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Sydney, Dec 14, 2011 (AFP)
Australia’s deputy central bank chief Wednesday warned a major change in the troubled euro area could not be ruled out, with its debt woes escalating to create an “unfavourable” cycle with the banks.

However, Ric Battellino said that despite the ongoing crisis, Australia was well placed to avoid any massive effects because local banks were well capitalised and had low exposure to Europe.

He told banking conference in Sydney that wide divergences in interest rates paid by European banks had begun resembling pre-euro levels as concerns grew about the sustainability of debt in some countries.

“The formation of the euro area brought convergence of interest rates towards the low levels previously enjoyed only by Germany, but pre-euro relativities are now re-asserting themselves,” the Reserve Bank of Australia deputy said.

“This suggests that markets are pricing in the possibility of a break-up of the euro area or a significant risk of default by some governments, or both.”

A “change in the composition of the euro area” could not be ruled out, he added.

Greece’s inability trouble to balance its books and the lingering fear that it could default on its huge debts have led many analyst to suggest the country could end up falling out of the euro club.

Battellino said Europe’s sovereign debt problems had escalated in recent months, creating an “unfavourable feedback loop” between government debt, the banking sector and broader global economy.

A succession of measures had been announced to counter the problem, each offering only limited relief, and Battellino said most commentators saw greater fiscal coordination and discipline as key in the long-term.

In the short-term, he said it was “highly likely that part of the solution will involve substantial financial assistance from outside the region or the purchase of sovereign debt by the (European Central Bank), or some combination of both.”

“It remains to be seen whether the latest measures will be more successful,” he said.

On Friday, 26 of the 27 European Union member states agreed to back a Franco-German drive for tighter budget policing in a bid to save the embattled single currency.

Britain’s decision not to join prevented leaders from making crucial treaty changes, but the other 26 states signalled their willingness to join a “new fiscal compact” imposing tougher budget rules.

Battellino said Europe’s banks and others with exposures to the region had been hard hit by the sovereign debt issues, leaving them with valuation losses which have raised questions about their own financial soundness.

But he said that Australian banks’ exposure to the euro area was small, with claims on the troubled region accounting for just 2.7 percent of total assets and strong domestic inflows of deposits meaning they were relatively shielded.

“I remain confident that Australia, with its strong government finances, resilient banking system, relatively low exposures to the troubled countries and strong links to the dynamic Asian region, is well placed to deal with events that may unfold,” he added, according to Dow Jones Newswires.

Diam-diam, investor kelas kakap yaitu George Soros masuk ke pasar obligasi Eropa dengan jumlah yang sangat besar. Melalui perusahaan investasi miliknya yaitu Soros Fund Management LLC, miliarder kelas dunia itu membeli surat utang Eropa dari MF Global Holdings Ltd.

Sumber yang mengetahui secara persis atas transaksi ini menyebutkan, Soros merogoh kocek hingga US$ 2 miliar. Tawaran Soros datang tak lama setelah MF Global mengajukan perlindungan kebangkrutan pada 31 Oktober lalu.

Di bawah kepemimpinan Jon S Corzine, MG Global bangkrut karena eksposurnya yang terlalu besar pada pasar obligasi Eropa yaitu mencapai US$ 6,3 miliar. Akumulasi itu berasal dari utang jangka pendek yang diterbitkan beberapa anggota Uni Eropa, terutama Italia.

Selama musim panas 2011, pasar Eropa dilanda kepanikan investor, regulator dan perusahaan pemeringkat. Wajar, MF Global ambruk dalam waktu sebulan. Laporan beberapa anggota Uni Eropa memburuk. Harga obligasi tergerus hebat diiringi meroketnya imbal hasil.

Menariknya dan perlu disoroti, dalam transaksi ini Soros diduga meraup keuntungan besar. Menurut pedagang yang membeli obligasi serupa, setidaknya dana kelolaan Soros Fund Management LLC sudah bertambah lebih dari US$ 130 juta, dihitung dari pergerakan pasar. Memang, tidak ada perhitungan yang tepat atas keuntungan Soros mengingat transaksi tersebut sangat rumit.

Yang jelas, Soros masuk ke obligasi Eropa dengan harga diskon. Perusahaannya membayar obligasi di level 89, padahal nilai pasar saat itu berada di titik 94. JPMorgan dan satu hedge fund besar dikabarkan terlibat dalam transaksi ini.

Kemarin (13/12) obligasi tersebut kembali merangkak naik ke level 96. Pasar melihat, sangat sulit menjual obligasi itu pada level tertentu sebelum jatuh tempo Desember 2012. Hal inilah yang ditebak-tebak oleh pasar, manuver apa yang sedang dijalani Soros. Akankah menjual surat utang di tengah jalan, atau memegangnya hingga jatuh tempo.

Sebenarnya, dengan mempertimbangkan aspek risiko krisis, memegang obligasi Eropa sangat riskan bagi investor dengan jumlah kepemilikan tak sedikit. Pasar obligasi gampang terkoreksi oleh berita masalah keuangan negara. Apalagi, rasio utang beberapa anggota Uni Eropa sangat besar.

WASHINGTON–MICOM: Pembuat kebijakan utama Federal Reserve mempertahankan suku bunga mendekati nol (ultra rendah) pada Selasa (13/12).

Tingkat itu telah bertahan selama tiga tahun karena mereka menggambarkan sebuah ekspansi ekonomi yang moderat penuh dengan masalah.

The Fed menegaskan kembali janjinya untuk mempertahankan suku bunga pada tingkat sangat rendah, setidaknya sampai pertengahan 2013.

Kehati-hatian bahwa penurunan pengangguran menjadi 8,6 persen tidak berjalan lancar ke depan, The Fed memperingatkan pengangguran masih tinggi dan stimulus lebih mungkin di atas kartu. (Ant/OL-5)

Dec. 13, 2011, 12:01 a.m. EST
Our decade from hell will get worse in 2012
Commentary: Market crash, political gridlock, revolution, new class wars

By Paul B. Farrell, MarketWatch

SAN LUIS OBISPO, Calif. (MarketWatch) — Fasten your seat belts: 2011 was far worse than expected. Our earlier predictions for America’s Worst Decade just got worse.

As financial historian Niall Ferguson writes in Newsweek: “Double-Dip Depression … We forget that the Great Depression was like a soccer match, there were two halves.” The 1929 crash kicked off the first half. But what “made the depression truly ‘great’ …began with the European banking crisis of 1931.” Sound familiar?

Commodity Futures Trading Corp, Invesco Technology Sector, Aston Value are among companies Chuck Jaffe has singled out to give his Lumps of Coal awards.

Yes, huge warnings: But America’s deaf. In denial. When we predicted the 2011-2020 “decade from hell” we didn’t see the big macro events dead ahead: Arab Spring virus that’s now Occupy Wall Street, promising to explode into an even more powerful force in 2012 … war on the middle class … widening inequality gap. … Washington gridlock … the Super Rich’s blind resistance to all new taxes.

As Ferguson puts it: “To understand what has been happening in our own borderline depression, you need to know this history. But hardly anyone does.” Get it? America’s already in a “borderline depression,” and virtually nobody gets it. American leaders are dummies about history. Worse, nobody may be able to stop our depression from turning “great.”

Investors beware: Please, protect your assets: “Those who don’t remember history are doomed to repeat it.” We’ve already forgotten the lessons of the 2008 disaster. No wonder we’re doomed to repeat the mistakes of the 1930’s triggering the Second Great Depression. Soccer anyone?
More bad news for 2012: from Gross, Grantham, Shilling and Stiglitz

Ferguson’s in good company with his dark forecast. Pimco’s Bill Gross asks rhetorically: “Where is the euro headed? More than likely down, perhaps significantly.” Gross warns of a “terrifying situation” where “the euro may fall … and take the U.S. recovery with it.”

Then there’s Jeremy Grantham, whose GMO firm manages $100 billion. He predicted the 2008 crash a couple years in advance. Predicts ‘Seven Lean Years” ahead, till 2016, the end of the next presidential term. Now, in his latest newsletter he feels “sadly … vindicated by my ‘seven lean years’ forecast.” The world “will not easily recover from the current level of debt,” as our self-destructive American and European leaders have “permanently slowed their GDP growth.”

More bad news: As we close out the first year of the “Worst Decade in American History,” economist and long-time Forbes columnist Gary Shilling just issued his semi-annual outlook: “Global Recession Likely” in 2012. OK, the best he can say is that this one “will be milder than the 2007-2008 nosedive.” Of course, you’ve already forgotten those pains, right?

And over at Vanity Fair, Nobel Economist Joseph Stiglitz also reexamines the dark history of the Great Depression, warning that in our ignorance of history we’re missing a fundamental economic “shift in the ‘real’ economy,” missing what will generate future jobs, just as we did back in the ‘30s. Yes, we “risk a tragic replay” of the Great Depression.
10 predictions for America’s Worst Decade Ever

Over the past decade we predicted the 2000 crash, the 2008 meltdown, the short-lived 2009 rally. Future historians will look back on the 2011-2020 decade as America’s Worst Decade. Worse than the 1930s Great Depression. Totally predictable. Totally denied.

So here’s an update of the 10 predictions of a chain reaction of events that are building to a critical mass, will consume America in what economist Joseph Shumpeter called “creative destruction” that will eventually, after cleansing the greed from America’s toxic capitalism, trigger a renewal of the American Spirit, as happened in the Great Depression.

Here’s how all this will generally unfold in the coming decade:
2011. Super Rich keep spending billions to control Washington

The conservative takeover of America’s democracy the past three decades became total and complete last year when an activist Supreme Court overturned long-established legal precedent giving soulless corporations — whose sole allegiance is to wealthy shareholders — the same inalienable rights as humans, accelerating their quest for absolute power. Hopefully Senator Bernie Sander’s proposed 28th Amendment will change that, but doubtful.
2012. Super Rich solidifies absolute power over our political system

That Supreme Court decision legalized political bribery. Now, billions pass through lobbyists to politicians with one goal: A promise that politicians vote for their special interests. Our middle class is in a rapid trickle-down into third-world status. The inequality gap steadily widens. Doesn’t matter who wins the 2012 race. Democracy is systemically corrupt by money. Obama, Mitt, Newt, all pawns of the system.
2013. Global population bubble exploding, rapidly wasting resources

America’s Conspiracy of the Super Rich drains trillions from middle-class taxpayers. They see the global population growth explosion of 100 million annually not as exhausting the world’s scarce resources, but as a tool to get richer through free-market capitalism and globalization. They ignore the tragedies as global population climbs to 10 billion, fail to hear the warnings of environmentalists like Bill McKibben that it may “be too late. The science is settled, the damage has already begun,” we can’t save the planet.
2014. Pentagon’s global commodity wars accelerate toward 2020 peak

At the outset of the Iraq War, Fortune analyzed a classified Pentagon report predicting “climate could change radically and fast. That would be the mother of all national security issues.” And billions of new people will spread unrest worldwide as “massive droughts turn farmland into dust bowls and forests to ashes.” Another history lesson forgotten: “An old pattern could emerge; warfare defining human life.” Yes, in denial politicians chose war and catastrophes over cooperation.
2015. Gilded Age globalization explodes America’s Global Empire

About the time of the Pentagon’s prediction of WWIII in 2020, Kevin Phillips warned in “Wealth & Democracy:” “Most great nations, at the peak of their economic power, become arrogant and wage great world wars at great cost, wasting vast resources, taking on huge debt, and ultimately burning themselves out.” Similarly, Ferguson, warns in “Colossus: The Rise and Fall of The American Empire,” that we are in denial, thinking “about the political process in seasonal, cyclical terms.”
2016. Reaganomics capitalism self-destructs, crashes, bank bankruptcies

“But what if history is not cyclical and slow-moving but arrhythmic,” asks Ferguson. “What if collapse does not arrive over a number of centuries but comes suddenly,” too rapid to respond in time. True to form, a new conservative president will keep ignoring the lessons of history. And, as Jared Diamond’s warns in “Collapse:” “One of the disturbing facts of history is that so many civilizations share a sharp curve of decline … demise may begin only a decade or two after it reaches its peak in population, wealth and power.”
2017. Class war and revolution: Rich class loses big, surrenders

Warren Buffett saw the revolution long ago: “There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning.” But by the 2016 presidential election, political rage explodes into a new American Civil War over inequality. The gaping income gap pops a bubble, causes economic collapse. Riots spread preventing another massive bailout of our too-greedy-to-fail banks. New depression ignites class rebellion.
2018. The Fed and Wall Street banks collapse, Glass-Steagall reinstated

Diamond warned us: Leaders need “the courage to practice long-term thinking, make bold, courageous, anticipatory decisions at a time when problems have become perceptible but before they reach crisis proportions.” Instead, they fail to act boldly, delay. History tells us leaders act in short-term self-interest, not long-term public interests, especially politicians backed by billionaires who see only quarterly earnings, year-end bonuses, next election.
2019. Global commodity wars spread, killing millions, wasting trillions

Over half our federal budget goes to the Pentagon’s war machine, limiting America’s domestic priorities. Predictably, new commodity wars are ignited by an accelerating global population versus a decline in the world’s scarce resources. That also forces a total rethinking of the balance between spending to protect against external enemies and a rapid deterioration of domestic programs: employment, education, health care, retirement.
2020. America’s first woman president, patriarchal dominance is dead

By the end of the decade, it is finally obvious that patriarchy — male dominance of leadership roles in philosophy, economics, politics and culture throughout history — has failed our civilization, bringing the world to the brink of total destruction.

