Posts Tagged ‘European Central Bank’
Wednesday, February 8th, 2012
Ireland was one of the nations that was hardest hit by the Eurozone crisis, but now it’s being seen as leading stricken nations in their efforts to turn their economies around. International Monetary Fund (IMF) and European Union (EU) officials are impressed by its austerity measures, imposed after the massive 2010 bailout. For the average Irish person, however, the gain is hard to see. Public services have been slashed, and housing prices have declined 60 percent. Approximately 1,000 young Irish people emigrate every week, and there’s extensive cynicism whether economic medicine being taken by the once-mighty Celtic Tiger actually works.
Ireland’s unemployment is currently upwards of 14 percent. At the start of Ireland’s second year of austerity, there have been tax rises, wage freezes, layoffs and more. This is being supervised by the so-called Troika, the European Commission (EC), the European Central Bank (ECB) and the IMF. These entities bailed out Ireland after the property bubble burst and its banks collapsed.
Larry Elliott, economics editor of The Guardian, describes Ireland as “the Icarus economy. It was the low-tax, Celtic tiger model that became the European home for US multinationals in the hi-tech sectors of pharma and IT. Ireland was open, export-driven and growing fast, but flew too close to the sun and crashed back to earth. The final humiliation came when it had to seek a bailout a year ago. In a colossal property bubble, debt as a share of household income doubled, the balance of payments sank deeper and deeper into the red, the government finances become over-reliant on stamp duty from the sale of houses and the banks leveraged up to the eyeballs.
During the time running up to the bubble bursting, Elliott says that “A series of emergency packages and austerity budgets followed as the government sought to balance the books during a recession in which national output sank by 20 percent. In November 2010, the Irish government asked for external support from the EU and the IMF. Again, it had little choice in the matter. The terms of the bailout were tough and there has been no let-up in the austerity. The finance minister, Michael Noonan, plans to put up the top rate of VAT by two points to 23 percent. At least 100,000 homeowners are in negative equity, and welfare payments (with the exception of pensions) have been slashed. In recent quarters there have been signs of life in the Irish economy, but the boost has come entirely from the export sector, which has benefited from the increased competitiveness prompted by cost-cutting. The best that can be said for its domestic economy is that the decline appears to have bottomed out. At least for now.
“Around a third of Ireland’s exports go to Britain, which is heading for stagnation, a third go to the eurozone, which is almost certainly heading for recession, and a third go to the United States, which will suffer contamination effects from the crisis in Europe. That’s the bad news. The good news is that the supply side of the Irish economy is sound. Much attention is paid to Ireland’s low level of corporation tax, which has certainly acted as a magnet for inward investment, but that is not the only reason the big multinationals have arrived. There is a young, skilled workforce and Dublin does not have London’s hang-up about using industrial policy to invest capital in growth sectors. Ireland had a dysfunctional banking system, but most of the multinationals — which account for 80 percent of the country’s exports — don’t rely on domestic banks for their funding. The problem is that you can’t run a successful economy on exports alone, no matter how competitive they might be.”
In fact, Ireland’s prime minister, Enda Kenny, recently called for even deeper budget cuts. Kenny outlined savings of up to €3.8 billion needed to slash its national debt under the terms of 2010’s EU/International Monetary Fund bailout. Kenny appealed for understanding from the Irish people and stressed that the nation may have to endure a further two or three harsh budgets to put the country’s finances in order. He said on Saturday that the Republic “was in the region of €18 billion out of line”.
“It is the same old story with Ireland in our view – doing good work and will continue to do so,” Brian Devine, economist at NCB Stockbrokers in Dublin said. “But the country is still extremely vulnerable given the level of the deficit.” The anticipated adjustments total approximately eight percent of Ireland’s economy, and follow spending cuts and tax rises of more than €20 billion since the economy began to decline in 2008.
And how are the Irish people dealing with austerity? “We’re squeezed to the pips,” said Tommy Larkin, a 35-year-old mechanic changing tires and oil on the double in northside Dublin. “I never had to watch my money in the good times, but that’s all I do with my money now.”
Wages for middle-class families have been cut around 15 percent, while the nearly 15 percent unemployed have seen welfare and other aid payments cut. The government recently imposed a new household tax, and is planning new water charges next. Driving a car can mean an annual fee of anything from $205 to $3,045, while recent fuel-tax increase haves taken gas upwards of $7.25 per gallon.
Tags: Austerity, bailout, Celtic Tiger, euro, European Central Bank, European Commission, European Union, Eurozone, Eurozone crisis, exports, International Monetary Fund, Ireland, Michael Noonan, negative equity, Property bubble, recession, Troika, unemployment, VAT, welfare
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Monday, January 23rd, 2012
European leaders will this week try to deliver new fiscal rules and cut Greece’s onerous debt burden. All this in the wake of Standard & Poor’s (S&P) Eurozone downgrades.
France was not the only Eurozone nation to feel the pain. Austria was cut to AA+ from AAA; Cyprus to BB+ from BBB; Italy to BBB+ from A; Malta to A- from A; Portugal to BB from BBB-; the Slovak Republic to A from A+; Slovenia to A+ from AA-; and Spain to A from AA-. S&P left the AAA ratings of Germany, Finland, Luxembourg and the Netherlands the same.
