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Westlake Legal Group > European Central Bank

Climate Change Could Blow Up the Economy. Banks Aren’t Ready.

Westlake Legal Group merlin_167625216_f9d54ac2-c793-4efe-be3d-4d4683e5610b-facebookJumbo Climate Change Could Blow Up the Economy. Banks Aren’t Ready. World Economic Forum Virtual Currency Villeroy de Galhau, Francois (1959- ) Subprime Mortgage Crisis Lagarde, Christine Inflation (Economics) Global Warming Frankfurt (Germany) Facebook Inc European Central Bank Electric and Hybrid Vehicles Davos (Switzerland) Basel (Switzerland) Banking and Financial Institutions Bank for International Settlements

FRANKFURT — Climate change has already been blamed for deadly bush fires in Australia, dying coral reefs, rising sea levels and ever more cataclysmic storms. Could it also cause the next financial crisis?

A report issued this week by an umbrella organization for the world’s central banks argued that the answer is yes, while warning that central bankers lack tools to deal with what it says could be one of the biggest economic dislocations of all time.

The book-length report, published by the Bank for International Settlements in Basel, Switzerland, signals what could be the overriding theme for central banks in the decade to come.

“Climate change poses unprecedented challenges to human societies, and our community of central banks and supervisors cannot consider itself immune to the risks ahead of us,” François Villeroy de Galhau, governor of the Banque de France, said in the report.

Central banks spent much of the last 10 years hauling their economies out of a deep financial crisis that began in 2008. They may well spend the next decade coping with the disruptive effects of climate change and technology, the report said.

The European Central Bank, which on Thursday concluded a two-day meeting in Frankfurt focusing on monetary policy, is beginning to grapple with those challenges. The bank did not make any changes in interest rates or its economic stimulus program on Thursday. Instead, other issues are coming to the fore.

Christine Lagarde, the central bank’s president, who took office late last year, has pledged to put climate change on the bank’s agenda, and it was a topic of discussion at the last monetary policy meeting, in December.

Members of the European Central Bank’s governing council argued “that there was a need to step up efforts to understand the economic consequences of climate change,” according to the bank’s official account of the discussion.

Global warming will play a big role in the European Central Bank’s strategic review, a broad reassessment of the way the bank tries to manage inflation. For example, when trying to influence market interest rates, the bank could decide to stop buying bonds of corporations considered big producers of greenhouse gases.

This new awareness of the financial consequences of a hotter earth comes as central banks are contending with another new challenge: technologies that threaten their monopoly on issuing money and their power to combat a financial crisis.

Unofficial digital currencies like Bitcoin or Facebook’s Libra, which is still in the planning stages, bypass central banks and could undermine their control of the monetary system. The obvious solution is for central banks to get into the digital currency business themselves.

On Wednesday, the central banks of Canada, Britain, Japan, Sweden and Switzerland said they were working together with the Bank for International Settlements to figure out what would happen if they did just that.

It’s complicated, though.

Like cash, people can use digital currencies to pay other people directly, without a bank in the middle. Unlike cash, digital currencies allow person-to-person transactions to take place online.

Such a system could be more efficient, but also risky, according to a report issued on Wednesday by the World Economic Forum, the organization that stages the annual conclave in Davos.

Commercial banks might become superfluous, and fail. Central banks would in effect become giant retail banks. But they have no experience dealing with millions of individual customers and could be overwhelmed. If a central bank collapsed, so would the monetary system.

Climate change also takes central banks into uncharted territory. Think the subprime crisis in 2008 was bad? Imagine a real estate crisis caused by rising sea levels and coastal flooding that renders thousands of square miles of land uninhabitable or useless for farming.

By some estimates, global gross domestic product could plunge by 25 percent because of the effects of climate change. Central banks have enough trouble dealing with mild recessions, and would not be powerful enough to combat an economic downturn of that scale.

“In the worst case scenario, central banks may have to intervene as climate rescuers of last resort or as some sort of collective insurer for climate damages,” according to the report, published by the Bank for International Settlements, a clearinghouse for the world’s major central banks.

It suggested some precautionary measures central banks could take.

Central banks, which often function as bank regulators, could require lenders to hold more capital if they hold assets vulnerable to the economic effects of a shift to renewable energy. An example might be a bank that has lent a lot of money to fossil fuel companies, or to the Saudi government.

The auto industry already illustrates how investors are moving their money away from companies seen as polluters and into companies seen as green, with disruptive effects on economies. Tesla’s value on the stock market is more than $100 billion, second only to Toyota among carmakers.

In this way, Tesla is being rewarded for producing emission-free electric vehicles. But the migration of capital away from the established manufacturers makes it difficult for them to invest in new technology, and threatens massive job losses and social and political upheaval.

Central banks need to coordinate their policies to deal with these new challenges, according to the Bank for International Settlements report. Unfortunately, coordination is not something that central banks are very good at right now.

“Climate change is a global problem that demands a global solution,” the paper said. But it added that “monetary policy seems, currently, to be difficult to coordinate between countries.”

Real Estate, and Personal Injury Lawyers. Contact us at: https://westlakelegal.com 

Climate Change Could Cause the Next Financial Meltdown

Westlake Legal Group merlin_167625216_f9d54ac2-c793-4efe-be3d-4d4683e5610b-facebookJumbo Climate Change Could Cause the Next Financial Meltdown World Economic Forum Virtual Currency Villeroy de Galhau, Francois (1959- ) Subprime Mortgage Crisis Lagarde, Christine Inflation (Economics) Global Warming Frankfurt (Germany) Facebook Inc European Central Bank Electric and Hybrid Vehicles Davos (Switzerland) Basel (Switzerland) Banking and Financial Institutions Bank for International Settlements

FRANKFURT — Climate change has already been blamed for deadly bush fires in Australia, dying coral reefs, rising sea levels and ever more cataclysmic storms. Could it also cause the next financial crisis?

A report issued this week by an umbrella organization for the world’s central banks argued that the answer is yes, while warning that central bankers lack tools to deal with what it says could be one of the biggest economic dislocations of all time.

The book-length report, published by the Bank for International Settlements in Basel, Switzerland, signals what could be the overriding theme for central banks in the decade to come.

“Climate change poses unprecedented challenges to human societies, and our community of central banks and supervisors cannot consider itself immune to the risks ahead of us,” François Villeroy de Galhau, governor of the Banque de France, said in the report.

Central banks spent much of the last 10 years hauling their economies out of a deep financial crisis that began in 2008. They may well spend the next decade coping with the disruptive effects of climate change and technology, the report said.

The European Central Bank, which on Thursday concluded a two-day meeting in Frankfurt focusing on monetary policy, is beginning to grapple with those challenges. The bank did not make any changes in interest rates or its economic stimulus program on Thursday. Instead, other issues are coming to the fore.

Christine Lagarde, the central bank’s president, who took office late last year, has pledged to put climate change on the bank’s agenda, and it was a topic of discussion at the last monetary policy meeting, in December.

Members of the European Central Bank’s governing council argued “that there was a need to step up efforts to understand the economic consequences of climate change,” according to the bank’s official account of the discussion.

