Business and Finance

As politicians, executives and financiers networked at parties and panels last week in Davos, Switzerland, Barrie Wilkinson was in a nearby hotel, warning that a 2015 financial catastrophe may be looming.

“The fundamentals haven’t been addressed at all,” Wilkinson, a London-based partner at consulting firm Oliver Wyman, said in an interview at the Hotel Morosani Schweizerhof. “The things that caused the previous crisis — loose monetary policy and trade imbalances — they’re actually bigger now than they were then.”

In the caste system of the World Economic Forum’s annual event in the Swiss ski resort, Wilkinson was at a bottom rung, with an identification badge that denied him access to most sessions and soirees. His message clashed with the optimistic tone of many at the center of the meeting, who were eager to emphasize the progress made after two years of hand-wringing in the wake of the 2008 financial crisis.

“The systemic reforms that have been accomplished are significant,” Canadian Finance Minister Jim Flaherty said as he left a private meeting with finance company chief executive officers on Jan. 29. “We need to communicate better that financial institutions globally are operating on a very different basis today, that they are operating with higher capital and are better regulated.”

‘An Avoidable History’

Wilkinson’s report, titled “The Financial Crisis of 2015: An Avoidable History,” isn’t so sanguine. The 24-page study describes how banks, unwilling to accept the lower returns on equity, or ROEs, that result from higher capital requirements, may fuel a new bubble by chasing high returns in commodities or emerging markets. Regulators, by focusing their restraints on banks, may drive risk-taking into unregulated funds that also pose danger to the system.

The report urges bank executives and shareholders to accept that returns of the past are unsustainable and that they need to do a better job of monitoring risks, especially in areas that produce unusually high profits.

“Banks need to be less leveraged,” said Wilkinson, 38, who has an engineering degree from the University of Cambridge’s Trinity College and has worked since 1993 at Oliver Wyman, where he focuses on risk management. “The true test for me of whether they’ve deleveraged is if the industrywide ROEs come down. If they don’t, I’m very suspicious that there are hidden risks in the system.”

UBS Advice

Oliver Wyman, a subsidiary of New York-based Marsh & McLennan Cos., played a role in the last financial crisis. The firm’s strategy consultants advised UBS AG’s fixed-income unit, which was lagging other divisions in early 2007, to invest in U.S. mortgage securities and collateralized debt obligations to boost returns, according to a review submitted by UBS to Switzerland’s federal banking commission in April 2008. Those investments helped fuel almost $58 billion in losses and writedowns at the Zurich-based bank.

Financiers at Davos this year weren’t talking much about future returns on equity or potential bubbles. Instead they were holding parties and meeting clients. JPMorgan Chase & Co. CEO Jamie Dimon, 54, hosted guests including Bank of Canada Governor Mark Carney and Dell Inc. founder Michael Dell, 45, at a reception one night. He was out late the next night with hedge- fund manager Louis Bacon, 54, and other guests at a party hosted by Google Inc.

Siniscalco, who now leads Morgan Stanley in Italy, said he had about 35 meetings in Davos this year compared with 15 last year. The co-head of investment banking at one firm was overheard telling someone on his mobile phone that he’d lined up five mandates.

When bank CEOs including Bank of America Corp.’s Brian Moynihan, Deutsche Bank AG’s Josef Ackermann and Barclays Plc’s Robert Diamond held a closed-door meeting with politicians and central bankers on Jan. 29, the tone was conciliatory.

“There was a very positive mood about what had been done so far,” said Davies, who is also a board member of New York- based Morgan Stanley and London-based insurance company Prudential Plc. “It was quite an upbeat session.”

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German two-year government note yields jumped to the highest in more than a year this week on speculation the European Central Bank may act to stem inflation.

ECB President Jean-Claude Trichet said on Jan. 26 that policy makers will do “what is necessary” to keep inflation in check. German consumer-price growth accelerated to the highest level since October 2008. Irish bonds slid before a vote on the budget tomorrow. The debut auction of the European Financial Stability Facility drew bids for almost nine times the securities on offer.

