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May 30, 2012

HERE COMES THE GERMAN PANZER

The End of Germany’s Illusions

A Commentary by Stefan Kaiser

Chancellor Merkel must give up more power to save the euro.

Germany’s booming economy and plummeting unemployment has long insulated the country from the euro crisis on Europe’s periphery. Those times, however, are coming to an end. The German economy is now showing it is vulnerable after all, and Chancellor Merkel will now be forced to make sacrifices.

There they are again: the traders with sad eyes and the stock price displays showing jagged lines sloping downward. In the last 10 days, the DAX, Germany’s blue-chip stock index, has fallen by 16 percent. On Monday it fell below the 6,000 point benchmark for the first time since January and has continued its plunge on Tuesday. Has the crisis, which for so long seemed to leave Germany untouched, finally reached Europe’s largest economy?

The stock slump is a warning signal, just as it was last summer, when the DAX lost 30 percent within just a few weeks, sparking a wave of politicking. One euro summit followed the next, resulting in ever larger bailout funds. Meanwhile, the German government tried to battle the problem by simply banning certain bets on sinking share prices. The widespread belief in Germany was that only the financial markets were acting up.

That is probably the biggest problem the Germans have in the now two-year-old euro crisis. For Germans, it was always a crisis that belonged to others — the Greeks, Portuguese, Spanish and Italians. That is, those who didn’t have their finances in control and were expected to kindly atone for it by adopting the German model. Back home in Germany, by contrast, the economy was booming and people had work. In a sea of misery, Germany was an island of bliss.

Fears Justified

But now, though, even its most stubborn adherents have begun realizing that this concept cannot work. The falling stock prices are just one of many indicators. Corporate purchasing managers have been reporting unfavorable outlooks for months in surveys, and in May the Ifo business climate index, one of the country’s leading economic pulse checks, fell for the first time in half a year.

Even Germany’s export-driven auto industry, typically spoiled by success, registered some major setbacks in May. Compared to the same month last year, domestic production dropped by 17 percent, while exports were down 13 percent. Though May 2011 was a record year for the industry, it still looks as though the European auto sales crisis has finally reached Germany too. Across the EU auto sales went down by 7 percent in April, year on year.

German companies fear that the crisis, which began on the outskirts of Europe only to edge ever closer to the center, will reach them too. The fear is justified. A national economy cannot remain separate from these developments in the long term. The business world recognizes that demand from the countries in crisis is collapsing, and they realize that this could be just the beginning.

Is the Party Over?

The fact that Germany has felt so little of the crisis so far is due largely to emerging markets like China, India, Brazil and Russia. Their economies booming, companies and consumers in developing economies were eagerly buying German products. In 2011, for example, China bought a record number of German cars.

But things are cooling off here too. The Chinese economy has long since ceased to grow as quickly as it did a year ago, while Russia feels the effects of the crisis in the form of currency turbulence. Not to mention that the United States, the biggest economy in the world, is also suffering major problems. The party in Germany could be over soon.

This makes it all the more important to finally grasp just how deeply mired in the crisis we are. Staying out of it is no longer an option. As far as Asia or the US are concerned, the differences have long since blurred. When investors lose their trust in the euro zone and take their money out of Europe, Germany too will feel the effects.

Letting Go of Power

Thus it is in Germany’s interest to solve the life-threatening problems within the currency union both swiftly and sustainably. But steps more radical than Germany has been willing to take will be necessary to achieve this — and that goes for both Chancellor Angela Merkel’s government and the German people at large, who have vehemently rejected the prospect of their country having to give up any power or money to save the euro.

But that’s what it must come down to in the end. Without an economic government and a true fiscal union, the euro won’t survive. Some elements have already been established. European leaders already have significant influence on the budgets of those countries in crisis. Furthermore, the planned fiscal pact, agreed on by 25 of the EU’s 27 member states at a summit in January, also requires signatories to pursue fiscal responsibility. But these measures are both incomplete and provisional.

Saving the euro requires European countries, including Germany, to give up more sovereignty and to accept more joint decisions. Ultimately, it also requires euro-zone countries to be collectively liable for their debts.

Nearly half of Germans polled want Greek euro exit
5 Jun 2012
Afraid of what the Greek crisis is doing to the eurozone, many Germans would welcome Greece’s exit from the euro. (file photo)
Afraid of what the Greek crisis is doing to the eurozone, many Germans would welcome Greece’s exit from the euro. (file photo)
Nearly half of Germans want Greece to leave the euro zone and a third is very afraid that the country’s debt crisis could threaten the euro, a poll in Stern magazine showed on Tuesday.

According to a survey of 1,001 Germans conducted by Forsa research institute, 49 percent of those polled want Greece to quit the single currency while 39 percent want it to stay.

Nearly two thirds want German Chancellor Angela Merkel to keep insisting that Greece stick to agreed austerity measures despite growing criticism of this course in other euro zone countries such as France, the poll said.

