International bankers meeting in Washington over the weekend shared their fears that central banks won’t be able to jumpstart a slowing European economy that could threaten global growth.
A European recession is the top concern or risk for the next 18 months, according to attendees surveyed by the Institute of International Finance at its annual gathering. The International Monetary Fund said last week the euro area will grow at a 1.3 percent rate in 2015, less than half that of the U.S. The IMF cut its outlook for global growth to 3.8 percent.
“No question that the theme over the past couple of weeks in the global markets has been the prospect of slow growth in Europe,”Deutsche Bank AG (DBK) Co-Chief Executive Officer Anshu Jain, 51, said at the IIF event. “We have overused monetary policy and in my own personal opinion, I think we’re coming to the point, and maybe we’re even past the point where monetary policy alone can wind up doing for us what we need.”
European Central Bank President Mario Draghi told reporters Oct. 11 that expanding the central bank’s balance sheet through actions such as asset purchases is the last monetary tool left to stimulate inflation. Bankers warned that broader structural changes such as labor-market reform, deregulation and the development of deeper capital markets were needed to get the European economy going again.
RUSSIA CONCERN
About 46 percent of respondents in the IIF poll picked a recession in Europe as their main worry, followed by increasing turmoil in Russia with 22 percent, a “hard landing” in China as economic growth slows with 21 percent and U.S. bond-market volatility with 9 percent. The survey was conducted during a lunch gathering with more than 500 attendees.
Politicians in Europe have hidden behind the actions of the central bank, leaving Draghi with only the possibility of quantitative easing similar to what the Federal Reserve did in the U.S., according to Anne Richards, the chief investment officer of Aberdeen Asset Management Plc. Political and market-structure differences make that no easy task, she said.
“If the last bullet you’ve got in your gun is sitting there and you don’t know how many aliens are going to land on your front lawn, you’re going to be careful about how you use it,” Richards told an IIF audience. “That’s the dilemma, because once that bullet has been shot, there’s really nothing left. So I think that the pressure has got to be going on behind the scenes to reform.”
WEBER’S VIEW
The ECB’s balance sheet, which can be boosted by buying assets or accepting collateral in return for loans, is at 2.1 trillion euros ($2.7 trillion) down from a 2012 peak of 3.1 trillion euros. Draghi said he plans to increase the balance sheet toward the 2012 figure, while giving no exact target.
That move seeks to offset the effect of allowing early repayment of the ECB’s longer-term refinancing operations, which served to tighten monetary policy, UBS AG Chairman Axel Weber said at the forum.
“Don’t kid yourself, this is nothing else but a correction of a policy mistake made three years ago,” said Weber, 57, who resigned as Bundesbank president in 2011 following a clash over bond-buying with the ECB council. “It’s not additional action.”
Concern that the Fed may raise interest rates amid slowing global growth has pushed the S&P 500 down more than 5 percent from its Sept. 19 record of 2,019.26. The benchmark U.S. index fell 3.1 percent last week, the most since May 2012. The U.S. economy will grow at a 3.1 percent rate next year, according to the IMF.
KELLEHER’S FIXES
Europe is struggling in part because of its over-reliance on bank lending, Colm Kelleher, head of Morgan Stanley’s investment bank and trading division, said Oct. 9 at a separate event in Washington. About 80 percent of the financing for the European economy comes from bank loans, making it important for Europe to develop a more robust private-placement and securitization market, he said.
“Mid-sized European companies would benefit from more liquid, active, well documented and well regulated private placement markets,” said Kelleher, 57. “That’s something that could easily be done by the regulators.”
REGULATION FAULTED
Lenders also used the two-day event to raise alarms about the unintended consequences of regulation. Brian Leach, head of franchise risk and strategy at Citigroup Inc., said new capital rules and annual stress tests are shrinking the pool of products banks can offer, and ultimately harming the economy. Increased lending by firms outside the regulated banking industry and reduced liquidity in stock and bond markets are among the effects of stricter rules, bankers said.
“Each regulation has a little bit of a product that it hits,” Leach said Oct. 10 at the IIF forum. “It’s narrowing the product offering and the capital that’s available to the real economy,” he said. “Eventually I think other sources will fill in and you will see a transition, but this is the time period when that is most difficult.”
Goldman Sachs Group Inc. Chief Risk Officer Craig Broderick also said new capital rules are hindering the ability of the biggest banks to serve as market makers in derivative and off-the-run bond markets. While market liquidity appears adequate because non-banks are stepping in, those new entrants may not remain involved when volatility picks up, and a shock to markets is likely to show that market participants are currently underpricing risk, he said.
DIMON, BLESSING
Bank of England Deputy Governor Jon Cunliffe countered at the same panel that large banks also stepped away from market making during the 2008 financial crisis. Capital rules force firms to appropriately price liquidity risk instead of underpricing it as they did before the crisis, he said.
The biggest topic remained growth in Europe, which JPMorgan Chase & Co. CEO Jamie Dimon, 58, called “absolutely critical for the world recovery.” It was his first public appearance since undergoing treatment for throat cancer. The uncertainty over Europe’s economy was summed up by Martin Blessing, 51, the CEO of Commerzbank AG (CBK), Germany’s second-largest lender.
“When I left on Tuesday, it still looked OK in Germany,” Blessing said as the audience laughed. “After having spent a couple of days here, I wonder how it will look when I come back on Monday.”
To contact the reporters on this story: Dakin Campbell in New York at dcampbell27@bloomberg.net; Michael J. Moore in New York at mmoore55@bloomberg.net
To contact the editors responsible for this story: Peter Eichenbaum at peichenbaum@bloomberg.net Dan Reichl, David Scheer