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U.S. consumer spending pauses, but rising confidence offers hope

WASHINGTON (Reuters) – U.S. consumer spending fell in July for the first time in six months, but confidence among households hit a seven-year high in August, suggesting the retrenchment would be temporary.

Another report on Friday showed a sharp acceleration in factory activity in the Midwest this month, a further sign the economy remains on solid ground.

“The weakness in spending will quickly subside this fall as consumer confidence is supported by record highs in the stock market, rising housing prices and improving labor market conditions,” said Michael Woolfolk, global markets strategist at BNY Mellon in New York.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity dipped 0.1 percent last month after rising 0.4 percent in June, the Commerce Department said. Economists had expected a 0.2 percent gain.

When adjusted for inflation, it fell 0.2 percent.

Spending was weighed down in part by a decline in automobile purchases and a weather-related drop in demand for utilities.

The weakness in spending prompted some economists to lower their forecasts for third-quarter economic growth. Goldman Sachs cut is projection by two-tenths of a percentage point to a 3.1 percent annual rate. Forecasting firm Macroeconomic Advisers cut its forecast by a similar amount, taking it down to 2.9 percent.

The economy grew at a 4.2 percent annual rate in the second quarter, with consumer spending advancing at a 2.5 percent rate.

Despite the tempering of expectations, economists expect another relatively sturdy quarter given the rise in confidence, a strengthening labor market, and gains in manufacturing and business spending. Housing and government spending are also on the mend.

The Thomson Reuters/University of Michigan’s consumer sentiment index increased to 82.5 in August, the highest level since July 2007, from 81.8 in July, a separate report showed.

“We expect growth to remain on a firmer trajectory as improving economic fundamentals continue to reassert themselves,” said Gennadiy Goldberg, a U.S. economist at TD Securities in New York.

In a third report, the Institute for Supply Management-Chicago said its barometer of Midwest factory activity shot up to 64.3 this month from 52.6 in July. It was the biggest monthly point gain since July 1983 and indicated continued strength.

U.S. stocks, which hit record highs in recent sessions, traded slightly higher, while the dollar firmed against a basket of currencies. Prices for U.S. Treasury debt were little changed.


Consumer spending has been sluggish as households have opted to save extra money from steady income gains. Income rose for a seventh straight month in July, while savings hit their highest level since December 2012.

High savings, combined with declining debt burdens, should put consumers in better position to spend.

“Consumers could be positioned to trim savings and tap credit to fuel stronger spending, although it remains to be seen,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors in Kalamazoo, Michigan.

Weak consumer spending left inflation muted in July, giving the Federal Reserve room to keep overnight interest rates near zero for some time.

Consumer prices edged up 0.1 percent, the smallest rise since February, the spending report showed. In the 12 months through July, it was up just 1.6 percent.

Excluding food and energy, prices also rose 0.1 percent, with the 12-month reading holding at 1.5 percent.

The Fed targets inflation of 2 percent.

(Reporting by Lucia Mutikani; Additional reporting by Sam Forgione and Dan Burns in New York; Editing by Tim Ahmann and Paul Simao)

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Sprint grabs lifeline with rural U.S. roaming deals

WASHINGTON (Reuters) – With plans for a T-Mobile US Inc merger in tatters, Sprint Corp is expanding a roaming program with rural cellphone companies that could provide a much-needed way for the debt-laden wireless carrier to cheaply increase its footprint.

In March, Sprint Chairman Masayoshi Son struck a roaming deal with the Competitive Carriers Association (CCA), which represents many U.S. rural and regional carriers, to use each other’s networks for roaming at a mutually attractive price.

In June, Sprint announced that a dozen small carriers, covering a population area of 34 million people, had struck roaming deals following the outlines of the CCA agreement.

Sprint and CCA plan to announce another batch of individual agreements to expand the roaming partnerships at an industry trade show in early September, CCA President and Chief Executive Officer Steve Berry said this week.

When Son announced the mutual roaming agreement, many industry observers shrugged it off as a sweetener to soften U.S. regulators’ opposition to a T-Mobile acquisition. Rural carriers have long complained about the difficulty and expense of getting the largest carriers, Verizon Communications Inc and ATT Inc, to let customers of smaller providers onto their networks.