The Greek election on June 17, the second in two months, is widely seen as a referendum on whether the debt-laden country should stay in the euro zone and press on with painful reforms or leave and go back to its old drachma currency.

Polls suggest the vote could go either way, with support for pro- and anti-austerity parties finely balanced.

In Tuesday’s survey, nearly two thirds of Germans expressed a lack of understanding for those Greeks who want to vote for opponents of austerity measures.

A third said they would have second thoughts about spending their holidays in Greece at the moment.

Greece’s income from tourism dropped 15 percent in the first quarter, with fewer holidaymakers from Germany and Britain, Greece’s biggest tourist markets. (Reuters)
Spain says markets closing on it, seeks help for banks
ReutersReuters – 1 hour 27 minutes ago

Spain’s Treasury and Public Administration Minister Cristobal Montoro listens to a question during a news conference after a cabinet meeting at Moncloa palace in Madrid June 1, 2012. REUTERS/Andrea ComasView Photo

Spain’s Treasury and Public Administration Minister Cristobal Montoro listens to a question during a news conference after a cabinet meeting at Moncloa palace in Madrid June 1, 2012. REUTERS/Andrea Comas

By Julien Toyer and Tetsushi Kajimoto

MADRID/TOKYO (Reuters) – Spain said on Tuesday it was losing access to credit markets and Europe should help revive its banks, as finance chiefs of the Group of Seven major economies conferred on the currency bloc’s worsening debt crisis but took no joint action.

Treasury Minister Cristobal Montoro sent out a dramatic distress signal about the impact of his country’s banking crisis on government borrowing, saying that at current rates, financial markets were effectively off limits to Spain.

“The risk premium says Spain doesn’t have the market door open,” Montoro said on Onda Cero radio. “The risk premium says that as a state we have a problem in accessing markets, when we need to refinance our debt.

Spain is beset by bank debts triggered by the bursting of a real estate bubble, aggravated by overspending by its autonomous regions. The premium investors demand to hold its 10-year debt over the German equivalent hit a euro era high last week on concerns it will eventually have to take a Greek-style bailout.

Montoro said Spanish banks should be recapitalized through European mechanisms, departing from the previous government line that Spain could raise the money on its own.

The European Union’s top economic official, Olli Rehn, said Madrid had not requested EU assistance but other sources said a lot hinges on an independent audit of the capital needs of Spanish banks, which is due to report soon.

Sources in Berlin and Brussels denied a report in German newspaper Die Welt that European officials were considering offering Spain a precautionary credit line via the bloc’s rescue fund by mid-June.

Two Spanish government sources had said earlier that Madrid neither needed or wanted such a line.

“Nothing is being prepared, nothing has been asked for,” a senior euro zone source told Reuters.

Another euro zone source pointed to the Spanish bank audit as the next pivotal moment. One option being discussed in some euro zone capitals was for money to be handed to the Spanish bank rescue fund FROB to avoid the government having the stigma of asking for aid, a third source said.

Montoro’s comments on Spain’s borrowing sent the euro down after the 17-nation European currency earlier hit a one-week high against the dollar on hopes that a conference call of G7 finance ministers and central bankers might hasten action.

The U.S. Treasury, which chaired that meeting, said in a statement that the G7 discussed “progress towards a financial and fiscal union in Europe” and agreed to monitor developments closely. But the group made no joint statement and took no immediate steps.

White House economic adviser Michael Froman said the EU had done a lot to address its debt problems but more action was required to reduce market anxieties.

“Europe has taken a number of very important steps in the last months to address the crisis,” Froman told a panel at the CSIS think-tank. “It’s clear now from the markets that they expect more, and more is needed.”

Japanese Finance Minister Jun Azumi said the G7 finance chiefs agreed to work together to deal with the problems facing Spain and Greece, where elections later this month could push Athens closer to the euro exit door.

“I see market anxiety over world economy largely stemming from Europe’s problems,” Azumi told reporters in Tokyo.

“BIGGER SOLUTION”

European leaders, alarmed by the latest turn of events, have begun thinking seriously about the economic union needed to make the single currency project secure. But that end-game is months or years away.

“What we have learnt since the weekend is that all the talk about a bigger solution, a bigger response from the politicians is gaining some steam,” said Rainer Guntermann, strategist at Commerzbank in Frankfurt. “At the same time it doesn’t look like they have a quick fix at hand, not a fundamental game changer at this point in time.”

One senior European G7 source, speaking just before the teleconference, said it was set to turn into a “Germany-bashing session”, with other partners applying severe pressure on Berlin to do more to stimulate growth and help the euro zone.

The source, who requested anonymity due to the confidential nature of the call, confirmed that Germany was pushing Spain to accept international aid, as Greece, Ireland and Portugal have done, to help it recapitalize stricken banks.

“They don’t want to. They are too proud. It’s fatal hubris,” the source said of the Spanish government.

Berlin and the European Central Bank have so far resisted pressure from Madrid to ride to its rescue without forcing Spain into the humiliation of an internationally supervised bailout.

