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Trichet May Signal Progress in Easing Credit-Market Logjam

By Gabi Thesing

Jan. 7 (Bloomberg) -- European Central Bank President Jean- Claude Trichet and his Group of 10 colleagues may signal today that their efforts to calm money markets are making headway.

G-10 officials are meeting at the Bank for International Settlements in Basel, Switzerland, for the first time since the ECB and the Federal Reserve started a coordinated effort Dec. 12 to pump cash into the markets to reduce borrowing costs.

Since then, there have been signs of recovery. Companies' costs to borrow in the short term have fallen to a 22-month low, and commercial paper backed by collateral increased last week for the first time since August. Trichet said Jan. 5 that money- market tensions ``have receded while remaining significant,'' and the Bank of Canada said a day earlier that ``pressures'' have eased.

``They're making some progress,'' Bill Gross, the founder and chief investment officer of Pacific Investment Management Co., said in a Bloomberg Television interview from Newport Beach, California, Jan. 4.

Trichet, 65, may underscore that view when he speaks at a press conference about 1 p.m. after meeting with policy makers including Fed Chairman Ben S. Bernanke, Chinese central bank governor Zhou Xiaochuan and Bank of Canada Governor David Dodge.

``Policy makers are breathing a collective sigh of relief that the year ended without a total meltdown,'' said James Nixon, an economist at Societe Generale in London.

International Effort

Trichet and Bernanke, 54, led the effort that began Dec. 12 to supply more dollars to markets in Europe, and the Fed followed that with a series of auctions of emergency loans, including two this month totaling as much as $30 billion. The ECB added an unprecedented 349 billion euros ($515 billion) in two-week money.

The plan, the biggest instance of international economic cooperation since the aftermath of the 2001 terrorist attacks, took shape when the group last met in Cape Town in November.

Money-market rates have dropped since then. The cost of borrowing euros for three months fell to 4.63 percent on Jan. 4 from a seven-year high of 4.95 percent on Dec. 17, the day before the ECB added the funds. The equivalent dollar and pound rates have also tumbled since mid-December.

It's still ``too early to give the all clear,'' said Michael Schubert, an economist at Commerzbank AG in Frankfurt. While ``money-market rates are going into the right direction,'' he said, ``central banks cannot solve the underlying problem.''

Subprime Meltdown

The central banks acted after borrowing costs jumped in August as banks began to reveal losses on securities linked to U.S. subprime mortgages, causing lenders to hoard cash. The Organization for Economic Cooperation and Development estimates losses tied to the subprime meltdown will reach $300 billion.

Central bankers have urged commercial banks to be more transparent about their exposure to subprime-backed assets. Deutsche Bank AG Chief Executive Officer Josef Ackermann and Commerzbank AG head Klaus-Peter Mueller were among bankers meeting with policy makers in Basel yesterday.

The three-month euro rate is still 63 basis points above the ECB's benchmark interest rate of 4 percent, up from an average of 25 basis points in the first half of 2007.

``Bearing in mind the weight of cash central banks have thrown into the market, the impact has been limited,'' said Ken Wattret, an economist at BNP Paribas in London. ``The only thing that will solve this is time.''

Inflation, Oil

The policy makers meeting in Basel also have to consider whether slowing growth or faster inflation, spurred by oil prices around $100 a barrel, pose the greater risk. This year's global economic expansion will be the weakest since 2003, the OECD has estimated.

Harvard University economist Martin Feldstein, head of the group that dates economic cycles in the U.S., said the odds of a recession are more than 50 percent after a Jan. 4 report showing the unemployment rate jumped.

``We are now talking about more likely than not,'' Feldstein, president of the National Bureau of Economic Research, said in a Jan. 5 interview in New Orleans. ``I have been saying about 50 percent. This now pushes it up a bit above that.''

The Fed has lowered its benchmark rate three times, to 4.25 percent, since September to shore up the world's largest economy. Traders increased bets last week that the Fed will cut its key rate by another half-point this month after manufacturing shrank in December and unemployment rose.

In contrast, the ECB may signal this week it would prefer to raise, rather than cut, rates. Inflation in the euro region was 3.1 percent in December, the highest level in more than six years.

The ECB's Governing Council will probably keep its benchmark rate at 4 percent when it convenes in Frankfurt on Jan. 10, a Bloomberg News survey of economists shows. The Bank of England will leave its rate at 5.5 percent the same day, according to a separate survey.

The G-10 comprises the U.S., Japan, Germany, the U.K., France, Italy, Canada, Sweden, the Netherlands, Belgium and Switzerland. The members account for 85 percent of the global economy. China attends in its capacity as a BIS board member.

To contact the reporter on this story: Gabi Thesing in Frankfurt at gthesing@bloomberg.net