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Full text: {https://www.ecb.europa.eu/press/key/date/2014/html/sp141127.en.html }

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Visit of the President of the European Central Bank to the Finnish parliament

Introductory remarks by Mario Draghi, President of the ECB,

Helsinki, 27 November 2014

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Summary

In his speech at the Finnish Parliament the President highlighted that, over the past crisis years, the ECB has acted forcefully to safeguard price stability and to contribute to financial stability in the euro area as a whole.

In particular, the ECB has taken several non-standard measures to ensure the transmission of its monetary policy to the economy. The latest unconventional measures announced by the ECB (the targeted long term refinancing operations (TLTROs), and the covered bond and ABS purchase programmes) will have a sizeable impact on our balance sheet, which we expect to move towards its early 2012 dimension. This will ensure the necessary degree of monetary accommodation and contribute to a gradual recovery and a return of inflation to levels closer to below, but close to, 2%. If, however, it becomes necessary to further address risks of too prolonged a period of low inflation, the Governing Council is unanimous in its commitment to using additional unconventional instruments within its mandate.

Accountability and transparency are the essential elements balancing the independence of a central bank, especially in times where unconventional measures are being taken. The ECB regularly publishes a variety of data on the execution of monetary policy operations and the liquidity conditions of the Eurosystem. (i.e. the SMP, the Covered Bonds Programmes and the ABS Purchase Programme portfolios). Additionally, the Governing Council committed to the publication of an account of monetary policy discussions.

As regards fiscal policy and structural reforms, while the Stability and Growth Pact should remain the anchor for confidence in sustainable public finances, a comprehensive strategy is needed to put the euro area economy back on track. This involves further sharing of sovereignty, i.e a leap forward from common rules to common institutions. The upcoming report commissioned by the Euro Summit on the future of economic governance will present a good starting point for further reflection.

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Honourable Members of Parliament,

Ladies and Gentlemen,

I would like to thank you warmly for having invited me to address you today. This is a good opportunity for me to explain the policies of the European Central Bank (ECB) and to listen to your concerns and questions. I am looking forward to a fruitful exchange of views today.

To lay the ground for our discussion, I will focus on three topics: the ECB’s monetary policy (even though I will not elaborate on possible upcoming measures as we are in the so-called “quiet” period during which members of the Governing Council are expected to remain silent on this issue), the ECB’s accountability framework and transparency, and the progress towards building a deeper economic and monetary union (EMU).

Economic and monetary developments

Let me first turn to economic developments in the euro area.

We have seen a weakening in the euro area’s growth momentum over the summer and the euro area economic outlook is surrounded by a number of downside risks. Also, most recent forecasts by private and public sector institutions have been revised downwards. Our expectation for a moderate recovery in the next years still remains in place, reflecting our monetary policy measures, the ongoing improvements in financial conditions, and the progress made vis-à-vis structural reforms and fiscal consolidation. But the recovery will likely be dampened by high unemployment, sizeable unutilised capacity, and the necessary balance sheet adjustments.

Inflation in the euro area remains very low, standing at 0.4% in October. In the light of the recent sharp fall in oil prices, and taking into account prevailing futures prices for energy, inflation is expected to remain at around current low levels over the coming months, before increasing gradually during 2015 and 2016.

Meanwhile, we are facing continuously sluggish money and credit dynamics – even if the growth rates of some key aggregates have edged up in recent months.

Monetary policy in crisis times

During the past crisis years, the ECB has acted forcefully to safeguard price stability and to contribute to financial stability in the euro area as a whole. In particular, we have taken several non-standard measures to ensure the transmission of our monetary policy to the economy. We provided the euro area banking system with unprecedented funding, including the full allotment - at fixed rates - of banks’ demand for liquidity. We also communicated our readiness to undertake Outright Monetary Transactions with a view towards restoring the monetary transmission mechanism which was impaired by distress in sovereign bond markets. While these measures have been successful in improving banks’ access to private credit and countering financial fragmentation, broader financing conditions – foremost the cost of borrowing from banks – have been exceptionally sluggish in responding to the monetary policy accommodation that was introduced. As a consequence, monetary and credit dynamics have followed a protracted, negative trend until very recently. Against this backdrop, and in view of a persistently weak inflation outlook, we decided in June and then in September to adopt a number of monetary policy measures. With these monetary policy decisions, we have moved from a monetary policy framework based predominantly on passive provision of liquidity to a more active and controlled management of our balance sheet.