French Foreign Minister Laurent Fabius said Europe must find a solution to the Spanish banking crisis that did not add to Madrid’s already heavy budget deficit.

The ECB holds its monthly rate-setting meeting on Wednesday and European Union leaders meet on June 28-29 to discuss a strategy for overcoming the crisis, which began in late 2009 when Greece revealed it had covered up a huge budget deficit.

MOUNTING CONCERN

Emilio Botin, chairman of Spain’s biggest bank, Banco Santander told Reuters Spanish banks needed about 40 billion euros in additional capital.

Montoro said the bank recapitalization figures were “perfectly accessible” but analysts were perplexed about his comments on Spain’s ability to raise debt.

Spain will test the market on Thursday by issuing up to 2 billion euros ($2.5 billion) in medium- and long-term bonds at auction.

His comments appeared aimed at pressuring the ECB and EU paymaster Germany to find ways of helping. But the central bank has so far shunned calls to resume purchases of Spanish government bonds, and Berlin has rejected allowing direct aid from the euro zone’s rescue fund to recapitalize Spanish banks without setting conditions for the government.

The festering euro zone crisis has sparked mounting concern outside Europe. On Monday, a G7 source said fears that capital flight from Spain could escalate into a full-fledged bank run had triggered the emergency conference call.

Pressure is building in particular on Germany, the biggest contributor to euro zone rescue funds, to back away from its prescription of fiscal austerity for the region’s weaker economies and to work harder on fostering growth.

Berlin argues it is already doing its share by encouraging generous domestic wage settlements, accepting the prospect of higher-than-usual German inflation and most recently agreeing that Spain should have more time to achieve its fiscal targets.

Chancellor Angela Merkel opened the door on Monday to the prospect of a euro zone banking union in the medium term, saying she would consider the idea of putting systemically important cross-border banks under European supervision.

However, Berlin is so far resisting a joint deposit guarantee for euro zone banks and a bank resolution fund, both of which would create new liabilities for German taxpayers.

A German government strategy paper seen by Reuters showed Berlin does not expect final decisions on strengthening economic policy coordination until March 2013, with only a roadmap being agreed at this month’s summit.

(Additional reporting by Jan Strupczewski in Brussels, Annika Breidthardt, Noah Barkin and Andreas Rinke in Berlin, Stella Dawson and Matt Spetalnik in Washington, Ana Flor and Alvaro Soto in Brazil, Fiona Ortiz in Madrid. Writing by Paul Taylor, editing by Mike Peacock)
Merkel calls for quick ratification of EU bailout fund
By blade
Created 04/06/2012 – 21:42

Chancellor Angela Merkel Monday stressed her determination to ratify the EU bailout fund and fiscal pact before the German parliament’s summer break amid reports she could add growth measures to the text.

A statement released after a meeting of the three party leaders in Germany’s fractious ruling coalition said they “reiterated their intention to ratify the ESM and the fiscal pact before the summer break and so to offer a sign of stability.

“The leaders of the coalition parties support the federal government’s policy to overcome the European debt crisis. They emphasise that all instruments stand ready to secure eurozone banks,” the statement added.

The meeting was called to iron out several internal rifts in Merkel’s government, including disputes over nursery places, Germany’s shift away from nuclear power and a proposed road toll.

Merkel needs the support of the opposition centre-left Social Democrats to ratify the fiscal pact in the Bundestag lower house of parliament as a two-thirds majority is required to pass the law.

The parliament’s summer break begins on July 6.

Designed as a successor to the EU’s current bailout fund, the European Stability Mechanism has core funds of 500 billion euros ($624 billion) to help struggling eurozone countries deal with the debt crisis.

The fiscal pact, pushed through by Merkel, is a new EU treaty designed to toughen budgetary discipline along German lines. It has been signed by all EU countries except Britain and the Czech Republic.

The SPD has called for various stimulus measures to be added to the text of the fiscal pact to shift Europe’s crisis-fighting efforts from austerity to growth.

Meanwhile, business daily Handelsblatt reported in its Tuesday edition that Merkel had made concessions to the SPD on several fronts, including on a mooted financial transaction tax opposed by her junior coalition partner.

Europe mulls major step toward “fiscal union”

6:40am EDT

By Noah Barkin and Daniel Flynn

BERLIN/PARIS (Reuters) – When Jean-Claude Trichet called last June for the creation of a European finance ministry with power over national budgets, the idea seemed fanciful, a distant dream that would take years or even decades to realize, if it ever came to be.

One year later, with the euro zone’s debt crisis threatening to tear the bloc apart, Germany is pushing its partners for precisely the kind of giant leap forward in fiscal integration that the now-departed European Central Bank president had in mind.

After falling short with her “fiscal compact” on budget discipline, German Chancellor Angela Merkel is pressing for much more ambitious measures, including a central authority to manage euro area finances, and major new powers for the European Commission, European Parliament and European Court of Justice.

