BOE’s Bean Says Greek Deal Doesn’t Eliminate Crisis Risks
Bank of England Deputy Governor Charlie Bean said agreement on a second bailout for Greece may not be enough to end the debt crisis and countries in the euro- area periphery must reduce debt and improve competitiveness.
While the agreement “between the Greek government and the euro-area authorities is certainly welcome, there still remains a possibility that events could unfold in a disorderly and damaging fashion at some stage in the future,” Bean said in a speech late yesterday in Glasgow, Scotland. The euro crisis “represents the biggest downside risk” to the U.K.
The Bank of England expanded its bond-purchase target by 50 billion pounds ($79 billion) to 325 billion pounds this month in response to a recovery weakened by a squeeze on consumers and Europe’s debt turmoil. Bean said that while inflation is easing and some recent business surveys have been encouraging, growth will be “sluggish” in the first half of 2012 and there’s “added incentive” to cement the recovery.
The deputy governor said a “disorderly outcome” in the euro area would hit the U.K.’s export and financial links, reduce confidence and lead companies and consumers to “hunker down and postpone spending.” He also said that Greece isn’t the only country in the currency zone facing challenges.
“Greece is the country in the headlines right now, but several countries of the euro-area periphery face, in varying degrees, a challenging mixture of unsustainably high public and/or private indebtedness and weak competitiveness,” Bean said. “At best, these countries face an extended period of very low growth while the necessary adjustments take place.”
The pound was little changed from yesterday, and traded at $1.5780 at 8:20 a.m. in London.
The Bank of England will publish the minutes of its February meeting at 9:30 a.m. in London today, which will show how the nine-member Monetary Policy Committee voted on the expansion of so-called quantitative easing. In its first round of stimulus, which ended in early 2010, it bought 200 billion pounds of gilts.
Data to be published Feb. 24 will probably confirm the economy shrank 0.2 percent in the fourth quarter, according to the median estimate of 36 economists in a Bloomberg News survey. Still, indexes of manufacturing and services improved in January, indicating the economy is strengthening.
“A margin of unused capacity and labor in the economy is likely to persist for some while yet,” Bean said. The prospect of a permanent loss of capacity and scarring of the long-term unemployed create “an added incentive to getting the recovery back on track quickly.”
He said that while growth should “gradually strengthen, the continuing headwinds from the unwinding of excessive debt and the government’s continuing fiscal consolidation mean that the pace of recovery is likely to remain moderate by historical standards.”
Bean also said the central bank’s bond program boosts asset prices and should encourage spending, though investors anticipating the bank’s actions “make it harder than before” to isolate the effect. Still, “so far we have seen little to suggest that the effect on nominal demand will be markedly at odds with that of our first round of purchases,” he said.
He also defended the policy from criticism that it has reduced returns on pensions and other savings. While the gilt purchases have helped lower yields, their impact on assets such as equities provides an “offset to the fall in annuity rates.”
“The impact of quantitative easing on those approaching retirement is thus more complex than it seems at first blush,” he said.