Why do male leaders consistently fail us? Jeremy Grantham brilliantly captured that fundamental flaw in our nation’s character a few years ago: Male leaders are actually quite emotional, myopic and “impatient … management types who focus on what they are doing this quarter or this annual budget.” But true leadership “requires more people with a historical perspective who are more thoughtful and more right-brained.”

Unfortunately, “we end up with an army of left-brained immediate doers.” And that guarantees “every time we get an outlying, obscure event that has never happened before in history, they are always to miss it.”

Worse, today’s male brain is so rigidly hard-wired in short-term myopia, it quickly forgets history’s most recent lessons, like 2008. As a result, our males leaders “collectively miss even totally obvious events that happen over and over in history.”

Class war? Or Gender War? By 2020 we’ll have an answer, but by then it may be too late.
Washington, (Analisa). Menteri Luar Negeri Inggris William Hague, Senin (12/12), bertemu dengan Menteri Luar Negeri Amerika Serikat Hillary Clinton di tengah-tengah kabar keretakan hubungan antara Inggris dan mitra Eropanya atas masalah utang zona euro.
Inggris telah memilih untuk keluar dari kesepakatan yang disepakati oleh 26 negara Uni Eropa lainnya untuk bergabung dengan “kesepakatan fiskal baru,” suatu sikap yang memicu kemarahan sebagian besar Eropa yang sedang berjuang untuk menopang euro.

Perdana Menteri konservatif David Cameron mengatakan ia menggunakan hak vetonya untuk melawan perubahan menyeluruh atas perjanjian Uni Eropa setelah para pemimpin Eropa yang lain menolak upayanya untuk mengamankan perlindungan bagi industri jasa keuangan penting Inggris. (Ant/AFP)

Europe back under pressure after summit
Published: 12 December 2011

Financial markets gave the thumbs down on Monday (12 December) to a landmark EU deal to deepen economic integration, pushing European stocks and the euro lower as investors judged its debt crisis would continue to worsen.

EU leaders on 9 December agreed on a new treaty to tighten fiscal discipline in the eurozone, aiming to draw a line under the bloc’s debt problems.

This new fiscal compact was backed by all 27 EU countries – except Great Britain – and means more automatic sanctions will be applied on budget rule-breakers in the future.

Countries committed to enshrine a “golden rule” to run budgets which are balanced or in surplus into their national constitutions “or equivalent level”. The signatories also recognise the European Court of Justice “to verify the transposition of this rule at national level”.

All EU countries except Britain agreed at a summit on Friday to pursue stricter budget rules and a stronger fiscal union, and to give up to €200 billion in bilateral loans to the International Monetary Fund to help tackle the crisis.

But the capacity of the euro zone’s bailout fund was capped and it was not granted a banking license. There was no sign the European Central Bank was ready to take the stronger action analysts say is needed to quell the crisis – even if the ECB was reportedly back in buying Italian bonds on Monday.

“Yes, we have a plan in place to tackle the longer term problems but…it doesn’t tackle the shorter term problems,” said Peter Dixon, economist at Commerzbank.

“I’ll be very surprised if it actually generates the results many EU leaders are currently hoping for.”

The euro was down 0.5% on the day at $1.3300, finding some support ahead of Friday’s low of $1.3280. It is now almost 6% below its October peak and 10% off its 2011 high of just under $1.50, struck in early May.

“There is a deflated feeling for the euro this morning after the EU summit. People were looking for a greater response and more importantly the ECB refused to significantly step up their bond buying,” said Beat Siegenthaler, currency strategist at UBS.

Prone to shocks

Moody’s Investors Service said it would look again at the ratings of European nations in the first quarter of 2012, judging the summit did not produce decisive initiatives and left the euro area prone to further shocks.

“The absence of measures to stabilize credit markets over the short term means that the euro area, and the wider EU, remain prone to further shocks and the cohesion of the euro area under continued threat,” it said in a report.

The agency said the crisis remained in a critical and volatile stage, with sovereign and bank debt markets prone to acute dislocation which policymakers will find increasingly hard to contain.

Bund futures were about 30 ticks higher at 135.83, after opening lower. German 10-year yields were 4 basis points down at 2.062%.

However, 10-year Italian government bond yields jumped 22 basis points to 6.6%, pushing its premium versus German Bunds 18 basis points wider to 447 basis points.

The 10-year Spanish government bond yield rose 15 basis points to 5.95%.

An early test of sentiment toward European government assets will come later on Monday when France, the Netherlands and Italy issue new Treasury bills.

The International Monetary Fund’s chief economist Olivier Blanchard said on Sunday the agreement reached by European countries was a step in the right direction but not a complete solution for the euro zone’s debt crisis.

“What happened last week is important: it’s part of the solution, but it’s not the solution,” Blanchard told the Globes business conference in Tel Aviv.

Euro-Crisis: ’Double A is the New Triple A’
By John Glover and Esteban Duarte – Dec 12, 2011

Europe’s failure to agree on a comprehensive solution to the sovereign debt crisis threatens to consign AAA rated bonds in the region to history.

Top-rated agencies in the 17-nation euro area have at least 847.5 billion euros ($1.1 trillion) of debt outstanding, according to data compiled by Bloomberg, and will be at risk should their sovereigns be downgraded. Moody’s Investors Service said today it will review the ratings of all European Union nations after last week’s summit failed to produce “decisive policy measures,” while Standard & Poor’s announced Dec. 5 it may cut 15 euro members, including AAA rated Germany and France.

“Double A is the new triple A,” said Raphael Gallardo, the head of economic research at Axa Investment Managers in Paris, which manages about $690 billion. “De facto, there are no more highly liquid, risk-free assets. It’s a dangerous problem because in a market crash, liquid AAA assets are the dam that contains the total exodus of liquidity.”

European leaders’ fifth attempt to draw a line under their debt woes ended in a fiscal accord that will bring tighter deficit rules, though with many details still to be ironed out and the U.K. vetoing an agreement among all 27 EU members. A lack of top-rated sovereigns would make it harder to gauge a risk-free benchmark for securities, reduce participation in euro-region debt markets and threaten ratings of agencies and supranationals such as the European Investment Bank and World Bank.
Market Reaction

Markets signaled investors are disappointed with the outcome of the Brussels talks. Yields on 10-year bonds sold by Italy, which according to UBS AG data must repay about 53 billion euros in the first quarter of next year, climbed above 6.50 percent after falling on Dec. 9. France’s note yield was at 3.29 percent, from 3.13 percent a week ago.

The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments jumped 15 basis points to 378.5, approaching the record 385 set on Nov. 25. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

“The rating agencies are likely to be underwhelmed” by the summit, said Peter Tchir, the founder of TF Market Advisors in New York. “Countries will still be on watch and might still be downgraded.”
‘Soon as Possible’

S&P said it will publish a decision “as soon as possible” after the EU talks. Moody’s said there was the chance of “more severe scenarios,” including “multiple defaults” and “exits from the euro area.”

Banks use government bonds to make a return on their funds while they seek more profitable uses for them. The practice was encouraged by regulators, which agreed to view the securities as risk-free, and has now rebounded against the lenders. The European Banking Authority published last week the results of tests calculating the additional capital needs of banks that had to mark their sovereign bonds to market prices, finding a 114.7 billion-euro shortfall.

While a downgrade from AAA may make European assets less attractive to investors, the effects would be muted should ratings firms cut a wide group of sovereigns, according to David Watts, a strategist at CreditSights Inc. in London. When the U.S. lost its AAA status, its bonds rallied, he said.

“A government is the only supplier of risk-free assets for a particular currency because it can tax and, in the end, it can print money,” said Watts. “In Europe there are alternatives. If France gets downgraded, say, you can shift to Germany. But if Germany gets downgraded too, and their relative positions stay the same, then it shouldn’t make any difference.”

Supranationals, institutions backed by groups of countries and whose ratings depend on their backers’ creditworthiness, would also be under threat if sovereigns were downgraded, as would national state agencies.

German agencies including state-owned development and investment bank Kreditanstalt fuer Wiederaufbau, so-called bad bank FMS Wertmanagement AoR and agricultural financier Landwirtschaftliche Rentenbank have 563 billion euros of bonds outstanding, according to data compiled by Bloomberg. Similar agencies in France, the Netherlands and Austria have another 284.5 billion euros of bonds and bills.
Bailout Fund

Ratings of the European Financial Stability Facility, the region’s bailout fund, would be the same as the lowest grade of the current AAA backers, S&P said this month. The EIB, which is backed by the 27 members of the EU, is also under review for a possible downgrade.

“There is no direct relationship between our rating and our shareholders that is so strong it would automatically lead to a downgrade,” said Marius Cara, an investor relations executive at the EIB in Luxembourg. “Our capital isn’t structured on guarantees and our portfolio of assets doesn’t depend on the credit of the member states.”

Caisse d’Amortissement de la Dette Sociale, the French agency known as Cades that was set up in 1996 to refinance social security debt, also challenged the link between its top rating and that of its sovereign Dec. 7.

The yield premium investors demand to hold the EIB’s 5 billion euros of 3.5 percent bonds due 2016 instead of benchmark German debt is 166 basis points, up from 88 at the beginning of August, according to Bloomberg Bond Trader prices. The spread on the EFSF’s 3 billion euros of 2.75 percent notes maturing in 2016 was 156 basis points, up from 94 basis points Aug. 1.

“The fact that we’re talking about triple-A downgrades and the kind of volatility we’re seeing in spreads indicates that paradigms are changing,” said Ben Bennett, a strategist at Legal & General Investment Management in London, which oversees about $500 million. “We’re starting to get unhappy holders, people who thought they held one thing and then realized that wasn’t what they held after all.”
Euro zone fiscal pact fails to restore confidence

By Marius Zaharia and Matthias Blamont

LONDON/PARIS | Mon Dec 12, 2011 4:38pm EST

(Reuters) – A European summit deal to strengthen budget discipline in the euro zone failed to restore financial market confidence on Monday, forcing the European Central Bank to step in again gingerly.

The euro fell, stocks slid and borrowing costs for Italy and Spain rose as investors weighed the outcome of last week’s summit that split the European Union, with Britain blocking treaty change and forcing euro zone countries to negotiate a fiscal accord outside the Union.

Friday’s initial market rally quickly petered out due to legal uncertainty surrounding the new pact and the absence of an unlimited financial backstop for the single currency.

French President Nicolas Sarkozy said the legal basis of a new accord to enforce debt and deficit rules in the 17-nation euro area with quasi-automatic sanctions and intrusive powers to reject national budgets would be worked out before Christmas.

“In the next fortnight, we will put together the legal content of our agreement. The aim is to have a treaty by March,” Sarkozy told newspaper Le Monde in an interview.

An EU diplomat said the first draft of the new treaty would be ready by early next week. Sarkozy said the aim was to have it ratified by all member states except Britain by June.

“You have to understand this is the birth of a different Europe – the Europe of the euro zone, in which the watchwords will be the convergence of economies, budget rules and fiscal policy,” the French leader said.

Traders said the ECB intervened to buy short-term Italian debt after yields on Italian and Spanish debt spiked.

The central bank revealed on Monday it had slashed bond purchases in the week before the EU summit as it raised pressure on the bloc’s leaders to act. It bought just 635 million euros in bonds in the week to December 9 compared to 3.66 billion the previous week.

ECB sources told Reuters on Friday purchases would remain limited, with no prospect of a “big bazooka” to shock markets.

Italian 5-year bond yields shot up above 7 percent, widely seen as a danger level while 10-year yields spiked above 6.8 percent and Spanish 10-year yields topped 6 percent.

