SINGAPORE, May 3, 2010 (AFP)
The euro fell in Asian trade Monday as doubts surfaced about the political outlook in Europe for a mammoth 110-billion-euro bailout designed to avert bankruptcy in Greece.
The single European currency bought 1.3224 dollars at 0200 GMT, down from 1.3294 late in New York Friday, paring back early gains that saw it climb as high as 1.3332 dollars.
“We still need the German parliament to approve (the bailout) and the other issue is the German election,” Philip Wee, a senior currency economist with DBS Group Research in Singapore, told AFP.
The European Union bailout must now pass rapidly through parliaments of eurozone nations including Germany, where public resistance to the bailout runs deep and where a major state election is due on Saturday.
The euro had rallied last week in anticipation of the bailout, but it is “still too early” to tell if the EU’s commitment to rescue Greece will shore up the currency, Wee said.
The 16-nation euro area’s endorsement Sunday for the package, organised with the International Monetary Fund, came after Greece agreed to draconian spending cuts ahead of a critical debt repayment deadline on May 19.
But Greek unions vowed to battle the painful austerity measures, worth some 30 billion euros, which include deep cuts to wages and pensions.
“There will be people who don’t believe this is the end and in reality it is not an easy fix,” ANZ Bank senior dealer Alex Sinton told Dow Jones Newswires.
ATHENS, April 30, 2010 (AFP)
Greek police clashed with protesters Thursday as the troubled nation came under intense pressure to force through extra cuts in return for a giant bailout deal said to be just days away.
But after recent heavy falls, the markets in Europe and the United States rallied at the news that the deal was close to being finalised.
Police fired tear gas at hundreds of demonstrators trying to approach the finance ministry in Athens in protest at austerity cuts aimed at cutting Greece’s budget deficit.
“Around 500 people were demonstrating and some of them tried to break through a police cordon guarding the ministry,” a police source told AFP. Further clashes erupted outside parliament, an AFP photographer said.
Greece is bracing for a wave of strikes and work stoppages in the coming days, including a general strike on May 5, as talks on a bailout from Europe and the International Monetary Fund come to a head.
Prime Minister George Papandreou meanwhile warned Greece was in “a battle for survival” and would complete talks on getting tens of billions of euros from the EU and IMF “in coming days.”
“We will do whatever it takes to save the country,” he said.
The bailout is deeply unpopular in Greece because of the harsh conditions that many believe will be imposed on ordinary people.
The government however says it needs the money by May 19 in order to avoid a devastating debt default.
Investors gave Greece some respite on the financial markets after the EU’s commissioner for economic and monetary affairs, Olli Rehn, said the marathon talks with Greece were “about to conclude.”
Fresh signs that Germany could back the deal also helped global stocks and the euro stabilise after days of losses caused by the demotion of Greek debt to “junk” status and the downgrading of Portugal and Spain’s credit ratings.
In Athens, Greek stocks jumped 7.14 percent by the close of trading and the interest rate that Greece has to pay to sell new debt fell back to below 10 percent.
European shares rallied and the euro clawed back from one-year low levels against the dollar on Thursday, partly on news that a Greek debt bailout was imminent.
And the effect rippled across the Atlantic to the US markets: the Dow Jones Industrial Average rose 122.05 points (1.10 percent) to 11,167.32 by the close.
Earlier, US President Barack Obama and German Chancellor Angela Merkel urged action by Greece to control spending and called for international support, as officials warned the Greek drama could spark a wider global conflagration.
Greece has asked the EU and IMF to activate a three-year rescue package worth 45 billion euros (60 billion dollars) this year alone as it faces a May 19 deadline to repay nine billion euros in old debts.
Germany has balked at leading Europe’s rescue effort: a bail-out for Greece is hugely unpopular there and Merkel faces a key regional election on May 9.
Greek trade union officials voiced outrage at the conditions for the loans after a meeting with Papandreou, saying the EU and IMF had asked Greece to save 25 billion euros in the next two years in return for the loans.
The IMF and the EU have demanded that Greece shave off by next year 10 percentage points from a public deficit that reached 13.6 percent of output in 2009, a top union official said on condition of anonymity.
Athens was also asked to get rid of 13th and 14th month bonuses for public sector workers and pensioners and raise the value-added tax, the official said.
Ilias Iliopoulos, secretary general of the ADEDY public workers union, said the conditions being demanded constituted “extremely rough measures which go against development and will lead to recession.”
The unions have called a new general strike for Wednesday in protest.
The EU’s Rehn, however, insisted that the EU aid would be conditional on “implementing the decisions required at every stage to meet the conditions of fiscal consolidation and structural reforms.”
German central bank chief Axel Weber told the Bild daily that Greece must be rescued to stop the debt crisis spreading to other parts of the euro area with “extremely negative consequences.”
Weber said the effects of letting Greece default were “incalculable.”
April 29, 2010
Save Greece, Protect Germany
By FLOYD NORRIS NYT
China is to the world as Germany is to Europe.
Industries in both countries are much better equipped to compete in export markets than are most of their rivals. That is due in part to fixed exchange rates that they zealously protect.
Both countries tend to see their advantage as the result of their own moral superiority: They save; others spend too much.
Germany’s fixed exchange rate is the euro zone, which legally includes 16 countries but in practice includes a number of others that seek to tie their currencies to the euro. It is enshrined in treaties and laws that assume that no country that adopts the euro can ever change its mind.
Now the world is riveted on the spectacle of Greece being forced to choose between default and seemingly permanent austerity. Other European countries, most particularly Germany, want to see many Greeks take pay cuts. If, that is, they hang onto their jobs. They also think unemployment should rise, and that many Greeks should consider moving to more economically attractive countries.
Sympathy and solidarity are in scarce supply. A few weeks ago, one German who has been involved in some of the talks regarding Greece put it simply: “They had their fun.”
The euro states have been talking about bailing out Greece for months now, hoping that a simple promise to do that would calm markets and reassure investors. But they are remarkably hesitant to actually part with the money.