In September, we cut the key ECB interest rates to their lower bound. The main refinancing rate now stands at 0.05%, and the deposit facility rate at -0.20%.

We also announced further measures to support lending and materially ease credit conditions for households and non-financial businesses.

These measures include the targeted longer-term refinancing operations (TLTROs), which we started to implement in September. These operations allow banks to borrow from the Eurosystem at very attractive conditions over a period of up to four years, provided that they meet certain conditions regarding their lending to the private non-financial sector (excluding loans to households for house purchases).

Moreover, last week we started to purchase simple and transparent asset-backed securities under our ABS purchase programme (ABSPP). Purchases will be restricted to senior and – down the line – guaranteed mezzanine tranches. Due to the stringent quality criteria for eligibility demanded of the underlying loans, and the considerable amount of credit enhancement which is built into the securitisations qualifying for the programme, the additional risk exposure which the Eurosystem will acquire under the ABSPP will remain limited.

We have also already started purchasing covered bonds issued by euro area banks under our new covered bond purchase programme (CBPP3).

These measures will enhance the transmission of monetary policy, support the provision of credit to the euro area economy and, as a result, ease our monetary policy stance more broadly. They will also have a sizeable impact on our balance sheet, which we expect to move towards its early 2012 dimension. This will ensure the necessary degree of monetary accommodation which will effectively contribute to a gradual recovery and a return of inflation to levels closer to our aim of below, but close to, 2%.

We already have indications that this credit easing package is delivering tangible benefits, but time is needed for the positive effects to fully materialise.

However, should it become necessary to further address risks of too prolonged a period of low inflation, the Governing Council is unanimous in its commitment to using additional unconventional instruments within its mandate. In this context, we have also tasked relevant ECB staff and Eurosystem committees with the timely preparation of further measures to be implemented, if needed.

The ECB’s accountability framework and transparency

Throughout the crisis, the ECB has undertaken a series of measures to pursue its mandate of price stability, including unconventional measures such as the ones just described. To carry out its tasks, the ECB enjoys a high degree of independence under the EU treaties.

This independence manifests itself in a number of institutional features of the Eurosystem. Let’s take collegiality: the Eurosystem’s main decision-making bodies (the Executive Board and the Governing Council) both work in a collegiate way, as it is absolutely essential to take decisions which reflect the wisdom and expertise of all members. For example, I have now worked for many years with Governor Liikanen in the Governing Council and really treasure his input into the discussions. Like the other governors, he is not there as a delegate of his country but contributes with his expertise, knowledge and the work of Suomen Pankki - Finlands Bank so that the best decision is taken for the euro area as a whole. National central banks (NCBs) play a crucial role in the functioning of the Eurosystem. NCBs’ tasks range from the research and analysis which feed into the decision-making process to implementing monetary policy decisions, the collection and production of statistics, and the operational aspects of payment systems and banknotes. Their role cannot be overplayed.

As an independent central bank, the ECB is committed to being fully accountable to citizens and their elected representatives and has an established framework to discharge accountability to the European Parliament. This includes, most importantly, the hearings of its Committee on Economic and Monetary Affairs (ECON), as well as an array of further channels for interacting with the European Parliament.

As regards national parliaments, Finlands Bank is accountable to your parliament, and I understand that the Parliamentary Supervisory Council is provided with information on monetary policy regularly to exercise its prerogatives. In addition, our accountability towards the European Parliament does not exclude that there are also a number ad hoc interactions with national parliaments, such as today’s meeting.

But accountability would not be meaningful without an appropriate degree of transparency, to which the ECB is also strongly committed.

In general, the ECB’s commitment to transparency has increased over the years. The ECB regularly publishes a variety of data on the execution of monetary policy operations and the liquidity conditions of the Eurosystem. The most recent examples include the weekly publication of the value of all monetary policy portfolios, i.e. the Securities Markets Programme (SMP), the covered bond purchase programmes and the ABS purchase programme.

Transparency is key, especially in times where unconventional measures are being taken. This is why the Governing Council committed to the publication of an account of its monetary policy discussions.