Global warming will play a big role in the European Central Bank’s strategic review, a broad reassessment of the way the bank tries to manage inflation. For example, when trying to influence market interest rates, the bank could decide to stop buying bonds of corporations considered big producers of greenhouse gases.

This new awareness of the financial consequences of a hotter earth comes as central banks are contending with another new challenge: technologies that threaten their monopoly on issuing money and their power to combat a financial crisis.

Unofficial digital currencies like Bitcoin or Facebook’s Libra, which is still in the planning stages, bypass central banks and could undermine their control of the monetary system. The obvious solution is for central banks to get into the digital currency business themselves.

On Wednesday, the central banks of Canada, Britain, Japan, Sweden and Switzerland said they were working together with the Bank for International Settlements to figure out what would happen if they did just that.

It’s complicated, though.

Like cash, people can use digital currencies to pay other people directly, without a bank in the middle. Unlike cash, digital currencies allow person-to-person transactions to take place online.

Such a system could be more efficient, but also risky, according to a report issued on Wednesday by the World Economic Forum, the organization that stages the annual conclave in Davos.

Commercial banks might become superfluous, and fail. Central banks would in effect become giant retail banks. But they have no experience dealing with millions of individual customers and could be overwhelmed. If a central bank collapsed, so would the monetary system.

Climate change also takes central banks into uncharted territory. Think the subprime crisis in 2008 was bad? Imagine a real estate crisis caused by rising sea levels and coastal flooding that renders thousands of square miles of land uninhabitable or useless for farming.

By some estimates, global gross domestic product could plunge by 25 percent because of the effects of climate change. Central banks have enough trouble dealing with mild recessions, and would not be powerful enough to combat an economic downturn of that scale.

“In the worst case scenario, central banks may have to intervene as climate rescuers of last resort or as some sort of collective insurer for climate damages,” according to the report, published by the Bank for International Settlements, a clearinghouse for the world’s major central banks.

It suggested some precautionary measures central banks could take.

Central banks, which often function as bank regulators, could require lenders to hold more capital if they hold assets vulnerable to the economic effects of a shift to renewable energy. An example might be a bank that has lent a lot of money to fossil fuel companies, or to the Saudi government.

The auto industry already illustrates how investors are moving their money away from companies seen as polluters and into companies seen as green, with disruptive effects on economies. Tesla’s value on the stock market is more than $100 billion, second only to Toyota among carmakers.

In this way, Tesla is being rewarded for producing emission-free electric vehicles. But the migration of capital away from the established manufacturers makes it difficult for them to invest in new technology, and threatens massive job losses and social and political upheaval.

Central banks need to coordinate their policies to deal with these new challenges, according to the Bank for International Settlements report. Unfortunately, coordination is not something that central banks are very good at right now.

“Climate change is a global problem that demands a global solution,” the paper said. But it added that “monetary policy seems, currently, to be difficult to coordinate between countries.”

Real Estate, and Personal Injury Lawyers. Contact us at: https://westlakelegal.com 

Climate Change Could Cause the Next Financial Meltdown

Westlake Legal Group merlin_167625216_f9d54ac2-c793-4efe-be3d-4d4683e5610b-facebookJumbo Climate Change Could Cause the Next Financial Meltdown World Economic Forum Virtual Currency Villeroy de Galhau, Francois (1959- ) Subprime Mortgage Crisis Lagarde, Christine Inflation (Economics) Global Warming Frankfurt (Germany) Facebook Inc European Central Bank Electric and Hybrid Vehicles Davos (Switzerland) Basel (Switzerland) Banking and Financial Institutions Bank for International Settlements

FRANKFURT — Climate change has already been blamed for deadly bush fires in Australia, dying coral reefs, rising sea levels and ever more cataclysmic storms. Could it also cause the next financial crisis?

A report issued this week by an umbrella organization for the world’s central banks argued that the answer is yes, while warning that central bankers lack tools to deal with what it says could be one of the biggest economic dislocations of all time.

The book-length report, published by the Bank for International Settlements in Basel, Switzerland, signals what could be the overriding theme for central banks in the decade to come.

“Climate change poses unprecedented challenges to human societies, and our community of central banks and supervisors cannot consider itself immune to the risks ahead of us,” François Villeroy de Galhau, governor of the Banque de France, said in the report.

Central banks spent much of the last 10 years hauling their economies out of a deep financial crisis that began in 2008. They may well spend the next decade coping with the disruptive effects of climate change and technology, the report said.

The European Central Bank, which on Thursday concluded a two-day meeting in Frankfurt focusing on monetary policy, is beginning to grapple with those challenges. The bank did not make any changes in interest rates or its economic stimulus program on Thursday. Instead, other issues are coming to the fore.

Christine Lagarde, the central bank’s president, who took office late last year, has pledged to put climate change on the bank’s agenda, and it was a topic of discussion at the last monetary policy meeting, in December.

Members of the European Central Bank’s governing council argued “that there was a need to step up efforts to understand the economic consequences of climate change,” according to the bank’s official account of the discussion.

Global warming will play a big role in the European Central Bank’s strategic review, a broad reassessment of the way the bank tries to manage inflation. For example, when trying to influence market interest rates, the bank could decide to stop buying bonds of corporations considered big producers of greenhouse gases.

This new awareness of the financial consequences of a hotter earth comes as central banks are contending with another new challenge: technologies that threaten their monopoly on issuing money and their power to combat a financial crisis.

Unofficial digital currencies like Bitcoin or Facebook’s Libra, which is still in the planning stages, bypass central banks and could undermine their control of the monetary system. The obvious solution is for central banks to get into the digital currency business themselves.

On Wednesday, the central banks of Canada, Britain, Japan, Sweden and Switzerland said they were working together with the Bank for International Settlements to figure out what would happen if they did just that.

It’s complicated, though.

Like cash, people can use digital currencies to pay other people directly, without a bank in the middle. Unlike cash, digital currencies allow person-to-person transactions to take place online.

Such a system could be more efficient, but also risky, according to a report issued on Wednesday by the World Economic Forum, the organization that stages the annual conclave in Davos.

Commercial banks might become superfluous, and fail. Central banks would in effect become giant retail banks. But they have no experience dealing with millions of individual customers and could be overwhelmed. If a central bank collapsed, so would the monetary system.

Climate change also takes central banks into uncharted territory. Think the subprime crisis in 2008 was bad? Imagine a real estate crisis caused by rising sea levels and coastal flooding that renders thousands of square miles of land uninhabitable or useless for farming.

By some estimates, global gross domestic product could plunge by 25 percent because of the effects of climate change. Central banks have enough trouble dealing with mild recessions, and would not be powerful enough to combat an economic downturn of that scale.

“In the worst case scenario, central banks may have to intervene as climate rescuers of last resort or as some sort of collective insurer for climate damages,” according to the report, published by the Bank for International Settlements, a clearinghouse for the world’s major central banks.

It suggested some precautionary measures central banks could take.

Central banks, which often function as bank regulators, could require lenders to hold more capital if they hold assets vulnerable to the economic effects of a shift to renewable energy. An example might be a bank that has lent a lot of money to fossil fuel companies, or to the Saudi government.