The European Central Bank (ECB) emerged unscathed. The ratings agency said Eurozone monetary authorities “have been instrumental in averting a collapse of market confidence,” mostly thanks to the ECB launching new loan programs aimed at keeping the European banking system liquid while it works to resolve funding pressure brought on by the sovereign debt crisis.
The talks on Greece and budgets may serve as tougher tests of the tentative recovery in investor sentiment than S&P’s decision to cut the ratings of nine Eurozone nations, including France. If history repeats itself, fallout from the downgrades may be limited. JPMorgan Chase research shows that 10-year yields for the nine sovereign nations that lost their AAA credit rating between 1998 and last year rose an average of two basis points the next week.
Policymakers worked doggedly to take back the initiative. German Chancellor Angela Merkel said S&P’s decision and criticism of “insufficient” policy steps reinforced her view that leaders must try harder to resolve the two-year crisis. Germany is now alone in the Eurozone with a stable AAA credit rating. Reacting to Spain’s downgrade to A from AA-, Prime Minister Mariano Rajoy pledged spending cuts and to clean up the banking system, as well as a “clear, firm and forceful” commitment to the Euro’s future. French Finance Minister Francois Baroin said the reduction of France’s rating was “disappointing,” yet expected
The European Financial Stability Facility (EFSF), which is intended to fund rescue packages for the troubled nations of Greece, Ireland and Portugal, owes its AAA rating to guarantees from its sponsoring nations. “I was never of the opinion that the EFSF necessarily has to be AAA,” Merkel said. Luxembourg Prime Minister Jean-Claude Junker said the EFSF’s shareholders will look at how to maintain the top rating of the fund, which plans to sell up to 1.5 billion Euros in six-month bills starting this week. In the meantime, Merkel and other European leaders want to move speedily toward setting up its permanent successor, the European Stability Mechanism, this year — one year ahead of the original plan.
Greece’s Prime Minister Lucas Papademos said that a deal will be hammered out. “Some further reflection is necessary on how to put all the elements together,” he said. “So as you know, there is a little pause in these discussions. But I’m confident that they will continue and we will reach an agreement that is mutually acceptable in time.”
Standard & Poor’s downgraded nine of the 17 Eurozone countries and said it would decide before too long whether to cut the Eurozone’s bailout fund, the EFSF, from AAA. “A one-notch downgrade for France was completely priced in, so no negative surprise here, and quite logical after the United States got downgraded,” said David Thebault, head of quantitative sales trading at Global Equities.
Thanks to the downgrades, fears of a Greek default also increased after talks between private creditors and the government over proposed voluntary write downs on Greek government bonds appeared near collapse. Greece appears to be close to default on its sovereign debt, eclipsing the news that France and other Eurozone members lost their triple-A credit ratings. “At the start of this year, (we) took the view that things in the Eurozone had to get worse before they got better. With the S&P downgrade of nine Eurozone countries and worries about the progress of Greek debt restructuring talks, things just did get worse,” wrote economists at HSBC.
Additionally there are implications for Eurozone banks from the sovereign downgrades.
“The direct impact of further sovereign and bank downgrades on institutions in peripheral. nations is perhaps neither here nor there given that they are already effectively shut out of wholesale funding markets due to pre-existing investor concerns over the ability of governments in these countries to stand behind their banks,’ said Michael Symonds, credit analyst at Daiwa Capital Markets.
Writing in the Sydney Morning Herald, Ha-Joon Chang says that “Even the most rational Europeans must now feel that Friday the 13th is an unlucky day after all. On that day last week, the Greek debt restructuring negotiation broke down, with many bondholders refusing to join the voluntary 50 per cent ‘haircut’ – that is, debt write off – scheme, agreed to last summer. While the negotiations may resume, this has dramatically increased the chance of disorderly Greek default. The Eurozone countries criticize S&P and other ratings agencies for unjustly downgrading their economies. France is particularly upset that it was downgraded while Britain has kept its AAA status, hinting at an Anglo-American conspiracy against France. But this does not wash, as one of the big three, Fitch Ratings, is 80 per cent owned by a French company.”
Tags: AAA rating, Angela Merkel, Austria, Cyprus, Czech Republic, Daiwa Capital Markets, Dollar, Downgrade, euro, European Central Bank, European Financial Stability Facility, European Stability Mechanism, Eurozone, Finalnd Dow Jones, Fitch Ratings, France, Francois Baroin, Germany, Global Equities, Greece, HSBC, Ireland, Italy, Jean-Claude Juncker, Lucas Papademos, Luxembourg, Malta, Mariano Rajoy, Portugal, Program Chase, Slovenia, Sovereign-debt crisis, Spain, Standard & Poor’s, The Netherlands
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Wednesday, January 4th, 2012
Yet another European nation – and one not in the Eurozone – is facing a financial crisis now that Standard & Poor’s (S&P) has downgraded its credit rating to junk status. The nation is Hungary, whose status was changed as a result of concerns about proposed policy changes regarding the country’s central bank. S&P cut its rating on Hungary’s debt to the non-investment grade of BB+ and warned that there could be additional adjustments. Its negative outlook on the Hungarian front means there is at least a 33 percent likelihood of another downgrade over the next year if Hungary’s fiscal performance worsens.