She is also seeking a coordinated European approach to reforming labor markets, social security systems and tax policies, German officials say.

Until states agree to these steps and the unprecedented loss of sovereignty they involve, the officials say Berlin will refuse to consider other initiatives like joint euro zone bonds or a “banking union” with cross-border deposit guarantees – steps Berlin says could only come in a second wave.

The goal is for EU leaders to agree to develop a road map to “fiscal union” at a June 28-29 EU summit, where top European officials including European Council President Herman Van Rompuy will present a set of initial proposals.

European countries would then put the meat on the bones of the plan in the second half of 2012, several European sources have told Reuters, including a timetable for overhauling EU treaties, a step Berlin sees as vital for setting closer integration in stone.

“The fundamental question is relatively simple. Do our partners really want more Europe, or do they just want more German money?” a government official in Berlin said.

If European countries go ahead, the steps would represent the most significant policy leap since they agreed to give up their national currencies and cede control over monetary policy 13 years ago. But the hurdles are daunting.

“The world is not coming to an end; rather, it feels as if we are on the doorstep to another major European integration move,” said Erik Neilsen, chief economist at Unicredit. “But why do these initiatives only come when we are on the edge of the cliff where the risk of an accident is so much higher?”

HOLLANDE QUANDARY

Spain, whose banking troubles have made it the latest target of financial markets, signalled over the weekend that it was on board with a key element of the plan.

Prime Minister Mariano Rajoy backed the creation of a new euro-wide fiscal authority of the kind Trichet sketched out in a speech in Aachen, Germany last year.

But other states, including the bloc’s second-biggest member France, have deep reservations about ceding so much sovereignty.

New President Francois Hollande rode to victory in a French election last month promising new steps to boost growth. At the EU summit later this month, he and other leaders were expected to gang up on Merkel, pressing her for new growth-enhancing measures.

But after a series of modest concessions from the German leader, a loose consensus on a growth strategy already appears to have been reached weeks before the leaders meet.

Now, the main focus of the summit seems likely to be on steps needed for a “fiscal union”, a debate which puts Hollande in a far more difficult position, even if people who know him well say his vision of Europe is much closer to the federalist German model than those of his Gaullist predecessors.

“It’s a big challenge for Hollande,” said a senior French official who declined to be named. “I think that he is ready for (closer fiscal integration) but I think the rest of the French political class – both on the left and right – is not.”

The hope in Berlin and other capitals is that if leaders can present a credible plan for moving towards a fiscal union, further contagion – even in the event of a Greek exit from the euro zone – can be limited, one senior central banker said.

But even if the Germans do win over the French and other sceptical countries like Finland and Austria, there are serious doubts about whether a 5-10 year plan for closer integration – weighed down by lengthy national debates over treaty change – will be enough to restore investor confidence now.

That means for some time the European Central Bank will remain the institution capable of acting quickly to avert disaster.

Even though it has made clear it wants governments to sort out the mess, a strong signal of intent from EU leaders could encourage the Frankfurt-based ECB, particularly if progress is made towards the sort of bloc-wide banking structures it has pressed for.

“The European leadership is working feverishly on the necessary fundamental changes, while the ECB no doubt stands ready with the fire hose if anything goes wrong in the meantime,” Neilsen said.

SPANISH BANKS

On top of Greece, Spain’s banking sector, dragged down by bad property debts, is a huge concern that continues to undermine faith in the bloc’s ability to get a grip on its crisis.

Germany is pressing Madrid to accept aid under the bloc’s rescue funds so that it can recapitalize its stricken financial institutions, multiple sources have told Reuters.

But the Spanish government is resisting, fearful of the stigma attached to a formal state rescue. It is trying to convince its partners to let EU bailout funds bypass the state and funnel aid directly to banks – a step Berlin opposes.

As long as the Greek nightmare continues and doubts about Spain’s banks persist, no amount of closer integration is likely to calm investor nerves.

The ECB is already girding, however reluctantly, to counter any new turmoil in the months ahead.

One ECB source told Reuters the bank had a number of tools at its disposal to tide the bloc over, including cutting interest rates and launching a third round of cheap loans to banks via a so-called Long Term Refinancing Operation (LTRO).

It is much less keen to revive its government bond-buying program.

Another problem with the German-led drive is that of democratic legitimacy.

Many of Europe’s struggling citizens already blame technocrats in Brussels for their troubles. And lawmakers across the bloc are keen to safeguard their right to veto EU decisions.

Against that backdrop it will be extremely difficult for leaders to convince their electorates about the integration steps under consideration in Berlin and other capitals.

To address this, officials are mulling a significant strengthening of the role of the European Parliament (EP), which is directly elected by the bloc’s citizens.

A German official at a European institution said, for example, that oversight powers for the bloc’s permanent rescue fund – the European Stability Mechanism (ESM) – could be transferred from national assemblies to the EP.

The French official said it would inevitably fall to the EP to monitor the European Commission if it won new powers over national budgets.

