One on One with Michael Hume, Chief European Economist at Lehman Brothers
Wednesday, March 26, 2008
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SUSIE GHARIB: The U.S. financial crisis is of course a concern in Europe, but today the president of the European central bank Jean-Claude Trichet continued to brush off calls for an interest rate cut. Fuche said the financial market turmoil has had no significant influence so far on the euro's own financing conditions or economy. Still not everyone agrees. This afternoon I talked with Michael Hume, chief European economist at Lehman Brothers. I began by asking him how vulnerable financial institutions in Britain and Europe are to risky mortgage investments.
MICHAEL HUME, CHIEF EUROPEAN ECONOMIST, LEHMAN BROS.: Most people suspect -- and we tend to agree with this -- that banks and financial institutions in Europe haven't quite admitted to all of the sub-prime exposures. And certainly there are a number of reasons why we would expect European banks to have exposures and one is simply that we do know that there were lots of financial flows into the U.S. market over a number of years. And secondly, the opportunities for profit in the domestic market weren't so great or didn't seem to be so great and therefore we think there's quite a bit there still lurking in the background. But hopefully the market has more or less adjusted to that likelihood already.
GHARIB: So Michael, to what extent are European institutions pulling back from lending and pulling back from taking risks? And how does that factor into your economic outlook?
HUME: Well, the evidence on that so far is fairly mixed. I mean, if you look at the euro area, for example and look at the lending that banks are doing to firms, to corporations, there doesn't seem to be any sign of a pull back at all. That is something that the ECB president Jean Claude Fuche is really making a point of in many of his recent comments. But if you look elsewhere, if you dig a little bit deeper, you can see that banks are beginning to change the way they behave. They're charging more for loans that they're making. They're telling us that they're going to be tightening lending standards. If you look in the UK, there's definitely clear signs that mortgage rate abilities dried up. So I think they're at the beginning of the process. We should expect a softening of bank lending going forward and that's likely to have a negative impact on growth.
GHARIB: Well, when we last talked in January, you said that you expected the economies in Britain and Europe to go through a sharp slowdown. So how would you describe economic conditions currently?
HUME: Well, I would say that over the last month or so, the data have been OK. They've held up perhaps a little bit better than some people, including myself, feared. But at the same time it doesn't really provide much comfort. It's really a question of time, we think, before the European economies begin to show clearer signs of slowing down. Now some of that will come through the banking system, but you've got more traditional channels, high euro prices, the fact that the exchange rates are so strong particularly against the dollar. All of these things are going to trickle through into the economy over the next few months and we'd expect some softer data as a result.
GHARIB: Speaking of currency, with the euro at record highs against the U.S. dollar, what impact is that having on European businesses and the economy?
HUME: Well, so far the impact isn't obvious. I think there are signs there in some of the indicators, such as for example, the manufacturing orders. In surveys such as the purchasing managers' index, that's the equivalent of the U.S., so if you look at the orders numbers they are tailing off. We would expect the output indicates in that survey to follow suit soon. But at the moment, it's very (INAUDIBLE) but at these levels of the exchange rate, there's got to be some damage done to European exporters. It's being covered up a little bit by strong export markets in the emerging markets and in the commodities exporting economies, but we doubt it will be enough to compensate.
GHARIB: Do you expect the European central bank to cut rates this year?
HUME: Yes, we do. We're looking for the ECB to cut rates first of all in June by 25 basis points. And then on a three monthly cycle cut rates twice again, so 25 basis points in September and then again in December. So it's a very, very different picture from the Federal Reserve which has been cutting rates very, very rapidly recently. And it suggests and is consistent with the ECB's more inflation focused approach to setting policy.
GHARIB: Michael, thank you so much for your time. We appreciate your insights.
HUME: Thank you.