Investors’ appetite for short-term paper drove Italian one-year borrowing costs down just below 6 percent at an auction but yields remain uncomfortably high.


The major ratings agencies could make matters worse.

Sarkozy prepared French voters for a possible downgrade of the country’s AAA credit rating but insisted he could cut the deficit without cutting salaries and pensions.

Moody’s Investors Service said it intends to review the ratings of all 27 members of the European Union in the first quarter of 2012 after EU leaders offered “few new measures” to resolve the crisis at their summit on Friday.

Fitch Ratings said the summit failed to provide a “comprehensive” solution to the crisis, thus increasing short-term pressure on euro zone sovereign ratings.

Standard & Poor’s, which warned last week of a possible downgrade of 15 euro zone countries shortly after the summit, still has to announce its decision.

But its chief European economist, Jean-Michel Six, told a business conference in Tel Aviv: “Time is running out and action is needed on both sides of the equation, on the fiscal and monetary side.”

If some of the euro zone’s AAA-rated members are downgraded, it would call into question the solidity of the euro zone’s rescue fund, which would likely suffer a similar fate. Its permanent successor will not come on stream until mid-2012 at the earliest.

“We have a nice agreement: a fiscal compact, commitments to keep fiscal deficits down. But, actually, does any of this solve the euro crisis? No it doesn’t,” said Victoria Cadman, economist at Investec in London. “We still sit here searching for the big bazooka solution.”

The euro area faces the next potential crunch point in mid-January when Italy, which has a debt mountain of 1.9 billion euros or 120 percent of its annual output, has to start issuing tens of billions of euros in bonds towards a 2012 total of 340 billion euros needed to roll over maturing debt.


Political aftershocks from Friday’s historic rift between Britain and the rest of the 27-nation bloc continued to shake Europe, with Prime Minister David Cameron facing tension in his coalition and doubts in the business community.

Cameron was given a hero’s welcome by Eurosceptics in his Conservative party but faced a backlash from his Liberal Democrat coalition allies after he wielded a veto that has cast Britain adrift from its continental partners.

“Britain remains a full member of the EU and the events of the last week do nothing to change that,” he told parliament.

In a defiant statement, he told lawmakers he made no apology for having demanded safeguards for the City of London financial centre in any new EU treaty.

LibDem Deputy Prime Minister Nick Clegg said on Sunday he was “bitterly disappointed” with an outcome that would diminish Britain’s global influence and was bad for jobs and business. Clegg was conspicuously absent during Cameron’s address.

In Brussels, officials were groping for a strong legal basis for the planned fiscal compact, with Britain arguing that the euro zone cannot use the EU treaty institutions – the European Commission and the European Court of Justice.

European Economic and Monetary Affairs Commissioner Olli Rehn said most of the measures to strengthen budget enforcement could be implemented immediately under a set of rules known as the “six-pack” agreed in October.

He said he regretted Britain’s decision and warned London: “If this move was intended to prevent bankers and financial corporations of the City from being regulated, that’s not going to happen. We must all draw the lessons from the ongoing crisis and help to solve it and this goes for the financial sector as well.”

The crucible of the crisis, Greece, could yet cause havoc if negotiations over a second bailout fall apart, leading to a rapid default.

Greek Finance Minister Evangelos Venizelos said he wanted to move fast in talks with the EU, IMF and bankers, reaffirming the aim of clinching a voluntary debt restructuring deal by end-January before the country heads to elections.

“We will proceed smoothly and with the maximum possible speed,” Venizelos said after separate meetings with the head of bank lobby IIF and with EU, IMF and ECB inspectors, on key aspects of a 130 billion euro bailout plan.

EU leaders have now said banks may not take a hit in any future sovereign rescues after they were roped into the Greek bailout, a move which proved a final straw for many investors.

Commerzbank and the German government have been in talks for several days over possible state aid, five people familiar with the matter told Reuters. The lender, 25 percent-owned by the government, wants to avoid forced recapitalization but needs to find 5.3 billion euros in capital by mid-2012 to meet new European capital rules.

(Additional reporting by Alexandra Za in Milan, Keith Weir and Sudip Kar-Gupta in London, George Georgiopoulos in Athens and Walter Brandimarte in New York; Writing by Paul Taylor/Mike Peacock; Editing by Alistair Lyon)
Latest update: 12/12/2011

‘There are now clearly two Europes’ says Sarkozy

French President Nicolas Sarkozy told French newspaper Le Monde on Monday that he and German Chancellor Angela Merkel ‘did everything’ to convince Britain to join the new EU treaty, adding that ‘there are now clearly two Europe’s’.
By News Wires (text)

AFP – EU Economic Affairs Commissioner Olli Rehn on Monday expressed regret over Britain’s veto of a new EU treaty to boost integration and warned it would not protect the City of London from new financial regulation.

“I regret very much that the UK was not willing to join the fiscal compact,” Rehn said. “I regret it not only for the sake of Europe, as for the sake of British citizens.

“We want a strong and constructive Britain in Europe and we want Britain to be at the centre of Europe, not on the sidelines,” Rehn said, three days after British Prime Minister David Cameron refused to sign up to a new treaty to allow the EU to press ahead with greater fiscal and economic integration.

He said he would have preferred to see all 27 EU states agree to the new moves together.

Cameron took his decision after failing to secure agreement from French President Nicolas Sarkozy and German Chancellor Angela Merkel for Britain’s huge financial services sector to be exempted from certain EU regulations and a drive to impose new EU taxes.

“If this move was aimed at preventing bankers and financial corporations of the City (of London) from being regulated, that’s not going to happen,” Rehn stressed.

“We must all draw the lessons of the crisis and help to solve it and this goes for the financial sector as well.”

Sarkozy said in an interview with the French daily Le Monde released on Monday that he and Merkel “did everything” to persuade Britain to join in.

“There are now clearly two Europe’s,” he added.

Cameron’s reluctance to sign up to a deal was due in large part to pressure from both his own lawmakers and the right-wing press in Britain who have been urging him to hold a referendum on any treaty change.

In October, Cameron suffered the largest rebellion of his premiership when 79 Tory lawmakers voted in favour of a referendum on Britain’s relationship with Europe.

Cameron also faces pressure from Scotland, where a majority nationalist government in Edinburgh is preparing a referendum on full independence from Britain.

In an angry letter on his return from trade talks in China, Scotland’s First Minister Alex Salmond accused Cameron of “blundering” without prior consultation and called for an urgent meeting on what had happened.

ATHENS, Dec 9, 2011 (AFP)
Greece’s economy remained trapped in a deep recession in the third quarter but shrank less than previously thought, at a revised 5.0 percent from an initial 5.2 percent, official figures showed on Friday.

“Available non-seasonally adjusted data indicate that in the third quarter of 2011, gross domestic product at constant prices (base 2005) … decreased by 5.0 percent in comparison with the third quarter of 2010,” the Elstat agency said.

It said exports at constant prices increased 3.2 percent in the period to 13.8 billion euros while imports fell 4.3 percent 14.23 billion euros, driving a sharp fall of 71.4 percent in the trade deficit.

The government expects the economy to shrink by 5.5 percent this year and by 2.8 percent in 2012.

According to EU estimates, it has contracted by 15 percent overall since Greece’s slump began in the final quarter of 2008.

Brussel, (Analisa). Bursa saham dan nilai mata uang euro naik setelah sebagian besar anggota Uni Eropa menyetujui kesepakatan baru hari Jumat untuk meningkatkan ikatan ekonomi mereka demi menyelamatkan zona euro yang kesulitan. Tapi reaksi beragam tentang kesepakatan itu, yang tercapai setelah pembicaraan maraton antara pemimpin Eropa di Brussels.
Kepala Bank Sentral Eropa Mario Draghi menanggapi positif kesepakatan atas ikatan fiskal yang lebih kokoh itu dan pengendalian lebih ketat atas anggaran pemerintah.

Ia mengatakan, “Hasil kesepakatan ini sangat baik untuk zona euro, sangat baik. Ini hampir mendekati kesepakatan fiskal yang padat, dan tentu akan menjadi dasar bagi kebijakan ekonomi yang jauh lebih berdisiplin bagi negara-negara anggota euro, dan tentunya akan bermanfaat dalam situasi saat ini.”

Dua puluh tiga dari ke-27 negara anggota Uni Eropa sudah menyetujui kesepakatan itu, yang diperjuangkan oleh negara-negara ekonomi kuat; Prancis dan Jerman untuk menjamin agar krisis utang dan krisis perbankan Eropa tidak terjadi lagi. Ini termasuk ke-17 negara anggota zona euro yang kesulitan.

Namun, dalam konferensi pers terakhir hari Jumat, presiden Uni Eropa Herman Von Rompuy mengatakan tiga negara lagi sedang mempertimbangkan untuk bergabung – ini akan membuat Inggris sebagai satu-satunya negara yang tidak menyetujuinya.

Ia mengatakan, “Kami lebih suka pada perubahan kesepakatan penuh dengan ke-27 negara itu, mengubah semua perjanjian Uni Eropa. Kami telah mencobanya, tapi karena tidak ada keputusan dengan suara bulat, kami harus mengambil keputusan lain.”

Kanselir Jerman Angela Merkel memuji kesepakatan itu sebagai sebuah keberhasilan.

Kanselir Merkel mengatakan negara-negara yang memilih untuk membentuk persatuan fiskal yang baru memilih masa depan yang pertalian ekonominya lebih solider, yang akan membuat mata uang euro lebih aman.

Anggota Uni Eropa yang mematuhi kesepakatan baru itu harus berkomitmen untuk menjaga defisit anggarannya di bawah 0,5 persen dari output ekonomi mereka – atau berisiko dikenakan sanksi.

Kesepakatan itu diperkirakan akan ditandatangani bulan Maret. Para pemimpin Eropa juga menyepakati langkah-langkah lain untuk menghentikan meluasnya krisis zona euro – seperti memberi Dana Moneter Internasional dana 260 miliar dolar lagi untuk menopang perlindungan keuangan. (voa)

EU treaty: David Cameron has done ‘bad deal’ on Europe, Nick Clegg says
Nick Clegg, the Deputy Prime Minister, has warned that David Cameron’s decision to opt out of Europe is “bad for Britain”, revealing a deep split in the Coalition.
Rowena Mason

By Rowena Mason, Political Correspondent

11:02AM GMT 11 Dec 2011

Mr Clegg said he was “bitterly disappointed” that David Cameron has vetoed European treaty changes.

The UK is the only one of 27 European Union members to opt out of closer ties this week.

The Liberal Democrat leader said any further withdrawal from Europe risks making Britain “a pygmy in the world”.

He spoke the Prime Minister straight after the European summit at 4am on Friday morning, warning that the decision to veto the treaty was wrong.

“I made it clear to the PM it was untenable for me to welcome it,” he told BBC1’s Andrew Marr Show.

Mr Clegg blamed the “intransigence” of France and German for Britain’s isolation. But he also criticised Eurosceptic MPs in the Conservative Party, who have been pressing Mr Cameron to show “bulldog spirit” in negotiations with Europe.

“There’s nothing bulldog aout Britain hovering somewhere in the mid-Atlantic, not standing tall in Europe and not being taken seriously in Washington,” Mr Clegg said.

He said Britain must now work extra hard to make sure it is not ignored by both Europe and the US.

The Deputy Prime Minister said any further withdrawal from Europe would mean the UK is “considered irrevelant by Washington and a pygmy in the world”.

“I will now do everything I can to make sure this setback does not become a permanent divide,” he said.

Mr Clegg, the leader of the Liberal Democrats, is considered one of the most pro-European politicians in Britain.

However, he dismissed suggestions that the Coalition would break up.

“It would be even more damaging for us as a country if the coalition Government was to fall apart,” he said.

“That would cause economic disaster for the country at a time of great economic uncertainty.”

Mr Clegg’s comments drew a stinging rebuke from Mark Pritchard, a leading Tory eurosceptic and secretary of the 1922 Committee.

“Better to be a British bulldog than a Brussels poodle,” he said. “People are getting rather fed up of the self-righteous whinging of some Lib Dems who are totally out of step with public and mainstream euroscepticism and have called it wrong on Europe for years.”

However, a number of prominent Liberal Democrats rallied round their leader.

Lord Oakeshott, the former Liberal Democrat Treasury spokesman, said he thought it was possible the dispute could bring down the coalition.

EU treaty: a tale of two dinners
In the space of 24 hours David Cameron experienced two meals that speak volumes – in their very different ways – about the seismic events of the past few days and Britain’s new relationship with Europe.