“The issue is that democratic control will now take place at a European level, and not at a national one,” the official said. “I think the problem is not so much the European people but the European politicians who don’t want to relinquish their power. There you will see a lot of resistance.”

(Reporting by Noah Barkin, Daniel Flynn, Andreas Rinke, Paul Taylor, Ilona Wissenbach, Julien Toyer, editing by Mike Peacock)

Euro exit would mean the death of Greece, Samaras says
3 Jun 2012

Greece’s possible exit from the eurozone would be tantamount to “death”, the New Democracy (ND) leader said on a televised interview on Skai tv station on Sunday, warning that the threat of a return to the drachma was very real at the June 17 election polls.

At the same time, addressing representatives of the tourism sector on the island of Rhodes on Saturday night, Samaras said that the ‘battle for growth’ would begin with the tourism sector and marine infrastructures, and pledged to establish an autonomous Ministry of Tourism as well as an autonomous Merchant Marine ministry.

Samaras pledged that, if ND was elected to government, there will be no more reductions of salaries or increases in taxes, adding that the 18 measures for boosting growth he announced last week while unveiling ND’s economic platform will “remedy” injustices, such as those suffered by the low-pension earners, certain categories of beneficiaries and special benefits.

Samaras further criticised the Syriza platform, saying it was not cost-estimated and gave no numbers, while he also opined that Syriza has a “secret agenda” on taxes.

Reiterating that a renegotiation of the Memorandum is necessary, Samaras said that Europe is obliged to take a big decision to minimize its tough policy by adopting, as a first step, the eurobond.

The ND leader further pledged to ‘travel the world over’ in order to attract investments to Greece, noting that great interest already existed on the part of China and Russia.

On the immigration problem, Samaras said that he will change the existing law and proceed with mass deportations of illegal immigrants. “I know that what I’m saying is tough, but there’s no other solution. We must create a new Athens, a new Patras, and restore the people’s sense of security in the cities and the villages,” he said.

Rhodes meeting with tourism industry reps

Speaking to tourism industry representatives on the island of Rhodes on Saturday night, Samaras said that Greece will wage the battle for growth through tourism, something that can be done immediately.

Stressing that tourism is a major pillar of growth as it directly ensures jobs and can lead to growth without delay, and reiterated his pledge for establishing an autonomous Ministry of Tourism that would be directly under the jurisdiction of the prime minister, as well as an autonomous Merchant Marine ministry.

He stressed the need of marine tourism a priority, including the construction of marinas and development of alternative forms of tourism. (AMNA)
Watch for avalanche of sell orders Monday
June 1, 2012, 6:11 PM

Monday’s trading will be the first opportunity stock investors in the U.S. will have to act on a major technical violation that occurred at Friday’s close: The breaking of the 200-day moving average.

This could result in an avalanche of sell signals hitting the market at Monday’s open, since many technical analysts use the 200-day moving average as the dividing line between bull and bear markets. They consider the primary trend to be up so long as the market is trading above its 200-day moving average, and that this trend turns to bearish whenever the market closes below this average—and that is what happened at Friday’s close.

Though the market doesn’t always fall off a cliff upon breaking the 200-day moving average, that certainly is what happened the last time the market broke this key technical level.

That occurred last Aug. 2, on which day the S&P 500 closed at 1,251.46. At its intra-day low just one week later, on Aug. 9, the S&P stood 150 points lower at 1101.54—an extraordinary decline of 12% in just five trading sessions.

Traders beware.

-Mark Hulbert
Activity in manufacturing sector improves again

Updated: 08:06, Friday, 1 June 2012
May’s PMI rise to 51.2 from 50.1 in April

Companies also took on extra staff last month to deal with increased workloads and the rate of job creation was solid.

However, cost inflation remained high amid rising fuel prices and other oil-related products.

The NCB purchasing managers index rose to 51.2 in May from 50.1 in April. Any figure over 50 signals growth in an area, while a figure under 50 signals contraction.

The index has been over 50 for the past three months.

NCB said that the most surprising aspect of the report was the fact that the employment index rose for the third month in a row, which means that more firms increased their employment levels than cut jobs.

Today’s survey reveals that new business at manufacturing companies increased for the fourth month in a row in May, with firms linking the growth to higher new export orders. New business from overseas rose at a solid pace as companies were able to generate sales from outside the troubled euro zone, NCB noted.

The higher level of new orders led firms to increase production last month and output rose slightly after a fall in April. Production has now risen in three of the past four months.

Companies also increased their headcounts for the third month in a row in May and NCB said the pace at which staff were taken on was the fastest since March 2011.

However, the survey also noted that the rate of inflation of input prices remained sharp in May. The rises were mainly due to higher costs for fuel and other oil-related products. But strong competition largely prevented companies from passing on increased costs to customers and prices charged were actually reduced marginally.