The increase in the German note yield “was driven by fears of tighter monetary policy,” said Patrick Jacq, a senior fixed- income strategist at BNP Paribas SA in Paris. “This is clear when you look at the evolution of the curve. We have hawkish rhetoric coming in from the ECB so it makes sense to be short at the short end.”

The two-year note fell for a fourth straight week, pushing the yield eight basis points higher to 1.37 percent as of 5:27 p.m. in London. It earlier reached 1.43 percent, the highest since Jan. 4. The 10-year yield fell two basis points to end the week at 3.16 percent.

Euribor futures declined, signaling traders were adding to bets on an increase in borrowing costs. The implied yield on the contract expiring in December increased four basis points to 1.9 percent.

German Inflation

German consumer-price inflation, calculated using a harmonized European method, rose to 2 percent from 1.9 percent in December, the Federal Statistics Office in Wiesbaden said on Jan. 27. Data published a day earlier showed import prices rose at the fastest annual pace in more than 29 years in December, also fueling speculation of central bank action.

“A permanent and repeated increase in the prices of imported products will tend to impact on inflation in the advanced countries, including the euro area,” ECB Executive Board Member Lorenzo Bini Smaghi said in a speech in Bologna, Italy. “This phenomenon can no longer be ignored fast cash online.”

Irish 10-year yields jumped 32 basis points to 9.12 percent as uncertainty rose about passing the Finance Bill and possible policy changes after elections. The bill paves the way to fully implement the 2011 budget, a condition of Ireland’s 85 billion- euro ($116 billion) aid package from the International Monetary Fund and the European Union.

‘Political Uncertainty’

Belgian debt also dropped after the collapse of talks to form a government, seven months after inconclusive national elections left the country with a caretaker administration.

“Both Ireland and Belgium are dogged by political uncertainty,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “The market is nervously awaiting the outcome of the Irish election next month but I think, ultimately, whoever gets into power has no choice but to pursue the fiscal consolidation that’s been put in place.”

Ireland became the first recipient aid from European Financial Stability Facility in November. The fund attracted 44.5 billion euros of orders for its debut sale of five-year debt on January 25, almost nine times the securities on offer. Asian investors bought about 38 percent of the 5 billion euros sold.

Spanish government bonds fell for the first week in three, widening the spread with bunds by 29 basis points, as a 20 billion-euro plan to shore up savings banks failed to convince investors. Portuguese debt also dropped, pushing the yield up 13 basis points to 7.07 percent. The Greek 10-year yield jumped 16 basis points.

Bunds have lost 1.7 percent this month, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, compared with a 0.4 percent decline in Irish securities, 1.9 percent drop in Portuguese debt and a 0.4 percent return on Spanish bonds.

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Moody’s Investors Service said it may need to place a “negative” outlook on the Aaa rating of U.S. debt sooner than anticipated as the country’s budget deficit widens.

The extension of tax cuts enacted under President George W. Bush, the chance that Congress won’t reduce spending and the outcome of the November elections have increased Moody’s uncertainty over the willingness and ability of the U.S. to reduce its debt, the credit-ratings company said yesterday.

“Although no rating action is contemplated at this time, the time frame for possible future actions appears to be shortening, and the probability of assigning a negative outlook in the coming two years is rising,” wrote Steven Hess, a senior credit officer in New York and the author of the report. The rating remains “stable,” according to the report.

The warning from Moody’s came on the same day that Standard & Poor’s lowered Japan to AA- from AA, signaling that the ratings firms are stepping up pressure on the governments of the world’s biggest economies to curb their spending. The threat of a lower rating may cause international investors to avoid U.S. assets. About 50 percent of the almost $9 trillion of U.S. marketable debt is owned by investors outside the nation, according to the Treasury Department in Washington.

U.S. debt has increased from about $4.34 trillion in mid-2007 as the government increased spending to bail out the financial system and bring the economy out of recession. The budget deficit has increased to 8.8 percent of the economy from 1 percent in 2007.

‘Trajectory Is Worse’

“Because of the financial crisis and events following the financial crisis, the trajectory is worse than it was before,” Hess said in a telephone interview.

Moody’s said it expects there will be “constructive efforts” to reduce the deficit and control entitlement spending. It predicted 10-year Treasury yields will rise toward 5 percent without surpassing that level.

