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Following is a transcript of a First on CNBC interview with Vítor Constâncio, Vice President of the European Central Bank, by CNBC's Annette Weisbach.
Annette Weisbach (AW): Let us talk about recent volatility in the bond markets especially. You think it's a one off or something that could reoccur in the future?
Vítor Constâncio (VC): It was a very significant correction and a revision of perceptions by market players, also about the fundamentals of the European situation. I think that such significant episode is not likely. Markets are always bound to have some volatility especially if some shocks occur and so it's hard to predict. Certainly not of the same significance.
AW: How afraid are you, or ECB, that these kind of market volatilities might also hurt financial players?
VC: Well, there were not many complaints after the recent event which means that many institutions were rather prepared or were able to absorb and possible consequence. In that sense it was not an episode that triggered stability concerns. But one never knows what may happen down the road.
AW: What kind of scenario are you thinking of when you say 'doesn't know what can happen down the road?'
VC: For instance everyone knows that sometime this year the US will increase its monetary policy rates and interest rates then will go up in the US. That will have repercussions in particular in emerging markets where there is a lot of borrowing in dollars and that may impact the world markets in ways that no one can really predict. We think that the contagion to Europe will not be in principle significant. We had an episode in 2013, in May with the so called taper tantrum where there was contagion but since then we have changed our policies and so the monetary policy is more accommodative in Europe and so we think that the contagion will not happen in the same way this time but who knows if in other parts of the world the impact is bigger and could have a worldwide effect. So there is an uncertainty around that possible trigger.
AW: Would the ECB be willing to intervene in case there is a bout of excess volatility in the markets, which could hamper financial stability?
VC: It's difficult to foresee such a situation. We have a policy which is directed to another target. We have been implementing that policy smoothly without difficulty in buying what we wanted to buy and according to the plan. I don't anticipate many changes in that course of events and certainly not because of some episodes of volatility as you saw in the recent episode of this correction we didn't change our behaviour.
AW: You were saying that QE has lead somewhat to less potential contagion for the Eurozone?
VC: Absolutely and that's one of the things that has changed. It changed also in 2013 when we introduced forward guidance about the future interest rates. We saw immediately a disconnect between the variables in the market in particular forward curves and for even more justification after we introduced QE.
AW: Let us also look at the Forex markets because we have a very dependent recovery here in the Eurozone on the lower euro and we also have seen that euro can actually change its value quite quickly as well. How afraid are you about volatility imposed by movements on Forex market?
VC: We don't target the exchange rate at all. That's not why we introduced QE or monetary policy measures so we just watched that. The recent movements were more triggered by changes in the US situation and perceptions about the dollar and then the euro. It was when the bad numbers for Q1 in US came out volatility happened in the Forex market then it has been somewhat corrected. These things may happen but it was more triggered by events in the US that were a bit of a surprise because no one was expecting those low figures of growth in Q1. But since then the situation has normalised.
AW: Let us talk about Greece. You're excluded an exit of Greece from the Eurozone but you're also saying that there could be not so nice things happening down the road. So what do you mean by that?
VC: Turbulence may ensue if an agreement is not reached in the short time span. We all know that. The Greek public finance is stressed for liquidity so it's necessary to have an agreement as quickly as possible. If that is not possible then a period of turbulence can occur
AW: What kind of turbulence?
VC: One never knows but for instance fortunately the outflows from Greece have subsided recently but that may change in a negative way and that will put further pressure on the liquidity situation of Greece.
AW: Greece has also almost reached the maximum of its collateral already when you look at ELA. So what happens next? Do you be more generous expanding what could be collateral or is that the ceiling now?
VC: Well the collateral that is available is indeed a limitation and a limit to what we can accept because collateral has to be there for either monetary operations or ELA operations. If there is no collateral available then that establishes a limit to the situation but I'm not predicting what may happen if indeed the situation will change significantly, if an agreement in successful terms will be achieved.
AW: But even agreement, now between the parties, is it enough for you – the ECB – for example to raise the T-bill limit, be more generous, for example reinstating the waiver. Just an agreement?
VC: The things you mentioned are different. When we abolished the waiver in February we did it according to the rules because there was no prospect of a successful conclusion of the review of the implementation of the programme. If there is then an agreement that leads the institutions to conclude that there was a successful conclusion of the programme, that situation changes in relation to February decision. It is totally different regarding the T-bill issue which have other considerations not related with the waiver and the acceptance of collateral. So it's not the same in the different cases that you've raised.
AW: Mr Coeuré was saying that if there was a little more willingness on the side of the Greek government you could actually think about raising that limitation for T-bill issuance. Is that on that table?
VC: That's a decision for the governing council as a whole to takes so I cannot predict what will be the view on the governing council on that one. It's not for the board of the ECB to decide on its own.
AW: Last question about Greece. How confident are you that they will face up to the reality they are in and come to a positive conclusion?
VC: I very much hope so and I'm convinced that the worst case scenario of Greek exit will not happen. If there is not a quick conclusion of the negotiations then we might face a more difficult period but in the end I still am convinced that Greece will stay in the Euro
AW: But that also includes a potential default, right?
VC: It has been even mentioned as a possibility by members of the Greek government so no one can exclude that.
AW: Let us talk about banks. Last year you said that after the asset quality review, the valuation of banks will improve for the Eurozone so it has somewhat improved but not like to the extent of US. Were you wrong?
VC: No I don't think I was wrong because we concluded the comprehensive assessment in Oct/Nov last year and since then the stock prices of banks has increased – from January to now. The equity price of banks has increased by 7%. They keep on increasing since we did our comprehensive assessment. Market analysts are predicting an improvement in the written on equity of banks for this year and that is being reflected also in equity prices. So it's going according to what we foresaw. Also it is true that the first 3 months of this year, and for this first time in several years, credit to the private sector by banks is increasing which is a turning point. Not only important for the economy but for the profitability of banks.
AW: How long do you think it will last until credit conditions are viably improving? People are complaining about high credit costs.
VC: People complain all the time (of course when we have to pay something) but the figures speak by themselves. The cost of credit decreased in Portugal, Spain, Italy and everywhere compared with last year and indeed in view of the sovereign paying much less than before helps all other borrowers in the country so the financial conditions have clearly improved. And in view of the economic situation in Europe our policy is very accommodative and now is being reflected in the cost of finance.