The auto industry already illustrates how investors are moving their money away from companies seen as polluters and into companies seen as green, with disruptive effects on economies. Tesla’s value on the stock market is more than $100 billion, second only to Toyota among carmakers.

In this way, Tesla is being rewarded for producing emission-free electric vehicles. But the migration of capital away from the established manufacturers makes it difficult for them to invest in new technology, and threatens massive job losses and social and political upheaval.

Central banks need to coordinate their policies to deal with these new challenges, according to the Bank for International Settlements report. Unfortunately, coordination is not something that central banks are very good at right now.

“Climate change is a global problem that demands a global solution,” the paper said. But it added that “monetary policy seems, currently, to be difficult to coordinate between countries.”

Real Estate, and Personal Injury Lawyers. Contact us at: https://westlakelegal.com 

Mortgage Rates Below 1% Put Europe on Alert for Housing Bubble

PARIS — Europe’s economy is struggling to gain traction after years of anemic growth. But the rock-bottom interest rates meant to power a recovery are fueling a property boom that is creating a new set of problems.

Money is so cheap — a 20-year mortgage can be had in Paris or Frankfurt at a rate of less than 1 percent — that borrowers are flocking to buy apartments and houses. And institutional investors, seeing a chance for lucrative returns, are acquiring swaths of residential real estate in cities across Europe.

In some parts of Europe, said Jörg Krämer, the chief economist at Commerzbank in Frankfurt, valuations have already returned to or exceeded levels that preceded the Continent’s debt crisis a decade ago, igniting concerns that the property boom could end badly.

“The risks are real, because negative interest rates in Europe are cemented,” Mr. Krämer said. “What’s important for the economy as a whole is to prevent the emergence of a dangerous new bubble.”

Demand has surged in the five years since the European Central Bank pushed one of its benchmark interest rates below zero, a step never before tried on such a scale. Prices jumped at least 30 percent in Frankfurt, Amsterdam, Stockholm, Madrid and other metropolitan hot spots, and are up an average of over 40 percent in Portugal, Luxembourg, Slovakia and Ireland.

That has made homeownership increasingly unaffordable for most anyone except high earners, while also driving up rents, pushing working class people farther from urban centers. A political backlash is unfolding as European mayors intervene in the market with rent controls, higher property taxes and subsidized housing programs.

“It plays into a sense of social distress,” said Loïc Bonneval, a sociologist at the Max Weber Center in Lyon, a social research organization.

While low rates helped produce a rebound in the eurozone, economists say the policies now appear to be doing more harm than good, clouding the bank’s efforts to reverse inequality. They have not resolved fundamental problems like weak business investment. Nor have they revived inflation — which helps lift wages — anywhere but in the housing market.

“The dynamics have totally changed in a short period of time,” said Matthias Holzhey, the head of Swiss real estate at UBS and the lead author of an annual report on property price spikes in major global cities. In some parts of Europe, he said, “low rates are pushing real estate valuations into the bubble risk zone.”

Financial authorities are on alert. In September, the European Systemic Risk Board, an arm of the European Central Bank that helps regulate Europe’s financial system, called on 11 countries including Luxembourg, Austria, Denmark and Sweden to pursue regulations and tax measures meant to rein in prices and promote housing affordability and availability.

In Europe, Cheap Money Is Fueling a Worrisome Property Boom

Westlake Legal Group 12TK-biz-web-BUBBLE-Artboard_2 Mortgage Rates Below 1% Put Europe on Alert for Housing Bubble Rent Control and Stabilization Real Estate and Housing (Residential) Prices (Fares, Fees and Rates) Mortgages Interest Rates European Central Bank Europe Banking and Financial Institutions

Housing prices have increased . . .

Change in housing price index

. . . while incomes have lagged . . .

Change in per capita disposable income

. . . and borrowing costs are at record lows.

Cost of household borrowing for house purchases

Top 7 cities at risk of a housing bubble

UBS Global Real Estate Bubble Index, 2019

Westlake Legal Group 12TK-biz-web-BUBBLE-Artboard_3 Mortgage Rates Below 1% Put Europe on Alert for Housing Bubble Rent Control and Stabilization Real Estate and Housing (Residential) Prices (Fares, Fees and Rates) Mortgages Interest Rates European Central Bank Europe Banking and Financial Institutions

Housing prices have increased . . .

. . . while incomes have lagged . . .

Change in housing price index

Change in per capita disposable income

. . . and borrowing costs are at record lows.

Top 7 cities at risk of a housing bubble

Cost of household borrowing for house purchases

UBS Global Real Estate Bubble Index, 2019

Sources: Eurostat (housing price index, income); European Central Bank (borrowing cost); UBS (real estate bubble index) | By The New York Times

The Bundesbank, Germany’s central bank, said recently that real estate in German cities had been overvalued by 15 to 30 percent — in other words, that there is a bubble. The UBS survey cited Munich, Frankfurt, Amsterdam and Paris as cities at risk. And a study by the global accounting firm Deloitte & Touche cautioned that average house prices “will exceed pre-crisis levels” if the European Central Bank keeps interest rates at zero, as planned.

Housing prices have risen sharply in the United States as well. But there, the boom has been driven by individual buyers, household debt has been held in check and lending standards have remained relatively tight — all factors that reduce the chance of another collapse. Moreover, while benchmark interest rates in the United States have been kept low, they were never negative — and have now been above zero for several years.

Some economists say that the concerns in Europe are overblown and that prices are overvalued but not in a danger zone. For one thing, job creation from the economic recovery, however tepid or uneven, has expanded the ranks of creditworthy borrowers. And buyers are mainly living in properties or renting them out, rather than flipping them as happened before the crisis.

The supply of urban housing, however, has failed to keep pace with the resulting demand. Disrupters like Airbnb have added to the crunch by converting residential properties into vacation stays. The result is a shortage of affordable housing, particularly in the rental sector, squeezing middle and low-income earners such as teachers, firefighters, nurses and retail employees who work in cities but cannot afford to live in them.

The dynamics are worsening as deep-pocketed domestic and foreign investors pivot from focusing almost exclusively on commercial real estate to acquiring residential housing around Europe. Pension and insurance funds, which typically invest in government bonds, have found it impossible to make money off countries like Germany, where the interest rate paid is less than zero. That has driven them into real estate funds, which offer high returns in comparison to bonds.

Rents and mortgages consume a quarter of monthly income on average, up from 17 percent two decades ago, according to data compiled by Housing Europe, a federation of affordable-housing groups. One-tenth of Europeans spend over 40 percent of their income on housing. The rates are sharply higher for the poorest households.

“House prices have risen much faster than citizens’ incomes,” said Cédric Van Styvendael, the organization’s president. “It’s a problem for Europe.” Wages and salaries in the eurozone grew 2.7 percent in the three months to June in 2019 compared to a year earlier.

The scarcity of affordable housing is fueling resentment and political strife. In Madrid and Barcelona, home prices have jumped more than 30 percent since 2016, pushing rents up as landlords sought bigger returns. Prime Minister Pedro Sánchez capped rents in Spain this summer at the rate of inflation, now 0.4 percent, limiting income for property owners.