About the only thing Europe has so far accomplished is to make the International Monetary Fund look good. When the I.M.F. does a bailout, it imposes strict austerity terms, which makes it wildly unpopular, but it provides money at very low rates. Europe wants strict austerity and high rates. Subsidizing the irresponsible Greeks is simply wrong, or so they say in Germany.
Angela Merkel, the German chancellor, made clear this week what she believed to be the primary purpose of the European rescue package. It was not to spare Greeks pain, or even to help that country’s economy regain competitiveness.
“When Greece accepts these tough measures, not for one year but several, then we have a chance for a stable euro,” she said.
All this brings to mind the American politician William Jennings Bryan, who was nominated for president three times more than a century ago. He campaigned against the “cross of gold,” arguing that American prosperity was being sacrificed so the country could stick to a gold standard.
Now the Greeks — and soon, perhaps, the Portuguese or the Spaniards or the Irish — are being told to accept higher unemployment and lower wages for the indefinite future. Not for their own good, necessarily, but to preserve a currency.
At the moment, the euro has weakened because of the Greek crisis. For Germany, that is another bonus. Its already competitive manufacturing industries get an extra boost.
Valéry Giscard d’Estaing, the former president of France, has said that his dream is to see Europeans subsume their national identities, so that a woman might say, “I am a European from Italy,” not an Italian. This crisis has made it crystal clear that the people running the more successful parts of Europe do not think in that way.
Greece needs many things, including labor market reforms and large reductions in government payrolls, some of which may come from the austerity being enforced from Brussels, Frankfurt and Berlin. But none of those will help the country’s industries regain competitiveness. Instead, domestic demand has been slashed by the austerity, while export demand remains weak.
Throughout most of Europe, manufacturers report a surge of new orders as the global recovery takes hold. But in Greece orders continue to plunge.
European markets were shocked this week when a bond rating agency, Standard & Poor’s, talked of Greek bond investors losing half their money. But it is hard to see a way out for the country without some kind of debt restructuring — and without a way to be freed from the harsh strictures of the euro.
The euro is not, of course, directly to blame for creating Greece’s problems. The country borrowed too much and spent too much. It has a tax system that is inefficient at collecting revenue, and a political system that has encouraged politicians to put people on the national payroll rather than fix problems that led to unemployment.
Were the country not in the euro zone, a devaluation of the drachma — perhaps several of them — would have taken place long before now. The country would have paid higher interest rates for years, not just recently, and the crisis would have hit earlier.
Competitiveness gained from devaluations can be a temporary thing, as Italy showed repeatedly before the euro came into being more than a decade ago. But with the euro, the devaluation alternative is not available as a partial fix. That makes the other possible actions less powerful and more painful.
Normally, a country in a deep recession would have a loose monetary policy. But Greece cannot have its own loose monetary policy; that is up to the European Central Bank, which must pay attention to the entire euro zone, not just to Greece’s problems.
The Chinese fixed exchange rate regime is, by contrast, less official and more flexible. But it, too, faces strains that come from the country’s difficulties in maintaining its own monetary policy.
China ties its currency to the dollar, and despite American jawboning, there is little that the United States can do about that. China has taken in so many dollars that it now owns a significant slice of Treasury securities issued by the Americans to finance the federal budget deficit.
When, or if, the Chinese currency is allowed to appreciate against the dollar, that will produce losses for China in that portfolio. But China has so far considered that cost to be well worth it for the stimulus it gives to export industries.
There have recently been hints that China would soon allow a gentle appreciation in the value of its currency against the dollar. Just how much that will do to relieve political pressures from America and Europe is unclear, but it would do little to cut into China’s trade advantages.
For China, the exchange rate policy has stimulated exports and employment. But there is a cost for the Chinese.
China has been trying to slow its own economy, but the fixed exchange rate regime has made that a lot harder. By tying itself to the dollar, it effectively appointed Ben Bernanke, the chairman of the Federal Reserve Board in Washington, to run Chinese monetary policy.
China will eventually have to deal with problems created by having a wildly inflationary monetary policy — a policy chosen based on American conditions, not Chinese ones. But for now the pressure is elsewhere.
Greece, it appears, has good reason to be fearful of Germans bearing bailouts. But having lied about its economic condition to get into the euro zone, Greece now has no easy way out, even though it badly needs one.
April 29, 2010
Euro Rises After I.M.F. Increases Aid Pledge to Greece
By LANDON THOMAS Jr. and NICHOLAS KULISH
European stocks rose modestly and the euro halted its decline Thursday, a day after the International Monetary Fund promised to increase the 45 billion euro aid package for Greece to as much as 120 billion euros over three years to quell the I.M.F.’s biggest crisis since the Asian woes of 1997.
The fund is racing to conclude an agreement for more painful austerity measures from Greece by Monday, clearing the way for the government in Athens to receive funding and to reassure investors worldwide that European debt is safe.
On Wednesday, Dominique Strauss-Kahn, the I.M.F.’s forceful managing director, pledged the additional aid in a private meeting with German legislators. The package would be the equivalent of up to $160 billion and would come from both the I.M.F. and from Germany and other countries using the euro.
But as has frequently been the case during Europe’s debt crisis, the promise of help was overshadowed by more disturbing news — in this case, a cut in the debt rating of Spain by a major agency just a day after downgrades for Portugal and Greece.
The growing fear is that the fallout from Greece and even Portugal, which together compose just 5 percent of European economic activity, could be a mere sideshow if Spain, with its much larger economy, has difficulty repaying its debt.
By Thursday afternoon the euro was at $1.3254, up from $1.3220 late Wednesday in New York. The Euro Stoxx 50 index, a barometer of euro-zone blue chips, rose 1.4 percent, and the FTSE-100 index in London rose 0.6 percent.
Shares in the United States were higher as market attention on Wall Street shifted toward the stronger results from corporate earnings reports.
Most major Asian markets fell, with both the Hang Seng index in Hong Kong and the S.&P./ASX 200 index in Sydney dropping 0.8 percent. Tokyo markets were closed for a holiday.
