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October 4, 2011

Brussels, Oct 5, 2011 (AFP)
German leader Angela Merkel was to hold talks at the European Commission Wednesday amid efforts to contain the eurozone debt crisis, as markets reacted nervously to an EU plan to help troubled banks.

The talks come after two days of negotiations between EU finance ministers ended without a breakthrough and as Athens was again denied the next eight billion euro ($10.7 billion) tranche of bailout cash it needs to avoid default.

In the Greek capital, civil servants staged another 24-hour walkout to protest against a government plan to sideline 30,000 staffers to reduce the bloated public deficit in return for a bankruptcy-saving EU-IMF loan.

Fears that the debt crisis could trigger a new financial sector collapse have sent global markets into freefall, but comments by the European Commission that it planned a coordinated bid to recapitalise lenders lifted US shares.

The respite was shortlived, however, with Asian traders more sceptical after news that Franco-Belgian bank Dexia had been broken up and Italy’s debt rating had been cut, with Tokyo and Seoul both falling.

As the two-days crisis talks wrapped up Tuesday, EU officials demanded Greece make more sacrifices and warned banks may have to shoulder more losses as part of the resolution of the debt crisis.

“I am not pretending that by the end of the day we had a solution to the eurozone crisis, much to my frustration,” British Chancellor George Osborne told Sky News after returning from Tuesday’s meeting in Luxembourg.

“But I think we did take some steps forward … We need to reflect on the reality of the situation in the eurozone and account for the reality of sovereign risk, which requires more capital in some eurozone banks.”

European commissioner for economic affairs Olli Rehn told the Financial Times that a unified approach to the crisis was required.

“There is an increasingly shared view that we need a concerted, coordinated approach in Europe while many of the elements are done in the member states,” he told the paper.

“Capital positions of European banks must be reinforced to provide additional safety margins and thus reduce uncertainty,” Rehn said.

On Tuesday, Dexia’s shares plunged 37 percent before French and Belgian regulators stepped in to guarantee its depositors and creditors.

French Finance Minister Francois Baroin compared the guarantees to the 6.4-billion-euro bailout of Dexia in 2008, when it was hit by the US sub-prime loan crisis.

Ratings agency Moody’s downgraded Italy’s government rating from Aa2 to A2 with a negative outlook, citing risks for the financing of long-term debt and slow economic growth.

And in a separate report Moody’s warned that the market pressure on European sovereign debt was not about to let up, with the prospect of weak growth in the eurozone likely to prevent governments from reducing their deficits.

“There has been a profound loss of confidence in certain European sovereign debt markets, and Moody’s considers that this extremely weak market sentiment will likely persist,” it said in an analysis published late Tuesday.

“It is no longer a temporary problem that might be addressed through liquidity support, and several euro-area governments are increasingly affected by the loss of confidence.”

The worry over how banks would be hit grew when Luxembourg premier Jean-Claude Juncker warned them to expect greater losses on their Greek debt than the 21 percent “haircut” agreed in July.

German Finance Minister Wolfgang Schaeuble confirmed that bondholders might have to take a bigger writedown, underlining that banks would then take a bigger hit.

Many European banks — notably French banks — have extensive holdings of Greek sovereign debt, and are expected to need substantial capital support in the event of a default.

With Juncker warning that Athens could wait until November to collect its next rescue package handout, Greek Finance Minister Evengelos Venizelos suggested his country was being made a “scapegoat” for eurozone debt troubles.

The bad news hit stock markets and the euro Tuesday. London’s FTSE-100 fell 2.58 percent; the DAX tumbled 2.98 percent and the CAC-40 shed 2.61 percent.

But the European Commission comments of a possible concerted approach to protect European banks boosted US stocks at the end of trade.

The European currency on Tuesday hit a nine month low against the dollar at $1.3146, and a 10-year low on the yen, 100.76 yen.

And in Asian trade the euro edged down and stood at $1.3315 against $1.3338 late Tuesday in New York.

EU preparing bank rescues amid Greece doubts

6:37pm EDT

By John O’Donnell and Ilona Wissenbach

LUXEMBOURG (Reuters) – European finance ministers agreed on Tuesday to safeguard their banks as doubts grew about whether a planned second bailout package for debt-laden Greece would go ahead.

Hours earlier French-Belgian municipal lender Dexia SA became the first European bank to have to be bailed out due to the euro zone’s sovereign debt crisis.

French Belgian lender Dexia will effectively be broken up, with the sale of healthier operations while toxic assets, including Greek and other peripheral euro zone government bonds, will be placed in a state-supported “bad bank.

