Posts Tagged ‘Eurozone’
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
Posted in Economics, Financing, General | No Comments »
Monday, February 6th, 2012
As the stock market moved between negative and positive territory on the last day of January, 2012, the Dow Jones Industrial Average was nevertheless poised to close with their biggest January gain in 15 years – despite closing down a few points for the day. In fact, it could be the best January for Standard & Poor’s (S&P) and Dow since 1997 and since 2001 for the Nasdaq.
“Everyone is cautiously waiting for the close today to see if we can put this on the board,” said Frank Davis, director of trading at LEK Securities. “It would be a pretty darn good foothold to start the year.” Stocks initially rose after European Union leaders agreed to strengthen their financial firewall. Additionally, most members have agreed to sign a new fiscal compact. Even so, 2012’s first summit ended without new solutions to resolve Greece’s debt crisis. “There’s positive news coming out of Europe, but it’s still very tenuous with Greece,” said Jeffrey Phillips, chief investment officer of Rehmann Financial. “Every time we see something positive there, we seem to see it reverse in four or five days.”
The S&P 500 rose 4.3 percent in January, which is its best performance since the 6.1 percent gain that occurred in January of 1997. One year ago, the market added a respectable 2.3 percent in January. Following a trying 2011, investors had such low expectations that it’s easy for the year’s earliest reports to come in better than expected, said Jerry Harris, chief investment strategist at the brokerage firm Sterne Agee. “I don’t see anything really glamorous or tremendous about the economy or earnings,” Harris said. “But I think they’re very acceptable, and things are grinding along.”
“Longer-term investors should not be fooled by what appear to be attractive valuations for financials,” said Brian Belski, Oppenheimer & Co.’s chief investment strategist. Any investor should look three to five years into the future and invest less money in these stocks than their S&P 500 weight would suggest because they account for roughly 14 percent of the index’s value. The financial index was recently valued at 12.4 times earnings, which is about twice as high as it was two years ago. “Most of these companies operate in a ‘whole new world’ of increased scrutiny and regulation,” Belski wrote, noting that more restrictive capital requirements, imposed as part of that shift, will hurt profitability.
The European debt crisis is a major culprit in the market’s volatility. Confidence that American markets can remain relatively unaffected by Europe’s difficulties has fueled gains in 2012. Money managers, some of whom missed the upward move, seem to be willing to buy on day-to-day declines. “The action that we’ve seen today is very similar to what we’ve seen throughout most of the year so far,” said Ryan Larson, head of equity trading at RBC Global Asset Management. “We see the resilience showing in U.S. markets and I think that’s a theme that we’ve seen throughout 2012. The U.S. appears to be slowly, slowly in the early stages of a decoupling from the Eurozone,” he said.
Chris Cordaro, chief investment officer at RegentAtlantic Capital, a wealth management firm, believes equities will finish sharply higher this year as Europe’s problems are resolved and investors buy into stock valuations that were beaten down through much of last year. “We could definitely end the year much higher on equities,” he said. “We have been favoring equities in our portfolio. We have just increased our exposure to emerging markets.”
More bad news came January 31 when the Conference Board’s consumer confidence index fell to 61.1, missing the forecast 68. December’s level had experienced a slight upwards tick to 64.8 from 64.5. “The US consumer has still seen a very firm turnaround since October, this also is likely to reflect the increase in gasoline prices since the start of the year,” wrote David Semmens, U.S. economist with Standard Chartered. “While the U.S. consumer is feeling better, the turnaround is still likely to be volatile.”
“Most market participants will raise their glasses to usher out what has proved to be a decent January for performance, data and sentiment,” said Jim Reid, a global strategist at Deutsche Bank AG.