By Robert Watts, and Patrick Hennessy

9:00PM GMT 10 Dec 2011

At the first, the Prime Minister was the outsider. For more than eight hours he was enclosed in a Brussels conference room with 26 European leaders bent on closer integration. He was isolated from his closest advisers, with just his Blackberry smartphone for company.

Mr Cameron sat in silence for hours as he was accused of selfishly putting petty national interests before plans to ward off the threat of an epic financial crisis that could plunge Europe – and perhaps the world – into another Great Depression.

Less than 24 hours later, Mr Cameron had returned to Chequers, his country retreat.

There he was cheered and feted over best British beef by Conservative MPs as “the heir to Margaret Thatcher” and praised as the man who had safeguarded Britain’s economic future, reunited his divided party and paved the way for a new relationship with Europe and its lawmakers.

This weekend, as the dust begins to settle from last week’s momentous EU summit, the questions about what it all means have begun in earnest.

Is Britain now dangerously isolated in Europe? How can the Prime Minister shield the country from new EU regulations if he has absented Britain from the top table? And could the past few days represent the first step in Britain’s departure from the single market?

When Mr Cameron woke on Thursday morning his position for the European summit had already been agreed with Nick Clegg and other Liberal Democrat members of the coalition.

After a visit to the suburban London constituency of Feltham and Heston, to campaign for in the by-election being held there this week, the Prime Minister enjoyed the brief respite of watching his five-year-old son Elwen perform in his school’s nativity play.

From there, Mr Cameron was rushed to RAF Northolt in west London, where he and a team of five from Downing Street boarded a small aircraft bound for Brussels.

With Britain in the grip of a winter storm, it was a turbulent flight. But the Prime Minister faced an equally bumpy ride when he landed in Belgium’s capital an hour later.

Within an hour of touching down the Prime Minister went into his first meeting, a 15-minute chat with Mario Monti, the new Italian prime minister brought into restore credibility to his country’s debt-laden public finances.

Then Mr Cameron was whisked down the corridor for a tense 45 minutes with Nicholas Sarkozy, the French president, and Angela Merkel, the German chancellor. Those close to the Prime Minister say it was at this meeting that it started to become clear just how dramatic the night could become.

After it, one French official uttered the bizarre jibe that Mr Cameron was like a husband who arrives at a wife-swapping party without a wife.

At 8.10 the leaders sat down for the marathon working dinner that would not end until nearly 5am the next morning.

Only the leaders are granted a seat at the meeting room’s vast oval table. The lobster bisque, cod with pumpkin and chervil mousse, followed by dessert of chocolate cake and ice cream, accompanied by soft drinks, must have left a sour taste in Mr Cameron’s mouth.

Mr Sarkozy and Mrs Merkel were no doubt hoping they could employ all the customary wiles of Brussels-style negotiations to bend Mr Cameron into agreeing wholesale changes to the Lisbon treaty that would take the continent on a path to closer fiscal integration.

William Hague, the Foreign Secretary, Sir Jon Cunliffe, the Downing Street European adviser, and Ed Llewellyn, Mr Cameron’s chief of staff, were all confined to the next room.

The Prime Minister’s lifeline was his Blackberry, which Mr Cameron would use to send a round robin emails to his advisers updating them on the snail-like progress of the talks.

For hour after hour, there was not even any negotiation – merely a tedious prologue as the 27 leaders set out their positions.

Away from the meeting room, in the council building’s marble-floored atrium, tensions were building. As the hours ticked by, early optimism gave way to frustration and disbelief that progress had been so slow.

One Downing Street aide admitted that little substantive had been discussed until after 1am.

Although most people in the room knew what was coming, it is understood it was not until 2.30am that Mr Cameron was given an opportunity to deliver his list of demands if Britain was to be willing to sign up to changes to the Lisbon treaty, itself only agreed in 2007.

These included a legally-binding “protocol” to protect the City of London from more EU regulations, safeguards for American banks based in the UK and a guarantee that the proposed “Robin Hood” tax on financial transactions would require the unanimous backing of all member states.

Each of these demands were knocked back. Mr Sarkozy, said to have reacted angrily to Mr Cameron’s points, insisted it was the lack of financial regulation that lead to the crisis. Any “waiver” for Britain was untenable to France’s leader.

At 3.30am, with the talks seemingly deadlocked, Herman Van Rompuy, the president of the European Council and chair of the meeting, allowed a five minute break.

The talks reconvened for a further hour before finishing shortly before 5am, when Mr Sarkozy hastily called a press conference where he attacked his British counterpart for scuppering the talks.

Frustrated at the French leader’s rush to the microphones, Mr Cameron summoned his own press conference in which he repeated his position.

“We wish them well,” the Prime Minister said of the European leaders battling to save the euro, as if he was bidding farewell to a lover.

The sour mood loomed over the conference hall as the sun rose. The 14 foot high television screen inside the building atrium’s displayed a video on a three-minute loop seeking to trumpet what had supposed to be the great highlight of the day – the ratification of Croatia’s full membership of the EU.

Below, all the talk on the floor was of a member state leaving the single market. European journalists berated their British peers for moving back into the dark ages. Initially, it looked like Britain and Hungary would not agree the treaty changes – but soon talk grew that only Mr Cameron was taking the hard line.

“I think Hungary have left you on your own now,” one German correspondent chided his British peers.

The negotiations recommenced at 11am, after Mr Cameron had enjoyed an hour’s sleep and a breakfast of scrambled egg and strong coffee.

Outside the United Kingdom room in the European Council’s Brussels offices hang a series of framed Shakespearean quotations, which speak of courage and defiance.

A passage from Richard II alluding to “jousting tournaments” follows the opening line of Richard III in which the monarch speaks of the “winter of our discontent”; appropriate words on Friday afternoon.

Despite hours of draining talks and precious little sleep, Mr Cameron looked relaxed but determined as he justified his stance.

“I was very clear on what assurances Britain needed when I came here,” the Prime Minister said.

“Last night it became clear to me that we were not going to get what was necessary. It’s very important in life that when you set a bottom line, you stick to your guns and do the right thing.”

He stressed his plea for Europe to show the flexibility of a network, adding that Britain is at the heart of the single market and the Nato defence treaty, even if it has rejected a place in the euro.

And in a move that set some tongues wagging he even suggested that Britain would only continue in the European Union “if” it continued to be in our national interest.

“It must be in Britain’s interests”, he said repeatedly.

Within minutes he was setting off home.

Just a few hours later, at the Buckinghamshire house which has provided a country retreat for Prime Ministers for almost a century, Mr Cameron hosted a very different gathering – the latest in a series of meals at which he has tried to rebuild relations with his party after 81 Tory MPs defied him in a Commons vote over a referendum on whether Britain should leave the EU.

The guest list had been drawn up before this week, The Sunday Telegraph understands, and represented all sides of Conservative opinion – although there was a high proportion of women MPs and backbenchers first elected to parliament last year.

Andrew Rosindell, the hardline eurosceptic MP who last week in the Commons urged Mr Cameron to be a “British bulldog” in Brussels, was there, as was Maria Miller, the well-regarded minister for disabled people.

Mr Rossindel showed the Prime Minister his Union flag cufflinks, worn to celebrate the perceived British “victory” that morning.

Other MPs who attended were understood to include Andrew Selous, Lee Scott, Heather Wheeler, Henry Smith, Amber Rudd, Jessica Lee, Jesse Norman, Jackie Doyle-Price, Helen Grant, Dan Poulter, Sajid Javid and Jason McCartney. At least four of them – Ms Wheeler, Mr Smith, Mr McCartney and Mr Rossindell – were among the 81 “referendum rebels”.

In all, it is thought about 20 MPs were at Chequers – around half of whom brought their partners.

The atmosphere was said to be “extremely informal and relaxed” – with the Prime Minister and most of the men in open-necked shirts.

Over a salmon starter, British roast beef (naturally) with mashed potatoes, and melon and strawberries, conversation ranged over several topics – including football and music. Mr Cameron’s wife, Samantha, was not there but Elwyn was “running around” at the start of the evening.

One topic dominated all others, however – the Prime Minister’s use of the veto in the early hours. All his guests congratulated him and at one point a cheer went up.

Mr Rossindell said: “Last week I called on David Cameron to be a bulldog prime minister and he did exactly that. He did what I would have expected Margaret Thatcher to have done.”

Mr McCartney added: “There was a lot of energy. I couldn’t believe he had only had a couple of hours sleep. he was focused and interested and calm. He was there at 7.30pm when. He moved around the room and we all congratulated him and said he had done a fantastic job. You could hear everyone saying it as he went round.”

While wine was on offer with the meal, round a large oval shaped table in Chequers’s main dining room, nobody drank very much, according to those present. Many were driving home and the evening came to an end at about 10.30pm.

“We knew,” said Mr McCartney, with commendable understatement, “that he needed some sleep.”

Europe’s great divorce

Dec 9th 2011, 8:03 by Charlemagne | BRUSSELS

WE JOURNALISTS are probably too bleary-eyed after a sleepless night to understand the full significance of what has just happened in Brussels. But after a long, hard and rancorous negotiation, the European Union split in a fundamental way at about 5am this morning.

France, Germany and 21 other countries have decided to draft their own treaty to impose more central control over national budgets in an effort to stabilise the euro zone. Britain and three others have decided to stay out. But in the coming weeks, Britain may find itself even more isolated. Sweden, the Czech Republic and Hungary want time to consult their parliaments and political parties before deciding on whether to join the new union-within-the-union.

So two decades to the day after the Maastricht Treaty was concluded, launching the process towards the single European currency, the EU’s tectonic plates have slipped momentously along the fault line that has always existed—the English Channel.

Confronted by the financial crisis, the euro zone is having to integrate more deeply, with a consequent loss of national sovereignty to the EU (or some other central co-ordinating body); Britain, which had secured a formal opt-out from the euro, has decided to let them go.

Whether the agreement does anything to stabilise the euro is moot. The agreement is heavily tilted towards budget discipline and austerity. It does little to generate more money in the short term to arrest the run on sovereigns, or to provide a longer-term perspective of jointly-issued bonds. Much will depend on how the European Central Bank responds in the coming days and weeks.

Some doubt remains over whether and how the “euro-plus” zone will have access to EU institutions—such as the European Commission, which conducts economic assessments and recommends action, and the European Court of Justice, which Germany hopes will ensure countries adopt proper balanced-budget rules—over the objections of Britain.

But especially for France, on brink of losing its AAA credit-rating and now the junior partner to Germany, this is a famous political victory. President Nicolas Sarkozy had long favoured the creation of a smaller core euro zone, without the awkward British, Scandinavians and eastern Europeans that generally pursue more liberal, market-oriented policies. And he has wanted the core run on an inter-governmental basis, ie by leaders rather than by supranational European institutions. This allows France, and Mr Sarkozy in particular, to maximise its impact.

Mr Sarkozy made substantial progress on both fronts. The president tried not to gloat when he emerged at 5am to explain that an agreement endorsed by all 27 members of the EU had proved impossible because of British obstruction. “You cannot have an opt-out and then ask to participate in all the discussion about the euro that you did not want to have, and which you also criticised,” declared the French president.

With the entry next year of Croatia, which will sign its accession treaty today, the EU was still growing, said Mr Sarkozy. “The bigger Europe is, the less integrated it can be. That is an obvious truth.”

For Britain the benefit of the bargain in Brussels is far from clear. It took a good half an hour after the end of Mr Sarkozy’s appearance for Mr Cameron to emerge to explain his action. The prime minister claimed he had taken a “tough decision but the right one” in the British interest—particularly of its financial-services industry. In return for his agreement to changing the EU treaties, Mr Cameron had wanted a number of safeguards for Britain. When he did not get them, he used his veto.

After much studied vagueness about Britain’ objectives, Mr Cameron’s demand came down to a protocol that would ensure Britain would be given a veto on financial-services regulation (see PDF copy here). The British government has become convinced that the European Commission, usually a bastion of liberalism in Europe, has been issuing regulations hostile to the City of London under the influence of the French single-market commissioner, Michel Barnier. And yet strangely, given the accusations that Brussels was taking aim at the heart of the British economy, almost all of the new rules issued so far have been passed with British approval (albeit after much bitter backroom fighting). Tactically, too, it seemed odd to make a stand in defence of the financiers that politicians, both in Britain and across the rest of European, like to denounce.

Mr Cameron said he was “relaxed” about the separation. The EU has always been about multiple speeds; he was glad Britain had stayed out of the euro and of the Schengen passport-free area. He said life in the EU, particularly the single market, would continue as normal. “We wish them well as we want the euro zone to sort out its problems, to achieve stability and growth that all of Europe needs.” The drawn faces of senior officials seemed to say otherwise.