Shares in Dexia, which had to be rescued a first time in2008 because it had loaded up on toxic sub-prime debt, plunged by more than 22 percent on Tuesday after losing 10 percent on Monday.

“Everyone said the big concern is that worrying developments on the financial markets will escalate into a banking crisis,” German Finance Minister Wolfgang Schaeuble told a news conference after EU ministers met in Luxembourg.

The growing prospect of a debt default by Greece in the coming months has stoked fears of a major banking crisis in Europe that would aggravate the global economic slowdown.

European Economic and Monetary Affairs Commissioner Olli Rehn told the Financial Times on Tuesday that the ministers, who have hitherto rejected any concerted bank recapitalization, had a new sense of urgency.

“There is an increasingly shared view that we need a concerted, co-ordinated approach in Europe while many of the elements are done in the member states,” Rehn was quoted as saying. “Capital positions of European banks must be reinforced to provide additional safety margins and thus reduce uncertainty.”

British finance minister George Osborne told reporters in Luxembourg he too had felt a sense of urgency among his euro zone colleagues.

“Euro zone banks need to be strengthened. We need to reflect the reality of the situation in the euro zone and we need to account for the reality of the sovereign risks which the market perceive out there. And that requires more capital in some euro zone banks,” Osborne said.

After falling early Tuesday to levels not seen in more than 13 months, U.S. stocks recovered with the S&P500 index ending up 2.3 percent helped by the news that EU finance ministers were preparing action to safeguard their banks.

Earlier on Tuesday European bank shares tumbled for the second day, leading a broader stock market retreat, after euro zone finance ministers called for a review of a July 21 debt swap agreement with private holders of Greek bonds.

The euro hit a nine-month low against the U.S. dollar before recovering some ground, and hit a 10-year low against the yen. Investors sought refuge in German government bonds, but the cost of insuring even those safe-haven Bunds against default hit another record.

MOMENT OF TRUTH

More and more European banks are being shut out of the market and relying on the European Central Bank for liquidity.

“The danger of escalation lies in the banking sector, as current events show,” Schaeuble said, alluding also to tension in the inter-bank lending market with echoes of the freeze after the collapse of investment bank Lehman Brothers in 2008.

ECB President Jean-Claude Trichet warned in his final testimony to the European Parliament before retiring at the end of the month that the financial crisis is far from over and euro zone governments need to address it.

“I would say it is their responsibility to face up to the worst crisis since World War Two,” the usually understated Frenchman said. “We are the epicenter of this global crisis.”

Asked whether the ECB should act as Europe’s lender of last resort, as the U.S. Fed and the Bank of England do in their countries, he pointed to its action in providing unlimited liquidity but said he did not favor bailout funds being refinanced by the central bank.

Schaeuble said the 27 EU ministers agreed to report by their next monthly meeting on the situation of banks in their countries and planned measures to protect them.

The decision came after euro zone ministers postponed a vital aid payment to Greece until mid-November, setting up a moment of truth in the long-running debt crisis.

Greek Finance Minister Evangelos Venizelos said the country had enough cash to cope until then and insisted that ministers are not preparing for a Greek default, despite the ominous delay.

“There is no discussion of default,” Venizelos said.

Analysts said the delay in disbursing the 8 billion euro Greek loan installment and the reopening of the private sector bond swap deal increased the likelihood of a default once the currency area has its new financial firefighting tools in place.

Under the July deal, private creditors agreed to a 21 percent write-down on their Greek holdings via a plan to lighten and stretch the debt burden, with euro zone governments funding credit enhancements to attract voluntary participation.

“If they are having problems getting the sixth tranche of funding, what’s going to happen to the seventh tranche of funding in three months’ time? The situation is going to be even worse then. So Greece is on the brink,” said Nick Stamenkovic, bond strategist at RIA Capital Markets.

Jean-Claude Juncker, chairman of the 17-nation Eurogroup, said ministers were considering “technical revisions” to private sector involvement in a planned 109 billion euro second rescue package which may now prove insufficient after Athens admitted it would miss key deficit targets.

Now that Greece’s economic growth and deficit situation has worsened, that deal needed to be reviewed, Juncker said.

A senior euro zone source said banks might have to take a bigger write-down, and a bond buy-back scheme could be expanded, to achieve the same 50 billion euro private sector contribution as was agreed in July.

Austrian Finance Minister Maria Fekter said the review was necessary because most bondholders had chosen the option most expensive for governments, skewing the cost of the operation.