Yields on the benchmark securities were little changed at 3.39 percent today as of 6:26 a.m. in London, according to BGCantor Market Data. The 2.625 percent security maturing in November 2020 traded at 93 22/32. Demand for U.S. debt has pushed the rate down from 5.27 percent a decade ago.

The U.S. Dollar Index, which tracks the currency against six counterparts, climbed to 77.791 today from a low during the global financial crisis of 70.698 on March 17, 2008, as the U.S. economy recovered.

‘Remote’ Downgrade Odds

The odds of a U.S. ratings cut are remote, said Hiromasa Nakamura, a senior investor in Tokyo at Mizuho Asset Management Co., which has the equivalent of $42.2 billion in assets and is part of Japan’s second-largest publicly traded bank.

“I don’t think the U.S. will be downgraded,” Nakamura said. “The U.S. may try to cut spending. Those kinds of policies will support the rating.” Mizuho Asset bought Treasuries in December, he said.

President Barack Obama’s deal with congressional Republications, announced Dec. 6, calls for a two-year extension of tax rates in return for extending long-term jobless benefits for 13 months and cutting the payroll tax for $120 billion for a year.

The U.S. has the highest government debt-to-government revenue of any Aaa rated country, Moody’s said yesterday. The ratio, at 426 percent, is more than double that of Germany, France and the U.K. and more than four times higher than Australia, Sweden and Denmark, according to Moody’s.

‘Trend May Continue’

“Other large Aaa countries have plans to reduce deficits substantially over the coming few years, indicating that this trend may continue,” Hess said.

S&P cut Japan’s credit rating for the first time in nine years, saying the government lacks a “coherent strategy” to address the nation’s 943 trillion yen ($11 trillion) debt burden.

The ratings firms also have downgraded Europe’s so-called peripheral countries on rising deficits and slumping growth.

Fitch Ratings cut Greece to BB+ on Jan. 14, following S&P and Moody’s in lowering the country to below investment grade. Moody’s began reviewing Portugal and Spain in December.

Credit-default swaps on U.S. Treasuries climbed for a fourth day yesterday, rising 1.5 basis points to 51.57 basis points, according to data provider CMA. That means it would cost the equivalent of $51,570 a year to protect $10 million of debt against default for five years.

Prices of the swaps compare with 59.8 basis points for debt issued by Germany, 83.1 for Japan, and 897.3 for Greek bonds.

Reduce Fed Borrowing

The U.S. Treasury Department said yesterday it will reduce its borrowing on behalf of the Federal Reserve to $5 billion from $200 billion because of concerns about the federal debt limit. The Obama administration and Congress are debating whether to raise the limit as the government approaches the current ceiling of $14.29 trillion, which the Treasury estimates will be reached between March 31 and May 16.

Focus on the debt ceiling, which was increased a year ago, has risen since Republicans won control of the House of Representatives in November with pledges to challenge the Obama administration on spending. Republican lawmakers have told the president and Democratic legislators that they will insist on specific cuts as a condition of raising the U.S. debt limit.

Treasuries are poised to fall as the debate on increasing the U.S. debt limit intensifies, Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co. was quoted by the Associated Press as saying.

U.S. debt “will sell off as this get more press and with more invective,” Gross said, according to AP. “Investors like us, we sell now.” Pimco, based in Newport Beach, California, is a unit of Munich-based insurer Allianz SE.

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Many Chinese cities are raising minimum wages for workers, fanning inflationary pressures while also seeking to soothe frustrations over price hikes.

The double-digit increases in major manufacturing centers like Guangdong, and the cities of Shanghai, Tianjin and Beijing follow wage hikes last year that have further raised labor costs, accelerating a shift by makers of inexpensive goods to lower cost places like Vietnam and Indonesia.

Shortages of workers in some areas and strikes and other protests by disgruntled young workers have also prompted authorities to push minimum wages higher, with most localities expected to follow suit.

A report released last week by the American Chamber of Commerce in Shanghai said that 85 of the companies responding believed that rising costs are hurting China’s competitiveness compared with other developing countries.