Deals with rural carriers could offer Sprint a lifeline to improve its national presence following the collapse of the merger with T-Mobile. So far, Sprint has already saved an estimated $1.7 billion in costs of building new towers and other infrastructure, according to a source familiar with the calculations.

Sprint’s new CEO Marcelo Claure said that the networks of rural carriers “are really important in places where we haven’t and don’t intend to build our network.”


The 12 mutual roaming agreements already signed with rural and regional carriers, including Virginia-based nTelos Wireless and Mississippi-based C Spire Wireless, have added 352,000 square miles to Sprint’s service territory, which like T-Mobile’s has been largely concentrated around metropolitan areas while Verizon and ATT’s coverage stretches nationwide.

“It’s a business relationship that’s frankly bred out of necessity,” said CCA’s Berry, explaining that the agreement helps rural partners share savings with Sprint while staying competitive. “You’ve got to have a roaming partner.”

Claure’s challenges are complex and long-term as the company struggles to recover the millions of customers it lost during its messy network overhaul in recent years. The task is particularly tough in a nearly saturated market and with No. 4 T-Mobile pushing to leapfrog Sprint as the No. 3 U.S. carrier.

Sprint’s debt is equivalent to 147 percent of its market cap, compared with 55 percent at Verizon.

Perhaps because Sprint needs rural coverage more than its rivals, its roaming agreements offer the carriers more perks and more flexibility than they have seen from other companies.

While T-Mobile has offered some roaming agreements, experts say Verizon’s rural program is the only comparable alternative that offers rural carriers nationwide 4G roaming.

Verizon’s program, however, largely limits partners to building networks that rely on airwaves owned by Verizon, while Sprint’s allows them to use their own spectrum. Sprint’s partners also say it offers more attractive roaming rates.

“It’s one thing to get a roaming agreement, it’s another thing to get a roaming agreement with non-punitive roaming rates,” said Eric Graham, senior vice president of strategic relations at C Spire.

Roaming agreements are notoriously secretive, with companies signing non-disclosure agreements about rates. Verizon says its roaming rates reflect the value of its nationwide network.

Another major perk Sprint offers is access to devices at cheaper prices negotiated with handset distributors, solving a major problem for smaller carriers who are often stuck paying top dollar for devices because they lack their competitors’ scale.

Claure’s appointment as CEO may lead to even better handset prices.

The Bolivian-born entrepreneur made his fortune through a cellular phone wholesale business called Brightstar which has close ties with handset makers and may provide better access to the latest smartphones at decent prices both for Sprint and its partners.

(Editing by Grant McCool)

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Oracle loses bid to restore $1.3 billion SAP verdict, could get new trial

(Reuters) – A federal appeals court on Friday rejected Oracle Corp’s bid to restore a $1.3 billion jury verdict in its long-running copyright dispute with German software company SAP SE, and said Oracle may choose to either accept a lower amount or face a new trial.

The 9th U.S. Circuit Court of Appeals in San Francisco said jurors used “an undue amount of speculation” in awarding $1.3 billion in damages in 2010.

But it said that U.S. District Judge Phyllis Hamilton in Oakland, California, erred in concluding that the verdict was too high and that Oracle deserved only $272 million of damages, a sum Oracle rejected.

Writing for a three-judge 9th Circuit panel, Judge William Fletcher directed Hamilton to offer Oracle a choice of $356.7 million of damages or a second trial.

Oracle spokeswoman Deborah Hellinger declined to comment. SAP did not immediately respond to requests for comment.

The case involved SAP’s TomorrowNow unit, which the German company had bought to provide software support to Oracle customers at lower rates than what Oracle charged, hoping to convince them to become SAP customers.

Oracle sued SAP in 2007 after noticing thousands of suspicious downloads of its software.

SAP later conceded that its employees were illegally downloading Oracle files. But it couldn’t agree with Oracle on damages, leading to the trial.

In finding that Oracle deserved no more than $272 million for the illegal downloads, Hamilton said the Redwood City, California-based company was entitled only to profit it lost and profit that SAP gained.