The 23 members of the new pact, if they act as a block, can outvote Britain. They are divided among themselves, of course. But the habit of working together and cutting deals with each other will, inevitably, begin to weigh against Britain over time.

Mr Sarkozy and Angela Merkel, the German chancellor, have given notice of their desire for the euro zone to act in all manner of domains that would normally be the remit of all 27 members—for example, labour-market regulations and the corporate-tax base.

Britain may assume it will benefit from extra business for the City if the euro zone ever passes a financial-transaction tax. But what if the new club starts imposing financial regulations among the 17 euro-zone members, or the 23 members of the euro-plus pact? That could begin to force euro-denominated transactions into the euro zone, say Paris or Frankfurt. Britain would, surely, have had more influence had the countries of the euro zone remained under an EU-wide system.

It says much about the dire state of the debate on Europe in Britain’s Conservative party that, as Mr Cameron set out to Brussels, one Tory MP should invoke the memory of Neville Chamberlain, who had infamously come back from Munich with empty assurances from Adolf Hitler. Mr Cameron may have made a grievous mistake over Britain’s long-term interest. But at least nobody can accuse him of returning from Brussels with a piece of paper in his hand.

December 9, 2011 nytimes

Most European Leaders Agree on Fiscal Treaty

By and

BRUSSELS — European leaders, meeting until the early hours of Friday, agreed to sign an intergovernmental treaty that would require them to enforce stricter fiscal and financial discipline in their future budgets. But efforts to get unanimity among the 27 members of the European Union, as desired by Germany, failed as Britain and Hungary refused to go along for now.

Importantly, all 17 members of the European Union that use the euro agreed to the new treaty, along with six other countries who wish to join the currency union one day. Two countries, the Czech Republic and Sweden, said they would want to talk to their parties and parliaments at home before deciding, said President Nicolas Sarkozy of France, but it seemed unlikely that Sweden would join. Hungary said it wanted to examine the details, leaving Britain isolated.

Though not a perfect solution, because it could be seen as institutionalizing a two-speed Europe, the intergovernmental pact could be ratified much more quickly by parliaments than a full treaty amendment. Crucially, the deal was welcomed immediately by the new head of the European Central Bank, Mario Draghi.

“It is a very good outcome for euro area members and it’s going to be the basis for a good fiscal compact and more disciplined economic policy in euro area countries,” Mr. Draghi said early Friday morning.

The support of Mr. Draghi and the bank to continue to buy the bonds of troubled large countries like Italy and Spain is crucial to buy time for their economic adjustment and restructuring, to reduce their debt and avoid a collapse of the euro.

The outcome was a significant defeat for David Cameron, the British prime minister, who had sought assurances to protect Britain’s financial services sector in exchange for doing a deal. Mr. Sarkozy said that “David Cameron requested something we all considered unacceptable, a protocol in the treaty allowing the U.K. to be exempted for a certain number of financial regulations.”

Mr. Cameron said, “What was on offer wasn’t in British interests, so I didn’t agree to it.” He conceded that there were risks with others going ahead to form a separate treaty, but added, “We will insist that the E.U. institutions, the court and the Commission work for all 27 nations of the E.U.”

The European Council president, Herman Van Rompuy, said that in addition, the leaders agreed to provide an additional 200 billion euros to the International Monetary Fund to help increase a “firewall” of money in European bailout funds to help cover Italy and Spain. He also said a permanent 500 billion euro European Stability Mechanism would be put into effect a year early, by July 2012, and for a year, would run alongside the existing and temporary 440 billion euro European Financial Stability Facility, thus also increasing funds for the firewall.

The leaders also agreed that private sector lenders to euro zone nations would not automatically face losses, as had been the plan in the event of another future bailout. When Greece’s debt was finally restructured, the private sector suffered, making investors more anxious about other vulnerable economies.

Mr. Sarkozy said that the institutions of the European Union would be able to police the new pact, though Britain may dispute that.

Chancellor Angela Merkel of Germany, who pressed hard for a treaty that would codify and enforce debt limits and central oversight of national budgets, said the decisions made here will result in increased credibility for the euro zone. “I have always said the 17 states of the euro zone need to win back credibility,” she said. “And I think that this can happen, will happen, with today’s decisions.”

After the agreement on the treaty was reached early on Friday morning in Europe, Asian markets remained noncommittal — the Nikkei 225 was down about 1.4 percent — about where they were before the news. On Thursday, the euro fell against the dollar, and the borrowing costs of the euro region’s two most closely watched convalescents, Italy and Spain, shot higher in bond trading.

President Obama said on Thursday that the European leaders’ efforts to reach a long-term “fiscal compact where everybody’s playing by the same rules” were “all for the good.” Yet he added, “But there’s a short-term crisis that has to be resolved to make sure that markets have confidence that Europe stands behind the euro.”

The best hope for providing that shot of confidence has been seen as the European Central Bank. But the bank’s president, Mr. Draghi, at a news conference in Frankfurt on Thursday, seemed to back away from signals he sent last week that a grand bailout bargain might be in the works — a big infusion from the central bank in exchange for a commitment to greater fiscal discipline from the European heads of state.

On Thursday, Mr. Draghi said that he was “surprised” that a speech he made last week had been widely interpreted as meaning the central bank stood ready to shore up weak European Union members like Italy and Spain by buying many more of their bonds — or to possibly work in concert with the International Monetary Fund. He played down the I.M.F. idea Thursday as too “legally complicated” and said it might violate the spirit of the euro treaty.

Many analysts were stunned by what appeared to be Mr. Draghi’s turnaround, which they said would make it even more crucial for the European heads of state to forge a market-calming master plan at their summit meeting — as unlikely as such an outcome is starting to look.

“While Draghi had opened the door for more E.C.B. support last week, he closed it again today,” Carsten Brzeski, an economist at the Dutch bank ING, wrote in a note to clients. “According to Draghi, it was up to politicians to solve the debt crisis.”

For now, Mr. Draghi appears to be leaving any government bailouts to the heads of state, while focusing the European Central Bank’s efforts on the less controversial business of keeping money flowing through commercial banks.

The main step the central bank took Thursday, which buoyed stock markets before Mr. Draghi held his news conference, was to cut its main interest rate to 1 percent, from 1.25 percent. That returned the rate to the record low level that had prevailed from 2009 until April. Mr. Draghi did not rule out the possibility that the rate could go even lower.

The central bank also announced additional measures to aid euro zone banks suffering from a dearth of the short-term lending and to avert a credit squeeze. The European Central Bank said it would start giving commercial banks loans for three years, compared with a maximum of about one year previously. Banks will be able to borrow as much as they want at the benchmark interest rate.

They must provide collateral, but the central bank on Thursday also broadened the range of securities it accepts, which will help banks that have large amounts of assets that are hard to sell. The central bank also eased its requirements for reserves that banks must maintain, which frees more cash.

In a sign of how badly banks need the money, 34 institutions took advantage of a new lower interest rate offered by the European Central Bank in conjunction with other central banks for three-month loans denominated in dollars.

Earlier Thursday, the Bank of England held its benchmark rate steady at a record low 0.5 percent, after the bank’s governor warned of growing risks for Britain’s economy from the euro area. Mr. Draghi, who took over at the European Central Bank from Jean-Claude Trichet on Nov. 1, has wasted little time reversing rate increases that Mr. Trichet oversaw in April and July. Those increases were widely criticized as an overreaction to tentative signs of inflation and may have helped hasten a widespread economic slowdown in Europe.

The economy of the 17 countries in the euro currency union is almost stagnant, growing just 0.2 percent in the third quarter, with unemployment at 10.3 percent. Economists expect the euro zone economy to slip into recession early next year if it has not happened already. Declining output makes the debt crisis even worse by cutting tax receipts.

The E.C.B. lowered its growth projections Thursday, saying that output could fall as much as 0.4 percent next year.

Lower interest rates will be particularly welcome in countries like Portugal and Italy, where the debt crisis has pushed up interest rates and made it harder for businesses to get loans. And the cuts will provide immediate relief to the many homeowners in Ireland and other euro countries who have variable-rate mortgages tied to the central bank’s rate.

But many economists continue to argue that ultimately the European Central Bank will have to intervene more aggressively in the region’s government bond markets, to prevent borrowing costs for Italy and other countries from becoming so high that they are unable to refinance their debt.

Jack Ewing contributed reportingfrom Frankfurt, and Mark Landler from Washington.

Cash for credibility

Laundering European rescue funds through the IMF

Dec 10th 2011 | Washington, DC | from the print edition

AS A new game plan for saving the euro by enforcing fiscal discipline takes shape (see article), there is growing speculation that Europe’s central bankers could help in another way—by channelling rescue funds through the IMF.

The ECB is not allowed to fund member governments, but it or national central banks could lend to the IMF. Those national central banks have provided resources to the fund before, which is why the ultra-orthodox Bundesbank does not object to filling the IMF’s coffers—even if that money were then used to provide rescue funds for countries such as Italy or Spain.

In many ways this money-laundering would be a clever wheeze. It gets around the central bankers’ hang-ups. It provides discipline, since the fund’s conditionality would help to keep Europe’s peripheral economies on track. And it could elicit funds from others. America won’t contribute anything more to the IMF, but big emerging markets seem willing to top up the fund’s resources, provided the Europeans do so too. With Europe’s own rescue fund—the European Financial Stability Facility—floundering, the IMF may be the best route to raising real money.

How much could be raised is still up for grabs. Eswar Prasad, an economist at Cornell University who follows the IMF closely, reckons that if Europeans come up with $150 billion-200 billion, then emerging economies might add a similar sum to the pot. Those are the kind of sums that would be needed. The IMF currently has some $390 billion of lendable cash in its kitty (see chart). That’s enough to deal with smaller economies, but not to back stop Italy and Spain, which need to refinance some €320 billion ($430 billion) and €142 billion respectively in 2012.

Unfortunately, like many clever wheezes, this one is full of pitfalls, both for the Europeans and for the IMF. The fund, which already has over half of its outstanding loans in the euro zone, would become even more heavily exposed to one region. For Italy or Spain, borrowing from the IMF is not the same as the ECB buying their bonds. The IMF is a preferred creditor, which means it always gets paid back first. Thus the more the fund lends to a country, the bigger the write-down for private creditors if there were ever a default.

An IMF rescue plan could spook investors rather than reassure them, particularly if parallels were drawn with Greece, Portugal and Ireland, which have already had rescue packages from the IMF and the Europeans, and show no sign of regaining access to financial markets. The experience of those countries does not bode well for the IMF’s credibility either. In each case the Fund’s technocrats are not in sole charge. Against their better judgment, they have often compromised on reform plans with European rescuers, who usually push for harsher austerity.

The same danger exists for Italy or Spain. Even if the Europeans launder rescue funds through the IMF, they are unlikely to outsource fiscal oversight entirely. The inevitable compromises could easily lead to rescue plans that fail. If the euro then falls apart, the IMF, the one institution that could pick up the pieces, will lack both the cash and credibility to do the job.

12/07/2011 12:53 PM
Battle to Save the Euro
Summit Seen Backing ‘Merkozy’ Plan – But Then What?

By Carsten Volkery and Philipp Wittrock

The pressure on the euro zone is so great that the German-French plan for treaty changes to punish budget rule-breakers is likely to be approved at a make-or-break EU summit starting Thursday. But it could still be thwarted by political wrangling in the coming months.

Last-minute discussions are underway ahead of the EU summit on Thursday and Friday that could decide the fate of the single currency. A French-German plan for European treaty changes to enshrine automatic sanctions is likely to be approved by leaders, but their three-month timetable for the amendments to come into force looks highly ambitious, and could be upset by post-summit horsetrading and ratification votes.

Officials from the EU member states are also discussing the option of doubling the firepower of the euro bailout fund at the summit, the Financial Times reported on Wednesday. The report, citing senior European officials, said the the temporary European Financial Stability Facility (EFSF) bailout fund could be strengthened by keeping it going even after the permanent fund that had been due to replace it comes into force in 2012.

The EFSF has available assets totalling €440 billion, and the European Stability Mechanism (ESM), the replacement long-term fund, will have €500 billion at its disposal.

The leaders of Germany and France, Chancellor Angela Merkel and President Nicolas Sarkozy, agreed on Monday that the launch of the ESM should be brought forward to 2012 from 2013 to help calm markets.

They also proposed rapid changes to the European treaties in order to enforce budget discipline across the euro zone through automatic sanctions and budget-balancing rules enshrined in national constitutions.

