Newspaper article International Herald Tribune

E.C.B. Sees Signs of Progress in Euro Zone ; Improvements Include Lower Borrowing Costs, but Banking Risks Persist

Newspaper article International Herald Tribune

E.C.B. Sees Signs of Progress in Euro Zone ; Improvements Include Lower Borrowing Costs, but Banking Risks Persist

Article excerpt

The weakness of Europe's commercial banks still poses a risk, said the central bank, which added that it was encourged that borrowing costs for troubled countries had dropped substantially.

Tensions in the euro zone have eased noticeably since the summer, the European Central Bank said Friday, but it warned that the situation remained fragile in part because commercial banks were still in a weakened state.

"There is a risk in spite of the recent improvements," Vitor Manuel Ribeiro Constancio, the vice president of the E.C.B., said at a briefing for reporters on Friday.

A separate report on Friday also indicated pockets of improvement in the euro zone, including signs that German economic growth may have resumed. But that report, based on a survey of business purchasing managers by the research firm Markit Economics, indicated the euro zone as a whole remains in recession.

Meanwhile, in Rome on Friday the Bank of Italy reported that Italian public debt had reached its highest level on record, in October: EUR 2.014 trillion, or $2.65 trillion. The figure indicated the country's fragile financial state despite the austerity budgets and economic reforms under Prime Minister Mario Monti.

The European Central Bank, in its twice-a-year report on financial stability, on Friday noted a number of signals that the euro zone is starting to heal. For example, borrowing costs for troubled countries have dropped substantially, and banks in Portugal and Ireland have regained access to money markets.

Still, euro zone banks, and falling bank profits, were the major weaknesses identified by the E.C.B. in the report. Shares of European banks are currently valued at much less than the value of the banks assets, the report said.

"It really is a very negative judgment by the stock market," Mr. Constancio said.

And while high unemployment and falling wages have helped countries including Spain and Italy to reduce labor costs and increase their exports, "this adjustment has had a heavy cost," Mr. Constancio said. "But at least we can say the adjustment occurred."

Unemployment will start to fall by 2014 as the stressed countries begin to grow again, Mr. Constancio said.

The E.C.B. gave itself credit for some of the improvement, including its promise to buy government bonds as needed to contain countries' borrowing costs. It also lauded the decision by euro zone leaders this past week to give the E.C.B. overall authority for regulating the currency bloc's biggest banks.

Mr. …

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