Tags: 21st century, Conference Board, consumer confidence, Dow Jones Industrial Average, European debt crisis, European Union, Eurozone, Financial firewall, Gasoline prices, Greece, NASDAQ, Standard & Poor’s, stock market
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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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Monday, January 16th, 2012
The United States added more than 200,000 jobs in December of 2011, building on a strengthening employment market that dominated the second half of the year. This brought the unemployment rate down to 8.5 percent from the revised 8.7 percent, which had been predicted in November. The primary growth was in transportation — primarily courier services that hired for the holidays — healthcare and manufacturing, according to the U.S. Bureau of Labor Statistics.
“It would have been even better without the drag from Europe,” said John Canally, economic strategist at LPL Financial, a stock brokerage firm. “The Europe situation created uncertainty, and uncertainty was used as a reason not to hire until now.” The year ended even more strongly than economists had predicted. They had forecast that employers would add a net 150,000 jobs in December, according to a survey by Factset. They also had predicted that the unemployment rate would tick up to 8.7 percent from November’s 8.6 percent; this is the lowest rate since March 2009.
In the end, November’s unemployment rate was revised up in this report, to 8.7 percent. The better-than-expected monthly gain of 219,000 private-sector jobs means American businesses have replaced more than three million of the 4.2 million private-sector jobs that were lost the past 13 months. The private-sector jobs gained since employment bottomed in February of 2010 marks the strongest recovery since the 1990-1992 recession, when U.S. businesses added 4.2 million jobs in the same amount of time.
The new job numbers highlight the fact that the U.S. economy is on its way to recovery even as strains in Europe persist,” said David Watt, senior currency strategist at RBC Capital in Toronto. The fact that the labor market is gaining traction should be good news to the Obama administration, whose economic policies are relentlessly attacked by the political opposition.
This string of better-than-anticipated economic indicators has highlighted the stark contrast between the recovery in the world’s biggest economy and Europe, which faces bad times for months or even years. Even with the good news, the American economy needs an even faster pace of job growth over a sustained period to make a noticeable dent in the pool of the 23.7 million people who remain out of work or underemployed in the wake of the 2007-09 recession.
December marked the 15th consecutive month that employment numbers have risen. Marcus Bullus, trading director at MB Capital, said: “That’s one hell of a number. Such an impressive fall in both the number of jobless Americans and the unemployment rate will cheer everyone bar Republican spin doctors. The Obama administration could be forgiven for showboating over this convincing evidence that America’s economy is pulling away from Europe’s. From a market perspective, strong US data like this will add to optimism, but nobody doubts the considerable downward pressure the Eurozone will continue to place on the global marketplace during 2012.”
Automatic Data Processing’s (ADP) numbers for December are even more impressive, saying the government added 325,000 jobs in December. ADP’s figures do not always match the government’s, and economists warned that seasonal factors could have boosted the figures. Even so, all the major measures of the job market appear to be on the upswing.
Lasting payroll gains are needed to chip away at joblessness and support household spending, which accounts for approximately 70 percent of the world’s largest economy. The labor market figures come on the heels of recent data showing increased manufacturing and a rebound in consumer sentiment that show the U.S. is barely impacted by Europe’s debt crisis. “You got the trifecta — more people working, wages up and the average work week up,” said Stuart Hoffman, chief economist at PNC Financial Services Group Inc., who accurately forecast the December payroll gains. “You can’t really argue that that isn’t a sign of significant improvement in the job market.”
Yearly benchmark revisions showed the unemployment rate averaged 8.9 percent in 2011, down from 9.6 percent and 9.3 percent in the previous two years. It still ranks as the worst three-year period since 1939 to 1941.
Writing in the Wall Street Journal, Phil Izzo says the increase is “for real.” According to Izzo, “While the unemployment rate has been falling in part due to people leaving the labor force, a large portion of this month’s number appears to come from people finding jobs.
“The unemployment rate is calculated based on people who are without jobs, who are available to work and who have actively sought work in the prior four weeks. The actively looking for work’ definition is fairly broad, including people who contacted an employer, employment agency, job center or friends; sent out resumes or filled out applications; or answered or placed ads, among other things. The rate is calculated by dividing that number by the total number of people in the labor force.
