Posts Tagged ‘euro’

Is the Eurozone Sustainable?

Thursday, June 14th, 2012

Mario Draghi, president of the European Central Bank (ECB), has asked policymakers to focus their crisis support on solvent Eurozone banks.  “The ECB will continue lending to solvent banks and will keep the liquidity lines active and alive with solvent banks,” Draghi said.

World stock markets have lost roughly $4 trillion as European turmoil proliferated after inconclusive Greek elections and the danger of Spain’s finances being overwhelmed by its banking crisis.  The ECB has taken the lead in fighting the turmoil by infusing the banking system with more than one trillion Euros ($1.24 trillion), cutting its benchmark rate to a record low and purchasing government bonds.  When asked whether the ECB can tame financial turmoil and help cap widening bond spreads, Draghi said that “it’s not our duty, it’s not in our mandate” to “fill the vacuum left by the lack of action by national governments on the fiscal front,” on “the structural front, and on the governance front.”

Draghi favors using the permanent bailout fund, the European Stability Mechanism (ESM), to inject capital into banks.  “People are actually working on finding ways that the ESM could be used to recapitalize banks,” he said.  “ The issue is not so much the use of ESM money to recapitalize banks but whether this could be done directly without having to go to governments.”

Despite the ECB’s efforts, Draghi admits that the setup of the 17-country euro currency union may be unsustainable.  According to Draghi, the financial crisis proved the inadequacy of the financial and economic framework set up for the Eurozone.  “That configuration that we had with us by and large for ten years which was considered sustainable,  I should add, in a perhaps myopic way, has been shown to be unsustainable unless further steps are taken,” he said.

Draghi said the next step “is for our leaders to clarify what is the vision…what is the euro going to look like a certain number of years from now.  The sooner this has been specified, the better it is.”  In 1989, European Commission President Jacques Delors issued a breakthrough report that charted the initial path to the creation and launch of the Euro 10 years later and detailed goals. “The same thing should be done now,” Draghi said.  He compared Europe’s efforts to those of someone crossing a river in thick fog while struggling against a strong current.  “He or she continues fighting but does not see the other side because it is foggy.  What we are asking is, to dispel this fog,” he said.

“Can the ECB fill the vacuum of lack of action by national governments on fiscal growth? The answer is no,” Draghi told the European Parliament.

Ongoing discussions about closer Eurozone economic union have been revived by growing apprehension that Spain may need an international bailout.  June elections in Greece could see major wins by anti-bailout parties, possibly leading to the country’s departure from the Euro.  Asked about the potential for a bank run, Draghi said: “We will avoid bank runs from solvent banks.  Depositors’ money will be protected if we build this European guaranteed deposit fund.  This will assure that depositors will be protected.”

Germany is loath to risk more of its taxpayers’ money to prop up Eurozone partners and has rejected any joint deposit guarantee.  “The financial crisis has heightened risk aversion in a dramatic way,” Draghi said.  “I urge all governments to keep this in mind, because it is better to err by too much in the very beginning rather than by too little,” he said, referring to the failure of regulators to correctly assess the needs of failed Franco-Belgian bank Dexia and Spain’s Bankia.

Bank of Italy governor Ignazio Visco said political inertia and bad economic decisions had put “the entire European edifice” at risk and only a clear path to political union could save the Euro.  “There are now growing doubts among international investors about governments’ cohesion in guiding the reform of European governance and even their ability to ensure the survival of the single currency,” Visco said.

EU Economic and Monetary Affairs Commissioner Olli Rehn said Europe needs tighter budget discipline and more integrated rescue funds to forestall the Euro’s breakup.  “We need a genuine stability culture and a much upgraded common capacity to contain common contagion,” he said.  “This is the case, at least if we want to avoid a disintegration of the euro zone and instead make the euro succeed.”

Beware: Double Dip Ahead?

Thursday, May 31st, 2012

The 17-nation Eurozone is at risk of falling into a “severe recession,” the Organization for Economic Cooperation and Development (OECD) warned, as it called on governments and the European Central Bank to act quickly to keep the slowdown from becoming a drag on the global economy.  OECD Chief Economist Pier Carlo Padoan warned the euro-zone economy has the potential to shrink as much as two percent in 2012, a figure that the think tank had described as its worst-case scenario last November.  The OECD -which comprises the world’s most developed economies — said its average forecast was that the Euro-zone economy will shrink 0.1 percent in 2012 and grow a mere 0.9 percent next year.  “Today we see the situation in the Euro area close to the possible downside scenario” in the OECD’s November report, “which if materializing could lead to a severe recession in the Euro area and with spillovers in the rest of the world,” Padoan said.

The report believes that Europe will lag behind other countries, especially the United States, where the economy is expected to grow 2.4 percent this year and 2.6 percent in 2013.  “There is now a diverging trend between the euro area and the U.S., where the U.S. is picking up more strongly while the euro area is lagging behind,” Padoan said.  Europe is split between a wealthier north that is growing and the southern nations that are falling into recession, according to OECD statistics.