Referring to the higher employment levels, NCB’s chief economist Brian Devine said there was a 2.4% quarter on quarter increase in industrial employment in the fourth quarter of 2011. ”The evidence from the PMIs would suggest that this trend has continued into the first quarter of 2012,” he added.
Euro zone interbank rates fall close to record low

Updated: 15:58, Tuesday, 29 May 2012
inShare

Interbank rates in the European Union fell close to record low levels this afternoon.
Analysts expect the ECB to extend its Long-term-refinancing-operation.
Analysts expect the ECB to extend its Long-term-refinancing-operation.

Analysts attribute the fall to abundant euro zone central bank funding and expectations that the European Central Bank will inject more funds.

The main euro zone interbank rate, the three-month Euribor, was at 0.673%, near the record low level of 0.634% on March 31, 2010.

At the end of October, amid high tension over the ability of the EU to put together a second debt rescue for Greece and concerns about the banking system, this rate had risen to 1.592%.

The one-month Euribor rate fell to a record low level of 0.386%. The six and nine-month Euribor rates were just 0.01% points away from record low levels.

The fall was triggered in December when the European Central Bank launched its first three-year long-term financing operation for banks on easy terms, and then launched a second operation at the end of February.

Under these facilities, euro zone banks borrowed €1.018 billion.

But one bond strategist, who declined to be named, commented that the fall in rates “is not the result of a perception that risk has fallen.”

Only big banks are currently lending to each other on the interbank market, for limited amounts and for very short periods, several observers said.

New risk ratios and capital adequacy rules, known as Basel III, strongly discourage bank to lend to each other because such operations come under a category of increased risk.

The effect of the open-ended three-year funding provided by the ECB is beginning to fade, traders said.

But the interbank rates continue to ease slightly because of anticipation that the ECB will soon take new action to contain stresses in the euro zone, from the political crisis in Greece and now a banking crisis in Spain.
Spanish rescue draws closer as Cyprus buckles
Spain’s ruling party has begun to crack under pressure, signalling for the first time that the country may need a European rescue to shore up its banking system.

By Ambrose Evans-Pritchard

7:39PM BST 03 Jun 2012

Spanish officials denied the claim but Mr Benyeto’s comments have caused deep confusion. He contradicted a speech on Saturday by premier Mariano Rajoy, who vowed once again that Spain would recover under its “own strength”.

Mr Rajoy demanded intervention by the ECB to cap bond yields and warned the EU authorities that they too had to deliver on their side of the bargain as his country swallows austerity.

“One must insure that the euro continues to be the currency of our countries. If it is urgent to solve Spain’s situation, it is equally urgent to solve the problems of the whole eurozone. Spain is one factor among many others in this situation. It is not the only one, and it is not the worst,” he said, calling for an EU “fiscal authority” and use of the European Stability Mechanism (ESM) to recapitalise banks.

Top EU officials are drafting a “master plan” for a Brussels summit this month but it will focus on the future shape of the EU in 10 years’ time. The drafters are powerless in the face of the immediate crisis. Berlin has a de facto veto on all key decisions.

The ECB has so far sat on the sidelines as spreads on 10-year Spanish bonds reached a record 496 basis points over Bunds. The ECB is wary of moral hazard but critics say it is a dangerous game for bureacrats to force democracies to their knees by switching intervention on and off. In this case it is spreading contagion to Italy and risks igniting a tinderbox.

Ms Merkel is herself under massive pressure from Europe’s Latin bloc and world leaders. Leaks of a teleconference call on Wednesday reveal that France’s François Hollande, Italy’s Mario Monti and US president Barack Obama launched a three-pronged attack, pressing Ms Merkel to drop Germany’s veto on the use of EU rescue funds for banks.

The trio repeated their demands three times with mounting tension. Each time she answered no, first in English, and then in German for precision, according to details obtained by Italy’s La Repubblica.

“Germany does not want the fund to spend billions in exchange for collateral from ruined banks. I don’t see why we should end up holding bits of bankrupt lenders,” she reportedly told them.

All three warned that if Spain is forced to request a sovereign rescue – as Germany demands – it will be deemed insolvent by markets. The EMU crisis will become much more dangerous.

Critics doubt whether a surgical bail-out of €50bn to €90bn is possible. Alberto Gallo from RBS said Spain will need €370bn to €450bn to tide it through to 2014, pushing its debt to 110pc of GDP.

A key reason is the cancerous precedent of the Greek haircut deal, in which private investors were left with all the losses. Once the ESM starts lending to Spain, others creditors are instantly pushed down the ladder or “subordinated”.

Losses will be larger if Spain ultimately needs to restructure. Stuart Thomson from Ignis Asset Management says this may well happen. He predicts haircuts of up to 50pc for Spanish bondholders.

Any rescue must be huge enough to fund Spain’s total debt needs for the foreseeable future. Theoretically, the EU bail-out machinery has deep pockets. Whether it can actually raise such sums from global investors – and cope with contagion to Italy at the same time – is untested.

