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Top Banker Warns: Expect European Union to Print Euros

By Dan Weil and Gene J. Koprowski   |   Wednesday, 13 May 2009 09:20 AM

Even as the world’s financial centers contemplate the effects of trillions of new U.S. dollars soon to be in circulation, it appears that the European Union will be following in the Federal Reserve’s footsteps.

The EU has already said it will soon conduct U.S. style stress tests on its own banks. Now a major European bank’s currency chief warns that the political and economic union of nations will be forced to print fresh euros as well, raising the specter of massive inflation there and rounds of damaging competitive devaluations worldwide.

The European Central Bank will have to print and then sell euros to protect member countries’ exports, says David Bloom, global head of foreign exchange strategy at HSBC.

Bloom told cable network CNBC that, despite disagreements among the 16 countries that use the euro “there's one thing that they have in common, the euro."

The currency’s strength hurts member countries by making their exports more expensive in foreign currency terms. After touching a low of $1.26 in March, the euro has jumped 8 percent to $1.36.

When the euro reaches $1.50, the ECB will have to act, Bloom argues.

"I think at some point the euro will strengthen and give them enough pain that they're all going to sit around the table and say, what shall we do?" he says.

"I think as the euro pushes up quite aggressively, it's not impossible at some point that they threaten us with intervention."

Intervention is when a central bank buys or sells its currency in order to control its value.

Already, the ECB has sought to increase money supply, announcing last week that it will extend maturities of liquidity auctions and buy covered bonds. The benchmark rate there is now 1 percent, a record low, but still higher than the zero target maintained in the United States.

Bloom doesn’t believe this action will be enough: "I do believe they'll head for deflation, never mind inflation," he says.

The huge U.S. Federal Reserve program known as “quantitative easing,” a bankerly phrase that means printing money, has put the United States at risk of losing its triple-A credit rating, warns the former head of the agency in charge of fiscal accountability.

Losing the top credit status would be a huge blow and would raise borrowing costs for the U.S. government and its corporations across the board.

David Walker, former director of the Government Accountability Office, cited a warning from Moody's Investors Service nearly two years ago about ballooning healthcare and social security costs.

"Signs abound that we are in even worse shape now, and that confidence in America's ability to gain control of its finances is eroding," the former comptroller general and current chief executive of Peter G. Peterson Foundation, wrote in the Financial Times newspaper.

His comments helped push the dollar index to a four-month low as investors refocused attention on rising U.S. debt issuance, traders said.

Meanwhile, Berkshire Hathaway CEO Warren Buffett is worried that the purchasing power of the U.S. dollar is going to decline as Washington policymakers try to finance their mammoth deficit spending plans.

He warned that efforts such as the Treasury's $700 billion Troubled Asset Relief Program (TARP) and the $787 billion fiscal stimulus plan passed recently by the Congress will be costly for American consumers and businesses.

Buffett said that "one sure way to pay for excess spending" is to inflate the value of the currency.

The biggest losers in a surge of inflation, he added, would include holders of bonds and other fixed-income assets.

International markets will be impacted too.

The current international finance architecture is based on the U.S. dollar as the dominant reserve currency, which now accounts for 68 percent of global currency reserves, up from 51 percent a decade ago.

"I haven't had my taxes raised," said Buffett. "My guess is the ultimate price will be paid by a shrinkage of the value of the dollar."

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Even as the world’s financial centers contemplate the effects of trillions of new U.S. dollars soon to be in circulation, it appears that the European Union will be following in the Federal Reserve’s footsteps.The EU has already said it will soon conduct U.S. style stress...
eu,print,euros
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2009-20-13
 

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