The future of EMU governance

Finally, let me turn to the governance of Economic and Monetary Union. In the short run, our overarching focus should be on the full and consistent implementation of the existing fiscal and macroeconomic surveillance framework. This is key to bringing down high public debt ratios, to raising potential growth and to increasing the resilience of the euro area economy to shocks. Now is certainly not the right moment for complacency, neither in the area of fiscal policies nor with regard to structural reforms. It should be clear that monetary policy alone cannot do all the “heavy lifting”. All policy actors – both at the national and the European level – need to do their part. This should be embedded in a comprehensive strategy that puts the euro area economy back on track.

The Stability and Growth Pact should remain the anchor for confidence in sustainable public finances – throughout the procedural steps under the agreed framework. With regard to macroeconomic surveillance, the implementation of structural reforms is imperative and should be a matter of priority for the euro area governments.

In the medium to long term, we need to explore various options to further ensure a smooth functioning of EMU. During the crisis, euro area Member States – including Finland – have made a significant effort in terms of strengthening both discipline and solidarity within EMU. While this has contributed decisively to overcoming the crisis, I believe that this is not yet fully commensurate with the long-term necessities of being part of a monetary union. In the euro area, economic policy choices are so interdependent that, ultimately, sovereignty over economic policy-making should be exercised jointly. Therefore, we need, in my view, to further share sovereignty in this realm. This could translate into a leap forward from common rules to common institutions. The forthcoming report that the Euro Summit has commissioned on the future of economic governance will present a good starting point for further reflection on these matters.

I am here today to represent the ECB and am looking forward to a constructive exchange of views. Therefore, I very much welcome your questions.

Shares in Japan’s Yakult fell as much as 10 per cent following a report that France’s Danone was considering unloading its 20 per cent stake in yoghurt drinks maker.

The alliance between the two companies – dating back to 2004 – had been strained since last year after Yakult executives expressed opposition to Danone’s move to to increase its stake in the company.

The two companies called off their strategic tie-up last April, with Sumiya Hori, Yakult’s chief executive, citing “differences in corporate culture”.

Yakult shares dropped 10 per cent in early Tokyo trading, erasing the gains it had made after boosting its annual profit outlook on November 7 on the back of strong sales in China and other parts of Asia. Yakult stock closed down 6 per cent at Y6,290 on Thursday.

The fall came after Bloomberg reported that Danone had held internal discussions about a possible sale of its Yakult stake worth almost $2bn.

Both Danone and Yakult declined to comment.

Market players said the potential sale, if true, was not totally unexpected, given that relations between the two companies had soured.

“The two firms had talked about their collaboration, but there seems to have been little merit from the alliance,” said Tomohiko Ikeno, an analyst at Ace Research Institute. He added that the relationship between the two companies had always been akin to “a black box”, as Yakult had been tight-lipped about its ties with Danone.

“Yakult’s business in China and other parts of Asia is doing very well so Danone’s exit is unlikely to affect its overseas strategy,” said Mr Ikeno.

When Yakult and Danone ended their tie-up last year, Mr Hori called the move “a new step forward” and said it would strengthen the company’s “management independence”.

Yakult’s efforts to expand outside of its shrinking home market has been led by a door-to-door sales force of red uniform-clad female workers, who wheel around pushcarts carrying Yakult’s probiotic yoghurt drinks.

While a bigger stake in Yakult may have given Danone more access to the Japanese maker’s extensive networks in Asia, the world’s largest dairy producer has already expanded its presence in the region.

Danone booked stronger-than-expected third-quarter revenues on strong sales of infant formula sales in Asia. Last month, the company also pushed further into China’s dairy market with a $550m investment in Yashili, the infant formula provider.

{http://www.thetimes.co.uk/tto/business/industries/health/article4279546.ece}

Japan Inc. is busy cranking out profits. Earnings on the broad Topix index rose 20% from a year earlier in the September quarter for companies that have reported so far. For the two-quarter period when Japan was technically in recession, Topix earnings were up 5% from a year earlier.

The ever-weakening yen is flattering exporters’ profits, but that’s not the whole story. Analysis by CLSA strategist Nicholas Smith shows domestically-oriented sectors also posted gains in the third quarter, including a 6% rise for road and rail companies, and a 21% rise for electric utilities.