The lower rating could mean that Hungary has more difficulty borrowing, and may have to pay higher rates on its debt. Moody’s Investor Service, a rival credit-ratings agency, had already reduced Hungary’s rating to junk status in late November. According to S&P, policy changes related to Hungary’s central bank will curtail its independence; these changes by necessity complicate the scene for investors. They’re likely to negatively impact investment and fiscal planning, which will weigh on Hungary’s medium-term growth prospects. “The downgrade reflects our opinion that the predictability and credibility of Hungary’s policy framework continues to weaken,” S&P said.
Not surprisingly, the European Central Bank (ECB) is concerned about Hungary’s draft law that it says would undermine the independence of the country’s central bank. The government recently introduced proposals to merge Magyar Nemzeti Bank (MNB) with the Financial Supervisory Authority, name a new president who will outrank the current central bank governor and increase the number of members of the governing council. All of this would be “to the detriment of central bank independence,” the ECB said. “In particular, by appointing a new president with authority over the Governor of the MNB, who would become the vice-president of the new institution, the personal independence of the MNB’s Governor would be impaired and Article 14.2 of the Statute of the European System of Central Banks concerning the possible reasons for dismissing the Governor of a national central bank would be breached,” the ECB said. “The Governing Council of the ECB has requested the Hungarian authorities to bring their consultation practice into line with the requirements of European Union law and to respect the obligation to consult the ECB. Three major revisions of the central bank law in 18 months are incompatible with the principle of legal certainty.”
The independence of the central banks in European nations is enshrined in European Union treaties. However, Hungarian Prime Minister Viktor Orban wants to use his two-thirds majority in parliament to push through changes in the make-up of the decision-making entities of the MNB, with whom he has frequently disagreed over policy.
According to Business Week, “Hungary will probably overshoot its budget-deficit target next year, the central bank said. The shortfall may be 3.7 percent of gross domestic product, compared with the government’s 2.5 percent goal, the Magyar Nemzeti Bank said. The gap may be reduced to 2.6 percent with the ‘complete cancellation’ of budget reserves and assuming no unexpected spending and no shortfall in revenue in 2012. A decline in risk premium may allow keeping the benchmark interest rate unchanged at seven percent, the highest in the European Union, or its ‘cautious reduction’, the central bank said, citing the rate-setting Monetary Council. The rate may have to be ‘permanently’ higher if the pace of disinflation is slower than the bank’s forecast.”
Tags: European Central Bank, European Union, Eurozone, Financial Supervisory Authority, Forint, GDP, Hungary, inflation, Junk status, Magyar Nemzeti Bank, Moody's Investor Service, Standard & Poor’s, Viktor Orban
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Tuesday, November 1st, 2011
The midnight oil burned in Brussels as European finance ministers, heads of state, bankers and the International Monetary Fund (IMF) try to reach an agreement to restructure Greek debt. In the deal, private banks and insurers would accept 50 percent losses on their Greek debt holdings in the latest bid to reduce Athens’ immense debt load to sustainable levels. Although it required more than eight hours of negotiations that did not end until 4 a.m., the deal also anticipates a recapitalization of hard-hit European banks and a leveraging of the bloc’s rescue fund, the European Financial Stability Facility (EFSF), to give it €1 trillion ($1.4 trillion).
Significant work remains to be done to assure that the rescue works as envisioned. Several aspects of the deal, including the technicalities of boosting the EFSF and providing Greek debt relief, could take weeks to firm up; the plan to rebuild confidence after two years of crisis could unravel over the details. “I see the main risk is that we are left waiting too long again for the implementation of these agreements,” European Central Bank (ECB) policymaker Ewald Nowotny said. “Speed is very important here.” According to Greek Prime Minister George Papandreou, “The debt is absolutely sustainable now. Greece can settle its accounts from the past now, once and for all.”
European Union (EU) President Herman Van Rompuy said that the deal will slash Greece’s debt to 120 percent of its GDP by 2020. Under current conditions, it would have soared to 180 percent. Achieving this will require that banks assume 50 percent losses on their Greek bond holdings — a hard-to-swallow pact that negotiators now must sell to individual bondholders. According to Van Rompuy, the eurozone and IMF — which have both propped up Greece with loans since May of 2010 — will give the country another €100 billion ($140 billion). That’s slightly less than amount agreed in July, primarily because the banks now must pick up more of the slack. “These are exceptional measures for exceptional times. Europe must never find itself in this situation again,” European Commission President Jose Manuel Barros said.
While some question whether Greece will be able to meet its debt obligations by the drop-dead date, the fact that leaders were able to finally put concrete numbers to what had previously been little more than vague promises represents an important step forward. “It’s great news that we’ve got an agreement,” said Deutsche Bank economist Gilles Moec. “When Europe puts its heads together, they do actually begin to cooperate.”
Greece, whose crippling debt load has in principle been cut in half in the deal that Papandreou says marks “a new day for Europe and for Greece,” emerges as the biggest winner. Although the necessary austerity measures will be tough for the Greek people to live with, the new plan has set the country on a sustainable debt trajectory, according to Moec. “At least the deal gives Greece a fighting chance. It’s not great, it would be much better if we could get the debt below 100 percent…but it’s doable.”