China retains massive advantages such as the standard of its infrastructure and its own huge market, which increasingly is the focus of foreign companies manufacturing there. But surging costs for labor, land, energy and materials have prompted many making low-cost items such as toys, shoes and clothing to move some production to other parts of the developing world.

Tianjin’s labor bureau, in a statement seen Wednesday on its website, said it is preparing to raise the city’s minimum monthly wage to 1,070 yuan ($160) from the current 920 yuan ($140).

Shanghai’s mayor, Han Zheng, confirmed last week that the city was preparing for an April 1 increase in the city’s minimum wage, by more than 10 percent over the current monthly 1,120 yuan ($170).

Han described this as an effective way to ensure a “rational income distribution.”

“It is our responsibility to raise wages in Shanghai because people living on those wages are having a really hard time,” he told reporters during an annual news conference. “It is important for every worker to share the fruits of progress and harmonious labor relations are conducive to healthy businesses,” he said.

Beijing has announced its minimum wage will rise by 20.8 percent this year. Jiangsu, an affluent region adjacent to Shanghai, is hiking its minimum monthly pay by 15 percent and Guangdong, by about 19 percent in March to 1,300 yuan (about $200) _ the country’s highest.

Mindful of past links between surging inflation and political unrest, the authorities have sought to reassure consumers that they have prices under control.

China’s inflation rate was at 4.6 percent in December, down from a 28-month high of 5.1 percent the month before but well above the government’s target of 3 percent. Annual inflation in 2010 was 3.3 percent, and many economists are warning that price hikes may persist in coming months, especially if recent bad weather keeps food prices above normal.

Asked if rising costs might discourage companies from investing in places like Shanghai, Han said he believed companies focus more on the local investment environment and their own business strategies than on labor costs.

“If the companies cannot afford such increases it means their business model is not suitable for the development pattern in Shanghai,” he said.

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Stocks closed mixed Friday, with technology shares lagging the broader market, as investors weighed strong earnings from General Electric against a quarterly loss from Bank of America.

The Dow Jones industrial average (INDU) rose 49 points, or 0.4%, to close at 11,872, the highest level since June 2008. The S&P 500 (SPX) added 3 points, or 0.2%, but the tech-heavy Nasdaq (COMP) fell 15 points, or 0.5%.

For the week, the Dow gained 1.2%, while the S&P was flat. The Nasdaq lost about 1.7% over the last five trading days.

General Electric (GE, Fortune 500) led gainers on the Dow after the conglomerate reported a fourth-quarter profit that topped Wall Street forecasts, sending its stock up 7%. Energy stocks Exxon (XOM, Fortune 500) and Chevron (CVX, Fortune 500) were also strong after an industry group suggested oil prices will continue to rise in 2011.

"The profit news is pretty favorable today," said Nick Kalivas, vice president of financial research at MF Global. "GE is probably the poster child for that, but Google certainly did well last night."

Google (GOOG, Fortune 500) reported late Thursday that quarterly profits and sales rose from year-ago and beat analysts’ forecasts. But shares of the search giant sank over 1% as investors digested news that Eric Schmidt is stepping down as chief executive, with co-founder Larry Page taking over in April.

Shares of Bank of America (BAC, Fortune 500) dropped 1.6% after it reported quarterly results that disappointed investors. But a better-than-expected quarterly report from SunTrust (STI, Fortune 500) bank in Atlanta helped temper ongoing worries about the banking sector, according to Kalivas.

The technology sector has been under pressure this week, despite strong earnings from tech leaders IBM (IBM, Fortune 500), Apple (APPL) and Google. Some traders say the sector is "overbought" and that strong tech earnings may not be enough to push the market higher.

"It’s getting harder to surprise investors who already have elevated levels of enthusiasm related to equity investments," said Mark Luschini, chief investment strategist for Janney Montgomery Scott.

On Thursday, stocks closed modestly lower as technology shares remained weak, and worries about the downside of China’s robust economy hung over the market.

But overall, stocks have been on an upward trajectory this year — with the Dow Jones industrial average now less than 200 points shy of 12,000.