In Athens, striking public sector workers blockaded the entrance to several ministries on the second anniversary of the ruling Socialist party’s election victory, disrupting talks with EU and IMF inspectors on the next aid tranche.

NOVEMBER CRUNCH

All roads now point to a mid-November crunch.

Euro zone parliaments are expected to complete approval of new powers for the EFSF rescue fund by mid-October, giving it scope to intervene on bond markets and help recapitalize banks.

Greece’s admission on Sunday that it will miss its deficit target this year despite ever deeper cost-cutting measures provoked a sharp sell-off in stock markets and raised new doubts over the proposed second bailout.

Greece’s draft budget sent to parliament on Monday showed this year’s deficit would be 8.5 percent of gross domestic product, well above the 7.6 percent agreed in Greece’s EU/IMF bailout program, the benchmark for future EU aid.

Compounding the debt problem, the economy is set to shrink by a further 2.5 percent next year after a record 5.5 percent contraction this year.

The deeper-than-forecast recession means public debt will be equivalent to 161.8 percent of GDP this year, rising to 172.7 percent next year, by far the highest ratio in Europe.

(Additional reporting by Annika Breidthardt, Jan Strupczewski and Philip Blenkinsop in Luxembourg, Ana Nicolaci da Costa and Neal Armstrong in London, Angeliki Koutantou, Ingrid Melander and Harry Papachristou in Athens,; Writing by Paul Taylor; editing by Janet McBride and Clive McKeef)
October 4, 2011
Euro Debt Crisis a Threat to Sink Global Economy
By LIZ ALDERMAN AND JACK EWING

PARIS — The European debt problems that have roiled global financial markets for the last 18 months are showing signs of turning into a far deeper challenge: Europe’s second recession in three years.

Greece, Ireland, Portugal and Spain are already in downturns or fighting to avoid them, as high unemployment and austerity belt-tightening take their toll. But in the last few weeks, even prosperous Germany and France, the Continent’s powerhouses, have started to be dragged down, hurt by the ebbing of business orders from indebted countries in the rest of Europe.

European stocks continued their latest plunge on Tuesday, as the German financial giant Deutsche Bank, buffeted by the debt crisis, reduced its profit forecast for the year. Investors were also jolted by news that the French-Belgian investment bank Dexia might be the region’s first large bank to need a government rescue as a result of the current debt crisis.

It is not just the Continent’s problem.

The United States, a major banking and trading partner with Europe, is stuck in its own rut — prompting the Federal Reserve chairman, Ben S. Bernanke, to warn Tuesday that “the recovery is close to faltering.” He told a Congressional panel that the economy could fall into a new recession unless the government took further action.

United States stocks ended up for the day, but had bounced wildly on jitters about Europe and rising fears that Greece would have to default on its sovereign — or government — debt. The Greek finance minister said Tuesday that the country could continue to pay its bills at least through mid-November, after other European finance ministers said Greece would not receive its next installment of bailout money before next month, if then.

A downturn in Europe, if it happens, could help tip America back into recession and would undoubtedly ricochet around the world. Europe’s banks are among the most interconnected in the world, and the euro is the world’s second-largest reserve currency after the dollar.

The 17 European Union nations that share the euro together account for about one-fifth of global output. And emerging markets that are important customers for European exports, like China and Brazil, are beginning to retrench.

“We are the epicenter of this global crisis,” Jean-Claude Trichet, the president of the European Central Bank, said on Tuesday at the European Parliament.

A growing chorus of analysts now predict that Europe is heading for an outright recession. “The sovereign debt crisis is like a fungus on the economy,” said Jörg Krämer, the chief economist at Commerzbank. “I thought it would be just a slowdown,” he said. “But I have changed my mind.”

Goldman Sachs predicted Tuesday that both Germany and France would slip into recession, although other forecasts are less grim.

Already, the euro zone economy has slowed to essentially zero growth. It could stay in a slump, many economists say, at least through next spring. If that happens, tax revenue is likely to fall and unemployment, already high, is expected to rise, making it even more difficult for Europe to address the sovereign debt crisis and protect its shaky banks.

In a sign of how quickly the ground is shifting, the European Central Bank might lower interest rates on Thursday — just a few months after it started raising them in what is now seen as a misguided effort to stem incipient inflation.

Distress is increasingly evident across Europe.

Philippe Leydier, a French businessman, had been feeling more upbeat until this summer, when orders for his company’s corrugated boxes suddenly began to slide. Orders fell further last month, as auto parts makers, electrical engineering firms, farmers and other industries reduced production.