Germany, which had been the driving force behind compelling the banks to take a bigger “haircut” or write down on Greek debt, is another winner. “If you look at the vote in German parliament outlining what Germany was going to ask for at the summit, and then you see the results of the summit, it’s basically identical,” Moec said. German Chancellor Angela Merkel believes that the deal is a victory for Europe in general. “Everybody was aware that the whole world was looking at this meeting,” she said. “I think that tonight we Europeans have taken the right measures.”
Writing for Reuters, Global Economics Correspondent Alan Wheatley sees some reason for skepticism. “Greece, however, has become something of a sideshow. Investors long ago judged that it was not just illiquid, but insolvent. Much more critical is what the eurozone could do to prevent the debt rot from spreading to bigger, systemically important but stagnant economies, notably Italy. Markets will have to wait for details as to how the EFSF will be scaled up; whether the likes of China will top up the bailout fund; and how operationally it will enhance the credit of member states’ new bonds. But some analysts are skeptical. Economists at Royal Bank of Scotland said they expected markets to re-price sovereign debt across the euro area given the size of the losses imposed on Greece. Expressed as the ‘net present value’ of the bonds, the proposed loss will be close to 70 percent, much more than the 40 percent hit that banks had volunteered to take, RBS said. What’s more, the EFSF will be too small to offer help to any country that might need it for any length of time. And a promise by governments to help banks regain access to long-term bond market funding implies they will have to assume extra contingent liabilities, thus adding to their debt burdens.”
Time’s Bruce Crumley is more hopeful. According to Crumley, “Let’s hope that upbeat attitude persists, but let’s not be stunned if it doesn’t. Because let’s be honest about another reality of Thursday’s development: it was only the most recent play by governments in a global confidence game that’s certain to shift and surge again before it’s all over. That’s not ‘confidence game’ in the usual, illicit ‘con’ sense. Instead it more literally describes attempts by EU leaders to inspire confidence and calm in financial markets so they’ll cease the doubt-inspired dumping of bonds, and bets against iffy sovereign debt that severely complicates efforts by eurozone officials to overcome current crisis. To that end, the relatively timid action taken earlier by European leaders was subsumed by the far more dramatic measures adopted – an emphatic upward ratcheting designed to prove their determination to tackle the evolving catastrophe once and for all.”
Tags: Angela Merkel, Austerity measures, Brussels, China, Deutsche Bank, euro, European Central Bank, European Commission, European Financial Stability Facility, European Union, Eurozone, GDP, Greece, Greek debt, Herman Van Rompuy, International Monetary Fund, Italy, Jose Manuel Barros, Royal Bank of Scotland, Sovereign debt
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Wednesday, October 19th, 2011
Greece’s dire financial crisis is taking a toll on the nation’s psyche in more ways than mere worries over whether the economy will survive. A team of technical experts, primarily from the European Union (EU), are in Greece monitoring the state of its debt-stricken economy – and they are well aware of how dire the situation is.
One sign of exactly how bad things are is the fact that the rate of suicide – especially among men desperate because they can no longer provide for their families – has increased by 40 percent in the last year. Suicide help lines report a deluge of calls – 5,000 in the first eight months of 2011 compared with 2,500 for all of 2010. The typical caller tends to be male, age 35 to 60 and financially ruined. “He has also lost his core identity as a husband and provider, and he cannot be a man any more according to our cultural standards,” clinical psychologist Aris Violatzis said. “Our times are dominated by depression and even mourning for the loss of everything people had managed to achieve in their lives,” Violatzis said. “Suicide is always due to a combination of several reasons but the economic crisis is becoming a major factor,” he noted. According to the World Health Organization, Greece traditionally occupied last place in the global list of suicides, but the numbers currently are rising fast.
Exact statistics are difficult to confirm, but unofficial figures showed a rise to 391 suicides in 2009 from 328 in 2007. Experts believe that the reality is much worse. To avoid traumatizing their families, some crash their cars in what police typically report as accidents. Additionally, families often cover up a suicide so their loved ones can be buried in the Greek Orthodox church. “The real suicide rate is many times the official one,” Violatzis said. “Right now we have the biggest increase in Europe.”
The Greek health ministry and Klimaka, a charitable organization, place the number of suicides even higher. They believe that the suicide rate has doubled since the crisis began to approximately six per 100,000 residents a year. A suicide help line at Klimaka at one time received from four to 10 calls a day, but “now there are days when we have up to 100,” according to Violatzis.
With speculation that Greece is on the brink of default more than 16 months after it received the biggest bailout on record, the country is the focus of the International Monetary Fund’s (IMF) talks. Some do not believe that time is running out to solve a crisis that began two years ago but, with markets far from appeased and enormous job losses, tax increases and out-of-control inflation, Greeks no longer believe what their politicians say.
“The belt is now at the eighth notch, it’s become so tight there are only two more left, but nothing has improved,” said Georgios Valsamis, a taxi driver who joined a barrage of strikes that brought public transport to a halt. “People in power, MPs, they’re like robots, they do whatever those foreigners (the EU, ECB and IMF) say. We are no longer willing to be a laboratory for failed policies. Low-income earners, those who have been really hit, can’t endure much more.”