Companies: Fairfield, Conn.-based GE said its fourth-quarter earnings rose 31% to $3.9 billion, driven by strong performance in its finance arm and growth in equipment orders.

Bank of America reported a fourth-quarter net loss of $1.2 billion, or 16 cents per share. The latest results included a previously announced goodwill impairment charge of $2 billion. .

SunTrust said it earned $84 million, or 17 cents per share, in the bank’s fiscal third quarter. That compares with a loss of $377 million, or 76 cents per share, in the third quarter of 2009.

Oilfield services company Schlumberger (SLB) said Friday that it earned net income of $1.16 billion in the fourth quarter, up 42% from last year. Earnings per share were 85 cents, versus a forecasted 83 cents. Shares tumbled 2.6%.

In other corporate news, Warner Music (WMG) said it retained Goldman Sachs (GS, Fortune 500) to find a buyer for all or part of the company, according to news reports. Shares of Warner Music surged 24%.

Hewlett-Packard (HP) announced late Thursday that four directors are stepping down. Five new directors will join the computer product company’s board, including eBay (EBAY, Fortune 500)’s ex-CEO Meg Whitman. Shares of HP edged up 0.8%.

World markets: European stocks closed higher. Britain’s FTSE 100 rose 0.5%, the DAX in Germany ticked up 0.5% and France’s CAC 40 gained 1.3%.

Asian markets ended mixed. The Shanghai Composite soared 1.4%, while the Hang Seng in Hong Kong fell 0.5% and Japan’s Nikkei tumbled 1.6%.

Economy: There are no market moving economic reports on tap for Friday.

Currencies and commodities: The dollar slipped against major international currencies, including the euro, the Japanese yen and the British pound.

Oil for March delivery was flat, slipping 48 cents to settle at $89.11 a barrel.

Gold futures for February delivery fell $5.50 to close at $1,341 an ounce.

Bonds: The price on the benchmark 10-year U.S. Treasury rose, pushing the yield down to 3.42% from 3.45%.  

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Treasuries fell, pushing up 10-year note yields the most in six weeks, as economic reports in the U.S. and Europe bolstered speculation the global recovery is building momentum and damped government debt’s refuge appeal.

Thirty-year bond yields rose to an eight-month high after European officials pledged to strengthen the safety net for debt-strapped countries and a record sale of U.S. inflation- linked notes drew lower-than-average demand. The Treasury will sell $99 billion of notes next week as the Federal Reserve meets and President Barack Obama gives his State of the Union speech.

“We’ve seen the continuation of positive economic data and some confidence in the European sovereign crisis, which have both weighed on Treasuries,” said Sean Simko, who oversees $8 billion at SEI Investments Co. in Oaks, Pennsylvania. “We are still range-bound and in a tug of war in rates ahead of a potential big news week that includes the Fed meeting and the State of the Union address.”

Benchmark 10-year note yields rose eight basis points in New York yesterday, or 0.08 percentage point, to 3.41 percent, from 3.33 percent on Jan. 14, according to BGCantor Market Data. It was the most since the five days ended Dec. 10. They touched 3.47 percent on Jan. 20, the highest level since Jan. 5. The 2.625 percent securities due in November 2020 fell 5/8, or $6.25 per $1,000 face amount, to 93 17/32.

Thirty-year yields increased four basis points to 4.57 percent after touching 4.63 percent on Jan. 20, the highest level since April 29.

Yields on 10-year notes have been in a 31 basis-point range since climbing to 3.56 percent on Dec. 16, the highest level since May 2010.

Housing Sales

Treasuries fell to their lows of the week on Jan. 20 after the National Association of Realtors said sales of existing homes increased 12 percent last month to a 5.28 million annual rate, the most since May. Claims for jobless benefits fell 37,000 last week, the biggest decline since February 2010, to 404,000, Labor Department figures showed. Building permits jumped 17 percent in December to an annual rate of 635,000, more than forecast, Commerce Department data showed on Jan. 19.

German business confidence unexpectedly rose to a record high in January as booming exports to Asia and stronger household spending bolstered growth in Europe’s biggest economy. The Munich-based Ifo institute said its business climate index increased to 110.3 from 109.8 in December.