The global economic outlook is still cloudy,” said Angel Gurria, OECD Secretary General. “At first sight the prospects for the global economy are somewhat brighter than six months ago.  At closer inspection, the global economic recovery is weak, considerable downside risks remain and sizable imbalances remain to be addressed.”

Germany, Europe’s largest economy, will grow two percent next year after expanding 1.2 percent in 2012.  France, the Eurozone’s second-biggest economy, will grow 1.2 percent next year after expanding 0.6 percent this year, the OECD said.  By contrast, Italy’s economy is expected to shrink 1.7 percent this year and 0.4 percent in 2013.  Spain will remain mired in recession, with contraction of 1.6 percent this year and 0.8 percent in 2013.  Padoan has asked Eurozone leaders to enter into a “growth compact” to promote expansion while cutting deficits.  French President Francois Hollande has made achieving this type of pact the focus of his European diplomacy.

The OECD is chiefly concerned that problems with European sovereign debt are a significant threat to growth around the world. “The crisis in the Eurozone remains the single biggest downside risk facing the global outlook,” Padoan said.  “This is a global crisis which is largely a debt crisis.  It is a result of excessive debt accumulation in both the private and public sectors.  One can not safely say we’re out of the crisis until debt comes down to more manageable levels.”

To protect its economic recovery, the OECD urged the American government to move very gradually to tighten its budget.  A wave of U.S. spending cuts and tax hikes – known as the “fiscal cliff” — are set to take effect in January unless politicians agree to delay at least some of them.  Bush-era tax cuts and benefits for the long-term jobless are both expected to expire.  Another $1.2 trillion in spending cuts on federal programs would take effect as a result of Congress’ failure last year to find a comprehensive deal to cut the budget deficit.  The OECD said these actions would be the wrong fiscal policy given the still-fragile condition of world’s largest economy.  “The programmed expiration of tax cuts and emergency unemployment benefits, together with automatic federal spending cuts, would result in a sharp fiscal retrenchment in 2013 that might derail the recovery,” according to the OECD.

Wall Street economists say that fiscal policy could tighten by about $600 billion in 2013, or about four percent of GDP, if lawmakers cannot agree on what programs to cut.  Goldman Sachs estimates the “fiscal cliff” could trim approximately four percent from GDP in the first half of 2013.  The majority of economists, however, expect lawmakers to act before that particular hammer has an opportunity to fall.

Is Greece Headed Towards a Third Bailout?

Monday, April 23rd, 2012

Lucas Papademos, Greece’s prime minister, said that his crisis-plagued country could require a third bailout just weeks after it secured a second round of rescue funds after much discussion in Brussels. Athens may have received the biggest bailout in history but another lifeline could not be ruled out, according to Papademos.  To date, the European Union (EU) and International Monetary Fund (IMF) have committed a total €240 billion to the nearly bankrupt nation.  “Some form of financial assistance might be necessary but we have to work intensely to avoid such an event,” Papademos said, noting that additional spending cuts are inevitable.  Whatever government emerges after the upcoming general election, it is vital that is it prepared for the measures.  “In 2013 – 2014, a reduction in state spending of about €12 billion is required under the new economic program,” Papademos said.  “Every effort must be made to limit wasteful spending and not to further burden salaries of civil servants.”

Greece’s new government will have “about 60 days” to enact long-overdue structural reforms and agree on ways of reining in public debt before officials make a decisive inspection tour in June.  “It is very important that there is no let up in the pace of reforms after elections,” said a senior Papademos aide.  The chiefs of both the EU and IMF missions to Greece said while progress is being made in meeting deficit-reducing targets, a lot of work remains to be done.  “There are still many measures to be taken, painful ones too.  I believe we’ll be able to see in the second half of the year in which direction we’re going, whether we’re on the right path or not,” said Matthias Mors, head EU monitor.

Papademos reiterated that Greece will do everything necessary to remain in the Eurozone, saying the cost of an exit would be “devastating.  More than 70 percent of the Greek people support the country’s continuing participation in the euro area,” he said.  “They realize, despite the sacrifices made, that the long-term benefits from remaining in the Eurozone outweigh the short-term costs.  Greece will do everything possible to make a third adjustment program unnecessary,” Papademos said.  “Having said that, markets may not be accessible by Greece even if it has implemented fully all measures agreed on.  It cannot be excluded that some financial support may be necessary, but we must try hard to avoid such an outcome.”

Private investors in Greek debt wrote down the value of their investment by 53.5 percent, or risk losing everything in a possible default.  Public-sector jobs are being slashed, workers ‘ wages are being frozen, welfare payments are being slashed, and taxes are being raised.  Greece’s official unemployment rate is currently more than 20 percent.  If Greece does default, it could start a domino effect that would drag down other ailing European economies — possibly plunging the Eurozone into recession.