“The worst part is perhaps psychological because there is no light at the end of the tunnel, no source of hope,” said Dr Thanos Dokos who directs Eliamep, a think-tank in Athens. “When you make sacrifices and you know they will come to something you don’t mind. But that is not the case.”
In addition to desperation, there is a collective sense of guilt and depression – more dangerous, say analysts, than even the social tensions that threaten to tear Greece apart. A short time ago, hundreds of Greeks crowded a lecture hall to hear Fotini Tsalikoglou, a noted psychology professor, speak on “the power of loss”. “Greeks feel like they are in a bad dream,” she said. “You wake up not knowing what will be overturned today of what was overturned yesterday. A common thread that unites people is the experience of fear and desperation.”
Tags: Austerity, bailout, Crime rates, euro, European Central Bank, European Union, Greece, Greek financial crisis, International Monetary Fund, Klimaka, Suicide, World Health Organization
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Wednesday, September 28th, 2011
World Bank President Robert Zoellick believes the world will not slide into a double-dip recession. Zoellick was in Singapore, attending an economic conference amid plummeting world stock prices and worries over a slowdown in U.S. economic growth. Zoellick believes the United States and the world will avoid a “double-dip” recession, but admitted that growth is likely to remain sluggish and prospects are uncertain. Zoellick said the world is entering a “dangerous period,” noting that the United States could reassure markets with steps to put the brakes on increasing its debt, rather than making deep cuts in spending.
Zoellick’s comments add pressure on European officials who are trying to contain a sovereign debt crisis that threatens Italy, whose government bonds in euros have declined a record 11 consecutive days. Finland has fostered division among policy makers by looking for collateral for loans to Greece, the first of the three euro-region nations to receive bailouts so far. American and European economies are stalling and feeble global growth are impacting Asia, Singapore’s Minister of Finance Tharman Shanmugaratnam said. Growth in the U.S. and Europe may be just one percent.
“We’re already at stall speed in the U.S. and Europe, which means we’re now more likely than not to see a recession,” Shanmugaratnam said. Companies are holding back spending and consumers globally lack confidence. Zoellick tamped down the likelihood of a “double-dip” global recession in comments to reporters in Singapore today. Still, “we are now seeing a particularly sensitive time in the euro zone,” the World Bank chief said. “A number of issues are converging.”
“These things are very hard to predict because if you have events trigger uncertainty in Europe, that will flow back to the U.S.,” Zoellick said. The eurozone’s performance “depends on the political decisions moving forward,” he said. The euro will survive in the next five years, although the question over membership of the common currency is one that Europeans must answer. “Sometimes people hope that you can muddle through by providing financing and liquidity, in the case of Europe, from the European Financial Stability Facility or the European Central Bank,” Zoellick said. “They now recognize that’s not going to happen and instead what you see is with some of the weaker economies, that the austerity policies are pushing them into slower and slower growth and so this could be a downward spiral.”
According to Zoellick, recent European Central Bank government bond purchases have given temporary monetary liquidity to markets. “The policies that have been pursued by the EU up to now can buy time, but parliaments and the public have to come to terms with fundamental questions,” Zoellick said. One direction is to deepen the fiscal union.”
“They’ve tried to pump money into it, they’ve tried in the past month. The ECB bought a lot of bonds. But, I think dealing with these problems through liquidity measures will not be sufficient,” Zoellick said. “Christine Lagarde of the International Monetary Fund (IMF) and I from a different position at the World Bank have been trying to prod people to recognize some of these questions.” Lagarde, who told the Federal Reserve’s annual conference that European banks need urgent capitalization, angered some European policymakers and politicians with her opinions.
“People should not underestimate the European response, but Europeans should not be fooled that that type of response will deal with the fundamental questions that still need to be addressed,” Zoellick said. The markets have been hoping for additional monetary stimulus from the Federal Reserve to relieve global growth concerns, but Zoellick said that monetary policy alone won’t do the job. Rather, he said, the real solution to Europe’s crisis must be found to deal with the crisis. “This one is really even beyond the finance ministers’ pay grade. These are going to be the decisions that have to be made by the heads of government and supported by their parliaments,” he said.
American markets analyst Peter Kenny of Knight Capital said “We have a eurozone that is an apoplectic frenzy of just trying to right the ship. If you can find some stabilizing influence in the eurozone to give the global markets some confidence, I’d be shocked.” Parliaments in Germany and France currently debating the extent of their countries’ contribution to the European Financial Stability Facility, the fund set up to bail out any eurozone nations struggling with their debt obligations.
Richard Jeffrey, chief investment officer at Cazenove Capital Management, said that “Money that the key worry for the markets was the health of the world economy. “If the world economy is slowing down or perhaps even moving into recession – I think that is less likely, but that is what people fear – then that has negative implications for the financial system and the banking sector. The debt problems in the peripheral European economies rumble on, of course, but again their debt problems are helped if there is growth. If there isn’t growth in the economies, then their debt problems become more difficult to support, so this is all interlinked.”
