Posts Tagged ‘European Central Bank’

Back to the Drawing Board for Greece

Monday, July 9th, 2012

International lenders and Greece will renegotiate the program on which the second financial bailout for Athens is based because the original has become outdated, according to a senior Eurozone official.  Greece received a €130-billion bailout in February from the European Union and the International Monetary Fund (IMF).  General elections in May and June delayed the bailout’s implementation.  The United States, the IMF’s largest member, supports discussions to review the Greek bailout program, but German Chancellor Angela Merkel countered that any relaxing of Greece’s reform promises is unacceptable.

“Anybody who would say that we need not, and cannot renegotiate the MoU (memo of understanding) is delusional, because he, or she, would be under the understanding that the whole program, the whole process, has remained completely on track ever since the weeks before the Greek first election,” the official said.  “Because the economic situation has changed, the situation of tax receipts has changed, the rhythm of implementation of the milestones has changed, the rhythm of privatization has changed — if we were not to change the MoU –it does not work.  We would be signing off on an illusion.  So we have to sit down with our Greek colleagues and say: this is where we should be in July, and this is where we are in July, and there is a delta.  Let’s find out what the delta is and then how to deal with the delta — that is a new MoU,” according to the official.

According to the official, representatives of the IMF, the European Central Bank and the European Commission will visit Greece as soon as a new government is in place to review the program’s implementation and prepare for negotiations.  “It is no secret, quite logical in fact, that due to the time passed without a functioning government in place that can take the required decisions, because of this, there have been significant delays,” the official said.  “The conclusion is that they have to engage in discussions on the memorandum of understanding and bring it back onto an even keel.”

Meanwhile at the G-20 summit in Mexico,  leaders of the world’s most powerful economies say they have produced a coordinated global plan for job creation, which it calls the top priority in fighting the effects of the European economic crisis.  The draft says “We are united in our resolve to promote growth and jobs.”

An editorial in the Australian Financial Review warns Europe not to misrepresent the issue. “The optimism that followed Greece’s election has proved to be short-lived as investors acknowledge the poll result doesn’t really change all that much in terms of Europe’s ongoing debt crisis.  Less than a day after Greece pulled back from installing anti-austerity parties in office, European bond markets were once again in meltdown on concerns that Spain, Italy, Portugal and Ireland may need more financial aid to prevent default.  The European Union’s financial ‘firewall’ is clearly not up to the task, with the yield on Spanish 10-year bonds soaring to a Euro-era high of 7.29 percent.  In Athens, talks are under way to form a pro-EU coalition government between the center-right New Democracy party and the socialist Pasok party, reducing the likelihood of a near-term Greek exit from the Eurozone.  Yet rather than insist that Athens stick to the tough conditions it agreed to as part of the EU’s €240 billion ($300 billion) rescue packages, there are signs that European leaders may again be preparing to fudge the issue.  German Chancellor Angela Merkel insists that Athens must stick to its austerity commitments and that there is no room for compromise.  But other European politicians are starting to talk about giving Greece more time to fix its problems.  This appears to confirm the Greeks will never live up to their austerity conditions and that the exercise was all about kicking the can further down the road.”

Devaluation would be the optimal way for Greece to jump start its economy.  Because that option is not on the table this time, achieving competitiveness is going to be much harder.  One of the bailout’s stipulations requires the government to cut pensions, slash the number of public servants and control costs – in other words, the “austerity” option.  Others prefer a program to stimulate growth and boost revenue, although one that would likely involve increased spending.  This is the “growth” option.  Angela Merkel favors austerity while French President Francois Hollande prefers the “growth” option.  In this debate, the Germans are in control because they are the ones that are going to cough up the money.  They have the ability to help because, contrary to most of Europe, they practice austerity and thrift.  If German taxpayers are going to have to pay higher taxes to save nations like Greece, they think their European brothers and sisters should share some of the pain.

