Central banks are calm markets, despite Europe woes

EUROPE is to hit another rough patch. But this time, disorders have just rattled world financial markets. It is a huge change.

Even if the United States events precipitated some of the more acute stages of the financial crisis of 2007-8 - the collapse of Lehman Brothers is a good example - the crisis in Europe was the pivot on which world markets have rotated in recent years.

""We have seen on the global markets for trade in unison to a surprising degree,"said Stacy Williams, a strategist HSBC in London, in a telephone conversation last week." "" Concerns about the risk of a collapse in Europe were the main factor of the phenomenon - risk, risk offshore. "Global markets are closely synchronized, it said, and they are still moving up and down mainly in response to the assessment of risk in the short term.

For the moment, however, they did not respond significantly to the events in Europe, one way or another. It is as if traders may decide to add to their bet or head for the exits. For the moment, at least, the markets are moving laterally.

It is not as if the European economy is suddenly thriving. To the contrary. The Government in London statistics released last week, for example, suggest that the austerity of the United Kingdom program has helped plunge the country into recession. Although there are pockets of prosperity, the economy of the European Union as a contract in the fourth quarter of 2011, according to Eurostat. Many forecasters believe that an economic crisis in the region is in progress.

Economic pain and fiscal austerity led to the fall of the Dutch Government, last week and threaten the chances of Nicolas Sarkozy, President of the France, in the runoff at the end of next week against François Hollande, the Socialist candidate. Yields of sovereign bonds in Spain, located in the heart of the crisis of the euro area, test the level of 6%, a sign of serious trouble. Rescue plans are already underway in Greece, Ireland and Portugal, while the Italy remains in a precarious state.

But how the markets have reacted to all this? With a sigh and a collective shrug. Inventories rose week last in London, Paris and Frankfurt, and with the help of reassuring comments from the Federal Reserve, they did in New York as well.

Larry Kantor, head of research for Barclays, said the Central Bank European is in large part responsible for the benign market response of most recent problems of Europe. By March, he said, the Central Bank injected 1,153 500 billion euros, 1.52 billion dollars in the European banking system, and a large part of this money was used to buy sovereign debt, lowering yields and reduce the pressure on jagged Governments and the whole of the economy of the region.

"In November, there is the risk of a real credit freeze,", said Mr. Kantor. "" Lack of bank loans really"in the eurozone in recession," said. "Injection by the E.C.B. was very important, and it is really much of this scenario disaster off the table."

He said that Europe could fight resolve his financial problems for years, but the "pragmatic approach" of the ECB in its new President, Mario Draghi, has given the markets much comfort.

"In the short term," at least, he said, "many of the tail risk has been removed."

None of which is to minimize the fundamental problems to come to Europe, where friction is growing on the wisdom of the dominant orthodoxy of fiscal austerity is to reduce government debt loads.

In France, Mr. Holland including promotes a more Keynesian solution, involving Government stimulus to promote growth and Government revenue. Mr Draghi, who was firmly in the camp of austerity, last week shifted his rhetoric, calling for a "Compact growth" in parallel with the budgetary Treaty of the European Union, which limits budget deficits and the national debt.

"We must intensify our reflections on the long-term European vision actively as we have in the past to other defining moments in the history of our Union," Mr. Draghi said members of the European Parliament in Brussels. But he indicated that he was contemplating "structural reforms", intend to make economies more competitive, rather than more of the Government spending. This is an approach that also promotes the German Chancellor, Angela Merkel.

Of course, the United States must cope with similar problems, but its economy, although really robust steps, now is growing faster than most of Europe. Gross domestic product increased at an annual rate of 2.2% in the first quarter, according to the Department of Commerce of the published figures Friday. Is that Wall Street had anticipated.

The economy is low enough that the Fed Wednesday policy makers reiterated their commitment to maintaining short-term interest rates, now close to zero, at "exceptionally low levels" for an extended period. They embark on the new programs unorthodox to stimulate the economy, but according to calculations by Barclays, various quantitative expansion efforts the Fed has expanded its balance sheet by $ 2.35 billion.

The balance sheet operations, low interest rates, had an extremely stimulating effect, amounting to the equivalent theoretical rate of interest reference Fed about negative 4 per cent, according to Thomas Lam, Economist at OSK - DMG to Singapore group.

Clearly, the Fed policy makers remain on high alert, even if their assessment of the domestic economy was slightly more optimistic than their previous forecast in January. On average, they predicted last week that G.D.P. would increase from 2.65% in 2012, an increase in the percentage of 0.2 of a point of their estimate of January. The rate of inflation will remain below the target of 2% for the year the Fed, they thought, and the unemployment rate slightly, drop to 7.9% of its current 8.2 per cent, according to Fed figures compiled by UBS Investment Research.

"" In a press conference Wednesday, Ben s. Bernanke, the Fed Chairman, said the Central Bank"did not hesitate" to take other measures to support the economy. Mr. Kantor said markets could display this promise as "a sort of extension of the Bernanke put"-a guarantee of intervention should data deteriorate considerably - which should give traders some consolation.

With election campaigns in the United States as well as in Europe, major new economic initiatives are unlikely for now, if they amount to fiscal austerity or stimulus. If markets remain calm in the meantime, it may be mainly through the influence of the central banks.

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