Tags: Asia, Austerity, Capitalization, Christine Lagarde, Double-dip recession, euro, Europe, European Central Bank, European Financial Stability Facility, Eurozone, Federal Reserve, Finland, Greece, International Monetary Fund, Italy, Monetary stimulus, Robert Zoellick, Singapore, Sovereign-debt crisis, Tharman Shanmugaratnam, World Bank
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Monday, July 25th, 2011
Italian Prime Minister Silvio Berlusconi said he would speed the passage of a 40 billion-Euro ($56 billion) deficit-cutting plan to stop a market selloff that threatens Europe’s single currency. The “crisis prompts us to speed up” approval of the budget cuts, Berlusconi said since Italian stocks lost nearly 7.5 percent over two sessions and bond yields soared to the highest in 10 years. Referring to the austerity plan, Berlusconi vowed “to bolster its content and draw up additional measures aimed at balancing the budget by 2014. The crisis in confidence that has battered financial markets and hit Italy in recent days is a threat for everyone in the Eurozone, the most concrete element of European unity,” Berlusconi said. He noted that Italy’s banks are “solid” and his government and opposition parties are determined to defend Europe’s third largest economy. Italy has the world’s 7th largest economy and the Eurozone’s third largest.
The initial signs that Italy was in trouble emerged last week, when investors began dumping Italian bonds and selling off the stocks of banks such as UniCredit that are heavily exposed to Italian debt. That accelerated three days after Berlusconi drove worries about Rome’s commitment to the passage of the proposed budget cuts by snarking about finance minister Giulio Tremonti. ”I think Italy is in a much better position than Greece still, but clearly the Europeans now need to make sure that Italy doesn’t go,” said Jonathan Tepper, partner at Variant Perception, a London research firm. ”That would be bad, and not just for the Europeans.”
Berlusconi said that the plunge in the country’s stocks and bonds in recent days is a threat for the unity of Europe and the Eurozone. “The crisis in confidence that has battered financial markets and hit Italy in recent days is a threat for everyone and that effects the single currency, the most concrete element of European unity,” he said, noting that his government and opposition parties are determined to defend Italy and that he is supported by his European Union allies.
“Berlusconi and Co. must back down and give (Finance Minister Giulio) Tremonti full support immediately,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. Of all Eurozone nations that are sensitive “to rising debt servicing costs, Italy tops the list, so it can’t afford for this colossal rise in long-term rates to be anything other than very short-term.”
Roben Farzad of Bloomberg Business Week said on National Public Radio’s “All Things Considered”, “Profligacy. Look, I mean, the Euro was great. The Eurozone was great when it all worked out and had this single currency and you can partake in cheaper labor and people going across the borders easily and lower cost of capital for everyone. But when times are bad, i.e., this great global recession of ours, suddenly you have a dynamic where the haves and the have-nots are exposed for what they are. And the smaller countries, the more peripheral countries, turns out that they really borrowed beyond their means. But Italy is the perennial sick man of Europe. It’s a slow growing economy. It’s not monolithic. The south tends to be poor. The north is wealthier and more industrious and has the majority of the finance and the capital and whatnot. The problem is, when times are good and risk is perceived as being overrated, you have the international debt capital markets being very easy with loaning money to countries. And slow-growing countries like Italy and Japan, if you look at their last 20 years, they tend to over-borrow in order to make ends meet. Believe it or not, Italy is the third most leveraged country in the planet.”
James Walston offers this analysis in the Telegraph. According to Walston, “For those of us not versed in the dark arts of accounting or international finance, there is little more solid than money; I have it or I don’t, I can borrow it or lend it and measure it down to the last penny. But confidence is an altogether different commodity, far more abstract and difficult to gauge. Italy is trying to persuade us that the world should have confidence in both its political and its financial stability. It will not be easy. The ratings agencies’ evaluation of a country’s creditworthiness are one measure of stability; another is investor confidence in the bond markets about Italy’s solvency. On both scores, the omens are getting worse for Italy day by day. Until recently, Italy had avoided the worst of the world and European crises. There was no housing bubble, as Italian banks demand copper-bottomed collateral before they will lend the ordinary house buyer a cent. There were almost no toxic assets, as banks are amazingly conservative in their investment policies.”
European Central Bank Governing Council member Mario Draghi urged the Italian government to move ahead with further measures to re-balance the budget by 2014. “The substance of future measures aimed at balancing the budget by 2014 should be defined as rapidly as possible,” he said. “This is what markets are looking at above all today.” Additionally, Draghi criticized the European policy response to Italy’s debt crisis, saying policymakers must “bring certainty to the process by which sovereign debt crises are managed” with clearly defined objectives and instruments. International Monetary Fund economists have urged “decisive implementation” by Italy to cut its enormous public debt, pointing out that its austerity plan is based on buoyant forecasts with measures weighted toward the future.
Tags: Austerity plan, Bloomberg Business Week, Debt crisis, euro, European Central Bank, European Union, Eurozone, Giulio Tremonti, Greece, International Monetary Fund, Italy, Monument Securities Ltd., National Public Radio, Roben Farzad, Silvio Berlusconi, Sovereign debt, Variant Perception, “All Things Considered”
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Tuesday, July 5th, 2011
European finance ministers are working to resolve a quandary over how to talk banks into “voluntarily” contributing to a second Greece bailout and avoiding a destructive debt default. This attempt to rescue Greece’s finances hinges on how far banks, pension funds and insurers will accept new terms on old debts prior to repayment by Athens. Greece has accumulated 350 billion euros ($500 billion) of debt, more than its entire economy produces in 18 months. The European Central Bank (ECB) is concerned that requiring private investors to help could see the credit ratings agencies deem Athens to be in default, an enormous risk for the entire eurozone.