Subsequently, SAP agreed to pay Oracle $306 million, but that agreement allowed Oracle to seek to restore the jury verdict, or win a retrial based on its own damages theories.

In finding the $272 million damages award “below the maximum amount sustainable by the proof,” the 9th Circuit said Hamilton erred in finding that Oracle had lost just $36 million of profit, when the proper figure should have been $120.7 million.

The case is Oracle Corp et al v. SAP AG et al, 9th U.S. Circuit Court of Appeals, No. 12-16944.

(Reporting by Jonathan Stempel in New York; Additional reporting by Maria Sheahan; Editing by Leslie Adler)

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Wall Street edges up, on track for fourth week of gains

NEW YORK (Reuters) – U.S. stocks rose in a quiet session on Friday, as the latest in a string of positive data pushed investors to extend a rally that had been briefly threatened by overseas concerns.

With the day’s advance the SP 500 is on track for its 12th rise of the past 16 sessions. It is also set to close out its fourth straight weekly advance and its sixth positive month of the past seven.

Wall Street fell early in the session after Britain introduced a note of caution into the market, raising its international terrorism threat level to the second highest level in response to possible attacks being planned in Syria and Iraq.

The Britain threat level “doesn’t sound good, but unless there’s definite news that’s worse than things we’ve already seen recently, the market should be able to process it and move on,” said Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey. “We’ve become conditioned to buy on dips. That’s almost ingrained in the market.”

In the latest economic data, the pace of business activity in the U.S. Midwest rebounded more than expected in August, signaling a pickup in that region’s economy. Separately, U.S. consumer sentiment rose more than expected, according to the final August reading from the Thomson Reuters/University of Michigan Surveys of Consumers.

The Dow Jones industrial average .DJI rose 16.38 points or 0.1 percent, to 17,095.95, the SP 500 .SPX gained 5.84 points or 0.29 percent, to 2,002.58 and the Nasdaq Composite .IXIC added 21.47 points or 0.47 percent, to 4,579.16.

For the week, the Dow is up 0.6 percent, the SP is up 0.7 percent and the Nasdaq is up 0.9 percent, the fourth straight week of gains for all three. For the month of August, the Dow is up 3.2 percent, SP is up 3.7 percent and the Nasdaq is up 4.8 percent. Both the Dow and SP have climbed in six of the past seven months.

The day’s gains were broad, with nine of the SP’s 10 industry sectors higher on the day. Industrials .SPLRCI were the only laggard, down less than 0.1 percent. That group was pressured by United Technologies Corp (UTX.N), which fell 1.2 percent to $107.78.

This week’s trading volume has been among the lightest of the year, with action especially muted going into the Labor Day holiday in the United States, for which markets will be closed on Monday.

U.S. shares of AstraZeneca (AZN.L) (AZN.N) rose 2.1 percent to $75.81 on news the company had moved its immuno-oncology medicine MEDI-4736 into a mid-stage study in colorectal cancer.

Splunk Inc (SPLK.O) jumped 19 percent to $54.10 a day after posting strong revenue growth and raising its full-year sales outlook.

(Editing by Chizu Nomiyama and Meredith Mazzilli)

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Tesco slashes dividend after second profit warning in two months

LONDON (Reuters) – Tesco (TSCO.L) will slash its dividend and investment spending to give its new boss more firepower to rebuild Britain’s biggest retailer, after a second profit warning in two months showed the scale of the task he faces.

The grocer said on Friday that as a result of its worsening performance, former Unilever (ULVR.L) turnaround specialist Dave Lewis would start on Monday – a month earlier than planned – with a remit for a major review of the 95-year-old business.

The latest profit warning lays bare the need for a change at a company once considered an unstoppable engine of growth, with annual trading profit now expected to come in around 25 percent lower than last year – a third straight year of decline.

Analysts said the 75 percent cut in the half-year dividend to 1.16 pence per share was much deeper than expected, but it would give Lewis greater flexibility to revive the world’s No.3 retailer, such as by cutting prices.

Shares in Tesco, which have been languishing near a 10-year low, slumped 6 percent to wipe around 1.2 billion pounds off its market valuation. An initial fall of 8.5 percent was its greatest single drop in two and a half years.