“The key to the drop in the broader unemployment rate was due to a 371,000 drop in the number of people employed part time but who would prefer full-time work, that comes on top of big drops in that category over the past two months. That number could reflect people having their hours increased or part-time workers moving on to full time work,” Izzo concluded.
Tags: : U.S. Bureau of Labor Statistics, ADP, Europe, European debt crisis, Eurozone, Factset, Obama administration, Private-sector jobs, recession, unemployment, unemployment rate
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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 29th, 2011
Italy’s Prime Minister Silvio Berlusconi has asked for international oversight of his efforts to slash the eurozone’s second-largest debt, even as his unraveling coalition threatens efforts to build a wall against Europe’s debt crisis. Berlusconi’s government asked the International Monetary Fund (IMF) to assess its debt-reduction progress, and turned down an offer of financial assistance.
“It hasn’t been imposed, it was requested,” Berlusconi said. The IMF will carry out quarterly “certifications” of the euro region’s third-largest economy, he said, noting that the current sell-off of Italian debt is “a temporary trend” even as the nation’s borrowing costs soared to record highs. Berlusconi is under mounting pressure as Italy tries to avoid yielding to the sovereign-debt crisis.
Italy’s 10-year borrowing costs are getting dangerously close to the seven percent level that forced Greece, Ireland and Portugal to ask for bailouts. The yield on the nation’s benchmark 10-year bond surged to a euro-era record of 6.404 percent, the highest since the creation of the single currency. “If the current Greek tragedy is not to turn into an Italian tragedy, with far more serious and far-reaching consequences for the eurozone, Berlusconi must resign immediately,” Marc Ostwald, a fixed-income strategist at Monument Securities Ltd., said. Berlusconi may be “remembered as the architect of Italy’s descent into an economic inferno.”
IMF managing director Christine Lagarde hopes that quarterly monitoring will start by the end of November to verify that the reforms Berlusconi promised are implemented. “It’s verification and certification if you will, of implementation of a program that Italy has committed to,” she said. “It’s one of the best ways to have an independent view…to verify that promised measures are actually implemented.” She agreed that Italy doesn’t need IMF funding. “The problem that is at stake — and that was clearly identified both by the Italian authorities and its partners — is a lack of credibility of the measures that are announced,” according to Lagarde. “The typical instrument that we would use is a precautionary credit line. Italy does not need the funding that is associated with such instruments so the next best instrument is fiscal monitoring, which is what we have identified.”
Lagarde isn’t certain that the proposed reforms are credible. “The problem that is at stake and that was clearly identified both by the Italian authorities and by its partners is a lack of credibility of the measures that were announced,” Lagarde said. Additionally, the IMF will provide funds to stimulate Italy’s economy, although under strict conditions.
Will Berlusconi’s regime survive this crisis? “Historically, technocrat governments in Italy have been able to pass pro-growth structural reforms, including politically difficult labor market reforms,” said Barclays Capital analyst Fabio Fois. Governments such as those led by Carlo Azeglio Ciampi and Lamberto Dini – who had served as central bankers — in the early 1990s saved Italy from financial crises even worse than the present one. “I think the political parties would have a big incentive to go through the painful policy adjustment now, before the next election due in 2013, so that whoever wins won’t have to do it later,” Fois said.
Berlusconi seemed almost nostalgic for the days when the lira was Italy’s currency. “You don’t get much in your supermarket trolley for €80 today, whereas you used to get a lot for 80,000 lire,” he said.
He insisted that Italy’s economy is generally prospering. “The restaurants and vacation spots are always full, nobody thinks there is a crisis,” he said, noting that, considering its low household debt levels, Italy has Europe’s second-strongest economy, after Germany and was stronger than France or the U.K. The country’s €1.9 trillion in public debt, the equivalent of nearly 120 percent of GDP, was a legacy problem, had not grown in the past 20 years, and had been consistently serviced, Berlusconi said.