In many ways, the current troubles in Europe go to the heart of the monetary fund’s new mission to serve as a firewall in the financial crisis — an objective bolstered by $750 billion in fresh capital from the Group of 20 countries last year.
Unlike its previous efforts in smaller, emerging economies in Asia in 1997, and more recently in Hungary, Romania, Latvia and Iceland, the International Monetary Fund has been hamstrung in its efforts to act quickly and decisively by political concerns within the European Union, which insists on assuming a leading role.
“It is a problem,” said Alessandro Leipold, a former acting director of the fund’s European department. “It should not be that difficult — they did it in Hungary and Latvia. But the egos are different in industrialized countries.”
A case can be made that if Greece had sought help from the fund late last year after the forecast for its budget deficit doubled, the amount of support needed to reassure investors would have been much less than the 120 billion euros that even now might not be enough.
In that vein, Mr. Leipold said Portugal and Spain should ignore any stigma associated with an International Monetary Fund program and make the case to the European Commission in Brussels that asking for aid now would soothe skeptical markets and save Europe billions in the future.
“The market has seen its worst fears come true,” he said. “What it needs is a surprise on the upside.”
Concerns have already surfaced in Washington that the broad demands of the sovereign debt crisis will quickly exhaust the fund’s reserves and leave the United States, the fund’s largest shareholder, with the bill.
Representative Mark Kirk, a Republican from Illinois, said such a drain could occur if Portugal, Ireland and Spain all sought aid at the same time. Mr. Kirk worked at the World Bank during the 1982 debt crisis in Mexico, which came close to depleting the fund’s reserves.
“We have seen this movie before,” he said. “Spain is five times as big as Greece — that would mean a package of 500 billion.”
Mr. Kirk sits on the House Appropriations Committee that oversees I.M.F. funds and said that he had already asked for hearings on the fund’s ability to handle a European collapse.
In Athens, the Greek government had no choice but to seek a solution with the monetary fund after its costs of borrowing skyrocketed, but that has not made the negotiations for aid any easier.
The fund has sent one its most senior staff members, Poul Thomsen, who has overseen complex fund negotiations in Iceland and Russia, to assist Bob Traa, the official responsible for Greece, to work out a solution.
According to people who have been briefed on the talks, the aim is to secure from Greece a letter of intent for even deeper budget cuts than the tough measures imposed so far, like reductions in civil service pay, in exchange for emergency funds.
Steps being discussed include closing down parts of the little-used Greek railway system, which employs 7,000 people and is estimated to lose a few million euros a day; limiting unions’ ability to impose collective bargaining agreements, which lead to ever-higher public sector pay; cutting out the two months of pay that private-sector workers get on top of their annual pay packages; increasing the retirement age and cutting back on pensions; and opening up the country’s trucking market in an effort to lower extremely high transportation rates that have hindered the country’s competitiveness.
With Greece now shut out of the debt markets, it has little leverage to resist — especially in light of the 8 billion euros it needs to repay bondholders on May 19. Analysts expect a deal by next week at the latest.
But whether a Greek resolution calms investor fears about the ability of Portugal and Spain to repay their own maturing debt remains unclear.
In a recent note to investors, Ray Dalio, founder of Bridgewater Associates, one of the world’s largest hedge funds, described the market concern as intensely focused on Spain.
“Spain’s cash flows (current account and budget deficit) are extremely bad,” Mr. Dalio and his colleagues wrote in a February letter. “Spain’s living standards are reliant on not just the roll of old debt, but also on significant further external lending. For these reasons, we don’t want to hold Spanish debt at these spreads.”
David Jolly, Matthew Saltmarsh and Sewell Chan contributed reporting.
Scenarios: Can Greece cut its deficit by 10 points in 2 years?
By Harry Papachristou and Michael Winfrey
ATHENS (Reuters) – Greece, the IMF and the European Union are discussing austerity measures aimed at cutting the country’s deficit by 10 percentage points of GDP in 2010 and 2011, labor union leaders said, a goal that could deepen recession and spark a public backlash.
Labor union leaders said the measures under discussion include more tax hikes and even steeper cuts in wages and bonuses than announced by the government last month, as well as the elimination of full-time jobs in the public sector.
The new budget objective would exceed the country’s current target of cutting the deficit by 7.1 percent of gross domestic product in two years — from a 2009 level of 13.9 percent of GDP — and push forward its goal of bringing the shortfall to near the EU prescribed level of 3 percent by 2012.
In a three-year stability and growth plan agreed with the European Commission, Greece planned to narrow the budget shortfall to 8.7 percent of GDP this year and bring it to below the euro zone’s 3 percent by 2012.
Based on the labor leaders’ statements, conversations with analysts, fiscal targets set out in the stability and growth plan, and comparisons of other EU/IMF bailouts, here are three scenarios Greece faces, with implications for financial markets:
- GOVERNMENT MEETS OR EXCEEDS FISCAL TARGETS
SCENARIO: Helped by extra austerity measures and a crackdown on waste and tax evasion, the government manages to cut the deficit by 10 percentage points by the end of next year.
PROBABILITY: Very low. Further austerity measures are expected to hurt an economy already in the doldrums. The IMF already expects the economy to contract by 2 percent this year and by 1.1 percent in 2011, making it Greece’s longest recession in 30 years. Some economists expect domestic demand to contract even more, by about 5 percent.
Additional belt-tightening would hurt the economy further, analysts say. That would undermine income tax revenues and make it tough for the government to achieve its already ambitious target of boosting net tax income by 11.7 percent this year.
MARKET IMPLICATIONS: A deficit cut of 10 percentage points within two years would be a positive surprise for investors and make it easier for Greece to tap financial markets sooner, perhaps even next year.
- GREECE WIDELY MISSES BUDGET TARGETS
SCENARIO: The economy shrinks by more than 4 percent, with tax revenues collapsing and Greece widely missing its deficit targets.