Gary Jenkins from Swordfish said half-measures are no longer enough. “We may be approaching the endgame where either the eurozone or the ECB takes action to stem the bleeding or the whole thing collapses,” he said.

Meanwhile, a Greek exit from the eurozone will be on the agenda if Athens fails to impose austerity measures required in its EU-IMF bailout deal, French Finance Minister Pierre Moscovici has said.

“The question would be raised without a doubt…. if the Greeks themselves do not respect their commitments,” Mr Moscovici said on French television, adding that he hoped Greece would remain in the eurozone.

Three Months to Save the Euro: George Soros
Published: Sunday, 3 Jun 2012 | 7:46 AM ET

By: Catherine Boyle
Staff Writer, CNBC.com

Euro-zone governments have around three months to ensure the survival of the single currency, billionaire investor George Soros said in a speech on Saturday.

“We are at an inflection point. After the expiration of the three months’ window, the markets will continue to demand more but the authorities will not be able to meet their demands,” he warned in a speech at the Festival of Economics in Trento, Italy. (Read the text of his speech.)

The European Union is “like a bubble” – not a financial bubble but a political bubble — that could pop as a result of the euro -zone crisis, Soros said.

“In the boom phase, the EU was what the psychoanalyst David Tuckett calls a ‘fantastic object’ – unreal but immensely attractive,” he said.

“In retrospect, it is now clear that the main source of trouble is that the member states of the euro have surrendered to the European Central Bank (ECB) [cnbc explains] their rights to create fiat money. They did not realize what that entails – and neither did the European authorities,” he said.

The euro zone needs a European deposit insurance scheme for banks, Soros said, as well as direct financing by the European Stability Mechanism (ESM) for banks, which “must go hand-in-hand with euro-zone-wide supervision and regulation.”

The “blockage” at the moment is coming from the Bundesbank and the German government, he said. German Chancellor Angela Merkel has been cautious about increasing Germany’s support for the rest of the euro [EUR=X 1.2415 -0.0017 (-0.14%) ] zone.

Soros believes Germany will eventually do what it takes to keep the euro zone going because of the large losses German banks would suffer if it broke up and the damage to exports which could be caused by a return to the Deutschmark, which would likely be substantially stronger than the euro.

“A German empire with the periphery as the hinterland,” could be the result of the current predicament, he warned.

The ECB has been instrumental throughout the crisis and its liquidity injection via a long-term refinancing operation helped boost European markets earlier this year, giving policy makers some much-needed breathing space.

Soros said that too much blame had been placed on peripheral euro-zone countries such as heavily indebted Greece and Spain, and that creditors like Germany had to share responsibility.

“The “center” is responsible for designing a flawed system, enacting flawed treaties, pursuing flawed policies and always doing too little too late.

“In the 1980s, Latin America suffered a lost decade — a similar fate now awaits Europe,” he said. “That is the responsibility that Germany and the other creditor countries need to acknowledge.”

Soros argued that the focus on austerity instead of growth had been a mistake by the European authorities.

“The authorities didn’t understand the nature of the euro crisis; they thought it was a fiscal problem, while it is more of a banking problem and a problem of competitiveness.

“The authorities didn’t understand the nature of the euro crisis; they thought it was a fiscal problem, while it is more of a banking problem and a problem of competitiveness. And they applied the wrong remedy: You cannot reduce the debt burden by shrinking the economy — only by growing your way out of it,” he said.

“The crisis is still growing because of a failure to understand the dynamics of social change; policy measures that could have worked at one point in time were no longer sufficient by the time they were applied,” he said.

These views are echoed by well-known economists including Paul Krugman. An increasing number of politicians in the euro zone are also arguing for less austerity and more promotion of growth. The debate has come to prominence during both the Greek election campaign and the Irish referendum on the EU fiscal pact for euro-zone-wide austerity measures.
Safe haven stocks for rocky times
May 23, 2012

John Collett finds the silver lining for investors in the Aussie’s latest slide against the greenback – and shares with good yields offer the best prospects.

The news couldn’t be worse. Continuing woes in the euro zone, weak US economic data and concerns about weaker growth in China have left Australian investors with a bad case of the jitters. They’re asking why they should be exposed to the sharemarket when they can get good returns on term deposits that have the backing of the government on deposits up to $250,000.

Professional investors, on the other hand, get paid to see past the latest set of gloomy economic numbers. And despite the challenges, some are daring to feel moderately optimistic.

”I think things are starting to move in the right direction,” the chief investment officer at Maple-Brown Abbott, Garth Rossler, says.
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”The Australian dollar is down 8¢ against the US dollar and interest rates are down,” he says. ”These are positive factors,” says Rossler, who has managed money since 1985.

The lower Australian dollar helps exporters and inbound tourism, while lower interest rates help consumer confidence. Australian share prices are back to where they began the year. As for the past two years, the initial run-up in Australian share prices faded as fears over the global economy increased.

Almost any company that’s considered to have a reliable dividend yield, such as Telstra, property trusts and infrastructure, has done well.