According to a Washington Post editorial, Germany and other creditworthy E.U. governments were right to tell Greeks before the election that they could not choose both the Euro and an end to austerity and reforms, as several populist parties were promising.  Yet now that voters favored parties that supported the last bailout package, it’s time for Angela Merkel and other austerity hawks to make their own bow to reality. For Greece to stabilize, some easing of the terms of EU loans will be needed, at a minimum; an extension of deadlines for meeting government spending and deficit targets may also be necessary.  Unless it can deliver such a relaxation, there is not much chance the new administration in Athens will be able to push through the huge reforms still needed to make the economy competitive, including privatizations, deregulation and public sector layoffs.

“In the end, a Greek slide into insolvency and an exit from the euro may still be unavoidable. That’s all the more reason why EU leaders must at last agree on decisive measures to shore up the rest of the currency zone, beginning with Spain and Italy.  Measures under discussion for a summit meeting next week, including euro-area bank regulation, are positive but not sufficient.  In the end, banks and governments must be provided with sufficient liquidity to restore confidence — something that will probably require the issuance of bonds backed by all Euro-area countries, or greatly increased lending by the European Central Bank.  As German officials invariably point out, bailout measures will be wasted unless they are accompanied by significant structural reforms by debtor nations.  But without monetary liquidity, and the chance for renewed growth, the Euro cannot be rescued.”

Germany Catches Cold

Monday, June 25th, 2012

In a sign that no Eurozone nation is completely immune to the shocks of the European debt crisis, ratings agency Moody’s Investor Services has cut the credit ratings of six banks in Germany.  The largest bank to be downgraded is Commerzbank, Germany’s second-biggest lender, which was cut to A3 from A2.

“Today’s rating actions are driven by the increased risk of further shocks emanating from the euro area debt crisis,” Moody’s said. The downgrade shows that Moody’s thinks Germany could be hit if the Euro crisis becomes a catastrophe.  “It brings the crisis in Southern Europe and Ireland closer to home in Germany,” said BBC Berlin correspondent Stephen Evans.

The other affected banks DekaBank, DZ Bank, Landesbank Baden-Wuerttemberg, Landesbank Hessen-Thueringen and Norddeutsche Landesbank.  In addition to its rating cut, Commerzbank was placed on negative outlook, meaning Moody’s is considering an additional cut.  According to Moody’s that is because of the bank’s exposure to the Eurozone periphery and its concentration of loans to single sectors and borrowers.  Moody’s deferred a decision on the rating of Germany’s biggest bank, Deutsche Bank.

The downgrades are a result of Moody’s concern about the “increased risk of further shocks emanating from the euro area debt crisis, in combination with the banks’ limited loss-absorption capacity”.  Moody’s believes that German banks are likely to find themselves under less pressure than many European peers as personal and corporate debt levels are more modest than elsewhere.  The agency noted that the downgrades are less harsh than it had originally said they could be.  “Moody’s recognizes the steps Germany banks have taken to address past asset quality challenges,” the ratings agency said.

The Group of Seven nations agreed to coordinate their response to Europe’s turmoil, which has tipped at least eight of the 17 Eurozone economies into recession and damped demand for foreign goods. Policy makers at the European Central Bank meeting today face increasing pressure to lower rates and introduce more liquidity support for banks.  Moody’s decision is “a bit harsh” given the strength of the German banking system and economy, said Sandy Mehta, chief executive officer of Value Investment Principals Ltd., a Hong Kong-based investment advisory company.  “But given the events in Europe, unless the authorities and the powers that be are more decisive and take firmer action, then you do have the risk that the economic problems will engulf Germany as well.”

The rating actions were driven by “the increased risk of further shocks emanating from the euro area debt crisis, in combination with the banks’ limited loss-absorption capacity,” Moody’s said.  “We wanted to identify vulnerabilities from further potential shocks from the euro area debt crisis and how this would affect investor confidence in institutions across Europe,” said Moody’s Managing Director for banking, Carola Schuler.  Moody’s agency was especially apprehensive about a potential decline in the value of banks’ portfolios of international commercial real estate, global ship financing, as well as a backlog of structured credit products, she said. “German banks have limited capacity to absorb losses out of earnings and that raises the potential that capital could diminish in a stress scenario.”  Moody’s action was anticipated.