PROBABILITY: Average. Recession deeper than 4 percent with unemployment rate soaring well past the 12 percent is expected to intensify social unrest and could prevent socialist Prime Minister George Papandreou’s government for pushing reforms, and labor unions have already vowed to resist further austerity.
Even without social unrest, cutting deficits in times of economic downturn is extremely difficult, as shown in the examples of three non-euro-zone EU states that pledged to trim public finance shortfalls as part of EU and IMF aid packages.
Latvia agreed with the IMF to aim for a fiscal deficit of 5 percent of GDP last year but ended with almost double that after austerity measures exacerbated an economic contraction of 18 percent that was more than three times worse than forecast.
IMF borrower Romania also saw its deficit rise from an original pledge of 4.6 percent of GDP in 2009 to 8.3 percent, and Hungary originally pledged to a 2.9 percent of GDP deficit, but finished at 4 percent. All three had to renegotiate targets.
MARKET IMPLICATIONS: Political instability in Greece would destroy any hope of Greece managing its debt, increasing the prospects of a debt restructuring or default. This would raise pressure on Greece to withdraw from the euro zone, at least temporarily, and could undermine the credibility of the European single currency. It would also raise market pressure on euro zone periphery states like Portugal and Spain, potentially making it more expensive for them to borrow.
- GREECE CUTS DEFICIT MODERATELY, MISSES TARGET
SCENARIO: The new measures lead to even deeper recession but the size of the tax increases and spending cuts are too great to allow the government to narrow the deficit by 10 percentage points of GDP over two years.
PROBABILITY: High. The Greek public sector is in such disarray that even elementary spending and structural reforms could generate significant deficit cuts, even in case of very deep recession. The government has already legislated wage and pension cuts in the public sector of about 2.7 billion euros.
Defense spending cuts of 460 million euros are also underway. The government has capped pharmaceuticals prices by about 1 billion euros to limit hospital spending. The EU has pledged to speed up disbursement of an extra 1.4 billion euros earmarked for infrastructure.
A new hike of VAT and excise taxes would help Greece exceed a current target of an additional 6.1 billion euros in revenues from VAT and other taxes this year,
But deeper recession would mean higher unemployment and cast doubt on plans to reduce social security subsidies by at least 540 million euros and raise about 1.7 billion euros by cracking down on tax evasion.
MARKET IMPLICATIONS: A deficit cut of 3-4 percentage points per year would not be a surprise but would create the impression that Greece has fallen short of its targets, shaking further investor confidence and delaying the nation’s return to markets.
HONG KONG, April 29, 2010 (AFP)
Asian markets were mixed on Thursday as the eurozone debt crisis weighed on sentiment after Spain’s credit rating was downgraded, while the euro remained near one-year lows.
The International Monetary Fund said confidence in the entire 16-nation euro area was at risk, while Greece’s prime minister said the European Union “must prevent a fire” from engulfing the regional and world economy.
Global markets were sent reeling after Standard & Poor’s downgraded its credit rating for Greece to “junk” status on Tuesday, while Portugal also saw its rating lowered.
Hopes for a bailout running up to 120 billion euros (158 billion dollars) were raised Wednesday as Germany signalled it was more willing to help Greece, with Chancellor Angela Merkel saying rescue talks must be accelerated.
Greece has said it needs emergency loans from the EU and IMF by May 19 to avoid defaulting on its debts.
Sydney fell 0.77 percent, or 37.2 points, to end at 4,785.6, while Seoul ended 0.32 percent, or 5.49 points, off at 1,728.42.
Hong Kong was down 0.25 percent but Singapore rose 0.95 percent.
Tokyo was closed for a public holiday.
Asia ignored a rally on Wall Street sparked by news that the Federal Reserve looks unlikely to raise interest rates in the very near future after keeping borrowing costs ultra-low on Wednesday.
Asian fears were stoked after the credit rating of Spain, whose economy is five times the size of Greece’s, was downgraded by S&P to “AA” from “AA+” while its outlook was lowered to negative.
Deputy Prime Minister Maria Teresa de la Vega said the Spanish government was “adopting all the measures needed to meet our commitments” to bring the swollen public deficit down.
But IMF managing director Dominic Strauss-Kahn struck an ominous note, warning: “It is the confidence in the whole zone that is at stake.”
Economist Ben May at research firm Capital Economics in London said: “The downgrade of Spanish government debt by S&P is another alarming sign that the effects of the Greek crisis are spreading.”
The news weighed on the euro, which hovered near one-year lows against the greenback at 1.3238 dollars, from 1.3201 in New York late Wednesday.
“Euro-dollar is getting hammered… we’re quite prepared for poor euro performance,” Thio Chin Loo, senior currency analyst of BNP Paribas in Singapore, said.
The dollar bought 93.97 Japanese yen in Asian trade Thursday from 94.05.
Herman Van Rompuy, the European Union’s president, has convened an emergency summit of eurozone leaders for around May 10 on the debt crisis.
Shanghai gained 0.27 percent with banks leading the gains after China Merchants Bank said its first-quarter profit soared 40 percent from a year earlier, dealers said.
The IMF warned meanwhile that Asian economies risk overheating as high capital inflows fan inflation and raise the danger of asset bubbles.
In its latest regional report, the IMF urged Asian economies to return to “more normal” monetary policies after the global downturn and increase their exchange rate flexibility.
“Brighter economic growth prospects and widening interest rate differentials with advanced economies are likely to attract more capital to the region,” the IMF report said.
“This could lead to overheating in some economies and increase their vulnerability to credit and asset price booms with the risk of subsequent abrupt reversals.”
Oil was lower, with New York’s main contract, light sweet crude for delivery in June, down 10 cents to 83.12 dollars a barrel, while Brent North Sea crude for June dipped eight cents to 86.08 dollars.
Gold opened at 1,165.40-1,166.40 US dollars an ounce, up from Wednesday’s close of 1,164.50-1,165.50 dollars.
In other markets:
— Taipei closed down 0.34 percent, or 27.50 points, at 8,054.05.
