Posts Tagged ‘Portugal’

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will renegotiate the program on which the second financial bailout for Athens is based because the original has become outdated, according to a senior Eurozone official.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.”

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.

Rising Unemployment Could Push Eurozone Into a Double-Dip Recession

Wednesday, April 18th, 2012

Europe’s unemployment has soared to 10.8 percent, the highest rate in more than 14 years as companies from Spain to Italy eliminated jobs to weather the region’s crisis, according to the European Union’s (EU) statistics office.  That’s the highest since June 1997, before the Euro was introduced.  European companies are cutting costs and eliminating jobs after draconian austerity measures slashed consumer demand and pushed economies from Greece to Ireland into recession.

According to Eurostat, the number of unemployed totaled 17.1 million, nearly 1.5 million higher than in 2011.  The figures stand in marked contrast to the United States, which has seen solid increases in employment over the past few months.  “It looks odds-on that Eurozone GDP contracted again in the first quarter of 2012….thereby moving into recession,” said Howard Archer, chief European economist at IHS Global Insight.  “And the prospects for the second quarter of 2012 currently hardly look rosy.”

The North-South divide is evident, with the nations reporting the lowest unemployment rates being Austria with 4.2 percent; the Netherlands at 4.9 percent; Luxembourg at 5.2 percent; and Germany at 5.7 percent.  Unemployment is highest among young people, with 20 percent of those under 25 looking for work in the Eurozone, primarily in the southern nations.  The European Commission, the EU’s executive arm, defended the debt-fighting strategy, insisting that reforms undertaken by governments are crucial and will ultimately bear fruit.  “We must combat the crisis in all its fronts,” Amadeu Altafaj, the commission’s economic affairs spokesman, said, stressing that growth policies are part of the strategy.

According to Markit, a financing information company, Germany and France, the Eurozone’s two powerhouse economies, saw manufacturing activity levels deteriorate.  France fared the worst with activity at a 33-month low of 46.7 on a scale where anything below 50 indicates a contracting economy.  Only Austria and Ireland saw their output increase.

Spain, whose government recently announced new austerity measures, had the Eurozone’s highest unemployment rate at 23.6 percent; youth unemployment — those under 25 years of age — was 50.5 percent.  Greece, Portugal and Ireland — the three countries that have received bailouts — had unemployment rates of 21 percent, 15 percent and 14.7 percent respectively.

With unemployment rising at a time of austerity, consumers have stopped spending and that holds back the Eurozone economy despite signs of life elsewhere.  “Soaring unemployment is clearly adding to the pressure on household incomes from aggressive fiscal tightening in the region’s periphery,” said Jennifer McKeown, senior European economist at Capital Economics.  She fears that the situation will worsen and that even in Germany, where unemployment held steady at 5.7 percent, “survey measures of hiring point to a downturn to come.”

The numbers are likely to worsen even more. “We expect it to go higher, to reach 11 percent by the end of the year,” said Raphael Brun-Aguerre, an economist at JP Morgan in London.  “You have public sector job cuts, income going down, weak consumption.  The economic growth outlook is negative and is going to worsen unemployment.”

Writing for the Value Walk website, Matt Rego says that “By the looks of it, Europe could be heading for a recession very soon.  If the GDP contracts this 1st quarter of 2012, they will most likely be in a double dip.  Those are some pretty scary numbers and forecasts because they would send economic aftershocks around the world.  If Europe goes into a double dip and U.S. corporate margins do peak, we could be looking at trouble.  If you are a ‘super bull’ right now, I would reconsider because we are walking the line for both factors coming true and there really is nothing we can do, the damage is done.  Could we have seen all of the year’s gains in the beginning of this year?  Probably not but this European recession scare would certainly trigger a correction in the U.S. markets.  Bottom line, get some protection for your portfolio.  Buy stocks that aren’t influenced by economic times and buy protection for stocks that would react harshly to a double dip.”