TIPS Auction

Treasuries also tumbled Jan. 20 after a $13 billion 10-year Treasury Inflation Protected Securities auction drew a yield of 1.17 percent, higher than the average forecast of 1 ceramic flat iron.108 percent in a Bloomberg survey of nine of the Fed’s 18 primary dealers, which are obligated to bid at U.S. government debt sales.

The bid-to-cover ratio, which gauges demand by comparing the amount offered with the amount sold, was 2.37, the lowest since April 2009. It averaged 2.73 at the previous 10 sales. The auction was the largest 10-year TIPS offering since the U.S. began issuing inflation-indexed debt in 1997.

“The TIPS auction surprised a lot of people,” said Sergey Bondarchuk, an interest-rate strategist in New York at primary dealer BNP Paribas SA. “Buyers didn’t show and the dealers ended up with more than they bargained for, so all of a sudden dealers are very long, and that’s not good for the market. Buyers are not bullish at TIPS on these levels.” Long positions are bets a security will increase in value.

The difference between yields on 10-year notes and comparable TIPS, a gauge of trader expectations for consumer prices over the life of the securities, narrowed as much as 15 basis points yesterday, the most since May. It was 2.18 percentage points yesterday, compared with 2.33 a day earlier.

Steepest Slope

The gap between yields on 2- and 30-year Treasuries narrowed to 3.96 percentage points yesterday after widening to 4.02 percentage points on Jan. 20. That was the steepest slope to the so-called yield curve since Bloomberg records on the data began in 1977.

The Treasury will sell $99 billion in 2-, 5- and 7-year notes in daily auctions that begin on Jan. 25. The amounts match those at the last three monthly auctions of the maturities.

Fed policy makers meet Jan. 25-26. They will keep the benchmark interest rate in a range of zero to 0.25 percent, where it’s been since December 2008, according to all 98 economists in a Bloomberg News survey.

Investors also will watch for what the Fed’s policy statement may say about the $600 billion U.S. bond-buying program the central bank began in November to try to lower interest rates and spur economic growth.

Treasury 30-year yields are poised to breach a so-called bullish trend channel that may indicate the end of a more-than two decade bull market in U.S. government debt, according to Royal Bank of Scotland Group Plc.

A rise above 4.71 percent would break a trend channel the security has been in for 24 years, according to technical analysis by William O’Donnell, managing director in Stamford, Connecticut, at the bank’s RBS Securities unit.

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Ontario

Taiwan’s top smartphone maker HTC said Friday its fourth-quarter earnings more than doubled from a year earlier amid strong demand in global markets.

Net profit for the October-December quarter surged to New Taiwan dollars 14.59 billion ($500 million), up 160 percent from a year earlier, and a 31 percent increase from the third quarter, the company said in a statement.

Unconsolidated revenue totaled NT$104 billion in the final quarter, up from NT$41.07 billion the year before.

HTC experienced fast business growth last year on the strength of its design and production of the first handset based on Google Inc.’s Android operating system.

HTC shipped 24.6 million handsets in total last year, up 111 percent from 2009. First quarter sales are expected to reach 8.5 million handsets this year, officials said.

It’s 4th-generation smartphone _ launched late last year _ will be marketed by U.S. carriers Verizon and AT&T, officials said.

Peter Chou, HTC chief executive, said the company began building its brand awareness globally in 2009 to seize on last year’s “explosive growth” in smartphone demand.

To meet expected double-digit world market growth in 2011, Chou said HTC will double its monthly capacity in its Shanghai factory to 2 million handsets and will consider outsourcing if that becomes necessary.

Chou also said that HTC will branch out into tablet computers, but declined to give details.

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NEW YORK - When borrowing money it

European Central Bank council member Athanasios Orphanides said the bank may be able to stop buying government bonds if Europe’s rescue fund is empowered to purchase debt.

The ECB initiated its bond program “to address market dysfunction that hampered the monetary transmission mechanism,” Orphanides said in a Jan. 14 interview in Frankfurt, a day after ECB policy makers met. If the European Financial Stability Facility “were to buy government bonds, and that improved the functioning of the monetary policy transmission mechanism, that might render some of the ECB’s non-standard measures no longer necessary,” he said.