If everything goes according to their plan, the amendments would take effect next March — either among all the EU’s 27 members or just among the 17 euro countries. But it’s uncertain whether such rapid treaty changes will be possible. The EU struggled for almost a decade to put the Lisbon Treaty in place.

Though France and Germany are only proposing amendments to existing agreements, their plan for rescuing the euro by whipping treaty changes through in just three months looks more than ambitious.

The devil is in the detail. And history has shown that the Europeans can spend ages passionately arguing about details.

Treaty Change Looking More Likely

But most European nations know the EU needs to get serious about fiscal discipline, because it is the only way to tackle the roots of the debt crisis. The treaties will be amended — the pressure to show unity and determination at the summit is so great that resistance seems pointless.

Even the Irish government has accepted that, although it had voiced deep skepticism. Prime Minister Enda Kenny had long resisted treaty change because he wanted to avoid another referendum on Europe at all costs. The Irish held two referendums on the Lisbon Treaty, in 2008 and 2009. But now Dublin is saying it won’t block treaty amendments if a majority of the euro countries want them.

The 10 EU countries that aren’t in the euro zone also appear ready to back the planned fiscal union among the 17 currency zone members. British Prime Minister David Cameron has signalled his support, along with his Danish counterpart Helle Thorning-Schmidt and Poland’s Donald Tusk. Their conditions are that the amendments should be as limited as possible and should not detract from more immediately necessary measures to contain the euro crisis. They don’t regard treaty change as the top priority, but they don’t want to block it either.

As the euro zone agreement wouldn’t affect their own national sovereignty, the British and Danish governments will refrain from calling national referendums on the amendments.

Thus, Merkel and Sarkozy can hope that they won’t have to enforce their threat to confine the treaty changes just to the 17 euro countries, a move that would cement divisions in the EU.

But the summit won’t be a rubber-stamping affair. Cameron will be determined to placate the many euroskeptics in his Conservative party by negotiating some sort of concessions in Brussels that allows him to claim he defended British national interests.

There is likely to be fierce debate on two main points at the summit:

What will the automatic sanctions against budget rule-breakers look like? Merkel and Sarkozy haven’t given any details yet. In the past, there has been talk about halting EU subsidies, imposing fines or even withdrawing voting rights. The question about which authority will carry out and monitor the punishment also remains undecided. Will there be an Austerity Commissioner or will the punishment be decided by the EU governments? It is clear though that no country will have a veto any longer. The German-French plan envisages that only a qualified majority will be able to prevent sanctions. EU Social Social Affairs Commissioner László Andor of Hungary condemned the plan on Tuesday, saying on Twitter: “Automatic sanctions are a joke.” He added that: “Fiscal union needs collective, democratic decision making.”

What will the relationship between the 17 euro states and the rest of the EU look like? The leaders of the euro zone governments will convene once a month, according to the German-French plan, at least for as long as the crisis continues. The non-euro countries fear they will be degraded to second-class members of the EU. They want to retain a say in key decisions. The Polish government warned in a preparatory paper for the summit that the creation of exclusive structures “could deepen possible rifts,” Financial Times Deutschland reported. The British government wants written assurance that it will continue to have a say in decisions that affect Britain’s national interest. It is unclear whether Cameron will demand further concessions for his country.

If the summit decides on Friday to start amending the treaties for all 27 EU member states, a range of contentious issues will remain open, and several governments will expect some form of payback in exchange for concessions. And every such negotiating maneuver will make the talks more complicated and threaten to upset “Merkozy’s” timetable.

But the most recent warnings from ratings agency Standard & Poor’s could end up playing into their hands. The threat to downgrade the ratings of 15 euro countries has piled pressure on leaders to come up with a concrete deal in Brussels. Perhaps that is why the German government’s response to the surprise announcement, which could end up costing Germany as well as the euro rescue fund their triple-A rating, has been so low-key.

German Finance Minister Wolfgang Schäuble called on the EU to seize on the S&P warning as an incentive to regain the confidence of financial markets. After all, S&P said it would closely monitor the outcome of the EU summit.

But even if the 27 governments agree to amendments in record time, further dangers will loom when nations set about ratifying the changes. The Irish could trigger the next euro crisis if they held a referendum with a negative outcome. Dublin has said there will have to be a referendum, regardless of how limited the amendments turn out to be.

EU critics in Ireland would find it easy to mobilize voters fed up with the austerity program imposed last year in return for EU aid. They would only have to label the planned automatic sanctions as a German-French dictate.



Why is EU treaty change needed to stabilise euro?
08 December 2011, 13:42 CET
— filed under: Finance, public, debt, treaty, FACTS
(BRUSSELS) – Potentially explosive EU treaty change takes centre stage at an EU summit opening Thursday as Europe’s power couple Angela Merkel and Nicolas Sarkozy push to throw a fiscal strait-jacket on the eurozone.

The French-German demand for a rewrite of the European Union rulebook, which history has shown to be a long and politically dangerous road, aims to enshrine tough rules ensuring budgetary rigour across the 17 nations sharing the euro.

Nations agree tighter rules and better policing can help overcome the debt crisis in the long term, but are sharply divided over how to implement change and how far to go.

Question: Why treaty change?

Answer: Because Berlin wants it. As one European diplomat put it: “The Germans fundamentally feel they were wronged by agreeing to replace the deutsche mark with the euro because member nations failed to respect the rules of the game demanding budgetary discipline in return.”

Given the failure of the initial and loosely-implemented Stability and Growth Pact governing the single currency, which France and Germany were the first to flout in 2004, Merkel is now calling for a “fiscal union” carving rules in stone that would be legally binding.

Q: What changes are under consideration?

A: Germany had wanted the European Court of Justice to have the authority to sanction repeated budget offenders, but France was cool to that idea. So the suggestion is for the court to verify states meet the obligation of introducing a so-called “golden rule” into their legislation, requiring a balanced budget. This way, eurozone debt levels could be brought back within a fixed threshold. Sanctions would be automatic and immediate and Brussels could be given guardianship of countries in dire straits.

Special powers too could be conferred on a European commissioner to step in and intervene directly in national budgets when deemed necessary.

Q: Are all the changes about tightening fiscal discipline?

A: No. EU president Herman Van Rompuy wants to also improve economic policy convergence in the 17-nation eurozone on issues such as tax, which Ireland is expected to resist to safeguard its cheaper corporate tax.

With national interests and political stakes at play, others may demand a quid pro quo, notably Britain which has already threatened to scupper a deal failing EU pledges to protect the country’s profitable financial sector.

Q: How can the treaty be changed?

A: How to change the EU’s rule-book is highly contentious. Because of a widening rift between the 17 eurozone nations and the 10 states outside the single currency, the European Commission wants treaty change to be submitted to the entire 27 to avoid deepening the chasm.

But the leaders will be asked to consider a change affecting only eurozone countries — as treaty change requires ratification by unanimous vote. This is when non-euro members, such as British Prime Minister David Cameron, may be tempted to ask for a pay-back. Under pressure from eurosceptics in his Conservative party, he could even ask to repatriate powers touching on labour laws and financial regulation to London.

Q: Can it be done quickly?

A: This is likely to be the crux of the problem. The European Commission and Van Rompuy see a quick light option to the fore for the most urgent changes — a deal during the summit to amend Protocol 12 of the Lisbon Treaty which would speedily reassure the markets. It would need approval by parliaments and would take two to three months in all.

But Germany, which has an almost religious belief in the constitution, is opposed because it would not enable tougher automatic sanctions against debt and deficit offenders.

Carving into stone quasi-automatic sanctions against sinners would require a “limited” treaty amendment of Article 136 that would take up to two years to implement. It would stunt a country’s ability to wriggle out of sanctions by changing voting procedures and bolster the Commission’s right to meddle in national budget plans.

Q: What does Germany want?

A: Germany is digging in its heels for the second longer option. But if this is rejected by the 27 leaders or gets bogged down in political haggling, then it could be put to the 17 eurozone nations under a simpler intergovernmental procedure likely to lead to a two-speed Europe.

December 7, 2011
On Eve of Key Meeting, New Rifts on Euro Emerge

PARIS — Disagreements over how to enforce better economic discipline and centralized oversight over nations in the European Union emerged on Wednesday, the day before a crucial summit meeting to deal with the euro crisis, including disputes over how extensively and how quickly to change European treaties.

French officials promised not to leave Brussels until a “powerful” deal was reached to save the euro. But senior German officials expressed more pessimism, saying that Berlin opposed a “quick fix” agreement. Instead, they insisted on full treaty changes and disagreed with the idea of combining two bailout funds, one temporary and one permanent, to create a larger pot of money to protect Italy and Spain.

Britain said that it would ask for special protections if there were any treaty changes, raising the possibility that changes would be limited to the 17 nations of the euro zone and those who want to join, and not to all 27 members of the European Union.

Still, Wednesday was a day of some posturing and public negotiating by national officials who demanded anonymity, with different nations staking out their positions before the meeting begins in earnest late Thursday afternoon.

“It’s internal politics,” said a senior European official. “This is macho-style, old politics.”

German officials sounded the toughest, seeing this summit meeting as a chance to achieve permanent changes to the way the euro is managed, an important goal for them. The Germans want firmer debt limits and sanctions for violators written into the treaty. They prefer a treaty of all countries in the European Union, even though the changes would apply only to countries in the euro zone.

But treaty changes can take two years and could involve a referendum in Ireland and other nations, so European Union officials, wanting to move quickly, have been exploring other options. In a paper that emerged on Wednesday, the president of the European Council and of the euro zone, Herman Van Rompuy, suggested a fast-track route to a “fiscal compact” that would avoid the problems and delays of a full treaty change.

The idea laid out by Mr. Van Rompuy, who organizes the European summit meetings, would avoid a full treaty change, which could involve a convention, referendums or parliamentary ratification, but it would still achieve much of what Germany wants.

This would mean amending a protocol of the treaty; leaders would simply have to consult with the European Central Bank and the European Parliament. Under this plan, also supported by the president of the European Commission, José Manuel Barroso, leaders could ensure that countries write into their own law an obligation “to reach and maintain a balanced budget over the economic cycle.” This could be complemented with pledges of “automatic reductions in expenditures, increases in taxes or a combination of both” if the rule was broken.

Britain insisted that such an amendment would still require at least parliamentary ratification, and a senior German official, briefing reporters, decried the quick fix as “a typical Brussels bag of tricks” and a “rotten compromise.”

More fundamental changes that would assure fully automatic sanctions against budget sinners, and give European institutions the power to overrule national budgets, would require full treaty change.

The German official said he was “more pessimistic than last week about reaching an overall deal,” adding, “A lot of the protagonists still have not understood how serious the situation is.” Berlin’s idea appeared to be to increase the pressure on partners to come to terms that Germany favored.

The American Treasury secretary, Timothy F. Geithner, was building the pressure in a softer way on Wednesday. He continued his public tour of meetings with German, French and Italian leaders to underscore how important reaching a deal this week was to the Obama administration. The administration says it believes that the euro zone crisis is dragging down the global and the American economy and could cause another full-fledged banking crisis.

But one senior European official said that an answer might be a “two-phase solution,” with a quick change to the protocol followed by work on treaty change.

European officials say that a less ambitious but faster strengthening of euro zone discipline will be more credible with investors and the European Central Bank than the promise to make larger reforms that could take two years to put into place.

As one French official said Wednesday, “The E.C.B. is not going to commit suicide” and oversee the destruction of the euro currency it is charged with keeping stable.

But Austria, like Germany, also tried to play down expectations for a “quick fix” solution to the euro crisis. The summit meeting “will not meet the goal of creating a comprehensive firewall for the euro zone for the next three to five years,” Austria’s chancellor, Werner Faymann, told lawmakers in Vienna, speaking of the effort to create a large “wall of money” in bailout funds to protect vulnerable euro zone states.

What was achievable, however, he said, was a “massive increase in voluntary coordination,” including measures to encourage greater budgetary discipline and to sanction countries running excessively high deficits.

The Americans have regularly counseled using ready bailout money as a firewall in the crisis. But it has not been easy for the Europeans, as they have tried to leverage a temporary, 440-billion-euro European Financial Stability Facility upward. One French-German idea is to move forward, to 2012, the establishment of the larger, permanent 500-billion-euro European Stability Mechanism. But Berlin is rejecting the idea of running the two in parallel.

The Europeans are also talking to the International Monetary Fund, where Washington has the largest voice, about helping to enlarge the firewall with money that the European central banks could loan to the fund.