A return to inflation, albeit still mild, is giving companies renewed pricing power. Crude oil prices are down more than 20% this year, even after accounting for the effect of the weaker yen, providing a break on input costs.

ENLARGE

What’s more, a government drive to improve corporate governance and profitability is bearing fruit. Operating profit margins for Topix companies rose to 7% in the third quarter from 5.3% two years earlier, while return on equity improved to 8.4% from 4.0%. This measure in particular has been a focus, as companies with poor ROE are excluded from a new benchmark stock index.

The government hopes corporate prosperity will lead to a “virtuous cycle” whereby companies boost wages and investment. In fact, this was under way before April’s increase in the consumption tax short-circuited the process.

Including one-off summer bonuses, workers earned 2.4% more than a year earlier in July, according to government data, the fastest increase since 1997, which is a clear sign of progress. Wage growth has slipped since, but these figures are likely understated, as new workers—especially women in part time jobs—drag down the average. An alternative measure of total employee income was up 3.1% in July and 1.4% in September.

That wasn’t enough to overcome headline inflation of around 3%, but the blame for that rests on the tax increase, without which headline inflation would have been much lower. Pay is more than keeping pace with underlying inflation of around 1%.

There’s clearly something amiss in an economy that can’t withstand a small rise in the consumption tax without a recession and crisis of confidence. A consumer culture scarred by two decades of on-and-off deflation is likely to blame. Real incomes will need to rise on a sustained basis for consumers to see through small bumps in the economic cycle—and for companies to change their mind-set about investing. Pushing back the next consumption-tax hike until April 2017 creates a window for this to happen.

Meanwhile, there are reasons to stay optimistic on corporate profits. The Bank of Japan’s reupped stimulus plan has sent the yen falling sharply again. And there’s room for improvement in terms of profitability, with return on equity far below U.S. levels of 15.3% at S&P 500 companies.

Reforms, especially giving companies greater flexibility to dismiss idle workers, are probably needed to achieve U.S. levels of efficiency. But investors don’t need to wait around for that. Even after the recent rally, Japanese equities look inexpensive, at 13.9 times estimated 2015 earnings compared with 15.9 times for the S&P 500. That discount is a reversal from the historic norm for the two indexes.

Investors can still profit alongside Japan Inc.

Global Investors Plow Cash Into Asian Stocks as Year-End Nears

Investor Appetite Undiminished by Recent Gains, Risk of Higher U.S. Interest Rates

Surprise moves in recent weeks by central banks in China and Japan to ease monetary policy have added to stimulus from Europe—and expectations for more—and are underpinning the resurgence in appetite for stocks in the region. The Shanghai stock market traded at more than a three-year high Wednesday, ending the day up 1.4% at 2604.35. It was the first closing level above 2600 since August 2011.

The flow of cash faltered in late summer and early fall, but the tide is surging again across emerging markets, including those in Asia, an indication that investors have been more willing to take on risk.

Stock investors put a net $6.3 billion into Asian emerging markets from the beginning of the month through Nov. 25, after taking out a net $2.4 billion in October, according to the Institute of International Finance, an industry group. The inflows this month are comparable with buying levels in the middle of the year.

But analysts at IIF say the market could be underestimating how quickly the U.S. Federal Reserve will tighten monetary policy, including the timing of its first increase in interest rates since before the financial crisis. The Fed has been saying since last year that short-term rates would stay near zero for a “considerable time” after the end of its latest bond-buying program, which wrapped up last month.

The fear is that higher yields in the U.S. could reduce the flow of capital into riskier economies, although fund managers aren’t expecting as big a selloff as in the spring of 2013, when the U.S. central bank first indicated it would start to scale back its bond purchases.

A similar situation to June 2004, the last time the Fed initiated a series of interest-rate increases, could emerge next year, said HSBC equity strategist Devendra Joshi. Price/earnings multiples in Asia, a measure of how expensive stocks are, fell six months before the rate increase, and valuations took more than two years to recover.

An MSCI index of stock performance in Asia, excluding Japan, is up 3.9% year to date, on par with a 3.5% gain last year but underperforming the S&P 500’s 11.8% rise.

Despite the risks, the easier money policies from central banks in Asia will provide another “marginally positive impact” on the market, adding to the current “immediate impact” from the announcements, noted BNP ’s Mr. Leenders.