European finance chiefs are hammering out a Greek rescue to prevent sovereign default after the country was given the world’s lowest credit rating by Standard & Poor’s. According to Dutch Finance Minister Jan Kees de Jager, “We need to make it as voluntary as possible to prevent triggering scenarios that cost more and make financial markets lose all confidence in the eurozone.”
German Finance Minister Wolfgang Schaeuble is firm in his belief that taxpayers in the eurozone’s biggest economy will be willing to lend Greece more money — but only if banks and private creditors take their own hits. “The German government is ready to participate in supplementary measures,” Schaeuble said, but, “of course, a role for the private sector is an element. We are in discussions.” Austrian Finance Minister Maria Fekter echoed this hardline stance, noting that “we can’t leave the profits in the hands of the banks and the losses in the hands of taxpayers.” The chairman of the 17-nation currency Eurogroup, Luxembourg Prime Minister Jean-Claude Juncker, said the finance ministers had come together “to examine different options…all the options.” Additionally, Germany is supporting a bond swap that would push out the maturities on Greece’s debt by seven years, giving it more time to rebalance its economy and sell state assets.
According to Finnish Finance Minister Jyrki Katainen, “Most of the countries have indicated that some form of private sector involvement is crucial, I want to underline that we have to avoid, whatever it takes, the next financial crisis. The balance is very difficult.” A new aid package for Greece is expected to be finalized at an upcoming European Union summit.
A majority of German banks say they can withstand Greek debt restructuring, according to Christoph Schmidt, an economic adviser to Chancellor Angela Merkel. A “soft restructuring” would have little effect on Greece’s debt burden and eventually creditors — including the European Central Bank — will have to write off part of their Greek sovereign debt, Schmidt said.
A more pessimistic viewpoint was expressed by European Central Bank Governing Council member Christian Noyer, who said any attempt by eurozone governments to fine-tune Greek debt that results in a default means financing the nation’s entire economy. “Our position is extremely simple: if there is a solution that avoids a risk of default, it seems suitable,” Noyer said. “If you can’t find it, it’s better to avoid touching the debt. If, despite everything, you try to reduce the debt and you provoke a risk of default, you’ll have to finance the entire Greek economy. We’ve gone as far as possible in our interpretation of the quality of debt. If we have debt in default, it will be impossible to consider that we have quality debt. Therefore it will become impossible to accept this debt as collateral.” Believing that restructuring or rescheduling can lead to a relaxation of budget plans is a “dangerous illusion,” he said. “Such operations do not in themselves provide any new financing. They always lead, at least initially, to a further drop in confidence and lower capital inflows, which increases the adjustment effort needed.” Noyer also rejected suggestions that the ECB’s stance was related to concerns about the ability of European banks to absorb losses on Greek debt, or even about the ECB taking losses on its own Greek holdings.
The position “has nothing to do with the situation of French or German or European banks, and nothing to do with the fact that the euro system holds Greek debt,” he said. “That’s rubbish. Our one and only concern is the financing of the Greek economy. We must absolutely avoid anything that could result in a default,” Noyer said. “It would be an extraordinarily serious risk for the financing of the Greek economy and would be one for a certain number of euro-zone regions after that.”
Greece now has the dubious honor of being the lowest-rated sovereign in the world, below Ecuador, Jamaica, Pakistan and Grenada. According to Standard & Poor’s, “In our view, Greece is increasingly likely to restructure its debt in a manner that, under the conditions of any package of additional funding provided by Greece’s official creditors, would result in one or more defaults under our criteria.”
Tags: Angela Merkel, Christian Noyer, Debt restructuring, default, Eurogroup, European Central Bank, European Central Bank Governing Council, European Union, Eurozone, Greece, Jan Kees de Jager, Jean-Claude Juncker, Jyrki Katainen, Maria Fekter, Standard & Poor’s, Wolfgang Schaeuble
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Monday, June 6th, 2011
Portugal has become the third European nation to accept a financial bailout to the tune of € 78 billion, with € 12 billion going directly to the Iberian nation’s banks. It is the third of four PIGS nations (Portugal, Ireland, Greece, Spain) to require a bailout. Caretaker Prime Minister Jose Socrates announced that he had reached preliminary agreement with the European Union (EU), International Monetary Fund (IMF) and the European Central Bank (ECB) for a three-year package of support, including help for Lisbon’s banks. Portugal’s bailout means three of the eurozone’s 17 countries can be described as being in financial intensive care. Greece accepted €110 billion of bilateral loans last year; Ireland signed an € 85 billion bailout last November — with the long-term fiscal and economic prognosis for all three nations still uncertain. Socrates believes that he has secured a good deal, saying, “There are no financial assistance programs that are not demanding.”
The eurozone’s three patients are on three different medicine regimes: Greece’s loans must be repaid over seven years at an average 4.2 percent interest rate; Ireland’s over seven years at an average 5.8 percent rate (although it is trying to change the rate); and Portugal’s is still under discussion. “I think the terms inevitably are going to be different in each country because the circumstances are…different,” said Eamon Gilmore, Ireland’s minister for foreign affairs. “The government would be very fed up too if another country was getting a bailout deal better than the terms that we are getting,” he said.