According to Forbes, “This latest downgrade could be used by European politicians to put pressure on Angela Merkel and other policymakers.  Germany is staunchly opposed to the idea of Eurobonds, which Spanish and Italian politicians believe is one of the ways out of this mess.  Moody’s downgrade is but another sign of the extent of financial interconnectedness in the European Union, which highlights the dangers of contagion.  While some have argued that Germany would be better off leaving the monetary union, its financial sector remains in close contact to the broader European economy, making it difficult for Merkel and the rest to give up.  According to Moody’s, German banks’ major headwind is the continuation of the European sovereign debt crisis.  These banks are sitting on assets that will see their quality erode as markets tank, an effect that will be exacerbated if the global economy begins to cool at a faster pace too.”

Writing on the 247wallstreet.com website, Douglas A. McIntyre says that “Germany is assumed to be the home market of some of Europe’s most stable banks because of the relative stability of its economy.  Moody’s has undermined that view as it cut ratings of seven banks there, including Commerzbank, the second largest firm in the country.  The move was the result of worry over exposure to debt issued by some nations in the region that are now in financial trouble.  And the banks Moody’s singled out have less than adequate balance sheet to handle a major shock to the region’s credit system.”

Spain Asks the Eurozone for a Bank Bailout

Wednesday, June 20th, 2012

Spain asked the Eurozone for a bailout of up to €100-billion to rescue its banks.  This is just a short-term fix for the troubled Eurozone because it doesn’t address the underlying problems in the monetary union.  The earlier bailouts of Greece, Ireland and Portugal didn’t resolve the problems either.  “The Spanish banking bailout is big enough for some shock and awe (€100-billion vs. talk of €40-billion) but details are murky,” said Kit Juckes, the chief of foreign exchange at Société Générale.

Still unanswered are who shares the burden, and just how much will Spain be limited in terms of talks over its debt troubles.  It’s crucial to keep in mind that in Spain, it’s currently a banking crisis.  “And where is the growth coming from to make the problems go away?” Juckes said.  “The Spanish bailout doesn’t solve Europe’s woes…but maybe it allows the rest of the world to focus on something else.”  There are many other questions, said Adam Cole of RBC in London.  Which bailout will fund the rescue?  How much will the final rescue total?  What will the ratings agencies do?  What terms will be attached to the funds?  “The International Monetary Fund’s (IMF) report concluded Spanish banks would need at least €37-billion,” Cole said, noting that the maximum of €100-billion is perceived as credible.  In terms of the ratings agencies, Cole said that “the loans will add directly to the Spanish government’s liabilities and so increase the debt-to-GDP ratio by around 10 per cent, leaving further downgrades likely.”

Spain’s bailout plan is seen as a robust answer to critics who accused European Union (EU) leaders of reacting too slowly, too late and with the least possible amount of cash while the crisis is spinning out of control.  “This is a very clear signal to the markets, to the public, that the Eurozone is ready to take determined action,” Olli Rehn, the EU’s top economic official, said.  “This is pre-emptive action.”

Instead of waiting for Spain to complete stress tests on its banks later, Eurozone officials agreed to move before the market turmoil that Greece’s upcoming elections may produce.  Rather than undershooting estimates of Spanish bank needs, they have been generous: the International Monetary Fund estimated a requirement of at least €40 billion, but the Eurozone agreed to provide at least €100 billion.  “We deliberately wanted to ensure there is some additional safety margin,” Rehn said.  “This is the first time Europe is willing and able to deal confidently and overwhelmingly with (such) a large contingency,” said an unidentified Eurozone diplomat.  “And all through a straightforward telephone conference.  No all-nighters, no devising new instruments in a panic, and no penny-pinching haggling over money.”

