiny

FRANKFURT: The European Central Bank will monitor the economic impact of a strengthening euro, ECB President Mario Draghi said, feeding expectations the climbing currency could open the door to an interest rate cut.
After the ECB left its main interest rate at 0.75 percent, Draghi said the exchange rate was near to its long-term average but went further than many analysts had expected.
“The appreciation is, in a sense, a sign of return of confidence in the euro,” Draghi said.
“The exchange rate is not a policy target, but it is important for growth and price stability and we certainly want to see whether the appreciation is sustained and will alter our risk assessment as far as price stability is concerned.”
The euro hit a 15-month peak of $1.3711 on Feb. 1. It traded below that level and fell to a one-week low against the dollar and sank against the yen after Draghi’s comments.
French President Francois Hollande said this week the euro zone must develop an exchange rate policy to protect the currency from “irrational movements.” Germany has been cooler to any thoughts of exchange rate action.
By linking the euro’s exchange rate to growth and price stability, Draghi achieved a deft piece of verbal intervention, analysts said.
“This hints that euro strength — if sustained — could eventually trigger a rate cut,” said Nick Kounis at ABN Amro.
Carsten Brezeski at ING added: “Draghi successfully tried to talk down the euro exchange rate and opened the door for possible policy action.”
Last month, Draghi unwound earlier expectations of a rate cut by citing a batch of improving economic indicators. But since then the euro has appreciated further.
The ECB’s room for maneuver is limited, however. Even if it wanted to, the bank’s statutes mean it is ill-equipped to join a currency “race to the bottom.”
Furthermore, the world’s other top central banks are expanding their balance sheets by printing money, or at least not reversing course, while the ECB’s balance sheet is tightening, partly due to banks paying back early cheap money the central bank doled out last year.
A by-product of that could be to drive the euro yet higher.
Although it took no monetary policy action, the ECB and Ireland reached a compromise on a long-standing dispute over the cost of servicing money borrowed for a failed bank.
Dublin rushed through emergency legislation early on Thursday to liquidate failed Anglo Irish Bank as part of a compromise to avoid paying 3.1 billion euros a year until 2023 on money it took for the stricken lender during a meltdown of the main Irish banks in 2008.
Draghi merely said the ECB “took note of the Irish operation” but Irish premier Enda Kenny stood up in parliament and declared the deal done that could go a long way to allowing Ireland to quit its bailout program this year.
Draghi gave a similar view on the state of the euro zone economy to the one he gave in January. Economic weakness was “expected to prevail in the early part of 2013” but later in the year, activity should gradually recover.
He said the recent move by banks to pay back early about 140 billion euros of cheap three-year money the ECB gave them last year was a positive sign.
“This reflects the improvement in financial market confidence,” Draghi said, adding that the ECB would watch to see if the money market tightened conditions by stealth.
“We will closely monitor conditions in the money market and their potential impact on the stance of monetary policy, which will remain accommodative,” he said.
A Reuters poll of economists last week suggested official ratest would not change until at least July 2014.
Draghi was pressed about what he knew of the derivatives scandal at Siena’s Monte dei Paschi bank, and what he did about it when he headed Italy’s central bank from 2006 to 2011.
Italy’s third largest and oldest bank has been at the center of a financial and political storm, facing losses of about 1 billion euros from a series of derivatives and structured finance trades and after a 9-billion-euro acquisition of smaller rival Antonveneta which left it badly weakened.
Draghi said there was no implications for the ECB’s future role as a European bank regulator.
“The IMF has publicly stated that their preliminary view is that the Bank of Italy took timely and appropriate action within the limits of legal framework to address problems at (Monte dei Paschi),” he said. “Oversight was close and supervisory action escalated appropriately as (the bank’s) problems became acute.”
A senior Italian central bank source said this week that Draghi was informed of doubts raised by Bank of Italy inspectors but had little control over what has been widely criticized as ineffective oversight of the stricken lender.
He has already faced criticism with former Italian economy minister Giulio Tremonti said it was “stupefying” that in his role as supervisor of Italy’s banking system Draghi failed to discover or prevent loss-making derivatives trades at Monte dei Paschi.


Costa Coffee to go solo pressed by investors

Updated 33 min 11 sec ago
0

Costa Coffee to go solo pressed by investors

LONDON: Latte king Costa Coffee is to go it alone following pressure from activist shareholders on Whitbread, the global coffee chain’s parent company, a statement said Wednesday.
UK company Whitbread, which will hold onto hotel chain Premier Inn, said the spin-off is part of a restructuring drive that is set to be completed within two years.
“Given the progress Whitbread is making, we are confident that both Premier Inn and Costa will soon be businesses of sufficient strength, scale and capability to enable them to thrive as independent companies,” Whitbread chief executive Alison Brittain said in the statement.
“The board, therefore, believes that it is in the best long-term interests of Whitbread’s many stakeholders to separate Premier Inn and Costa, via a demerger of Costa,” she added.
Analysts welcomed the move.
“A cleaner operation should enable greater operational focus and afford investors greater clarity on profit and cash generation,” said analyst Greg Johnson at Shore Capital.
Whitbread’s announcement comes after activist investor, US group Elliott last week became its biggest shareholder with a six percent interest.
“The question will of course arise over whether CEO Alison Brittain jumped or was pushed into this proposal by the arrival of two activist investors on the shareholder register,” said Laith Khalaf, senior analyst at Hargreaves Lansdown stockbrokers.
Whitbread bought Costa in 1995 from founders Sergio and Bruno Costa and presently runs about 2,400 stores in the UK and some 1,400 around the world.
Its shops are popular with a wide array of coffee lovers, ranging from students in London, to journalists and Beirut, and tourists in Paris.
Premier Inn has 785 hotels in the UK plus some more in Germany and the Middle East.