In Paris, where 70 percent of residents are renters, Mayor Anne Hidalgo imposed new rent controls. While rents are limited by strict housing regulations, they have risen 40 percent between 2000 and 2018. As property prices keep climbing — they recently broke a record of 10,000 euros on average per square meter, or about $1,000 per square foot, one of the highest prices in Europe — Ms. Hidalgo is taking other steps to prevent the city from becoming a “ghetto for the rich.” Her plans include building subsidized housing that families with modest incomes can purchase at half the market rate.

Few places have felt the impact as sharply as Berlin. Since the fall of the Berlin Wall 30 years ago, workers, artists and students have increasingly been displaced by an influx of young professionals with families. But property prices and rents have skyrocketed in recent years as home buyers and investors double down.

The city imposed a five-year rent freeze, the toughest in Europe, in the summer after rents jumped more than 50 percent in five years, and gave tenants the right to demand reductions if rents go too high. German real estate stocks have slumped since the ruling.

For Kathrin Hauer, 39, the measures are urgent. She was a student nearly two decades ago when she became a tenant in a World War II-era building formerly owned by the East German government, on Schönhauser Allee, a central street. Ms. Hauer, who works as a costume and set designer for German theaters, was long happy with her $450-a-month apartment, which was bought by a small group of investors after Communism.

Then in 2016, the building was sold to an investment company. Last December, right before a national law limiting rent increases was to take effect, the company announced major construction work that would raise rents on the low-income tenants by 250 percent. Ms. Hauer’s rent would surge above $1,500 a month, far more than she could afford.

“This is meant to scare us to get out,” Ms. Hauer said.

The tenants won an order from the city’s planning department to halt the renovations, which included large elevators, balconies and floor-to-ceiling windows. Soon after, in a move that tenants believe was a form of retaliation, Ms. Hauer said, the investors ordered all the trees in the interior courtyard to be razed, and hired a middleman to persuade tenants to agree to the renovations and accept buyouts.

Itai Amir, the director of the company that now owns the building, would not comment for this article.

Wibke Werner, the deputy director of Berliner Mieterverein, an association of Berlin renters with more 170,000 members, said that because of the low interest rates, investors were “betting on concrete gold.”

“These investments are designed to optimize returns,” she said, “which means rising rents and the crowding out of low-income households.”

In Denmark, which is not part of the euro but closely tracks E.C.B. monetary policy, benchmark interest rates have been negative for seven years. Seeking greater returns, some Danish pension funds are buying large holdings of prime real estate and new buildings to offer for rent. But rents have grown so high that the city is considering capping them, which could cut into those investments.

At the same time, rates are so low that bargains being offered by banks are hard to pass up. In August, Jyske Bank of Denmark began offering 10-year fixed-rate mortgages at negative 0.5 percent interest before fees, meaning the amount outstanding on the loan will be reduced each month by more than the borrower has paid. Nordea Bank is offering 20-year loans at zero interest.

While banks have stopped flooding mailboxes with credit card offers, a common practice before the debt crisis, offering ultracheap mortgage loans is a way of luring new customers.

That has tempted borrowers in the Netherlands to go to extremes. While Dutch banks took steps to curb lending this year, Dutch households held mortgage debt of 527 billion euros ($584 billion) at the end of March — equal to nearly two-thirds of the Dutch economy.

The Dutch central bank warned recently that “systemic risk” in the Dutch housing market posed the biggest threat to financial stability. A sudden fall in housing prices could be disastrous for households and banks, it said, because borrowers are overextended.

With little room to maneuver, the European Central Bank recently called on politicians in euro countries to take bolder steps to prevent asset bubbles from growing.

“This is all new territory,” Mr. Holzhey of UBS said. “Some caution is warranted because in the past, no one really forecast a house price crash,” he said.

“Headlines always said prices are rising, but there’s no bubble,” he added.

Until there was.

Christopher Schuetze contributed reporting from Berlin, Jack Ewing from Frankfurt and Ben Casselman from New York. Alain Delaquérière contributed research.

Real Estate, and Personal Injury Lawyers. Contact us at: https://westlakelegal.com 

Mortgage Rates Below 1% Put Europe on Alert for Housing Bubble

PARIS — Europe’s economy is struggling to gain traction after years of anemic growth. But the rock-bottom interest rates meant to power a recovery are fueling a property boom that is creating a new set of problems.

Money is so cheap — a 20-year mortgage can be had in Paris or Frankfurt at a rate of less than 1 percent — that borrowers are flocking to buy apartments and houses. And institutional investors, seeing a chance for lucrative returns, are acquiring swaths of residential real estate in cities across Europe.

In some parts of Europe, said Jörg Krämer, the chief economist at Commerzbank in Frankfurt, valuations have already returned to or exceeded levels that preceded the Continent’s debt crisis a decade ago, igniting concerns that the property boom could end badly.

“The risks are real, because negative interest rates in Europe are cemented,” Mr. Krämer said. “What’s important for the economy as a whole is to prevent the emergence of a dangerous new bubble.”

Demand has surged in the five years since the European Central Bank pushed one of its benchmark interest rates below zero, a step never before tried on such a scale. Prices jumped at least 30 percent in Frankfurt, Amsterdam, Stockholm, Madrid and other metropolitan hot spots, and are up an average of over 40 percent in Portugal, Luxembourg, Slovakia and Ireland.

That has made homeownership increasingly unaffordable for most anyone except high earners, while also driving up rents, pushing working class people farther from urban centers. A political backlash is unfolding as European mayors intervene in the market with rent controls, higher property taxes and subsidized housing programs.

“It plays into a sense of social distress,” said Loïc Bonneval, a sociologist at the Max Weber Center in Lyon, a social research organization.

While low rates helped produce a rebound in the eurozone, economists say the policies now appear to be doing more harm than good, clouding the bank’s efforts to reverse inequality. They have not resolved fundamental problems like weak business investment. Nor have they revived inflation — which helps lift wages — anywhere but in the housing market.

“The dynamics have totally changed in a short period of time,” said Matthias Holzhey, the head of Swiss real estate at UBS and the lead author of an annual report on property price spikes in major global cities. In some parts of Europe, he said, “low rates are pushing real estate valuations into the bubble risk zone.”

Financial authorities are on alert. In September, the European Systemic Risk Board, an arm of the European Central Bank that helps regulate Europe’s financial system, called on 11 countries including Luxembourg, Austria, Denmark and Sweden to pursue regulations and tax measures meant to rein in prices and promote housing affordability and availability.

In Europe, Cheap Money Is Fueling a Worrisome Property Boom

Westlake Legal Group 12TK-biz-web-BUBBLE-Artboard_2 Mortgage Rates Below 1% Put Europe on Alert for Housing Bubble Rent Control and Stabilization Real Estate and Housing (Residential) Prices (Fares, Fees and Rates) Mortgages Interest Rates European Central Bank Europe Banking and Financial Institutions

Housing prices have increased . . .

Change in housing price index

. . . while incomes have lagged . . .

Change in per capita disposable income

. . . and borrowing costs are at record lows.

