Appeal for lower euro interest rates

The European Central Bank (ECB) will have to cut its interest rates, following the example of the US Federal Reserve, if Europe is to avoid paying the consequences of a crisis originating on the other side of the Atlantic, according to Jean-Paul Betbeze, chief economist of France’s Credit Agricole (CA). In a recent interview with Kathimerini in Athens, Betbeze said CA’s exposure to subprime mortgage loans, which have caused the international credit crisis, is particularly limited. «The subprime crisis comes from the US but is transmitted throughout the world, creating a crisis of confidence. The source of the crisis itself, the subprime loans, is rather small, but the consequences are serious. In all countries, the central banks reacted by offering greater liquidity and in the US we had a cut in interest rates. But the subprime loans are the offspring of the period of especially low interest rates in the US (2002-2005).» «I fear we may be battling fire with fire,» said Betbeze. «Surely, this is no solution, it is simply the measure you have to take for things not to get worse,» he adds. «From then on, we have to re-examine the excesses that took place in financial innovation, there may be mergers in the banking sector, and we should rethink the issue of credit ratings,» he continues. «If we react quickly with interest rate reductions and confidence returns in the market, we shall have learned a big lesson without paying too high a price. The longer we take to react, the more expensive the lesson will be.» Asked whether European rates should come down, Betbeze replied that due to the credit crisis, European businesses are now in effect paying higher rates, as if the European Central Bank had put through increases of 50 basis points. Risk of heavy price «As economic growth is expected to slow down, the ECB should consider reducing its rates. There is a risk of Europe paying a heavy price, while the origin of the problem, the subprime loans, lies in America. The problem of subprime loans is American and should not become a European one,» says Betbeze, adding that CA’s exposure to the risk is about 1 billion euros, through asset management. «In France, we have not granted such loans, for the simple reason that they are forbidden by law,» he says. As for the impact of the credit crisis on the real economy, Betbeze considers «it is not huge but significant in the US, where it amounts to half a percentage point in interest rates.» «There will be an impact on the eurozone; previously we expected growth of more than 2 percent, and now it will be less than 2 percent,» he says. Betbeze believes that the European economy has passed the strong growth stage of recent years. «If we want stronger growth in coming years, we have to have more reforms aimed at increasing flexibility in the labor and product markets. Structural reforms should boost the level of potential growth to above 2 percent where it is today. «Provided this is achieved, I am optimistic about the prospects of the European economy,» he says. Betbeze argues that there are important reasons for the dollar’s current weakness. «The declining competitiveness of the US economy, the twin deficits of the current account and the budget, the reluctance of Chinese consumers to buy American products. «Nevertheless, I would consider a major dollar crisis to be rather unlikely. If the euro rises to $1.50-1.60, it will kill growth in the eurozone and start falling.» Betbeze believes that under present conditions the dollar will return to 1.30 against the euro in about 12 months and that investors are unduly worried.