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U.S. monetary tightening to expose European vulnerability: OMFIF


20:13, June 24, 2013

LONDON, June 24 (Xinhua) -- The United States interest rate tightening will expose the true state of European vulnerability that had previously been covered up by a wave of central banking liquidity, said David Marsh, Chairman and co-founder of the Official Monetary and Financial Institutions Forum (OMFIF).

"The basic problem besetting Europe is lack of growth. Signs of buoyancy from across the Atlantic should be welcome in the Old Continent. Unfortunately, the beneficial aspects are likely to fade into the background," said Marsh.

The financial expert argued that the gradual unwinding of the Federal Reserve's extraordinary asset purchases as the US economy slowly recovers has been one of the best-trailed interest rate events in monetary history.

"The main victims up to now of real and prospective U.S. monetary tightening have been emerging market economies, with countries as varied as Brazil, Turkey and Indonesia in the firing line - developments which have not been helped by social unrest in the first two countries. But wider repercussions are likely across the euro area, in a volatile state on account of highly disparate economic developments in the 17-nation bloc and the prospect of rising financial market nervousness ahead of the German elections on 22 September."

On numerous occasions in the past 30 or 40 years, American monetary tightening has had a negative impact on various European exchange rate regimes, Marsh highlighted.

"World economic management is getting ever more complex in view of great heterogeneity in different groups of countries' economic performance. Europe remains mired in diversity with euro bloc states collectively bumping along the bottom and no sign of sustainable growth in recession-hit debtor nations."

"The bull run in peripheral European bonds promoted by the European Central Bank's unused Outright Monetary Transaction (OMT) bond-buying program has juddered to a halt. I still think the OMT will go down in history as a splendid psychological coup that was never implemented," warned Marsh.

Apart from signs of wrangling over topping up official credit programs for Greece and Cyprus, there have been other signs of strain in the last few days.

EU finance ministers failed to clinch an accord on new rules for bailing out European banks after a marathon session that ended early Saturday morning, although no doubt some sort of compromise will be hammered out next week. And the European Investment Bank rejected the notion that it could put together large-scale securitization packages for loans to medium-sized enterprises, scotching a suggestion by Mario Draghi, the ECB president, that the EIB could somehow ride to the rescue.

"The barometer reading for monetary union is moving towards 'stormy'," added Marsh.

The OMFIF is an independent globally-operating financial think-tank and a platform for confidential exchanges of views between official institutions and private sector counterparties.

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