United Microelectronics Corp fell 1.83 percent to 16.1 Taiwan dollars while HTC rose 0.61 percent to 415.5.
— Manila gained 0.37 percent, or 12.22 points, to close at 3,297.00.
Aboitiz Power Corp. rose 1.7 percent to 15 pesos and International Container Terminal Services also added 1.7 percent, to 29.50 pesos.
— Wellington was flat, edging up 1.71 points, to 3,282.27.
Telecom fell 0.5 percent 2.19 New Zealand dollars, Fletcher Building was down 0.1 percent to 8.35 and Fisher & Paykel Healthcare rose 0.6 percent to 3.51.
MELBOURNE, April 29, 2010 (AFP)
The head of Australian banking giant ANZ voiced renewed fears about the global economy Thursday, describing Europe as a “mess”, despite a steep rise in profits.
Chief executive Mike Smith, announcing that first-half profits were up 36 percent, said there was concern that sovereign debt issues plaguing Europe could spread, affecting equity and credit markets.
“I am still quite worried about the global economy … Europe is a mess,” Smith said.
“I think the uncertainty has continued and is possibly going to get worse because I think the contagion issue is now very real,” he added.
Smith was speaking as European countries mulled a massive bailout for debt-stricken Greece, while Spain was slapped with a credit downgrade, roiling financial markets.
Australia’s big banks rode out the financial crisis in good shape thanks to stringent lending practices, helping the country become the only advanced economy to avoid recession during the financial crisis.
“In terms of the funding that the Australian banks have, in terms of their wholesale funding, obviously credit spreads are going to be more volatile,” Smith warned.
ANZ said net profit for the six months to March was 1.925 billion dollars (1.78 billion US), up from 1.419 billion a year earlier at the height of the crisis. Cash earnings more than doubled to 2.376 billion dollars from 954 million.
Smith also confirmed ANZ was considering a move for US buyout fund Lone Star’s controlling stake in the Korea Exchange Bank (KEB), valued at more than four billion US dollars, but had not decided whether to bid.
“I think it’s no secret that there’s a mandate out there from Lone Star to sell their interest in KEB and it would be remiss of us not to look at it,” Smith said.
“There is absolutely no decision one way or another right now — you have to just evaluate the opportunity,” he added.
KEB would give ANZ an important foothold in Asia’s fourth economy as it pursues plans to push into Asia and eventually compete with Standard Chartered and HSBC.
“Countries like Japan, Korea, India and China are going to be incredibly important, because they’re major trading partners of Australia and therefore it figures there is going to be customer flow,” Smith said.
“But those areas are quite difficult in terms of opportunity, they’re not emerging markets, they are mature markets and opportunity for assets rarely comes up. You just have to be opportunistic,” he said.
— Dow Jones Newswires contributed to this report —
UPDATE 1-Germany’s CDU keeps pressure on Greece over aid
Mon, Apr 26 2010
* Stability of the euro at risk so aid imperative – CDU
* Greece must show it is progressing on deficit cuts – CDU
* Opposition SPD calls for debate, likely to back aid
(Recasts with SPD, quotes, details)
BERLIN, April 26 (Reuters) – German Chancellor Angela Merkel’s ruling coalition will back Greek aid because the euro’s future is at stake, but Greece must first prove it is tackling its budget deficit, a senior official in her party said. “We said we would help if the euro’s stability is at stake, we’re now in that situation,” Volker Kauder, parliamentary floor leader of Merkel’s Christian Democrats (CDU), told German television station ARD.
“However, firstly we need to check carefully that Greece is pressing ahead with its deficit cuts. It’s not going to be handed over on a silver plate,” he said. “We’ll have to help, but the conditions for that have not yet been met,” he added.
Public opposition to a bailout for debt-stricken Greece is widespread in Germany, and Merkel has consistently pursued a tough line on offering potential aid.
Kauder said he expected the ruling coalition of conservatives and pro-business Free Democrats (FDP) would back any financial support for Greece in parliament.
“If the conditions are met, we’ll do it. The chancellor has always said the last resort would be when the stability of the euro is in danger. I think we’ll get the majorities in the coalition then,” Kauder added.
Germany’s opposition Social Democrats (SPD) have threatened to delay efforts to accelerate the legislative process of approving any aid, and a senior member of the party said on Monday it was important that any bill was properly discussed.
The SPD’s Petra Merkel, who heads the budgetary committee of the Bundestag lower house of parliament, told ARD it was important to hold a transparent public debate on Greek aid.
Asked whether her party, whose votes would not be needed to get a bill through parliament, would block aid, she said:
“We won’t reject it. We’re going to look at exactly what’s possible and what alternatives there are,” she said. “I also think we’re likely to take the view that we’ll have to help.”
It was vital that aid for Greece did not encourage other debt-laden euro zone members to follow suit, she added.
The SPD could slow down the parliamentary process by demanding committee hearings to discuss the aid.
German Finance Minister Wolfgang Schaeuble is due to meet parliamentary leaders in the coalition on Monday to discuss the euro zone/International Monetary Fund aid package for Greece, of which Germany could shoulder up to 8 billion euros.
(Reporting by Dave Graham; Editing by Toby Chopra)
Greek bank woes pose new risk in debt crisis
George Georgiopoulos and Boris Groendahl – Analysis
Wed Apr 28, 2010 2:20pm EDT
Deutsche Bank economist: banks could aid Greece too
S&P cuts Greek debt to junk, downgrades Portugal
Tue, Apr 27 2010
S&P cuts Greek bank ratings after sovereign downgrade
Tue, Apr 27 2010
Markets hammer Greek debt, Germany sets tough terms
Mon, Apr 26 2010
Greece presses “help” button, markets still wary
Sat, Apr 24 2010
(Reuters) – They did not cause the debt crisis but Greece’s banks may soon become its victims, and increasing pressure on their balance sheets could add another chapter to Athens’ fiscal tragedy.
Greece’s downgrade to speculative status by ratings agency Standard & Poor’s on Tuesday was also applied to Greek lenders, a move that simultaneously hit the value of government bonds in the banks’ portfolios and their own ability to raise credit.