Cost of household borrowing for house purchases

Top 7 cities at risk of a housing bubble

UBS Global Real Estate Bubble Index, 2019

Westlake Legal Group 12TK-biz-web-BUBBLE-Artboard_3 Mortgage Rates Below 1% Put Europe on Alert for Housing Bubble Rent Control and Stabilization Real Estate and Housing (Residential) Prices (Fares, Fees and Rates) Mortgages Interest Rates European Central Bank Europe Banking and Financial Institutions

Housing prices have increased . . .

. . . while incomes have lagged . . .

Change in housing price index

Change in per capita disposable income

. . . and borrowing costs are at record lows.

Top 7 cities at risk of a housing bubble

Cost of household borrowing for house purchases

UBS Global Real Estate Bubble Index, 2019

Sources: Eurostat (housing price index, income); European Central Bank (borrowing cost); UBS (real estate bubble index) | By The New York Times

The Bundesbank, Germany’s central bank, said recently that real estate in German cities had been overvalued by 15 to 30 percent — in other words, that there is a bubble. The UBS survey cited Munich, Frankfurt, Amsterdam and Paris as cities at risk. And a study by the global accounting firm Deloitte & Touche cautioned that average house prices “will exceed pre-crisis levels” if the European Central Bank keeps interest rates at zero, as planned.

Housing prices have risen sharply in the United States as well. But there, the boom has been driven by individual buyers, household debt has been held in check and lending standards have remained relatively tight — all factors that reduce the chance of another collapse. Moreover, while benchmark interest rates in the United States have been kept low, they were never negative — and have now been above zero for several years.

Some economists say that the concerns in Europe are overblown and that prices are overvalued but not in a danger zone. For one thing, job creation from the economic recovery, however tepid or uneven, has expanded the ranks of creditworthy borrowers. And buyers are mainly living in properties or renting them out, rather than flipping them as happened before the crisis.

The supply of urban housing, however, has failed to keep pace with the resulting demand. Disrupters like Airbnb have added to the crunch by converting residential properties into vacation stays. The result is a shortage of affordable housing, particularly in the rental sector, squeezing middle and low-income earners such as teachers, firefighters, nurses and retail employees who work in cities but cannot afford to live in them.

The dynamics are worsening as deep-pocketed domestic and foreign investors pivot from focusing almost exclusively on commercial real estate to acquiring residential housing around Europe. Pension and insurance funds, which typically invest in government bonds, have found it impossible to make money off countries like Germany, where the interest rate paid is less than zero. That has driven them into real estate funds, which offer high returns in comparison to bonds.

Rents and mortgages consume a quarter of monthly income on average, up from 17 percent two decades ago, according to data compiled by Housing Europe, a federation of affordable-housing groups. One-tenth of Europeans spend over 40 percent of their income on housing. The rates are sharply higher for the poorest households.

“House prices have risen much faster than citizens’ incomes,” said Cédric Van Styvendael, the organization’s president. “It’s a problem for Europe.” Wages and salaries in the eurozone grew 2.7 percent in the three months to June in 2019 compared to a year earlier.

The scarcity of affordable housing is fueling resentment and political strife. In Madrid and Barcelona, home prices have jumped more than 30 percent since 2016, pushing rents up as landlords sought bigger returns. Prime Minister Pedro Sánchez capped rents in Spain this summer at the rate of inflation, now 0.4 percent, limiting income for property owners.

In Paris, where 70 percent of residents are renters, Mayor Anne Hidalgo imposed new rent controls. While rents are limited by strict housing regulations, they have risen 40 percent between 2000 and 2018. As property prices keep climbing — they recently broke a record of 10,000 euros on average per square meter, or about $1,000 per square foot, one of the highest prices in Europe — Ms. Hidalgo is taking other steps to prevent the city from becoming a “ghetto for the rich.” Her plans include building subsidized housing that families with modest incomes can purchase at half the market rate.

Few places have felt the impact as sharply as Berlin. Since the fall of the Berlin Wall 30 years ago, workers, artists and students have increasingly been displaced by an influx of young professionals with families. But property prices and rents have skyrocketed in recent years as home buyers and investors double down.

The city imposed a five-year rent freeze, the toughest in Europe, in the summer after rents jumped more than 50 percent in five years, and gave tenants the right to demand reductions if rents go too high. German real estate stocks have slumped since the ruling.

For Kathrin Hauer, 39, the measures are urgent. She was a student nearly two decades ago when she became a tenant in a World War II-era building formerly owned by the East German government, on Schönhauser Allee, a central street. Ms. Hauer, who works as a costume and set designer for German theaters, was long happy with her $450-a-month apartment, which was bought by a small group of investors after Communism.

Then in 2016, the building was sold to an investment company. Last December, right before a national law limiting rent increases was to take effect, the company announced major construction work that would raise rents on the low-income tenants by 250 percent. Ms. Hauer’s rent would surge above $1,500 a month, far more than she could afford.

“This is meant to scare us to get out,” Ms. Hauer said.

The tenants won an order from the city’s planning department to halt the renovations, which included large elevators, balconies and floor-to-ceiling windows. Soon after, in a move that tenants believe was a form of retaliation, Ms. Hauer said, the investors ordered all the trees in the interior courtyard to be razed, and hired a middleman to persuade tenants to agree to the renovations and accept buyouts.

Itai Amir, the director of the company that now owns the building, would not comment for this article.

Wibke Werner, the deputy director of Berliner Mieterverein, an association of Berlin renters with more 170,000 members, said that because of the low interest rates, investors were “betting on concrete gold.”

“These investments are designed to optimize returns,” she said, “which means rising rents and the crowding out of low-income households.”

In Denmark, which is not part of the euro but closely tracks E.C.B. monetary policy, benchmark interest rates have been negative for seven years. Seeking greater returns, some Danish pension funds are buying large holdings of prime real estate and new buildings to offer for rent. But rents have grown so high that the city is considering capping them, which could cut into those investments.

At the same time, rates are so low that bargains being offered by banks are hard to pass up. In August, Jyske Bank of Denmark began offering 10-year fixed-rate mortgages at negative 0.5 percent interest before fees, meaning the amount outstanding on the loan will be reduced each month by more than the borrower has paid. Nordea Bank is offering 20-year loans at zero interest.

While banks have stopped flooding mailboxes with credit card offers, a common practice before the debt crisis, offering ultracheap mortgage loans is a way of luring new customers.

That has tempted borrowers in the Netherlands to go to extremes. While Dutch banks took steps to curb lending this year, Dutch households held mortgage debt of 527 billion euros ($584 billion) at the end of March — equal to nearly two-thirds of the Dutch economy.

The Dutch central bank warned recently that “systemic risk” in the Dutch housing market posed the biggest threat to financial stability. A sudden fall in housing prices could be disastrous for households and banks, it said, because borrowers are overextended.

With little room to maneuver, the European Central Bank recently called on politicians in euro countries to take bolder steps to prevent asset bubbles from growing.

“This is all new territory,” Mr. Holzhey of UBS said. “Some caution is warranted because in the past, no one really forecast a house price crash,” he said.

“Headlines always said prices are rising, but there’s no bubble,” he added.

Until there was.