An announcement is also expected late Thursday on how European banks would comply with the tougher capital requirements.

Steven Erlanger reported from Paris, and Stephen Castle from Brussels.

Latest update: 23/10/2011
– debt – European Union – eurozone – financial crisis – history – Nobel Prize – USA

US history holds key to resolution of eurozone debt crisis, Nobel laureates say
US history holds key to resolution of eurozone debt crisis, Nobel laureates say
Thomas Sargent (right) and Christopher Sims (left), winners of the 2011 Nobel Prize for economics, said Tuesday that a decision by the first 13 US states to combine their individual debt under a federal government holds the key to the EU debt crisis.
By News Wires (text)

AFP – The American winners of this year’s Nobel prize in economics said Tuesday that the solutions to the eurozone crisis are clear, economically, and the issue is mainly political.

New York University’s Thomas Sargent, who with Princeton University colleague Christopher Sims captured the annual prize for economics, said the history of the founding of the United States shows what the issues and solutions are.

“There are no new issues in economic theory with Europe and the euro… the difficult thing is the politics,” Sargent told a news conference in Princeton.

“In the 1780s, the United States is a basket case,” he said, with 13 sovereign governments — the 13 original states — each of which could raise taxes and print money.

Meanwhile, he said, the new country had a very weak center, not having yet established a central bank or gained taxing power.

“Does this remind you of anything?… They (the states) all have debt, and the center has debt. Like eurobonds, they are going at deep discount.”

Sims said the crisis of the European Monetary Union, focused now on Greece’s inability to service its debts, and with two other members, Ireland and Portugal, in tough bailout programs, was predictable — and that he had predicted it.

“I wrote a paper a few years ago on the precarious fiscal foundations of the EMU,” Sims said hours after the Nobel announcement.

“The euro was founded with a central bank but no unified fiscal authority,” he said, which “raised questions about what would happen when the need for fiscal and monetary coordination arose.”

The eurozone nations “will have to work out a way to share fiscal burdens and connect fiscal authorities to the ECB,” the European Central Bank.

to share fiscal burdens and connect fiscal authorities to the ECB

“Right now none of those connections are clear… and the prospects for the euro are dim.”

Sargent said the way the 13 states came together in 1787 to combine their debt under the new federal government and allow the federal government to levy taxes to be able to service the debt points the way for the eurozone.

a huge, complex and bold political decision.

But he said achieving that took a huge, complex and bold political decision.

“We were born with a determined solution to the problem that Europe is facing now. And it was a comprehensive solution,” he told journalists.

“It was all done simultaneously, through a process that looks like a miracle.

“The older you get, and the more you watch Europe, the more miraculous that you will see.”

Kicking out a weak eurozone state — as is often suggested for Greece — is not the solution, Sims added.

The notion “that things will get settled in the euro only if some weak countries leave is unrealistic,” he said.

“It’s in no sense a cure for the problems that face the euro.”

Longtime freinds and sometime rivals, Sims and Sargent, both 68, were named Monday as this year’s winners of the Nobel prize for economics for the work analyzing the causal relationships between economic activity and policy actions.
IMF denies report on $600 billion lending facility
4:56pm EST

(Reuters) – The International Monetary Fund on Wednesday denied a report in Japan’s Nikkei newspaper that the Group of 20 nations were planning to assemble a $600 billion IMF lending facility that could be used to bolster euro zone countries.

“There has been no such discussion with the IMF,” an IMF spokesman said in response to the Nikkei report.

Separately, a G20 official also said the report was untrue.

(Reporting by Leslie Wroughton in Washington and David Lawder in Milan, Editing by Chizu Nomiyama)

Geithner Sees ‘Progress’ in Efforts to Shore Up Euro
Published: December 7, 2011

PARIS — Germany helped allay market jitters Wednesday with a successful bond offering, as the United States Treasury Secretary Timothy F. Geithner stressed the importance of restoring confidence in the euro for growth around the world.

European leaders are to gather Thursday night in Brussels to begin seeking agreement on the latest series of measures to support euro-zone governments that are facing a crisis of confidence in their finances.

After meetings in Germany on Tuesday, Mr. Geithner arrived in Paris for talks with French officials including Prime Minister François Fillon and President Nicolas Sarkozy.

Mr. Geithner said he had confidence in what French officials “are doing with Germany to try to build a stronger Europe,” adding that he was “encouraged by the progress they’re making.”

“I want to emphasize again how important it is to the United States and to countries around the world that Europe succeeds in this effort to build a stronger Europe, and I’m confident they will succeed,” he added.

He spoke as the German Finance Agency sold €4.1 billion, or $5.5 billion, of 5-year debt securities at an average yield of 1.11 percent, up slightly from the 1.0 percent it paid to sell similar debt on Nov. 2. Investors had been watching the auction carefully, after a November offering of 10-year bonds flopped, sending markets reeling.

This time, there were a healthy 2.1 bids for each of the 5-year bonds sold, up from 1.5 on Nov. 2. Stock markets in Europe were generally flat Wednesday, after early gains.

“Today’s tender reflects volatile and uncertain market conditions,” Reuters quoted the agency as saying in a statement. “Investors are looking for, and trust, the quality of the paper from the euro zone’s benchmark issuer.”

The European Union’s main bailout fund, known as the European Financial Stability Facility, will provide another test of investor confidence later this month, when the German debt management office begins auctioning the fund’s 3-, 6- and 12-month bills.

“The launch of a short-term funding program is in line with the enlarged scope of activity of E.F.S.F. to use its new instruments efficiently,” Klaus Regling, the fund’s chief executive, said Wednesday in a statement.

The fund currently enjoys the highest short-term credit ratings from all three of the major agencies, Standard & Poor’s, Moody’s Investors Service and Fitch Ratings.

But analysts are skeptical that it can maintain that rating if the top-rated European governments cannot maintain their own ratings.

S.&P. warned Monday that the ratings of 15 euro-zone countries, including Germany and France, faced a possible downgrade, and it said Tuesday that the bailout fund also faced a downgrade if top governments’ ratings were cut.

The fund said the auctions would be held “before year end.”

Annie Lowrey contributed reporting.

Why The Latest Euro Bank Bailout is Bullish for America
By Stephen Gandel | @stephengandel | November 30, 2011 | 14

The bottom-line truth about today’s Federal Reserve-led coordinated effort by six of the developed worlds’ central banks to ease the liquidity problems of European financial institutions is this: It doesn’t change anything. European leaders still have the same tough decision to make. Either impose even stricter austerity measures on Europe’s struggling nations or force Germany and other stronger European nations to come forward with an even bigger bailout, or, of course, kiss the Euro good-bye. And in fact that choice got a little tougher last night, after European bank leaders said that the plan to lever up the funds already in place to help the struggling Eurozone nations may not work.

stricter austerity measures
bigger bailout
the funds may not work
slow the entire global economy

Another wrinkle: If the move leads to an even bigger bailout the result could be a new round of inflation, particularly in the emerging market countries. That would lead to more rate hikes in China and elsewhere, which could slow the entire global economy.

So if that’s the case, why did U.S. stocks, which have taken a beating recently on fears that the Eurozone’s problems will spread to U.S. banks and the rest of the American economy, rise 490 points on Wednesday on news of the latest effort to prop up Europe’s banks? As one analyst put it, the amount of people who bought stocks this morning on the news that central banks around the world were lowering currency swap lines probably far outweights the number of people who know what currency swap lines are.

In fact, the deal struck today says more about the strength of the U.S. and the U.S. economy than it does about how and whether Europe’s issues will be resolved.

some Euro banks would fail

The latest European bank bailout measure is a coordinated effort by six central banks, but the heavy lifting is being done by the U.S. Fed. Recently, overnight lending rates among European banks had been rising on fears that some Euro banks would fail, and not be able to pay off their debts. It turns out the plan to relieve this problem is to put more U.S. dollars in the hands of banks around the world. The six large central banks – including the Bank of Canada, the Bank of Japan, the European Central Bank and others – have all agreed to allow their local banks to effectively borrow dollars at half the rate that they used to be able to. That should drive down lending rates, because if you can get dollars for cheap to fund your short-term borrowing costs why would you do anything else.

The effort is being made possible by the U.S. Fed, which has agreed to make the dollars available to the other five central banks to lend to their local banks. And the Fed has agreed to keep the rate low on dollars for those other central banks until February 2013.

There was a fear after the financial crisis, and there still is, that the U.S. would lose its place as the leading financial power, and all the advantages that entails. But even after the financial crisis, the crippling recession and the building up of $15 trillion dollars in debt, America remains the world’s lender of last resort. The move today by central banks, and the fact that the bailout deal is being made in dollars, says that, for all the worry about the fall of the American economy, the U.S.’s standing in the world remains, for now at least, strong. So strong, that essentially the U.S. is setting rates low for the rest of the developed world through early 2013. And that alone should make U.S. investors feel better about the U.S. economy and stock market, even if they don’t know for certain what currency swaps are – or that they won’t do all that much to solve Europe’s true problems.

Stephen Gandel is a senior writer at TIME.

Read more:
Monday, Aug. 22, 2011
The End Of Europe
By Rana Foroohar

Britain is burning. Strange that it should be so. After all, the catastrophic economic news of recent days, including the highly controversial downgrading of U.S. debt by Standard & Poor’s, the burgeoning euro crisis in continental Europe and the market turmoil that followed both, has been made in New York City, Brussels and Berlin, not in the streets of North London. But if you look closer, it all makes sense. Britain, like the U.S., has been a center of both great wealth creation and a widening wealth divide over the past 20 years, thanks to the rise and, more recently, fall of the markets and global economic growth.

Now the U.K. is sharing the suffering of the rest of Europe — namely, deep budget cuts that are hurting vulnerable populations the most. As youth programs, education subsidies and housing allowances are axed by a state desperate to get out from under crushing sovereign debt, it’s clear why the poorest populations in the most economically unequal large European nation are taking to the streets. (See the 25 People to Blame for the Financial Crisis.)

The only surprising thing is that it didn’t happen sooner. We’ve known since the beginning of the financial crisis and subsequent economic downturn that the world order was changing in profound ways. But we’ve tried to wish it all away with talk of temporary blips and cyclical recessions. We’ve come up with every possible excuse, from tsunamis to a lack of market certainty, to explain why rich-country economies aren’t rebounding.

But the past two weeks of dismal economic news have made the new reality impossible to ignore: the West — and most immediately Europe — is in serious trouble. This is no blip but a crisis of the old order, a phrase once used by historian Arthur Schlesinger Jr. to describe the failures of capitalism in the 1920s. It is a crisis that is shaking not only markets, jobs and national growth prospects but an entire way of thinking about how the world works — in this case, the assumption that life gets better and opportunities richer for each successive generation in the West.

As bad as things might seem in the U.S., the smoldering center of the crisis is Europe. Volatile continental markets and angry demonstrations from Athens to Madrid are manifestations of the desperate scramble by European politicians to contain the euro-zone debt crisis that threatens to unravel the single currency and destabilize the region. The European Union and the euro zone were supposed to bring about economic stability and remove traditional barriers to growth, such as tariffs and regulations. Instead it’s become a selfish union in which flailing economies feed rising nationalism, angst over immigration and simmering distrust between rich and less affluent countries. “Europe is at the center of the global financial problems,” wrote Michael Hartnett, chief global equity strategist for Bank of America Merrill Lynch, in a recent note to investors. “Those problems have been exacerbated by the inability, or the unwillingness, of policymakers … to address the debt issues.”

Why the Euro Is Everyone’s Problem

While the crisis may seem to be Europe’s problem, if it results in a breakup of the euro zone or even a growth-dampening series of costly bailouts, it will reverberate from Beijing to Boston and back. Europe is the largest trading partner of both the U.S. and China. It’s home to one of the world’s largest pools of wealthy consumers. If they stop buying our stuff, everyone suffers. Meanwhile, a dramatic depreciation of the euro or a dissolution of the union would make nations from Asia to Latin America that hold the euro as a reserve currency much weaker. Even the mere effort to contain the crisis with looser monetary policy on either side of the Atlantic creates a risk of inflation and hot money that could punish emerging markets, economists like Goldman Sachs’ Jim O’Neill have warned.

See the top 10 government showdowns.

The worries have now come to a head. Borrowing costs for Europe’s weaker economies, like Greece, Ireland, Portugal, Spain and Italy, have skyrocketed as halfhearted measures to stabilize markets have made investors suddenly wary that the European center is not going to hold and that richer countries like Germany simply aren’t committed to the monetary union. That’s why bond spreads are widening, European stocks are tanking and the European Central Bank is desperately trying to calm markets by buying up weaker countries’ debt.