According to Papademos, “The real economy is still weak, and high unemployment is likely to persist in the near future.  The challenging period ahead of us needs to be addressed with great care.  If we do things right, implementing all measures agreed upon in a timely, effective and equitable manner, and if we explain our policy objectives and strategy convincingly, public support will be sustained.  An improvement in confidence would have a positive multiplier effect on economic activity and employment.”

When asked if Greece might return to its old currency, Papademos said “The consequences would be devastating.  A return to the drachma would cause high inflation, unstable exchange rate, and a loss of real value of bank deposits.  Real incomes would drop sharply, the banking system would be severely destabilized, there would be many bankruptcies, and unemployment would increase.  A return to the drachma would increase social inequalities, favoring those who have money abroad.”

Is Hard-Hit Ireland Resolving It’s Economic Crisis?

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.

Fallout From European Credit Downgrades Still Underway

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.”

Italy Asks IMF to Oversee its Debt Reduction Efforts

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.”

S&P Computer Error Briefly Downgrades France’s Credit Rating

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.

Spain’s New Financial Hit: S&P Downgrades Its Credit Rating

Tuesday, November 15th, 2011

Standard & Poor’s slashed Spain’s credit rating to AA-, three steps beneath the highly desirable AAA, underscoring the challenges facing Europe’s major powers as they meet G20 counterparts over the eurozone debt crisis.  S&P, whose move mirrored that by fellow ratings agency Fitch, cited high unemployment, tightening credit and high private-sector debt.  Spanish 10-year government bond yields climbed slightly in response, although they are still nearly 60 basis points lower than those of Italy.

“Despite signs of resilience in economic performance during 2011, we see heightened risks to Spain’s growth prospects due to high unemployment, tighter financial conditions, the still high level of private sector debt, and the likely economic slowdown in Spain’s main trading partners,” according to S&P.  Spain’s Economy Minister Elena Salgado noted that there would be some margin for maneuver this year thanks to about two billion euros raised by an auction of wireless frequencies and lower interest payments.  “Interest payments by the central government will be at least two billion euros below budget.  So the combined effect of the spectrum auction and lower interest payments will mean we have a margin of 0.4 percent (of GDP)” Salgado said.

S&P took note of Spain’s “signs of resilience in economic performance during 2011” but saw “heightened risks” to the country’s prospects for growth.  Elevated unemployment, tighter financial conditions, and an external debt-to-GDP ratio of approximately 50 percent and the likely economic slowdown of Spain’s main trading partners are the downgrade’s primary causes.  S&P noted that the “economy” variable in its credit-rating equation was responsible for the downgrade.  Spain’s GDP, according to S&P, will likely grow about 0.8 percent in 2011 and nearly one percent in 2012, weaker than S&P’s 1.5 percent estimate made in February.  S&P said that Spain is still in danger of another downgrade if the situation deteriorates.  According to their downside scenario, “We have also adopted a downside scenario, consistent with another possible downgrade.  The downside scenario assumes a return to recession next year, partly as a result of weaker external and domestic demand, with real GDP declining by 0.5 percent in real terms, followed by a weak recovery thereafter.  Under this downside scenario, the current account deficit would decline, but the general government deficit would remain above 5.5 percent of GDP, at odds with the government’s fiscal consolidation targets.”

Investors currently are focusing on“whether European governments can forge a political solution to the sovereign crisis,” said Guy Stear, Hong Kong-based credit strategist at Societe Generale SA.  The longer-term question is “whether austerity plans will work,” he said.

S&P pointed out ongoing challenges facing Spain. “The financial profile of the Spanish banking system will, in our opinion, weaken further, with the stock of problematic assets rising further,” according to S&P analysts.  Spain is being held back by “uncertain growth prospects in light of the private sector’s need to access fresh external financing to roll over high levels of external debt amid rising costs and a challenging external environment.”

Simon Denham, the head of Capital Spreads, noted that “S&P and Moody are working overtime at the moment downgrading bank after bank and European country after European country which reminds us of the dangerous situation that the eurozone is in.  However, as mentioned, the overriding theme that something will be done to sort the mess out is keeping equity markets afloat and the FTSE remains just above the 5,400 level at the time of writing.”

Steven Barrow, currency strategist at Standard Bank, offers this perspective.  “The move follows a similar downgrade from Fitch last week and hence does not have a huge shock factor for the market.  Nonetheless, it clearly questions the markets ability to continue with the more optimistic tone towards the debt crisis that seems to have been reflected in the euro recently – although not necessarily in the bond markets.”

 

Catalina Parada, Marketing Consultant, is Alter NOW’s Madrid correspondent.

A Long Night in Brussels Ends With a Greece Debt Deal

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.”

As Economic Woes Deepen, Greece Seeing More Suicides

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.”