Christopher Schuetze contributed reporting from Berlin, Jack Ewing from Frankfurt and Ben Casselman from New York. Alain Delaquérière contributed research.

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Christine Lagarde Begins to Chart a Course at the E.C.B.

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FRANKFURT — Christine Lagarde is one of the most recognizable people on the world stage, but as president of the European Central Bank, a job she began six weeks ago, she is a cipher.

That could begin to change Thursday when Ms. Lagarde holds her first news conference as leader of the institution that has often determined Europe’s economic fate.

The event will follow a meeting of monetary policymakers. Analysts and investors will be listening intently for clues about her opinions on questions such as whether the central bank’s fire hose of economic stimulus has begun to do more harm than good.

For all her prominence, no one knows what kind of central banker Ms. Lagarde will be. Before beginning work at the European Central Bank on Nov. 1, she spent eight years as managing director of the International Monetary Fund. In that job, she was often in the thick of the action during a financial crisis or debt meltdown. She was one of the world’s most powerful women.

But until last month she had never worked as a central banker, and unlike many in the profession, she has never been an economics professor whose published research would reveal her worldview.

In public appearances so far, including a question-and-answer session with members of the European Parliament, she has stuck to the course articulated by her immediate predecessor, Mario Draghi. That course commits the central bank to ample monetary stimulus for the foreseeable future.

But Ms. Lagarde has also signaled that she will question the assumptions underlying central bank policy since the euro began to circulate two decades ago.

She is overseeing a comprehensive review of central bank strategy that could redefine its role. “What the outcome will be, we do not know at this stage,” Ms. Lagarde told European Parliament members in Brussels last month, “but clearly every stone will have to be turned and every option will have to be examined.”

There is a lot to talk about. Despite record doses of monetary stimulus under Mr. Draghi, inflation remains well below the European Central Bank’s target of 2 percent. Among economists and many central bankers, there is a growing feeling that the stimulus has become counterproductive.

Extremely low interest rates have made borrowing cheap and encouraged lending, which is the point. But low rates have also cut into bank profits. Some economists argue that banks in countries like Germany have no reason to issue credit because they can no longer make money doing so.

“We have overstretched the use of monetary policy,” Eric Dor, the director of economic studies at IÉSEG School of Management in Lille, France, told reporters in Frankfurt on Wednesday.

The low rates have been a boon for debt-burdened governments and companies, but there is growing concern that easy money is fueling real estate bubbles in places like Germany, and encouraging insurance companies and other investors to buy too many risky assets.

At the same time, Mr. Dor said, the European Central Bank cannot end stimulus without damaging the economies of heavily indebted countries like Italy.

“It’s a problem if we don’t normalize monetary policy, and it’s a problem if we do,” Mr. Dor said. “It’s a trap.”

Ms. Lagarde must try to reconcile that dilemma while also healing differences within the European Central Bank’s Governing Council, which sets policy. There is an open rift between members from northern countries who would like to see stimulus reduced and those from southern countries eager to keep it flowing.

The strategy review, of uncertain duration, is likely to focus on the central bank’s approach to inflation. By law, the European Central Bank is required to guard price stability. But it has discretion to define what that means.

Since the last strategy review, in 2003, the monetary policymakers based in Frankfurt have promised to keep the annual inflation rate “below, but close to, 2 percent.” Some inflation is considered a good thing because it provides a comfortable buffer against deflation, a downward spiral of prices that can lead to economic depression.

Modest inflation also encourages individuals and companies to invest and spend, because otherwise their money slowly loses value.

Some economists, such as Otmar Issing, the European Central Bank’s former chief economist, say the bank should give up trying to hit the 2 percent target, which it never succeeded in doing consistently under Mr. Draghi. Fear of deflation is overblown, Mr. Issing and others argue, and there is nothing wrong with low inflation.

Another group, whose most prominent member is Olivier Blanchard, former chief economist of the International Monetary Fund, argue for an inflation target as high as 4 percent in boom times. The theory is that a higher target would encourage companies to raise prices, while giving the central bank more space to cut interest rates in bad times.

Carsten Brzeski, the chief economist at ING Germany, suggested that the central bank could buy itself more flexibility by simply promising to keep inflation “around 2 percent.” That may seem like an insignificant change, but it would allow the central bank to overshoot the target when necessary to compensate for a long period of meager inflation.

Where Ms. Lagarde stands in this debate is not clear. But those who scrutinize central bankers’ utterances detect signs that she is concerned about pernicious consequences from measures to push up the inflation rate.

As evidence, analysts point out that during a speech in Frankfurt last month, Ms. Lagarde said the European Central Bank “will continuously monitor the side effects of our policies.”

Because Ms. Lagarde is so new to her job, the experts are not sure how much weight to give such comments.

“Expect a lot of second-guessing of Lagarde,” economists at Deutsche Bank said in a recent note to clients, “as the market gets used to her communication nuances.”

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E.C.B. Acts to Head Off Recession Threat in Europe, With a Caveat

FRANKFURT — The European Central Bank took unexpectedly aggressive steps on Thursday to head off a downturn before it gained momentum, but the bank signaled that it was reaching the limits of what it could do to stimulate the eurozone economy.

The central bank cut a key interest rate and revived a money-printing program, but later issued an unusually strong call for eurozone governments to do more of the economic heavy lifting.

Those countries that can afford it should stimulate growth by increasing public spending, Mario Draghi, the central bank president, said during a news conference.

Asked whether the message to political leaders was that they can’t expect the central bank to come to their rescue forever, Mr. Draghi answered: “Definitely yes.”

Mr. Draghi’s call for government action, which he said had the unanimous support of the bank’s 25-member Governing Council, was also an expression of unity with his soon-to-be-successor, Christine Lagarde. Ms. Lagarde, who will become the European Central Bank’s president in November, issued a similar plea when she spoke to members of the European Parliament last week.

For much of the last decade, the European Central Bank has prevented the eurozone economy from collapsing with an array of sometimes unprecedented crisis measures. But economic growth has almost stalled, and there is a growing consensus among analysts that wealthier countries like Germany or the Netherlands need to pump money into their economies, and by extension the rest of the eurozone, with tax cuts or public works projects.

Central banks are “not the only game in town,” Ms. Lagarde said at the European Parliament last week.

Read more: Central banks around the world are cutting rates to fend off recession.

The measures that the European Central Bank announced Thursday go beyond what many analysts were expecting. Recent comments by members of the Governing Council had cast doubt on whether the bank would restart purchases of government and corporate bonds. It has been only nine months since the bank ended a previous bond-buying program, an initiative that started in the midst of the financial crisis.

The bank will buy 20 billion euros’ worth of bonds, or $22 billion, every month starting in November, a form of money printing intended to inject money into the system and hold down interest rates.

In a bid to increase lending, the bank also pushed even lower the so-called negative interest rate it imposes on commercial banks that hoard cash.

In normal times, banks earn interest when they deposit money in central banks. But since 2014, the European Central Bank has imposed a negative rate — essentially, a charge — on such deposits to pressure commercial banks to lend more. On Thursday, the central bank changed this deposit rate to minus 0.5 percent from minus 0.4 percent. It was the first cut in interest rates since 2016.