“We are not expecting a quick turnaround,” said Niall Dineen, a portfolio manager at AGF International Advisors, who increased his holding in Tesco on Friday morning.

“We think it will be a couple of years for margins to recover and we think the share price could be under pressure for a while.”

Rival Sainsbury’s (SBRY.L) fell 4.5 percent and Morrisons (MRW.L) dropped 4 percent on fears that Lewis could plough cash into slashing prices and spark an industry-wide battle.

“We see this as “clearing the air” ahead of a strategy reset involving a significant reduction in pricing and, potentially, further asset disposals outside the UK,” Standard Poor’s analyst Carl Short said.

Tesco has been hit by fierce competition from discounters at the lower end of the market as well as by rivals at the top, and by changing British shopping habits.

The big out-of-town stores it long championed are now less in demand, with more people preferring to shop little and often at local stores or buy online. Costly mistakes abroad, such as a failed U.S. venture, have also taken their toll on Tesco.

Britain’s largest private sector employer, with over 500,000 staff, started losing ground in its key home market in the latter years of CEO Terry Leahy’s tenure, after he had transformed the company into the clear market leader.

His successor Philip Clarke, who spent more than 1 billion pounds on a failed recovery plan, issued his first profit warning in January 2012, and another in July as he quit.

With industry data showing Tesco’s UK market share continuing to slide at an alarming rate, the company turned to Lewis as its first external CEO appointment in its history.


“The board’s priority is to improve the performance of the group,” Chairman Richard Broadbent said.

“Our new Chief Executive, Dave Lewis, will now be joining the business on Monday and will be reviewing every aspect of the group’s operations. This will include consideration of all options that create value for customers and shareholders.”

Data on Wednesday showed Tesco’s sales decline had worsened, hurt by the weakest overall market growth in a decade, with its sales down 4.0 percent year on year in the 12 weeks to Aug. 17.

Its market share has dipped to 28.8 percent from the 30.7 percent it held when Clarke took over in March 2011, as it lost ground both to discounters Aldi ALDIEI.UL and Lidl LIDUK.UL and upmarket grocers such as Waitrose [JLP.UL].

Rivals Sainsbury’s and Wal-Mart’s (WMT.N) Asda have remained largely stable while Morrisons, the country’s fourth largest player, has also struggled.

The cut to the interim dividend, which analysts estimate could save Tesco 800-900 million pounds assuming a similar cut to the final dividend, and the 400 million pound reduction in capital spending on IT and store revamps will give Lewis greater financial firepower to cut prices and win back shoppers.

Other more radical options open to the new boss include a shake-up of Tesco’s store structure to create different formats for different areas, including a chain to compete with discounters, one to target the mid-market and a third to challenge the upmarket sector.

Its brand and image could also be revamped, costs and staffing numbers could be cut, while international units could be sold or spun off.

“Dave is really keen to get started and the board recognised the need to get on and address these challenges,” a source familiar with the situation told Reuters.

Clarke, a 40-year Tesco veteran, will remain on hand to help with the transition through to January.

Analysts at Shore Capital said the rest of the company’s management also needed an overhaul, a view echoed by ex-Tesco directors speaking to Reuters earlier this month.

“This update fundamentally raises questions in our minds about the capability of the management under Clarke at this once great company… We expect … there to be considerable senior management change under Lewis in time,” the analysts said.

Lewis will be joined in December by new Chief Finance Officer Alan Stewart, who announced in July he would quit Marks Spencer (MKS.L) to join Tesco.

The Tesco tactics appear to be following the same route as those taken by Sainsbury’s in 2005 when Justin King halved the dividend and its margins in order to fund a swathe of price cuts designed to get customers back into its stores.

The dividend cut will come as a blow though to those attracted by its 6 percent yield, compared with the average FTSE 100 company yield of 3.8 percent. With profits falling, analysts had said the pay-outs had become unsustainable.

Tesco now expects trading profit for 2014/15 to be in the range of 2.4-2.5 billion pounds ($4.0-$4.2 billion), compared with an analyst forecast range of 2.7-2.8 billion pounds.

Lewis could present some initial thoughts to the market on Oct. 1 at Tesco’s half-year results, when the firm expects to report an interim trading profit of around 1.1 billion pounds.