That added to a bleak environment of more possible downgrades by other agencies, an economic downturn expected to squeeze earnings and push up non-performing loans, and a rising worry among analysts that Greece may restructure its debt.
If this last possibility happened, it would be a major blow to Greek banks, which hold around 40 billion euros in debt on their books, and raise the specter of capital hikes in a market that has seen foreign investors flee as the debt crisis intensifies.
Analysts agree the Greek banking sector is relatively well capitalized and has a comparatively low loan-to-deposit ratio, and they are not yet predicting a banking crisis.
But the crux of the issue remains whether a multi-billion-euro aid package Athens is trying to secure from euro zone states and the International Monetary Fund will tide it over long enough to cut a bloated public sector and tackle a 300 billion euro debt pile.
Markets have not passed final judgment, but see that as increasingly unlikely, with Greek five-year credit default swaps briefly rising to a record 911.6 basis points on Wednesday, indicating an implied default rate of 52.6 percent.
Such a development would also ratchet up pressure on public finances despite the government having already imposed a raft of painful austerity measures to save itself from bankruptcy.
“If the situation really deteriorates sharply and with it systemic risk for the Greek bank sector, I don’t think the Greek government has any money left to support that or any other sector of the economy,” said Diego Iscaro, a senior economist for IHS Global insight.
Analysts say default or restructuring could shave anywhere from 20 to 50 percent off the value of Greek debt, a major part of the portfolios of Greek banks.
National Bank has the biggest exposure with 17.9 billion euros or 16 percent of total assets and 223 percent of equity, followed by Eurobank with 7 bln euros, and Piraeus with 6.5 billion.
According to UniCredit, even a 20 percent haircut would chop NBG’s equity Tier-1 capital to 4.7 from 10 percent, Piraeus’ to 4.1 pct from 7.7 pct, and Eurobank’s to 5.1 pct from 7.9 pct, making recapitalizations necessary.
Other drags for the sector, which has shed 37 percent of its market value since the start of the year, is the upward pressure on funding costs and government deficit-cutting measures expected to deepen last year’s recession into 2011.
Greek two-year government yields spiked to almost 16 percent this week, posing problems for banks looking for funding in the market, while domestic competition for deposits will become more fierce, compressing profit margins.
With other European banks staying away, Greek lenders have been using liquidity facilities offered by the European Central Bank for short-term financing, but that too faces some uncertainty.
Under ECB rules, if S&P rival Moody’s also cuts Greece to speculative level, Greek banks would receive 5 percent less cash when they use Greek bonds as collateral, exacerbating tight borrowing costs.
Economists also expect a 3-5 percent economic contraction and a jump in unemployment to over 12 percent this year, which will boost non-performing credits, squeeze borrowing demand and prompt lenders to shut their vaults to consumers and businesses.
“We expect Greek banks’ asset quality to remain under pressure in 2010 as the country’s economy is expected to undergo an even deeper recession than in 2009,” Standard & Poor’s said.
Other issues include public confidence, after domestic non-government deposits fell by nearly 9 billion euros, or about 4 percent, in January and February, a figure analysts said was not alarming but also not insignificant.
Greece’s government has guaranteed deposits and, earlier this month, said it would release 17 billion euros — 7 percent of gross domestic product and more than the entire amount the government hopes to cut from last year’s fiscal gap — remaining from a 28 billion euro support scheme launched in 2008.
Either guarantee, if tapped, would put further pressure on Athens’ strained public finances, and investor aversion to Greek assets would mean any capital hikes would require more state cash.
“If it was the case that they needed capital, it probably would probably have to be government who would pay, so once again would have further nasty implications for public finances,” said Ben May, an economist at Capital Economics.
(Writing by Michael Winfrey; editing by John Stonestreet)
April 28, 2010, 12:01 a.m. EDT
Tragedy or comedy?
Commentary: Greek’s fiscal woes don’t have to lead to lower stock prices
Commentary: Greek’s fiscal woes don’t have to lead to lower stock prices
By Mark Hulbert, MarketWatch
ANNANDALE, Va. (MarketWatch) — The difference between a tragedy and a comedy, I was taught in Classics 101, is that, in the latter, the hero wakes up in time.
I take this to mean that it’s premature to label the current fiscal crisis in Greece as a tragedy, as many commentators nevertheless are already doing. It might in the end turn out to be a tragedy, but it doesn’t have to.
This is especially worth remembering after a day in which the stock market plunged as Greece’s debt was freshly downgraded (this time to “junk” status). The Dow Jones Industrial Average (INDEX:INDU) fell by more than 200 points, or 1.9%. The S&P 500 had an even worse day in percentage terms, shedding 2.3%.
But investors can’t really have been all that surprised by the downgrade of Greek debt — or at least shouldn’t have been. John Dessauer, editor of an investment advisory service called John Dessauer’s Outlook, argued in an interview last week that it was almost certain that Greece would end up defaulting on its sovereign debt, either outright or de facto.
In any case, Dessauer furthermore argued, the impact on the world economy of an outright Greek default would be fairly modest. That’s because the damage to world trade inflicted by the Greek crisis has already happened — and for the most part has been already priced into the level of the stock market. ( Read my interview with Dessauer.)
Dessauer’s point is confirmed by a recent analysis I conducted of the stock market’s reaction to past sovereign debt crises. Interestingly, Greece’s sovereign debt crisis is hardly unique. And the stock market on average has performed quite well in the wake of past such crises.
Over the last two decades, I counted at least four major sovereign debt crises:
The Mexican peso devaluation and associated crisis, which began in December 1994.
The so-called “Asian Contagion” that began in July 1997, when a government debt crisis in Thailand led to a run on its currency. That in turn precipitated similar crises throughout the region, leading many to fear that the crisis might eventually spread around the world.