All this could have happened six months ago or three months ago or three months from now. But the crisis exploded in the past week because of the slow-growth news coming out of the U.S. As improbable as it sounds, “Europe’s Plan A, B and C was to outgrow its debt problem via the normalization of the economic situation in the U.S.,” says Harvard economist Kenneth Rogoff. “When they saw the U.S. growth numbers coming in so much weaker than they expected, it became clear that the world wasn’t going to normalize. And they panicked.” (See 5 Economists Judge Congress’s Last-Minute Debt Bargain.)

While economists were betting on 4% growth in the U.S. earlier this year, numbers released in recent days show that the American economy grew a paltry 1.3% in the second quarter of this year, after a truly anemic first-quarter figure of 0.4%. With growth like that, we can’t even save ourselves from 9%-plus unemployment at home, let alone save the world. The much feared 2% economy, now the consensus prediction for U.S. growth this year, has become a reality. We are no longer the economic counterweight to Europe. We are Europe.

According to Rogoff, the pre-eminent seer of the crisis, who wrote the sovereign-debt history This Time Is Different: Eight Centuries of Financial Follies with economist Carmen Reinhart in 2009, Europe and the U.S. are not experiencing a typical recession or even a double-dip Great Recession. That problem can ultimately be corrected with the right mix of conventional policy tools like quantitative easing and massive bailouts. Rather, the West is going through something much more profound: a second Great Contraction of growth, the first being the period after the Great Depression. It is a slow- or no-growth waltz that plays out not over months but over many years. That’s what happens after deep financial crises that require bailouts by beleaguered states, which are then left with few resources and tools to cope with a stagnant, high-unemployment environment rife with populist politics, social instability and violence of the kind we’ve most likely only begun to see in the streets of Athens and London.

It’s a very different era than the historically exceptional period of rapid global growth from 1991 to 2008, the period in which the European Union, the euro and the dream of greater European integration were born. The linchpin of this age of optimism was, of course, the U.S. It helped rebuild Europe after World War II and toppled its main ideological competitor, the Soviet Union. The dollar and U.S. government debt, backed by America’s well-functioning democracy and strong growth prospects, remained the largest, most liquid and (seemingly) safest investments on the planet. It was in this environment, in which all boats were rising, that the euro began to gain strength.

Needless to say, the global picture has changed. It is a measure not only of the long tail of America’s special position in the global economy but also of just how bad things are in Europe and elsewhere that there hasn’t been a rush out of U.S. Treasuries. Following the S&P downgrade, ascribed to our slower growth and debt-ceiling shenanigans, investors piled into Treasuries as the market tanked. China, the largest foreign holder of T-bills, issued a stern warning to the U.S. to “cure its addiction to debt.” But central bankers from Beijing aren’t breaking down doors in Frankfurt to convert their dollar holdings to euros. The euro is the only viable alternative to the dollar as a global reserve currency. The British pound is history, and emerging-market currencies are still too small, volatile and controlled. And while plenty of investors are fleeing into gold, the world gold market isn’t big enough to accommodate serious dollar diversification without massive inflation in gold itself. Prices are already at record levels.

See how F.D.R led the U.S through a depression.

It’s unclear at this stage whether the euro will even survive the debt crisis that has engulfed Europe, one that is in many ways worse than the one we’re experiencing in the U.S. On the surface, the picture doesn’t seem so bleak. After all, the average euro-zone deficit is only 6% of GDP, compared with 10.6% in the U.S., and Europe’s debt-to-GDP ratio, while similar to America’s, isn’t rising as fast. The difference is that the U.S. has time and favorable borrowing rates on its side; Europe has neither. Also, the U.S. can tackle its fiscal problems if it finds the will to rise above partisan politics; the politics of the E.U. — and in particular its lack of true political integration — makes it impossible for it to actually get to the root of the euro crisis.

That’s because the euro zone is essentially a selfish union. Europeans want to benefit economically from their proximity to one another and want at all costs to avoid expensive and destructive wars — either trade or shooting — with their neighbors. Beyond that, many of their political, cultural and social agendas diverge. At each stage in the development of modern Europe, from the creation of the European Union to the introduction of the euro, it has always been difficult to get nations to agree to deeper political integration, which is hardly surprising given what a heterogeneous place Europe is. That’s why in 2005 voters rejected a European constitution that would have required member states to cede much more power to the E.U. (See photos of the dangers of printing money.)

The Casino Continent

The result is a monetary union that can sometimes resemble a casino. The existence of a European Central Bank (ECB) means that countries like Greece, Belgium and Ireland are free to borrow from the credit window and take on more debt than they can handle. But the fact that there’s no centralized political control or accountability means that more-prudent member countries like Germany have no way to stop weaker states from undermining the viability of their shared currency.

Of course, there’s also no one to tell Germany that it shouldn’t let its state-owned banks leverage themselves 50 to 1 on junk assets. The hypocrisy of it all is evidenced by the fact that nearly all the euro-zone countries have flouted the core economic rule that in theory limits annual budget deficits to 3% and debt-to-GDP ratios to 60% for all members. “We created the stability pact as a set of rules for the euro. But it has become a pact of cheaters and liars,” says Jean Arthuis, a centrist politician and head of the finance commission in the upper house of France’s Parliament.

The euro zone’s early doubters always believed that Greece or other weak nations would cheat on the deficit issue. The result now is a continent — and a common currency — that is shaky, requiring perhaps trillions in capital injections from France and Germany, first among others, into a rescue fund to prevent the euro’s collapse.

Even in good times, it is never easy to balance the fiscal needs of a high-cost exporter like Germany with those of cheap and cheerful service economies like Greece, Spain and Portugal. In bad times, it’s impossible. The poorer peripheral countries in Europe used to be able to devalue their individual currencies to maintain global competitiveness. Post-euro, with that quiver removed, they have two choices. They can make painful structural reforms that are unpopular with voters, including cutting welfare programs, reforming tax collection, trimming pensions and increasing competitiveness by working harder and longer (starting with the politicians currently sunning themselves while the euro crumbles). Or they can borrow from the ECB and hope to grow their way out of trouble. It’s obvious from the debt loads of European nations which road was chosen. “Europe is about to blow,” says Rogoff. “There is no longer any question of standing still … They are going to have to fix things at home.”

See the top 10 things you didn’t know about money.

That’s not so easy on a continent with a currency and a monetary system underpinned by multiple political systems, economies and fiscal priorities. Figuring out how to bail out the euro zone is a lot tougher than figuring out how to bail out the U.S. financial system, although throwing money at the problem is a certainty. For starters, there’s no single institution or figure, like former Treasury Secretary Henry Paulson, that can marshal the troops and put together a TARP-style program for indebted nations. The head of the ECB, Jean-Claude Trichet, has been trying to play that role, buying up billions of euros’ worth of shaky Italian and Spanish bonds. But even as the two most important leaders in Europe, German Chancellor Angela Merkel and French President Nicolas Sarkozy, have been patting him on the back for his efforts, they’ve also been reluctant to get serious about giving more money to the euro-zone rescue fund that was set up to deal with crises exactly like this one. (See the five destructive myths about the economic recovery.)

The message is clear: the two strongest nations in the euro zone don’t yet have the stomach to commit to saving the common currency. The markets, which as ever loathe uncertainty, have reacted badly because investors know the ECB’s efforts are just a Band-Aid. The central bank simply doesn’t have the firepower to stem the crisis.

How to Bail Out Europe

There is a way out. Germany, one of the strongest and most solvent economies not only in Europe but in the rich world, could swoop in and save the day by leading an effort to guarantee all Spanish and Italian debt as well as the debt of the major European banks. This would calm markets. But it would be hugely expensive, not to mention politically contentious. After all, why should prudent Germans — who have their economic house in order — have to rescue a bunch of spendthrift, books-cooking Greeks and Italians? It’s a tough sell politically, as evidenced by a June poll showing that 71% of Germans have little confidence in the euro, up from 46% in 2008.

The reality is, the Germans are in for pain no matter what. Euroskeptics like to argue that Europe might be better off economically without the common currency — the Germans would enjoy the privileges of a strong deutsche mark, and Greece could devalue the drachma enough that its hotels would be full of even more sunburned German tourists. But if the euro goes under, most experts believe there would be, as HSBC chief economist Stephen King put it, “unmitigated financial chaos.” Skyrocketing borrowing costs for many of Europe’s slow-growth, highly indebted countries would result in a recession or even a depression that wouldn’t leave Germany unscathed. After all, about 40% of German exports stay in Europe. Meanwhile, competitors like Italy (which has a strong manufacturing sector) could nibble at Germany’s economic edge by offering lower prices thanks to their highly devalued currency.

Bailing out Europe would represent a huge economic and political cost. Assuming it became politically acceptable, Germany would need to be able to make sure that Portugal, Italy, Greece and Spain — and any other European “PIGS” — cleaned up their act. And that, in turn, would require a real political union in Europe, one in which Brussels, the euro capital, and perhaps to a disproportionate extent Berlin had control of the purse strings and fiscal policies of the euro zone.

See “The Euro Crisis: How Much Worse Can It Get?”.

As difficult and politically improbable as it sounds, experts like Rogoff, as well as many politicians and economists in Europe, believe it will happen, and possibly quite soon. But that would be only the beginning of the hard work. Fixing the crisis of the old order will require serious reforms of everything from Europe’s sclerotic labor markets to its still vulnerable financial sector. (American banks, despite their troubles, are much better run and capitalized than European ones.) Most important, it will require painful and deeply unpopular austerity measures that could lead to more violence among populations already struggling to cope with the downturn.

Rioting of the kind we’ve seen in London and Athens is just one side effect of the new age of austerity. Populist politics is another. Just as the economic downturn in the U.S. helped fuel the Tea Party, Europe’s debt crisis is fueling a resurgence of polarizing, right-wing politics embodied by figures like Marine Le Pen in France. Xenophobia and anti-immigrant sentiment are rife, a fact most dramatically illustrated by the mass shootings at a Norwegian youth camp in July. Even in mainstream politics, there’s a sense that unity is impossible. Within the past few months, Sarkozy, Merkel and British Prime Minister David Cameron have all spoken about the end of the European dream of multiculturalism.

The turmoil is a portent for the U.S. We are ultimately facing the same problem as old Europe: how to grow amid a continuing downturn when the public sector can’t or won’t spend more to jump-start the economy. It’s clear that we’ve still got a lot of work to do before that problem is solved.

In the meantime, both Europe and the U.S. will continue to struggle with the crisis of the old order. Populations will have to come to terms with no longer being able to afford the public services they want. Investors will have to cope with a world in which AAA assets aren’t what they used to be. Businesses will deal with stagnating demand, and workers will face flat wages and high unemployment. All this will take place at a time that is in many ways the opposite of the optimistic two decades that preceded the financial crisis. Think the 1970s, without inflation (though there are those who think a whiff of inflation to wipe out debt might not be a bad idea). It’s the end of an era in which the West and Western ideas of how to create prosperity succeeded. The crisis in Europe and the challenges yet to come on either side of the Atlantic take us into a whole new era. The rules and risks of it are only just becoming clear.

a whole new era

Wednesday, Dec. 07, 2011
Europe’s Financial Crisis
By Ishaan Tharoor
time 10 best of anything

The aftereffects of the financial crisis laid bare the clumsy and at times irresponsible state of affairs underlying growth and prosperity in a number of euro-zone economies, particularly in Greece

The aftereffects of the financial crisis laid bare the clumsy and at times irresponsible state of affairs underlying growth and prosperity in a number of euro-zone economies, particularly in Greece, where a proposed IMF and European bailout package mandated crippling budget cuts and other austerity measures. In response, tens of thousands took to the streets in Athens and elsewhere to protest the prevailing financial institutions and feckless political elites that got them into the mess in the first place. Similar antiausterity demonstrations rocked Spain, where the indignados, the outraged, occupied Madrid’s iconic Puerta del Sol square for weeks.

In both countries, incumbent governments fell and beleaguered Prime Ministers departed. The threat of fiscal contagion from Greece spreading elsewhere pushed Italy — the euro zone’s third biggest economy — to the brink and forced the departure of controversial Prime Minister Silvio Berlusconi, a man who had been unbowed by an earlier string of sex and corporate scandals. The crisis has strained the very fabric of the E.U. and threatened the dissolution of the common euro currency, as disgruntled voters in Germany — the continent’s main economic engine and biggest lender — and elsewhere chafe at Brussels-imposed austerity measures and at their own governments’ obligation to bail out struggling neighbors.


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