The deposit rate is one of the few remaining levers the bank can use to push down market interest rates. Its benchmark interest rate, the rate at which it lends to banks, is already at zero and cannot go any lower.

The move was symptomatic of the upside-down world of modern finance, in which interest rates are so low that insurance companies and other investors must pay governments and even some corporations to keep their money safe.

The central bank acknowledged Thursday that negative interest rates have some unwanted side effects and took steps to ease the pain. Some bank holdings will be exempt from the penalty, a practice known as tiering.

Despite Mr. Draghi’s plea for governments to do more, the idea of debt-financed spending, even on such favorable terms, is politically touchy in Germany. Germans are proud of their balanced budgets, and a constitutional amendment effectively forbids deficit spending.

ImageWestlake Legal Group merlin_160661526_6442e930-0759-41b6-83cb-6ca02a20d88d-articleLarge E.C.B. Acts to Head Off Recession Threat in Europe, With a Caveat Recession and Depression Quantitative Easing Interest Rates Inflation (Economics) Government Bonds Eurozone European Central Bank Europe Draghi, Mario Banking and Financial Institutions

Mario Draghi, the European Central Bank president, at a news conference after the meeting of the Governing Council in Frankfurt on Thursday.CreditRalph Orlowski/Reuters

With Germany on the brink of recession, weighed down by slumping exports caused by the United States-China trade war, some domestic leaders have begun to question that orthodoxy. “We should think about whether a break-even budget is the right path,” Wolfgang Tiefensee, economics minister of the state of Thuringia, said in an interview last month.

“We should use increased tax receipts to invest in infrastructure — bridges, streets, railways, broadband,” he said, “everywhere there is an urgent need to catch up.”

“Many people share this view,” Mr. Tiefensee added, “but not yet a majority.”

The European Central Bank also exceeded expectations by making an open-ended commitment to keep interest rates low, and sweetening a program that encourages banks to lend money to consumers and businesses.

The bank said it would not begin raising interest rates “until it has seen the inflation outlook robustly converge to a level” below but close to 2 percent, the official target. The annual rate of inflation in August was only half that much. The open-ended commitment was in contrast to previous statements when the bank outlined a specific time frame.

Further, the bank said it would ease the terms of a program that allows banks to borrow money on favorable terms, provided they lend it to customers. The loans will be extended to three years from two, and for banks that meet certain benchmarks the interest rate will be negative. In other words, banks won’t pay any interest and won’t have to repay all of the money they borrowed.

President Trump, who has been pressing the Federal Reserve to cut its benchmark rate, responded to Thursday’s move by needling his own central bank. The European bank, he said, is “trying, and succeeding, in depreciating the Euro against the VERY strong dollar, hurting U.S. exports … And the Fed sits, and sits, and sits.”

President Trump wants negative interest rates. Here’s how that would work.

The euro slipped against the dollar on Thursday, but Mr. Draghi rejected the idea that currency manipulation was behind the bank’s action.

“We have a mandate, we pursue price stability, and we don’t target exchange rates, period,” he said.

Some prominent economists say that it’s time for the European Central Bank to get more creative. The bank’s balance sheet already includes €2.6 trillion, or about $2.9 trillion, in government and corporate bonds. They were bought with newly created euros to inject money into the financial system and push down interest rates.

Analysts say that the bank has limited scope to buy more government bonds because it already owns such a big chunk of the market.

“As I see it, he has only about €60 billion of sovereigns he can buy,” Carl Weinberg, chief international economist at High Frequency Economics in White Plains, N.Y., said in an email. “That does not support sovereign bond purchases lasting for very long.”

Some economists have begun urging the bank to consider printing money and distributing it directly to citizens.

Among them is Stanley Fischer, former vice chairman of the Fed and Mr. Draghi’s thesis adviser when he was a doctoral student at M.I.T. Mr. Fischer was among the authors of a report published last month by the fund manager BlackRock.

“An unprecedented response is needed when monetary policy is exhausted and fiscal policy alone is not enough,” the report said.

“That response will likely involve ‘going direct,’” the report said. “Going direct means the central bank finding ways to get central bank money directly in the hands of public and private sector spenders.”

The eurozone economy probably needs to get a lot worse before the central bank would consider such an idea, which would be highly contentious. “Giving money to people in whatever form, it’s a fiscal policy task,” Mr. Draghi said Thursday. “It’s not a monetary policy task.”

He added, though, that Ms. Lagarde might reconsider the issue.

Mr. Draghi will preside over one more monetary policy meeting, on Oct. 24, before handing power to Ms. Lagarde.

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E.C.B. Acts to Head Off Threat of Recession in Europe

Westlake Legal Group 12ecb-facebookJumbo E.C.B. Acts to Head Off Threat of Recession in Europe Recession and Depression Quantitative Easing Interest Rates Inflation (Economics) Government Bonds Eurozone European Central Bank Europe Draghi, Mario Banking and Financial Institutions

FRANKFURT — The European Central Bank took steps on Thursday to stimulate the eurozone economy, moving to head off a downturn before the problem gathers momentum.

In a bid to increase lending, the bank increased the de facto penalty it imposes on commercial banks that hoard cash. The bank’s Governing Council also said it would begin another round of bond purchases, a form of stimulus known as quantitative easing. The bank will buy 20 billion euros’ worth of bonds every month starting in November.

In normal times, banks earn interest when they deposit money in central banks. But since 2014, the European Central Bank has imposed a so-called negative interest rate on such deposits to pressure commercial banks to lend more. On Thursday, the central bank changed this deposit rate to minus 0.5 percent from minus 0.4 percent.

Analysts had expected an interest-rate cut Thursday, but there was considerable debate whether the bank would go further and restart purchases of government and corporate bonds. Mario Draghi, the president of the European Central Bank, has been signaling since June that measures to head off a recession would be necessary, absent an improvement in the economic outlook. Inflation has been stuck well below the official target of 2 percent.

Mr. Draghi, whose term ends in October, has faced growing criticism that easy-money policies and record low interest rates are fueling asset bubbles and undermining the profitability of commercial banks.

In response, on Thursday the central bank took steps to ease the pain of negative interest rates, saying that some bank holdings will be exempt from the penalty, a practice known as tiering.

Central banks around the world are cutting interest rates and trying to encourage borrowing as more and more indicators point to a global slowdown. Last week, the People’s Bank of China cut the amount of money that banks are required to keep in reserve, a step that will increase the amount available for lending and that will lead to lower interest rates. The Federal Reserve is expected to cut interest rates at its next meeting on Sept. 17-18 in Washington.

The European Central Bank’s action on Thursday amounted to a pre-emptive strike as economic indicators signal slowing growth in the 19 countries of the eurozone. Many analysts predict that Germany is about to slide into recession, dragging down the rest of the bloc. Trade wars and Britain’s chaotic attempt to leave the European Union have made business managers uncertain about the future and reluctant to invest in expanding factories or hiring new workers.

But the measures will also raise questions about what other options the central bank has if the eurozone economy continues to deteriorate.