($1 = 0.6030 British Pounds)

(Additional reporting by Paul Sandle, Emma Thomasson and Nishant Kumar; Editing by Mark Potter and Tom Pfeiffer)

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U.S. consumer sentiment rises in final August reading

NEW YORK (Reuters) – U.S. consumer sentiment rose in August, while an index of current economic conditions hit its highest since July 2007, a survey released on Friday showed.

The Thomson Reuters/University of Michigan’s final August reading on the overall index on consumer sentiment came in at 82.5, up from 81.8 the month before.

It was above the the median forecast of 80.1 among economists polled by Reuters.

“Consumer confidence rebounded in late August due to a positive reassessment of prospects for the national economy,” survey director Richard Curtin said in a statement.

“A weakened trend in equity and home prices in the absence of resurgent wages would threaten the modest pace of consumer spending that is now expected.”

The survey’s barometer of current economic conditions rose to 99.8 from 97.4, marking its highest level since July 2007 and above a forecast of 99.5.

The survey’s gauge of consumer expectations slipped for a fourth straight month, to 71.3 from 71.8, marking its lowest level since March but above an expected 67.0.

The survey’s one-year inflation expectation fell to 3.2 percent from 3.3 percent, while the survey’s five-to-10-year inflation outlook was at 2.9 percent, up from 2.7 percent.

(Reporting by Sam Forgione; Editing by Chizu Nomiyama)

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McDonald’s says 12 Russian branches temporarily closed

MOSCOW (Reuters) – McDonald’s (MCD.N) said on Friday that a total of 12 of its branches in Russia had been temporarily closed over the state food safety regulator’s allegations of sanitary violations.

The U.S. fast-food chain, which has 440 restaurants in the country, also said that more than 100 inspections were underway at its restaurants in various regions of Russia.

“We are studying the essence of claims in order to determine the necessary actions for the swift re-opening of restaurants for visitors,” it said in a statement.

(Reporting by Maria Kiselyova; Editing by Pravin Char)

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Fiat signals Chrysler merger on track

MILAN (Reuters) – Fiat (FIA.MI) signaled its merger with U.S. affiliate Chrysler was on track on Friday as a tally of shareholders suggested most had chosen not to exercise an option that could derail the plan, a vital step in the Italian carmaker’s turnaround efforts.

Chief Executive Sergio Marchionne wants to incorporate the two carmakers into a Dutch-registered company called Fiat Chrysler Automobiles (FCA), paving the way for a U.S. stock market listing that would help fund an ambitious investment plan.

But it could fail if the carmaker were asked to pay more than 500 million euros ($658 million) to investors who decide to sell their shares, exercising a legal right triggered by Fiat’s decision to move its registered offices away from Italy.

Fiat said it was finishing a count of shares for which cash exit rights had been validly exercised, but it could already say that the 500 million euro limit would not be exceeded, based on data calculated so far.

“Fiat has determined that even if all remaining unmatched notices and unmatched confirmations were to be matched, the maximum number of shares for which cash exit rights have been validly exercised will yield an aggregate exposure that is below the cap,” it said in a statement.

It plans to publish the final count by Sept. 4.

Investors had until Aug. 20 to tell Fiat whether they planned to cash in on their exit rights.

The merger of Fiat and Chrysler, which already operate as a single company, was approved by shareholders at the start of August but dissenting investors had a right to sell their shares for an exit price of 7.727 euros.

“The Fiat statement puts to rest rumors that have been doing the rounds since the start of this month … and ensures the merger process with Chrysler will turn out well,” Italian broker ICBPI said.

At 0850 GMT, Fiat shares were up 1.3 percent, outperforming the Italian benchmark share index .FTMIB

Marchionne said previously that if a critical mass of investors were to breach the cap, he would start the merger process again – effectively meaning a delay of several months.

“I am reassured by the fact that the vast majority of our equity holders have remained loyal and committed shareholders,” Marchionne said in the statement on Friday.

Fiat said it did not expect creditor opposition to stand in the way of a timely closure of the merger. Creditors, including bondholders, have until Oct. 4 to submit objections.