The Russian ruble devaluation in August 1998, which led to (among other things) the bankruptcy of Long-Term Capital Management
The Argentine government debt/currency crisis that began in November/December 2001
The accompanying chart is based on a composite of how the stock market reacted following all four cases, with 100 representing the stock market’s level when those crises first broke onto the world financial scene. On average the stock market was 17% higher in one year’s time (as measured by the Wilshire 5000 Total Market Index).
The chart also shows how, on the same scale, the stock market has reacted so far to the Greek crisis. Notice that, more or less, the stock market is following a similar script. In fact, even with Tuesday’s big drop in the stock market, it nevertheless remains ahead of the average experience in the wake of the four prior debt crises.
This analysis doesn’t amount to a guarantee that the stock market will perform as well this time around, needless to say. There is a big leap of faith involved in extrapolating from this — or any — historical analysis, especially one based on a sample containing just four examples.
Still, this analysis does serve to remind us that the negative impact of a sovereign debt crisis, scary as it otherwise may be, can also be exaggerated.
April 28, 2010
Europe Looks to Aid Package as Spain’s Debt Rating Is Cut
By NICHOLAS KULISH and MATTHEW SALTMARSH
BERLIN — European leaders scrambled Wednesday to quell the market instability growing out of Greece’s debt crisis, with German officials seeking legislative approval for a major contribution to an international aid package that looks as if it could reach 120 billion euros ($160 billion) over the next three years.
One day after cutting Greece’s status to junk and downgrading Portugal, a major ratings agency also cut Spain’s debt rating by a notch and the euro reached a one-year low, underscoring how difficult it will be for Europe to contain problems that started in Greece.
“Every day which is lost is a day where the situation is getting worse and worse, not only in Greece but in the whole European Union,” said Dominique Strauss-Kahn, managing director of the International Monetary Fund. “It’s the confidence in the zone which is at stake and that’s why we need to act swiftly and strongly.” After meeting here with Mr. Strauss-Kahn, Chancellor Angela Merkel of Germany seemed to find a new sense of urgency in dealing with the crisis. “It’s completely clear that the negotiations by the Greek government with the European Commission and the I.M.F. must now be accelerated,” she said. “Germany will do its part to safeguard the euro as a whole.”
Germany’s finance minister, Wolfgang Schäuble, said the government could present draft legislation on a bailout plan as early as Monday and get such legislation through the lower house of Parliament by next Friday if negotiations with Greece over the terms of the deal were concluded, as hoped, by the end of this week.
Mr. Schäuble met with top legislators, Mr. Strauss-Kahn and the president of the European Central Bank to discuss plans to aid Greece. They refused to discuss specifics of any bailout Wednesday, citing continuing negotiations in Athens.
But Jürgen Trittin, a parliamentary leader for the opposition Green Party, said after the meeting that Mr. Strauss-Kahn had put the combined aid package by European countries and the I.M.F. at roughly 100 billion to 120 billion euros, or $130 billion to $160 billion, over three years. Germany’s share could reach $32 billion, triple the sum under discussion for this year.
“It is important to act quickly,” Mr. Trittin said, criticizing what he called Mrs. Merkel’s policy of “hesitance and indecision.”
Mrs. Merkel has balked at any kind of bailout, a prospect highly unpopular with German voters. But the downgrading of Greece’s credit rating to junk level and the resulting plunge in markets appeared to have spurred her government to take a more aggressive stance, along with a promise to move quickly once a deal is reached with Greece.
“The challenge for Greece is to accept an ambitious program, in order to restore the trust of markets in Greece,” Mrs. Merkel said.
For months Mrs. Merkel played for time, talking tough on Greek debt and the need for austerity measures while hoping to stave off a bailout decision until after a key regional election later this month in Germany’s most populous state. Instead, skittish markets and ratings agencies have forced her hand directly in the middle of the run-up to the vote.
Gerd Langguth, professor of political science at the University of Bonn, said the political fallout, including on the election in the state of North Rhine Westphalia on May 9, would be less than many had predicted. “The people in Germany know that if this operation doesn’t work, the whole euro would be damaged and this is damage for Germany,” he said.
The political developments in Germany came as Standard & Poor’s downgraded the sovereign credit ratings of Spain, a day after making similar announcements about Greece and Portugal.
The agency cut its rating of Spain to AA from AA+, reflecting the country’s deteriorating budgetary situation and weaker economic outlook. It said that the current rating had a negative outlook but that the decision had no automatic effect on the ratings of Spanish banks.
“We now believe that the Spanish economy’s shift away from credit-fueled economic growth is likely to result in a more protracted period of sluggish activity than we previously assumed,” an S. & P. credit analyst, Marko Mrsnik, said in a statement. “We now project that real G.D.P. growth will average 0.7 percent annually in 2010-2016, versus our previous expectations of above 1 percent annually over this period.”
The effects continued to ripple through European markets following the agency’s downgrades on Tuesday, which took Greece’s sovereign ratings below investment grade, forcing a number of institutional investors to cut holdings of Greek assets. Many institutions have investment rules that preclude or restrict them from holding paper rated as junk.
The yield on the 10-year Greek government bond narrowed to below 10 percent, having earlier surged through 11 percent. But it still closed higher on the day, as did those of Portugal, Ireland, France, Italy and Spain.
Stock markets mostly closed lower, with the CAC-40 in Paris down 1.5 percent and the IBEX 35 index down 3 percent in Madrid. Reports that the I.M.F. was contemplating a larger aid package for Greece helped to contain some of the losses late in the day.
Investors also moved out of southern European corporate debt Wednesday into safer assets and focused on the possibility of a financial domino effect.
Nicola Sanders, credit analyst at Daiwa Capital Markets Europe in London, said that European corporate credit spreads widened after the ratings announcement and in particular, investors shifted out of the bonds of companies based in southern Europe, like Telecom Italia and the Portuguese energy company EDP and into paper issued by northern European companies.
“The environment is very volatile and is being driven by the news flow on Greece,” she said. Amid the fears of contagion about Greece, she added, there had been a generally positive flow of announcements on corporate earnings and ratings in Europe in recent weeks.