The ECB is pressing governments to take more responsibility for Europe’s sovereign debt crisis so that it can withdraw non- standard measures and return to its traditional role of inflation fighting. Euro-area finance ministers meeting in Brussels today have signaled they’re considering expanding their response to the crisis, which may include mandating the 440 billion-euro ($585 billion) EFSF to purchase debt.

“I believe that that would be one way to have additional flexibility that at times might be found useful,” said Orphanides, who heads the central bank of Cyprus. “To the extent euro-area governments improve the effectiveness of the stabilization facility and this relieves some market tensions, this would facilitate the ECB’s task.”

ECB ‘Frustration’

German two-year government notes advanced for the first time in five days, pushing the yield down five basis points to 1.11 percent at 10:52 a.m. in London. The euro initially dropped before recovering to be little changed at $1.3287.

Orphanides’ comments “show that frustration at the ECB over government handling of the crisis and constantly having to act as the first line of defense is coming close to boiling point,” said Carsten Brzeski, an economist at ING Group NV in Brussels.

Ceasing bond purchases may help to appease the inflation hawks on the ECB’s Governing Council, some of whom objected to the program in the first place and are concerned the ECB’s emergency measures could fuel price gains if left in place too long. ECB President Jean-Claude Trichet last week signaled growing concern about price stability after inflation breached the bank’s 2 percent limit in December, accelerating to 2.2 percent.

Not ‘Overly Hawkish’

Orphanides, a former adviser to the U.S. Federal Reserve, was more sanguine about the inflation outlook, noting that “measures of the underlying inflation rate remain rather low.”

Asked about market reaction to the ECB’s change in tone, which drove the euro three cents higher and prompted some economists to bring forward forecasts for rate increases, Orphanides said there is sometimes an “overreaction to the underlying message.” The ECB’s statement was not “overly hawkish,” he said, and suggested he sees no need for rate increases any time soon no faxing payday loan.

“In my view, the important message to be taken out of our decision and statement was to acknowledge that, largely due to an increase in energy prices, overall inflation is somewhat higher than we would like it to be, but at the same time we expect that overall inflation will actually be coming down,” Orphanides said. “We do not see any need to change the view that the current degree of accommodation in our monetary policy is consistent with price stability in the euro area in the medium term.”

‘Unusually Forthright’

The comments are “unusually forthright,” said Julian Callow, chief European economist at Barclays Capital in London. “He has weighed into the debate more directly than he would have in the past and seems keen to downplay how hawkish the press conference really was.”

The ECB left its benchmark lending rate at a record low of 1 percent on Jan. 13. Trichet said inflation risks “could move to the upside” and the bank has “never pre-committed not to move interest rates.” Citigroup Inc. revised its forecast for the ECB’s first rate increase to the second half of this year from the first quarter of 2012.

Asked when the ECB might raise borrowing costs, Orphanides said he doesn’t find it helpful “to try and forecast interest- rate changes well into the future.”

The ECB has been forced to shoulder much of the burden of containing the debt crisis as governments procrastinate. It has repeatedly delayed the withdrawal of unlimited liquidity provision for banks, and taken the unprecedented step of buying government bonds.

‘Temporary’ Measure

The bank has so far spent 76.5 billion euros in an attempt to soothe debt markets in nations such as Greece, Ireland, Portugal and Spain, where yields have surged to euro-era highs. The ECB last week stepped up bond purchases, settling transactions worth 2.3 billion euros, the most in five weeks, a market notice from the central bank showed today.

Bundesbank President Axel Weber opposed the bond purchases when they began in May last year, and policy makers including Trichet and ECB Executive Board member Juergen Stark have stressed the “temporary” nature of the measure.

French Finance Minister Christine Lagarde suggested last week that governments may discuss allowing the EFSF to buy government debt when they meet in Brussels today.

“We should acknowledge that the tensions we have seen in the euro area over the past year reflect, to some extent, weaknesses in the governance of the euro area and concerns about the stability mechanism that is in place,” Orphanides said. “It is extremely important at this juncture to make maximum effort to improve the underlying stability mechanism.”

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