“The euro crisis and the financial crisis linked to the debt of European countries is serious,” said Mr. Leydier, whose box and paper manufacturing firm, Emin Leydier, in Lyon, often provides an early signal of seismic shifts in economic activity. “European governments need to find a solution — and fast.”

In Italy, which has the euro zone’s third-largest economy, after those of Germany and France, a 45 billion euro austerity program aimed at reducing debt has many worried about a recession. On Tuesday, the ratings agency Moody’s downgraded Italian government bonds by three notches, to A2 from Aa2, and kept a negative outlook on the rating.

Paolo Bastianello, the managing director of Marly’s, an Italian clothing retailer, is increasingly discouraged.

At the start of the year, Mr. Bastianello was more optimistic that Europe would escape its troubles and that the government might seriously tackle Italy’s problems. “But the turbulence of the markets and the uncertainty about this abnormal mass of public debt just scare people away from buying,” he said.

Not everyone is so pessimistic. Some German executives say sales remain healthy, at least so far. “We don’t see any impact on our business,” said Roland Busch, a member of the management board of Siemens, the electronics and engineering giant based in Munich.

“The economy is cooling down but not more than that,” said Mr. Busch, who oversees a unit that supplies traffic control systems, streetcars and other products for public works.

Expecting demand for urban infrastructure improvements to grow, Siemens plans to add about 150 people over the next two years to its 850 employees at its complex in Sacramento that makes light-rail cars.

Bucking the trend almost everywhere else in the developed world, unemployment in Germany continues to fall, and there are shortages of skilled workers in several important sectors.

Jens Weidmann, who runs Germany’s central bank and serves on the executive board of the European Central Bank, predicted last week that the nation would hit “a soft patch” but escape recession.

Commerzbank predicts German growth will slow almost to zero in the fourth quarter of 2011, but not decline. At best, though, it expects Germany to grow by no more than 1 percent in 2012.

The International Monetary Fund is a little more optimistic, predicting growth of 1.3 percent next year in Germany after a healthy 2.7 percent this year.

But the I.M.F. recently acknowledged that it, too, had overestimated the rate of Europe’s recovery. It now forecasts that growth in the euro zone will slide to 1.1 percent in 2012, after a 1.6 percent gain this year. In Spain, where tens of thousands of protestors have called for the government to ease its austerity plan, the I.M.F. expects growth to pick up to 1.1 percent next year from 0.8 percent this year.

Still, unemployment in Spain remains at 20 percent, and youth joblessness is nearly twice that rate. Pfizer, the American pharmaceutical giant, said last week it would cut 220 Spanish jobs.

The economy is worse in Portugal, which is operating under a bailout agreement with the European Union and the I.M.F. The I.M.F. warned the new prime minister, Pedro Passos Coelho, that Lisbon still needed to find an additional 1 billion euros in budget savings. But further austerity may only deepen the downturn, with Portugal’s economy expected to fall by 1.8 percent this year and 2.3 percent in 2012.

João Figueiredo, the owner of a small ship repair yard in Lisbon, expects his first annual loss since 2002. “There are now many clients who are late in their payments and whose money I will probably never see,” he said.

The worldwide dimension of the financial crisis, Mr. Figueiredo added, made the outcome even more uncertain. “We’re now in the middle of a crisis that started in American real estate and then crossed over to Europe, and it seems really nobody has any idea where this will go next and for how long.”

Portugal’s slump convinced François Libner, the president of Libner S.A., a French manufacturer of delivery truck bodies, that it was hopeless to keep trying to sell there.

After growth in Portugal, Greece, Spain, and Italy started to trail off last year, he shifted his focus to Germany. Mr. Libner figures it will take at least a decade for any real growth to return to Southern Europe, particularly in Spain and Greece, which he classifies as “a catastrophe.”

Mr. Libner said he hoped Paris’s efforts to bring the country’s deficit and overall debt into line with European rules would allow France to keep its AAA bond rating — provided that European leaders figure out how to contain the debt crisis to Greece. If that happens, he said, Europe could rebound quickly, as investors regain faith in the viability of the euro union.

But if it does not happen, and Europe’s banks become further ensnared in the crisis — he shuddered at the thought. “We can pay for Greece, but not for all of Europe,” he said. If the crisis swells, he added, “we won’t have the means to pay for all of this.”

Liz Alderman reported from Paris and Jack Ewing from Frankfurt. Raphael Minder contributed reporting from Lisbon, Gaia Pianigiani from Rome and Stephen Castle from Luxembourg.

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