Still, in the view of some analysts, the downgrades solidified the potential for another downward price spiral in markets, if the euro-area financing problems drag on.
“It is probably fair to say that Tuesday, 27 April was the day that the situation in the euro area took a dramatic and rather frightening turn for the worse,” credit analysts at Credit Suisse in London said in a research note Wednesday. “The concern is the extent and speed of the spreading of the crisis in an environment of too many financial obligations, not all of which will be serviced, in our view, and in a crisis which in our view is about far more than Greece.”
The bank noted that market contagion triggered by the collapse of the American hedge fund Long-Term Capital Management in 1998 after some of its bets on Russian debt turned sour, continued to create distortion in the swaps market and problems for pension funds for years after the event. But the effects of the collapse could have been far worse if the fund had not been bailed out in a Wall Street operation orchestrated by the Federal Reserve Bank of New York.
Nicholas Kulish reported from Berlin, and Matthew Saltmarsh from Paris.
April 28, 2010
Germany Has Big Investment in Greece Even Before Bailout
By JACK EWING
FRANKFURT — There may be a good reason why German taxpayers are so unhappy about having to lend money to Greece. In effect, they already have.
Germany’s financial institutions hold some €28 billion, or $37 billion, in Greek bonds, Barclays Capital estimates, extrapolating from International Monetary Fund data.
A quick survey of Germany’s largest banks Wednesday indicates that probably half of that debt — rated “junk” by Standard & Poor’s since Tuesday — sits on the balance sheets of institutions that are owned or controlled by the government. The percentage could be much higher, but outsiders have no way of knowing for sure because bank regulators and many of the banks refuse to disclose precise numbers.
Germany’s existing exposure to Greek debt easily exceeds the €8.3 billion that the country would lend to Greece as part of a European Union plan to help the country avoid default on its debt — though not the €24 billion that may eventually be needed from Germany. Hypo Real Estate Group alone holds €7.9 billion worth of Greek debt. And, after a bailout last year, the taxpayers own Hypo Real Estate.
Germany’s direct exposure to Greek debt provides another reason why the country’s problems are very much Europe’s problems. “It’s not just a question of paying for Greece’s luxury pensions. There are intrinsically strong German interests as well,” said Alessandro Leipold, former acting director of the I.M.F.’s European Department.
Greece’s fiscal crisis not only threatens the credibility of the euro and the stability of the European economy, it also threatens to hit government budgets in a very direct way, perhaps requiring them to again pump money into banks they have already rescued once.
“If the banks take a hit, then the German government will be involved again,” said Jürgen von Hagen, a professor of economics at the University of Bonn.
One reason that German political leaders have rejected all talk of restructuring Greek debt, requiring banks to share some of the pain, is that they know that taxpayers would ultimately get the bill, Mr. von Hagen said.
“I have a sense that is one reason why Mr. Schäuble does not want to involve the banks,” said Mr. von Hagen, referring to Finance Minister Wolfgang Schäuble.
Germany is by no means the only European country that is exposed to Greek debt. France is Greece’s biggest creditor, with €50 billion in holdings including €7 billion held by the Bank of France, according to Barclays. Italy holds €20 billion in Greek paper, followed closely by Belgium, the Netherlands and Luxembourg.
The European Central Bank is also exposed to Greek debt, which it accepts as collateral when lending to euro-area banks. One question is what the E.C.B. will do if the other major ratings agencies also downgrade Greek debt to junk, which would make the bonds ineligible as collateral.
Analysts expect that the E.C.B., which has already adjusted its rules to accommodate lower-rated bonds, would find a way to prevent Greek debt from being completely ineligible. “The E.C.B. in principle is always free to change its policy in the interests of financial market stability,” said Jörg Krämer, chief economist at Commerzbank.
S.&P.’s downgrade of Spanish government debt Wednesday is the latest indication that the Greek syndrome is spreading. Investors “have now moved on to what appears to be a full-blown bond market crash across the periphery,” economists at Royal Bank of Scotland said in a note Wednesday.
Even if other governments do not default, downgrades cut the value of their bonds on open markets and hurt bank balance sheets.
There is a lack of precise data on which banks are most exposed to Greece and its now toxic paper. But the case of Hypo Real Estate suggests that the holdings could be concentrated at a few institutions that were badly managed and acquired too much risk. Hypo Real Estate’s total exposure to the so-called PIIGS — Portugal, Italy, Ireland, Greece and Spain — is €39 billion.
Westdeutsche Landesbank, owned by state and local governments in northwestern Germany, had some €12 billion in PIIGS holdings. As part of a drastic restructuring plan following severe losses during the financial crisis, the bank put all but €1 billion of its PIIGS paper in a separate institution formed to try to dispose of the bad assets.
Commerzbank, of which the government owns 25 percent as well as having veto power on major decisions, holds €3 billion in Greek debt.
In Spain, it is the midsize banks that have suffered the most from the collapse of the country’s construction industry. They have been struggling to clean up bad real estate loans on their balance sheets, and could face another hit if their holdings of Spanish government bonds lose value.
“Spanish banks did not have direct exposure to toxic assets like the German Landesbanks,” said Xavier Vives, a professor of economics at IESE Business School in Barcelona. “They had their own toxic assets.”
Spain’s big banks, which have so far escaped the worst of the financial crisis, could suffer if Portugal goes the way of Greece. Santander, based in Madrid, has assets in Portugal valued at €48 billion, according analysts at Nomura in London.
Even if Europe’s bigger banks are not heavily exposed to Greek debt, they could see a surge in bad loans in the country as local companies suffer from a sharp economic downturn. “There is the whole question about what you do about corporate borrowing, and there are implications for Germany as well,” said Leila Heckman, senior managing director at Mesirow Financial in Chicago.
Deutsche Bank’s chief financial officer, Stefan Krause, said Tuesday that the bank would feel the effects of a deeper Greek crisis. “We don’t have much exposure to Greece directly. We are not concerned,” Mr. Krause said during a conference call with analysts. He added, “We could not completely isolate ourselves if the situation gets worse.”