(1 US dollar = 0.7594 euro)

(Editing by Tom Pfeiffer)

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Disappearing euro zone inflation set to heighten ECB concerns

BRUSSELS/FRANKFURT (Reuters) – Euro zone inflation dropped to a fresh five-year low in August, data showed on Friday, something likely to concern the European Central Bank but not force it into immediate policy action.

Consumer prices in the 18 countries using the euro rose by just 0.3 percent year-on-year in August, the smallest increase since October 2009, the European Union’s statistics office Eurostat said. The number matched market expectations.

The ECB targets an inflation rate at below-but-close to 2 percent over the medium term, a level not seen since the first quarter of 2013. It also considers anything below 1 percent over time to be in a “danger zone”.

Inflation moving ever closer toward zero, a stagnating economy, a double-digit unemployment rate and increasing signs of reform fatigue among euro zone governments are posing a tough challenge for the ECB that it says it cannot solve alone.

In a landmark speech at a central banker gathering in Jackson Hole last week, ECB President Mario Draghi said it would be “helpful for the overall stance of policy” if fiscal policy could play a greater role alongside the ECB’s monetary policy.

He got backing on Thursday from German Finance Minister Wolfgang Schaeuble, who told Bloomberg that monetary policy could only buy time and had run out of tools, calling instead for more investment without running excessive deficits.

Others believe the ECB should do more to stimulate growth.

“This is yet another bad indicator of the health of the euro zone economy,” said Aberdeen Asset Management Investment Manager Luke Bartholomew. “We are now relying on Draghi the politician not Draghi the economist to get Europe out of this mess.”

“He is walking a tightrope between conservative European institutions and the markets desire for more stimulus. But as every month passes we get closer to the dread of deflation and Draghi looks more and more like Nero fiddling while Rome burns.”

The euro rose to the day’s high of $1.3195 EUR= as investors trimmed bets against the currency after the data and German Bund futures fell.

The drop in August inflation was led by a 2.0-percent decline in the highly volatile prices of energy. Prices of food, alcohol and tobacco fell by 0.3 percent for a second month in a row in August. Core inflation, which strips out such volatile components, rose to 0.9 percent from 0.8 percent.

“Core inflation resilience at just below 1 percent confirms that outright deflation remains unlikely,” said Marco Valli, chief euro zone economist at UniCredit.

In a separate data release Eurostat said that unemployment in the euro zone was, as expected unchanged at 11.5 percent for a second months in a row in July, leaving 18.4 million people without jobs in the 9.6 trillion euro economy.


Attention now shifts to the ECB’s September policy meeting next Thursday where the inflation reading is set to liven up the debate in the Governing Council. Analysts expect a more serious discussion about possible large-scale asset purchases.

Commerzbank now sees a 60-percent chance that the ECB will embark on quantitative easing (QE) in the next 12 months , spending billions of euros on private and sovereign debt to boost growth and inflation, up from an earlier 40 percent.

“QE is now our baseline scenario,” said Commerzbank economist Joerg Kraemer, mainly because of the weakening growth prospects for the currency bloc, although he does not expect the ECB to take fresh action on Thursday.

“We expect at best a modification in the wording compared with the August meeting rather than ECB action,” he said.

Sources told Reuters on Wednesday that new action on Thursday was unlikely but not impossible. [ID:nL5N0QX47B]

A Reuters poll on Thursday put a 40-percent chance on the ECB conducting QE through the purchase of sovereign bonds by March next year. [ID:nL3N0QY4DR]

ECB policymakers have said in recent weeks the ECB wanted to see the impact of its June stimulus package first before considering further steps. It will offer banks new four-year loans from September and may decide to buy securitised loans.

Expectations the ECB could activate QE, its most powerful tool yet, intensified after Draghi’s Jackson Hole speech in which he said financial markets indicated a “significant decline at all horizons” in inflation expectations, adding the ECB would use “all the available instruments” to ensure price stability.

Such a step is, however, highly contested by some ECB Governing Council members, who worry about moral hazard, while others question the effectiveness of such a policy tool that is likely to cost the ECB billions of euros.

(Reporting by Martin Santa and Eva Taylor, Editing by Jeremy Gaunt)

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