The bad news is that Prime Minister Mariano Rajoy’s request for a bailout for Spain’s banks may undermine his political authority and credibility in financial markets.  “The emperor’s clothes are tattered,” Simon Maughan, financial strategist at Olivetree Securities Ltd., said. “Unless he uses this money to attack the regions and control the failed cajas, what threads he has left will be stripped off him.”  Rajoy has to persuade the Spanish people to accept austerity, and convince bond investors the cuts will deliver the deficit goals he has pledged.  if he fails, he may have to return for a larger rescue, potentially draining the Eurozone’s financial ammunition.

“Clearly his domestic credibility will have been hampered by this U-turn but at least he is partially recognizing the depth of the problem,” said Stuart Thomson, a fixed income fund manager at Ignis Asset Management, who predicts another bailout, this time for the government itself, within the next year and a  half.  “This bailout is predicated on a return to growth next year and we don’t think that’s possible.”

Protestors demanded to know why billions would prop up broken Spanish banks, instead of helping people who are suffering financially.  According to Moody Analytic’s Mark Zandi, the reason why Spain is in so much trouble may sound familiar to Americans.  “Spain had a bigger housing boom and bust than we had here in the United States and that means a lot of bad mortgage loans bad real estate loans that undermined the capital positions of the banks.  They are broke, they need help from the European Union,” Zandi said.  “The Spanish must be very humiliated by having to take the aid.  For them to actually have to go to the European Union for help like this, I’m sure was very difficult.”  But the pain runs deep with 25 percent of Spaniards is out of work; among the young, unemployment is upward of 50 percent.

Prime Minister Rajoy warned that Spain’s economy, Europe’s fourth-largest, will get worse before it gets better.  ‘‘This year is going to be a bad one,’’ he said.  ‘‘By no means is this a solution,’’ said Adam Parker, of Morgan Stanley.  Spain’s aid ‘‘could be a near-term positive from a trading standpoint, but you haven’t solved anything in the long term.’’

European leaders must prove to the world that they are making a credible effort to repair flaws in the Eurozone that allowed the problems in Greece to threaten the world economy.  If Greek voters elect a government that is willing to live up to the terms of its €130 billion bailout by meeting its payments and narrows its enormous budget gap, strong doubts remain whether new leadership can fulfill those obligations.  A significant amount of private money has already fled Greece, while its deeply depressed economy and dwindling tax revenues threaten to put the country deeper in the hole.  ‘‘Even in case of a new government, I doubt whether the institutional framework in Greece can guarantee the program,’’ said Jurgen Stark, a former member of the European Central Bank’s executive board.  ‘‘Who has the competence to implement the program?  That is the key point.’’

Catalina Parada is an International, Marketing Consultant and Alter NOW’s Madrid correspondent.  She can be reached at catalinaparada@hotmail.com.

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.

Eurodammerung?

Wednesday, May 23rd, 2012

Despite Germany’s strong manufacturing output in March, it was not enough to compensate for a slump across the rest of the Eurozone with declining production, a signal that an expected recession may not be as mild as policymakers hope.  Industrial production in the 17 Eurozone countries declined 0.3 percent in March when compared with February, according to the European Union’s (EU) statistics office Eurostat.  Economists had expected a 0.4 percent increase.

The figures stood in stark contrast with German data showing output in the Eurozone’s largest economy rose 1.3 percent in March, according to Eurostat, 2.8 percent when energy and construction are taken into account.  “With the debt crisis, rising unemployment and inflation, household demand is weak and globally economic conditions are sluggish, so that is making people very reluctant to spend and invest,” said Joost Beaumont, a senior economist at ABN Amro.

According to Eurostat, output declined 1.8 percent in Spain; in France — the Eurozone’s second largest economy after Germany — output fell 0.9 percent in March.  Many economists expect Eurostat to announce that the Eurozone went into its second recession in just three years at the end of March, with households suffering the effects of austerity programs designed to slash debt and deficits.