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.

Portugal Becomes Third of PIGS To Seek EU Bailout

Monday, June 6th, 2011

Portugal has become the third European nation to accept a financial bailout to the tune of € 78 billion, with € 12 billion going directly to the Iberian nation’s banks.  It is the third of four PIGS nations (Portugal, Ireland, Greece, Spain) to require a bailout.  Caretaker Prime Minister Jose Socrates announced that he had reached preliminary agreement with the European Union (EU), International Monetary Fund (IMF) and the European Central Bank (ECB) for a three-year package of support, including help for Lisbon’s banks.  Portugal’s bailout means three of the eurozone’s 17 countries can be described as being in financial intensive care.  Greece accepted €110 billion of bilateral loans last year; Ireland signed an € 85 billion bailout last November — with the long-term fiscal and economic prognosis for all three nations still uncertain.  Socrates believes that he has secured a good deal, saying, “There are no financial assistance programs that are not demanding.”

The eurozone’s three patients are on three different medicine regimes: Greece’s loans must be repaid over seven years at an average 4.2 percent interest rate; Ireland’s over seven years at an average 5.8 percent rate (although it is trying to change the rate); and Portugal’s is still under discussion.  “I think the terms inevitably are going to be different in each country because the circumstances are…different,” said Eamon Gilmore, Ireland’s minister for foreign affairs.  “The government would be very fed up too if another country was getting a bailout deal better than the terms that we are getting,” he said.

The capital of these banks isn’t really the main problem at the moment.  The focus is their dependency on the ECB for liquidity and how they can get out of that and somehow fund themselves in the wholesale market again,” said Carlo Mareels, banks analyst for RBC Capital Markets.  Portugal’s banks have been unable to raise funds in wholesale markets for the last year, demonstrating exactly how intertwined the fortunes of the state and lenders has become in eurozone countries.  Margins have been squeezed as banks compete for retail deposits, which strains their capital positions.  The declining value of their government bonds makes a bad situation even worse.

Simonetta Nardin, a spokeswoman for the IMF, l confirmed that officials had reached an agreement with the Portuguese government ”on a comprehensive economic program.  We have said from the beginning that it is important that any program should have broad cross-party support and we will continue our engagement with the opposition parties to establish that this is the case.”  The bailout requires EU approval.  Portugal’s prime minister said that he would present the deal to opposition parties and called on them to show ”a sense of responsibility and a superior sense of national interest” to ensure Portugal receives emergency financing quickly.  Under the plan, the deficit would need to be reduced to 5.9 percent of GDP this year; 4.5 percent in 2012; and three percent in 2013.

Jonathan Loynes, chief European economist at Capital Economics, predicted that Portugal’s GDP will decline by two percent in 2011. “Against this background, while the confirmation of the bailout should provide some reassurance that Portugal will be able meet its upcoming bond redemptions, it won’t put an end to speculation that – along with Greece and perhaps others – it will sooner or later need to undertake some form of debt restructuring,” he said.

The bailout needs wide-ranging cross-party support because Socrates’ government collapsed last month, which set off a round of increased borrowing rates.  Additionally, it forced Lisbon to seek financial assistance from the EU.  The winner of the June 5 general election will implement it.  Agreement on the loan terms is required by June 15, when Lisbon needs to redeem € 4.9 billion worth of bonds.

European Central Bank Raises Interest Rates to Fight Inflation

Monday, May 2nd, 2011

The Federal Reserve is unlikely to follow the European Central Bank’s (ECB) recent decision to raise interest rates and will hold off until there is looming inflation.  The ECB’s move may be the first of several this year as high oil costs drive consumer prices above its target.  That’s not to say that some members of the Fed’s policy-setting committee are not proposing an increase in the overnight lending rate by three quarters of a percentage point by the end of 2011.