The Shanghai Composite Index, which had a bull run—a rise of 20% or more—from January through October, has added 7.6% this month, with the help of the People’s Bank of China’s announcement last Friday that it will cut borrowing rates for the first time in two years.

Shares had rallied since April, when Beijing unveiled a trading program, launched this month, that allows foreign investors to buy Shanghai-listed stocks via Hong Kong.

In Japan, the Nikkei Stock Average is up nearly 6% this month, partly because the Bank of Japan announced an expansion of its monetary stimulus on Oct. 31. Foreign investors bought a net $10.7 billion of Japanese stocks from the beginning of the month to Nov. 24, helping lead a resurgence in the flow of money to Asia, according to HSBC data. The country saw $3.7 billion of net outflows in the previous month.

“There is a bit of a tug of war in terms of monetary policy,” meaning that money flows into Asia will likely be volatile in the short term, said HSBC’s Mr. Joshi.

Coca-Cola, SABMiller Strike New Africa Deal

U.S. Drinks Giant Agrees To Buy South African Brewer’s Appletiser Brand, Merge Bottling Assets

Coca-Cola is buying SABMiller’s Appletiser soft-drink brand and the rights to a further 19 nonalcoholic ready-to-drink brands in Africa and Latin America for around $260 million.

The U.S. drinks group and SABMiller, the world’s number 2 brewer by volumes, are also combining the bottling operations of their nonalcoholic drinks businesses in Southern and East Africa in a new company.

Coca-Cola Beverages Africa, will serve 12 high-growth countries accounting for 40% of all Coca-Cola beverage volumes in Africa, the companies said on Thursday.

On completion of the proposed merger, Coca-Cola will hold 11.3%. of the new company, SABMiller will hold a 57% shareholding, while Gutsche Family Investments, currently the major shareholder in South Africa-based bottler Coca-Cola Sabco, will have a 31.7% stake.

“A combined Coca-Cola bottling operation is further evidence of our commitment to Africa, and our firm belief in the tremendous growth prospects that the continent offers,” said Muhtar Kent , Chairman and CEO of Coca-Cola.

Phil Gutsche will be Chairman of Coca-Cola Beverages Africa and Port Elizabeth, South Africa, is the intended location for the company’s headquarters.

SABMiller will retain ownership of its nonalcoholic malt beverages in Africa and Latin America and will retain its Coca-Cola franchises in El Salvador and Honduras.

Portugal Telecom: Isabel dos Santos seeking anti-trust approval in Portugal, Brazil for EUR 1.21bn offer 

The Perth-based transport group and its partner have seen off competition from rival FirstGroup and a consortium led by the French state to secure the East Coast rail franchise.

Stagecoach also helps run the the other north-south intercity rail service in the UK - the West Coast franchise - it has a 45 per cent stake in the Virgin Trains joint venture controlled by Sir Richard Branson's Virgin Group.

Announcing the eight-year deal on Thursday morning, the UK government chose to focus on "a host of extra benefits for passengers" in the new contract - due to start next March - and ignore the controversy behind its decision to return the one state-run rail franchise back to the private sector.

The opposition Labour Party has argued that East Coast's strong performance since it was renationalised in 2009, after National Express walked away from the contract, was justification for leaving it in state hands to provide a benchmark against other privatised franchises.

The government countered that it was being starved of investment - the biggest single investment is new trains, which are being procured centrally by the state - which only the private sector can deliver.

Stagecoach will run the East Coast franchise with Virgin although Sir Richard is taking a step back this time round and is only expected to take 10 per cent in the new operator - dubbed Inter City Railways. The government said it expected to receive payments of £3.3bn from Inter City Railways over the eight-year contract.

Its bid won out over rival ones from FirstGroup and a joint venture between Keolis, a subsidiary of SNCF that has been active in the UK for almost a decade, and Eurostar, the operator of cross-Channel trains, which is majority owned by the French state operator.

Patrick McLoughlin, the UK's transport minister, said:

This is a fantastic deal for passengers and for staff on this vital route. It gives passengers more seats, more services and new trains.

Martin Griffiths, chief executive of Stagecoach was equally effusive about what the deal would do for the travelling public:

A passion for customers, employees and the community is at the heart of our plans for the franchise. We want to build on the quality and pride of the people who will be joining our team.

