Tags: Bundesbank | Impact | Emerging | Market

Bundesbank Sees Muted Impact from Emerging-Market Turmoil

Monday, 17 February 2014 08:55 AM

The turbulence experienced in emerging markets early this year is insufficient to derail a recovery in the global economy, which could strengthen during 2014, the Bundesbank said on Monday.

The German central bank also signaled that, to help stabilize eurozone money markets, it would be open to adjustments of the European Central Bank's weekly withdrawal of money it spent on its first government bond purchase program.

Currencies in Turkey, South Africa, Hungary and Russia suffered major sell-offs over the past month before recovering slightly after central banks fought back via interest rates hikes or exchange rate interventions.

In its February monthly report, the Bundesbank said China appeared poised to continue growing without much disruption but noted that central banks in some emerging economies had hiked rates in response to capital outflows and currency falls.

"Even if this should slow the economic growth of the countries concerned, their low global weight means it is not to be expected that the recovery of the world economy will be appreciably affected," the German central bank added.

In Germany, the underlying momentum of the economy should have "increased appreciably" in the final quarter of 2013 and the first quarter of 2014, it said, noting the "almost continual improvement" in companies' and households' assessment of the situation.

"However, this should only fully show up in the GDP growth rates at the turn of the year, when the increased order inflow translates into production," the Bundesbank added.

The German economy grew by 0.4 percent in the final quarter of last year.

"In the eurozone, if burdens from the debt crisis still exist, the signs are increasing for a gradual economic recovery," the bank said.

The Bundesbank noted that increased risk aversion in financial markets led early this year to a fall in share prices and a flight into liquid government bonds, adding:

"Nevertheless, the valuation level of shares on both sides of the Atlantic is still relatively high."

In a sign of further normalization, banks have scaled back their liquidity buffers since the start of the year, which has led to a drop in excess liquidity, the amount of money banks have beyond what they need for their day-to-day operations.

This showed banks were returning to a more normal liquidity management, the Bundesbank said, but added that against this background, the ECB's weekly absorption of funds from its Securities Markets Program added to money market volatility.

"Overall, the Bundesbank therefore is open to a possible adjustment of the hitherto offer of liquidity absorbing operations, should this be suited to stabilizing money markets and liquidity conditions and thereby signal even more clearly than so far the accommodative monetary policy stance of the Eurosystem," the Bundesbank said.

Such a step would add about 175.5 billion euros ($240.19 billion) to the market. It is one option the ECB has considered as a possible tool to deploy in case it needs to act again.

ECB Executive Board member Benoit Coeure, asked by Reuters about the idea last week, said such options can be effective, adding: "But I don't see the need to do it now."


In a section of its report on the German property market, the Bundesbank said residential prices continued to rise, with prices in 125 German cities up 6.25 percent in 2013, though it still saw no larger macroeconomic risks in the market overall.

"There is currently no indication for a destabilizing interaction between real estate price increases and credit supply on a macroeconomic level," the Bundesbank said.

Prices rose significantly more strongly in cities than in rural Germany. The Bundesbank said residential property in big German cities was probably over-valued by 25 percent on average.

Separately, the Bundesbank took a closer look at bank deleveraging in Germany, France, Spain and Italy, whose credit institutions account for almost three quarters of total assets of the euro zone banking sector.

French, Spanish and Italian banks reduced bond holdings of their respective governments significantly in the second half of 2013, in the run-up to the year-end reporting date for the sector-wide asset quality review by the European Central Bank.

The holdings had risen steadily over the previous quarters.

The Bundesbank said it would welcome a permanent weakening of the link between banks and governments, rather than the relationship just being diluted to meet short-term balance sheet targets.

A Bundesbank spokeswoman said German banks had increased holdings of their government's debt in the second half of 2013.

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The turbulence experienced in emerging markets early this year is insufficient to derail a recovery in the global economy, which could strengthen during 2014, Germany's central bank said on Monday.
Monday, 17 February 2014 08:55 AM
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