“The capital of these banks isn’t really the main problem at the moment. The focus is their dependency on the ECB for liquidity and how they can get out of that and somehow fund themselves in the wholesale market again,” said Carlo Mareels, banks analyst for RBC Capital Markets. Portugal’s banks have been unable to raise funds in wholesale markets for the last year, demonstrating exactly how intertwined the fortunes of the state and lenders has become in eurozone countries. Margins have been squeezed as banks compete for retail deposits, which strains their capital positions. The declining value of their government bonds makes a bad situation even worse.
Simonetta Nardin, a spokeswoman for the IMF, l confirmed that officials had reached an agreement with the Portuguese government ”on a comprehensive economic program. We have said from the beginning that it is important that any program should have broad cross-party support and we will continue our engagement with the opposition parties to establish that this is the case.” The bailout requires EU approval. Portugal’s prime minister said that he would present the deal to opposition parties and called on them to show ”a sense of responsibility and a superior sense of national interest” to ensure Portugal receives emergency financing quickly. Under the plan, the deficit would need to be reduced to 5.9 percent of GDP this year; 4.5 percent in 2012; and three percent in 2013.
Jonathan Loynes, chief European economist at Capital Economics, predicted that Portugal’s GDP will decline by two percent in 2011. “Against this background, while the confirmation of the bailout should provide some reassurance that Portugal will be able meet its upcoming bond redemptions, it won’t put an end to speculation that – along with Greece and perhaps others – it will sooner or later need to undertake some form of debt restructuring,” he said.
The bailout needs wide-ranging cross-party support because Socrates’ government collapsed last month, which set off a round of increased borrowing rates. Additionally, it forced Lisbon to seek financial assistance from the EU. The winner of the June 5 general election will implement it. Agreement on the loan terms is required by June 15, when Lisbon needs to redeem € 4.9 billion worth of bonds.
Tags: bailout, Capital Economics, Debt restructuring, euro, European Central Bank, European Union, Eurozone, Financial intensive care, GDP, Greece, IMF, Ireland, Jose Socrates, Lisbon, PIGS, Portugal, RBC Capital Markets, Spain
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Monday, May 2nd, 2011
The Federal Reserve is unlikely to follow the European Central Bank’s (ECB) recent decision to raise interest rates and will hold off until there is looming inflation. The ECB’s move may be the first of several this year as high oil costs drive consumer prices above its target. That’s not to say that some members of the Fed’s policy-setting committee are not proposing an increase in the overnight lending rate by three quarters of a percentage point by the end of 2011.
Fed Chairman Ben Bernanke and New York Fed president William Dudley both believe that the economy is still to weak to remove support. “The old analogy that the Federal Reserve removes the punch bowl just when the party gets going doesn’t apply here because, well, there is no party,” said Bernard Baumohl, chief global economist at the Economic Outlook Group in Princeton, NJ. “There’s not even a balloon in sight.”
Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, also sees the ECB’s move as having minimal impact on the Fed. “I don’t see that a move by the ECB has any particular influence on our policy posture here in the United States,” Lockhart said. “Obviously by increasing the differential between short-term rates in the U.S. and short-term rates in the eurozone, you can see some influence” because “exchange markets are affected by short-term rates. I think some of the dollar selloff reflects some extent of that.”
The ECB “will hike twice in quick succession in April and June to satisfy the core economies’ demand for tighter policy,” said Stuart Thomson, a Glasgow-based money manager at Ignis Asset Management, which oversees about $120 billion. “But the sensitivity of the peripheral economies to higher rates, both in terms of overall debt and proportion of consumer loans tied to variable interest rates, means the central bank will pause over the summer.”
The Frankfurt-based ECB raised its refinance rate to 1.25 percent from just one percent, the first increase since July 2008. The ECB also boosted other rates by a quarter point, raising its marginal lending facility rate to two percent and its overnight deposit facility rate to 0.5 percent. According to ECB President Jean-Claude Trichet, “We did not decide it was the first of a series of rate increases,” emphasizing that the central bank will “always do what is necessary” to assure that inflation expectations across the 17-nation eurozone are given due consideration.
The ECB has forked over billions of dollars in the last year, purchasing bonds from troubled European nations such as Greece, Ireland and Portugal – all of which have been bailed out by the European Union – to assure that they stay afloat. The bank, whose intention is to focus on inflation is raising interest rates to combat rising prices, a major concern in Germany, which is the ECB’s most influential member.
“The ECB has decided that it will tighten policy for the core countries like Germany that are doing well and leave the non-standard measures support in place for the periphery countries,” said Silvio Peruzzo, an economist at Royal Bank of Scotland Group Plc. “The rate increase is appropriate and there will be another one as early as June.”
Tags: Ben Bernanke, Dennis Lockhart, Economic Outlook Group, European Central Bank, European Union, Euros, Eurozone, Federal Reserve, Federal Reserve Bank of Atlanta, Germany, Greece, Ignis Asset Management, inflation, interest rates, Ireland, Jean-Claude Trichet, New York Fed, Overnight lending rate, Portugal, Royal Bank of Scotland Group Plc, unemployment, William Dudley
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