Berlusconi admitted that his government “might have made a mistake” in assuming the public debt was sustainable without more aggressive fiscal and reform action. When asked what he thought about frequent warnings from European Union partners that Italy demonstrate credibility with the promised reforms, Berlusconi said the criticism reflected prejudice about past Italian behavior. “If we don’t enact the reforms Italy will be in trouble,” he said. “But we will enact them.”
Tags: bailouts, Cannes, Christine Lagarde, euro, European Union, Eurozone, France, G20, GDP, Germany, Greece, International Monetary Fund, Ireland, Italy, Lira, Portugal, Silvio Berlusconi, Sovereign-debt crisis, U.K.
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Tuesday, November 22nd, 2011
Whoops! Someone has a red face. France’s credit ratings have not been downgraded by Standard & Poor’s (S&P) and apparently resulted from an accidental transmission of a message that it had downgraded the nation’s credit. S&P’s error roiled global equity, bond, currency and commodity markets when it sent and then corrected the erroneous message.
“As a result of a technical error, a message was automatically disseminated today to some subscribers of S&P’s Global Credit Portal suggesting that France’s credit rating had been changed,” S&P said. “This is not the case: the ratings on Republic of France remain ‘AAA/A-1+’ with a stable outlook, and this incident is not related to any ratings surveillance activity. We are investigating the cause of the error.”
Downgrading France’s credit rating would negatively impact the rating of the European Financial Stability Facility (EFSF), the bailout fund for struggling euro member countries that has funded rescue packages for Greece, Ireland and Portugal. If the EFSF ends up paying higher interest on its bonds, it may not be able to provide as much funding for indebted nations. “It was a mess,” said Lane Newman, the New York-based director of foreign exchange at ING Groep NV. “It calls into question the credibility of people who can have that sort of impact not really being careful.”
“It clearly raises issues about internal systems and controls,” said Christopher Whalen, managing director of Institutional Risk Analytics, a Torrance, CA-based bank- rating firm. “The onus is on them to be careful and it’s troubling. Whether you’re a broker dealer or a rating agency, everything you say has to be very carefully considered because of the weight that they carry.”
The incident is currently under investigation. “This is a very serious incident,” said European Union (EU) Internal Market Commissioner Michel Barnier. “This shows that we are in an extremely volatile situation, that markets are extremely tense, and therefore that players on these markets must be extremely rigorous and exercise a duty of responsibility.” Barnier continues, “It is all the more important since these are not minor players on these markets, but actually one of the three major rating agencies and therefore an agency that has a particular responsibility. I do not wish to make a statement on the failure itself, which immediately was recognized by Standard & Poor’s. The European authority for credit rating agencies, together with AMF, the French market authority, will have to look into this and draw conclusions from this incident.”
S&P’s error spooked investors already apprehensive over Europe’s debt crisis, feeding concerns that the continent’s debt problems had engulfed the region’s second-largest economy. It contributed to the worst day for French government bonds since before the euro debuted in 1999.
The Globe and Mail’s David Berman wonders If the error was practice for the real thing. “Standard & Poor’s downgrade of France’s credit rating was apparently accidental – so consider the reaction to the panicky downgrade as a kind of dress rehearsal: It lets you know how markets will react if and when an actual downgrade goes through. The way things are going for Europe’s sovereign-debt crisis, an actual downgrade looks more than likely. Just as Italy supplanted Greece as the eurozone’s biggest trouble spot, highlighted by the country’s surging bond yields, France has the makings of a troubled spot in-the-making.”
As MarketWatch’s Laura Mandaro sums it up, the computer did it.
Tags: AAA rating “Stable” outlook, bailouts, Bond yields, Credit downgrade, euro, European Financial Stability Facility, European Union, Eurozone, France, Global Credit Portal, Greece, Institutional Risk Analytics, Ireland, Italy, Portugal, Standard & Poor’s
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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, 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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