“Industrial production is a timely reminder that first-quarter GDP will likely show a contraction,” said Martin van Vliet, an economist at ING.  “With the fiscal squeeze unlikely to ease soon and the debt crisis flaring up again, any upturn in industrial activity later this year will likely be modest.”  European officials believe that the slump will be mild, with recovery in the 2nd half of this year.  The strong economic data seen in January has unexpectedly faded point to a deeper downturn, with the drag coming from a debt-laden south, particularly Greece, Spain and Italy.

Economists polled by Reuters estimated the Eurozone economy contracted 0.2 percent in the 1st quarter, after shrinking 0.3 percent in the 4th quarter of 2011.  “We suspect that a further slowdown in the service sector meant that the wider economy contracted by around 0.2 percent last quarter,” said Ben May, an economist at Capital Economics.  “What’s more, April’s disappointing survey data for both the industrial and service sectors suggest that the recession may continue beyond the first quarter.”

“It is evident that Eurozone manufacturers are currently finding life very difficult amid challenging conditions,” said Howard Archer at IHS Global Insight. “Domestic demand is being handicapped by tighter fiscal policy in many Eurozone countries, still squeezed consumer purchasing power, and rising unemployment.”  Eurozone governments have introduced broad austerity measures in order to cut debt, and these have undermined economic growth.

European watchers also expect to see Greece exit the Eurozone.  Writing for Forbes, Tim Worstall says that “As Paul Krugman points out, the odds on Greece leaving the Eurozone are shortening by the day.  In and of itself this shouldn’t be all that much of a problem for anyone. Greece is only two percent of Eurozone GDP and it will be a blessed relief for the Greeks themselves.  However, the thing about the unraveling of such political plans as the Euro is that once they do start to unravel they tend not to stop.”

The European Commission hopes Greece will remain part of the Eurozone but Athens must respect its obligations, the European Unions executive Commission said.  “We don’t want Greece to leave the Euro, quite the contrary – we are doing our utmost to support Greece,” European Commission spokeswoman Pia Ahrenkilde Hansen said.  Greece is likely to face new elections next month after three failed attempts to form a government that would support the terms of an EU/IMF bailout.  Opinion polls show most Greeks want to stay in the Eurozone, but oppose the harsh austerity imposed by the emergency lending program.  “We wish Greece will remain in the euro and we hope Greece will remain in the euro … but it must respect its commitments,” according to Ahrenkilde.  “The Commission position remains completely unchanged: we want Greece to be able to stay in the Euro.  This is the best thing for Greece, for the Greek people and for Europe as a whole,” she said.

European Central Bank (ECB) policymakers Luc Coene and Patrick Honohan voiced the possibility that Greece might leave the currency bloc and reached the conclusion that it will not be fatal for the Eurozone.  According to Luxembourg’s Finance Minister Luc Frieden “If Greece needs help from outside, the conditions have to be met.  All political parties in Greece know that.”  There are powerful incentives for keeping Greece stable, one of which is that the ECB and Eurozone governments are major holders of Greek government debt.  A hard default could mean heavy losses for them; if the ECB needed recapitalizing as a result, that debt would fall on its members’ governments, with Germany first in line.  “If Greece moves towards exiting the Euro…the EU would then need to enlarge its bailout funds and prepare other emergency measures,” said Charles Grant, director of the Centre for European Reform think-tank.

Meanwhile, Britain’s Deputy Prime Minister Nick Clegg warned euro skeptics to avoid gloating over the state of the Eurozone as Greece tries to assemble a workable government.  According to Clegg, “We as a country depend massively on the prosperity of the Eurozone for our own prosperity, which is why I can never understand people who engage in schadenfreude – handwringing satisfaction that things are going wrong in the euro.  We have an overwhelming interest – whatever your views are on Brussels and the EU – in seeing a healthy Eurozone.  That’s why I very much hope, buffeted by these latest scares and crises in Greece and elsewhere, that the Eurozone moves as fast as possible to a sustainable solution because if the Eurozone is not growing and the Eurozone is not prosperous it will be much more difficult for the United Kingdom economy to gather momentum.”

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.”

Hungary’s Debt Downgraded to Junk

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.”

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.”