We have some fantastic ideas to deliver a more personal travel experience for customers. Investing in the committed people who will make that happen is a big part of our plans, giving opportunities for them to develop and grow into more senior roles. At the same time, we have developed major programmes to help young people, communities and small businesses along what is one of Britain's major rail routes.

Rail franchising in the UK was thrown into disarray after the 2012 West Coast rail fiasco, which saw the government reverse its decision to award FirstGroup the highly cash-generative franchise after incumbent Virgin Trains, challenged the decision and uncovered huge irregularities in the way the state had run the bid process.

The government subsequently overhauled the rail franchising process, leading to delays of more than 5 years in re-letting some of the franchises, including the West Coast contract, which remains with Virgin Trains until 2017.

The failure to secure the East Coast franchise will come as another blow to FirstGroup, which has seen its position as the UK's largest rail operator undermined as it has lost two of its rail contracts - Thameslink and Scotrail - since rail franchising restarted, and failed to win a third - Essex Thameside.

- OPEC members have been stressing unity and cooperation in comments leading up to today's meeting. The organization has had governance or enforcement challenges to it current 30M bps quota- OPEC share of the world oil production has fallen with the rise of non

-OPEC sources, like Russia, Norway, the UK, Canada, and significantly in recent years, increasingly the US

- Some reports this week have said that OPEC will not announce a production cut but could agree to more strictly enforce the cartel's 30M bpd production ceiling, which if adhered to could take about 300K bpd of overproduction out of the market

Friday's rate cut, with this week's net injection as the biggest in 3 months....Samsung Elec. +5.25% on First Buy Back announcement in 7y... Nikkei -0.78% Hang Seng -0.50% Shanghai +0.47%

- EU Overhaul May Hit as Many as Half of Europe’s Biggest Banks

- China Draft Law Allows Pension Investment in Private Equity

- ALV GY : Allianz’s Utermann Sees $50 Oil Real Possibility: Handelsblatt

- BP/ LN : BP Can Exclude Most Cleanup Workers From Pact, May Save $1.2b, Judge Says

- BPTY LN : Bwin.party said to have agreed 150p per share cash offer from Amaya (AYA CN)

- O2C GY : CAT Oil 3Q Rev. Rises 7%, Profit Up 41%; Confirms 2014 Outlook

- CPR PL : Cimpor 3Q EPS Loss EU0.03 Vs EU0.10 Y/Y

- EDF FP : French Energy Minister Says EDF Must Curb Costs to Limit Prices

- EKTAB SS : Elekta Cuts FY Forecasts; 2Q Ebita Misses Est.

- GSK LN : GlaxoSmithKline Ebola Vaccine Found Safe, Gets Immune Response

- GXI GY : Gerresheimer could make an acquisition for EUR 200m-EUR 300m (Medical devices in North America), confirm sale of 51% stake in JV in life science with Thermo Fisher - Hard to find targets - Boersen-Zeitung

- IFX GY : Infineon Sees FY15 Sales Rising 6% - 10%; 4Q Sales in Line

- NXI FP : Nexity to Consider Paying Dividend of 2 Euros a Share in 2015

- NOK1V FH : Nokia's Chennai plant being eyed for acquisition by Micromax, Xiaomi, HTC and Lava, but tax dispute with Indian authorities leaves sale in limbo

- NHY NO : Norsk Hydro Sees 2015 Total Capex at NK6.5b vs NK3.5b in 2014

- PTC PL : Semapa in MOU W/ Apax, Bain to Bid for PT Portugal

- PTC PL : Oi receives no proposal for PT Portugal aside from Altice, Apax-Bain

- 1913 HK : Prada’s Earnings Will Worsen Further in 3Q, Barclays Says --> limited impact -0.13% in HK

- RCO FP : Remy 1H Current Operating Profit Beats Ests; Confirms Outlook

- SAB LN : From venture with Coca Cola in Africa - BBG

- SN/ LN : Smith & Nephew’s Bohuon Said to Tell Staff He Will Stay as CEO

- FP FP : France’s Total CEO to Visit Moscow Tomorrow, Tass Reports

- WDI GY : Wirecard does not rule out Turkish buys in medium term - Webrazzi