Fed Chairman Ben Bernanke and New York Fed president William Dudley both believe that the economy is still to weak to remove support.  “The old analogy that the Federal Reserve removes the punch bowl just when the party gets going doesn’t apply here because, well, there is no party,” said Bernard Baumohl, chief global economist at the Economic Outlook Group in Princeton, NJ.  “There’s not even a balloon in sight.”

Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, also sees the ECB’s move as having minimal impact on the Fed. “I don’t see that a move by the ECB has any particular influence on our policy posture here in the United States,” Lockhart said.  “Obviously by increasing the differential between short-term rates in the U.S. and short-term rates in the eurozone, you can see some influence” because “exchange markets are affected by short-term rates.  I think some of the dollar selloff reflects some extent of that.”

The ECB “will hike twice in quick succession in April and June to satisfy the core economies’ demand for tighter policy,” said Stuart Thomson, a Glasgow-based money manager at Ignis Asset Management, which oversees about $120 billion.  “But the sensitivity of the peripheral economies to higher rates, both in terms of overall debt and proportion of consumer loans tied to variable interest rates, means the central bank will pause over the summer.”

The Frankfurt-based ECB raised its refinance rate to 1.25 percent from just one percent, the first increase since July 2008.  The ECB also boosted other rates by a quarter point, raising its marginal lending facility rate to two percent and its overnight deposit facility rate to 0.5 percent.  According to ECB President Jean-Claude Trichet, “We did not decide it was the first of a series of rate increases,” emphasizing that the central bank will “always do what is necessary” to assure that inflation expectations across the 17-nation eurozone are given due consideration.

The ECB has forked over billions of dollars in the last year, purchasing bonds from troubled European nations such as Greece, Ireland and Portugal – all of which have been bailed out by the European Union – to assure that they stay afloat.  The bank, whose intention is to focus on inflation is raising interest rates to combat rising prices, a major concern in Germany, which is the ECB’s most influential member.

“The ECB has decided that it will tighten policy for the core countries like Germany that are doing well and leave the non-standard measures support in place for the periphery countries,” said Silvio Peruzzo, an economist at Royal Bank of Scotland Group Plc.  “The rate increase is appropriate and there will be another one as early as June.”

Australia Rules In Market Transparency

Tuesday, July 13th, 2010

Australia’s office market is the most transparent, according to report.  Jones Lang LaSalle and LaSalle Investment Management have noted reasonable improvement in global market transparency, according to their recently released 2010 Commercial Real Estate Transparency Index.

According to the Index, Australia ranks as 2010’s most transparent market.  Canada is next in line, and improving markets include China, India, Poland, Portugal, Romania, Greece and Hungary.  Market transparency had fallen in Pakistan, Venezuela, Dubai and Bahrain.

“The 2010 Global Real Estate Transparency Index reveals a notable slowdown in the progress of real estate transparency over the past two years,” said Jacques Gordon, LaSalle Investment Management’s global head of strategy.  “It suggests that the recent turmoil in global financial, economic and real estate markets has impacted on market behavior, with real estate players focusing on survival rather than market advancement.”

PIGS Financial Uncertainty Good News for U.S. Homebuyers

Tuesday, June 8th, 2010

Troubles in Greece sending your mortgage interest rates to historic low levels.  If you’ve noticed a recent drop in mortgage interest rates, thank the PIGS’ (Portugal, Italy, Greece and Spain) troubles, which are causing jitters in the globe’s equity markets.  Seeking a safe haven, investors are putting their money into U.S. Treasury notes.  Because mortgage interest rates tend to rise and fall with 10-year U.S. Treasury note yields, this translates to good news for people contemplating a home purchase.  Freddie Mac noted that the typical 30-year fixed-rate mortgage fell to 4.78 percent recently, down from 4.84 percent just a week earlier.  The record low of 4.71 percent occurred in 2009.

According to the Mortgage Bankers Association, homeowners are refinancing at a rate not seen since last fall.