The benchmark interest rate is already at zero, and the central bank’s balance sheet includes 2.6 trillion euros, or about $2.9 trillion, in government and corporate bonds purchased as part of a so-called quantitative easing program. The purchases are intended to drive down market interest rates by creating demand for government and corporate debt.

In December, the bank announced it would stop adding to its stock of bonds, though it has continued to reinvest the proceeds when bonds mature. Analysts say that the bank has limited scope to restart the quantitative easing program because it already owns such a big chunk of the market.

As a result, some economists have begun speculating that the central bank could consider more radical action, particularly if it looks like there is a danger of deflation. Some economists have begun urging the central bank to consider printing money and distributing it directly to citizens.

The eurozone economy probably needs to get a lot worse before the central bank would consider such an idea, which would be unprecedented and highly contentious. Nothing is likely to happen before Christine Lagarde replaces Mr. Draghi as president of the central bank at the beginning of November.

Mr. Draghi will preside over one more monetary policy meeting, on Oct. 24, before handing power to Ms. Lagarde.

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E.C.B. Acts to Head Off Threat of Recession in Europe

Westlake Legal Group 12ecb-facebookJumbo E.C.B. Acts to Head Off Threat of Recession in Europe Recession and Depression Quantitative Easing Interest Rates Inflation (Economics) Government Bonds Eurozone European Central Bank Europe Draghi, Mario Banking and Financial Institutions

FRANKFURT — The European Central Bank took steps on Thursday to stimulate the eurozone economy, moving to head off a downturn before the problem gathers momentum.

In a bid to increase lending, the bank increased the de facto penalty it imposes on commercial banks that hoard cash. The bank’s Governing Council also said it would begin another round of bond purchases, a form of stimulus known as quantitative easing. The bank will buy 20 billion euros’ worth of bonds every month starting in November.

In normal times, banks earn interest when they deposit money in central banks. But since 2014, the European Central Bank has imposed a so-called negative interest rate on such deposits to pressure commercial banks to lend more. On Thursday, the central bank changed this deposit rate to minus 0.5 percent from minus 0.4 percent.

Analysts had expected an interest-rate cut Thursday, but there was considerable debate whether the bank would go further and restart purchases of government and corporate bonds. Mario Draghi, the president of the European Central Bank, has been signaling since June that measures to head off a recession would be necessary, absent an improvement in the economic outlook. Inflation has been stuck well below the official target of 2 percent.

Mr. Draghi, whose term ends in October, has faced growing criticism that easy-money policies and record low interest rates are fueling asset bubbles and undermining the profitability of commercial banks.

In response, on Thursday the central bank took steps to ease the pain of negative interest rates, saying that some bank holdings will be exempt from the penalty, a practice known as tiering.

Central banks around the world are cutting interest rates and trying to encourage borrowing as more and more indicators point to a global slowdown. Last week, the People’s Bank of China cut the amount of money that banks are required to keep in reserve, a step that will increase the amount available for lending and that will lead to lower interest rates. The Federal Reserve is expected to cut interest rates at its next meeting on Sept. 17-18 in Washington.

The European Central Bank’s action on Thursday amounted to a pre-emptive strike as economic indicators signal slowing growth in the 19 countries of the eurozone. Many analysts predict that Germany is about to slide into recession, dragging down the rest of the bloc. Trade wars and Britain’s chaotic attempt to leave the European Union have made business managers uncertain about the future and reluctant to invest in expanding factories or hiring new workers.

But the measures will also raise questions about what other options the central bank has if the eurozone economy continues to deteriorate.

The benchmark interest rate is already at zero, and the central bank’s balance sheet includes 2.6 trillion euros, or about $2.9 trillion, in government and corporate bonds purchased as part of a so-called quantitative easing program. The purchases are intended to drive down market interest rates by creating demand for government and corporate debt.

In December, the bank announced it would stop adding to its stock of bonds, though it has continued to reinvest the proceeds when bonds mature. Analysts say that the bank has limited scope to restart the quantitative easing program because it already owns such a big chunk of the market.

As a result, some economists have begun speculating that the central bank could consider more radical action, particularly if it looks like there is a danger of deflation. Some economists have begun urging the central bank to consider printing money and distributing it directly to citizens.

The eurozone economy probably needs to get a lot worse before the central bank would consider such an idea, which would be unprecedented and highly contentious. Nothing is likely to happen before Christine Lagarde replaces Mr. Draghi as president of the central bank at the beginning of November.

Mr. Draghi will preside over one more monetary policy meeting, on Oct. 24, before handing power to Ms. Lagarde.

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Trump Calls for Fed’s ‘Boneheads’ to Slash Interest Rates Below Zero

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WASHINGTON — President Trump urged the Federal Reserve to cut interest rates below zero, suggesting a last-ditch monetary policy tactic tested abroad but never in America.

His comments came just one day before European policymakers are widely expected to cut a key rate further into negative territory.

In a series of tweets, Mr. Trump said that “The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt,” adding that “the USA should always be paying the the lowest rate.”

Mr. Trump continued to criticize his handpicked Fed chair, Jerome H. Powell, saying “it is only the naïveté of Jay Powell and the Federal Reserve that doesn’t allow us to do what other countries are already doing.”

He concluded by calling Mr. Powell, whom he nominated to head the central bank in 2017, and his colleagues “Boneheads.”

Mr. Trump’s request is extraordinary for several reasons. The United States economy is still growing solidly and consumers are spending strongly, making this an unusual time to push for monetary accommodation, particularly negative rates, a policy that the Fed debated but passed up even in the depths of the Great Recession. It is also typical for countries with comparatively strong economies to pay higher interest rates, not the “lowest” ones.

Negative rates, which have been used in economies including Japan, Switzerland and the Eurozone, mean that savers are penalized and borrowers rewarded: Their goal is to reduce borrowing costs for households and companies to encourage spending. But they come at a cost, curbing bank profitability.

While it’s unclear how effective they have been as a policy tool — some research suggests negative rates could curtail lending — they are increasingly a reality in much of the world as central banks rush to support economic growth and investors look for safe assets.

The timing of Mr. Trump’s tweet is also significant. The European Central Bank is expected to cut a key interest rate to a record-low negative 0.5 percent and roll out additional stimulus measures at its meeting on Thursday, in a bid to shore up very-low inflation and waning growth in important economies like Germany. Central banks around the world have been lowering their policy rates, partly because Mr. Trump’s trade war is combining with Brexit jitters and a global manufacturing slowdown to threaten growth in many nations.

The American president has commented on foreign central bank rate moves before, tweeting in June that “they have been getting away with this for years,” when Mario Draghi, who heads the European Central Bank, indicated that officials might provide additional stimulus to shore up the eurozone economy.

The Fed itself has already cut rates for the first time in more than a decade in July and is poised to lower borrowing costs further as risks to economic growth loom. Mr. Powell and his colleagues lowered interest rates to a range of 2 percent to 2.25 percent at their July meeting, and they are widely expected to cut by another quarter of a percentage point at their meeting next Tuesday and Wednesday in Washington.

“The Fed has, through the course of the year, seen fit to lower the expected path of interest rates,” Mr. Powell said in a speech last week, adding “that’s one of the reasons why the outlook is still a favorable one, despite these crosswinds we’ve been facing.”

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