But offsetting the winners are the ”cyclical” stocks: those whose fortunes are tied to the economic cycle – resources companies and building materials, for example, which have done poorly, the head of Australian equities at Schroder Investment Management Australia, Martin Conlon, says.

He says, however, that Schroder’s valuations are pointing towards industrials, banks and large resource businesses as offering superior prospective returns in the long term over companies with defensive cash flows that have had sharp run-ups in their share prices.

But others are still very cautious on cyclical shares.

The head of equities at Morningstar, Andrew Doherty, says the company is ”still encouraging investors to focus on income because of the slow-growth environment”.

With trouble in Europe and around the world, investors cannot expect strong capital-value increases, he says. Solid businesses producing good yields seem to offer the best prospects.

BETTER THAN CASH

Rossler says that although we’re going to have continuing volatility, investors are better off in shares than cash. Term-deposit interest rates are on their way down and further cuts to the cash rate are expected.

Even though many shares paying high dividends have had a good run, some still offer good value as well.

Telstra has had a very good run during the past year. The stock is on a yield of about 8 per cent after franking credits. ”It is not as cheap as it was but its yield is still very attractive,” Rossler says.

Doherty also likes Telstra. ”Even now, it is attractive buying,” he says. ”The National Broadband Network payments are a boon for Telstra and the strong cash flows should allow the company to lift its dividend.”

Morningstar analysts are forecasting the telco will lift its dividend to 33¢ a share (it is currently 28¢) from 2014. ”There is good growth in the mobile business and, in a market where there is great uncertainty, here is a stock with fairly certain earnings growth and an attractive yield,” Doherty says.

Fund managers also like marketing and distribution company Metcash for its defensive earnings and a fully franked yield of about 10 per cent.

The head of company research at fund manager Constellation Capital, Brian Han, says Metcash is the ”standout on the yield front”.

He says although Metcash is a low-growth business, the share price still has upside. Rossler also likes Metcash and has it in his portfolio.

INTEREST-RATE CUTS

”I think there are good opportunities in the market and good underlying fundamentals for some stocks where their value is not reflected in their share prices,” the head of research at ATI Asset Management, David Lui, says.

He likes Wesfarmers, the conglomerate that owns, among other businesses, Coles, Kmart, Officeworks and Bunnings, as well as a coal business and a fertiliser business.

”We like the diverse nature of the [Wesfarmers] business,” Lui says. ”We think that over the next six months, it may be an out-performer, thanks to interest-rate cuts, which is beneficial to 70 per cent of its business [the retail component].”

Doherty also likes Wesfarmers. ”Through its restructuring, it is delivering good growth,” he says.

Among the ”growth” shares, Lui says CSL is a standout at the moment. He says the blood-products maker has been capturing market share against its peers, has a share buy back in place (which supports the share price) and is benefiting from the lower Australian dollar.

The share price has risen by about 20 per cent over the past few months, but Lui believes there is potential for it to go higher.

INCOME V GROWTH

The chief investment officer at Insync Funds Management, Monik Kotecha, says that over time, income-oriented shares have done a lot better than growth-oriented shares.

The Insync Global Titans Fund holds shares in between 10 and 15 companies, including Australian offerings. He says that in Australia, the fund manager focuses on companies with ”predictability and consistency of earnings”. He nominates Transurban, the toll-road operator, as a ”wonderful” business and a ”compelling” investment from among the yield-oriented shares.

It has interests in six toll roads in Australia and two overseas. Most are in urban locations where there is traffic congestion, and on most of the toll roads the operator is allowed to increase tolls in line with inflation or more, Kotecha says. In Sydney, it has the Hills M2, which is being widened, and it bought the Lane Cove Tunnel at a good price, he says. The yield is just over 5 per cent but is growing and, with that, the share price should also grow, he says.

Kotecha also likes Coca-Cola Amatil. It is a company that should be in every investors’ portfolio, he says. The core business is in Australia and New Zealand, which produce 80 per cent of profits, but the company has a major position in Indonesia. Coca-Cola will benefit from exposure to this major emerging market, Kotecha says.

The head of company research at Constellation Capital Management, Brian Han, likes Brambles, which services the essential-goods sector with the supply of pallets, and the building materials company James Hardie. They pose a higher risk, with large exposure to the US, but will benefit from the lower Australian dollar. They are lower-yielding, Han says, with low franking levels, but have conservative balance sheets.

Golden rules for banks and miners

The backbone of many share portfolios are the big banks, BHP Billiton and Rio Tinto. Banks and resources are the dominant sectors of the Australian sharemarket.

Credit growth is slow, after growth rates of about 15 per cent during the years prior to the GFC.

That is a challenge for the banks. But they are enjoying strong deposit growth and have been able to manage their way through sluggish economic conditions with low levels of bad or doubtful debts.

The banks have pricing power, as shown by the way they can set their interest rates on their loans independently of the changes in the cash rate. That has allowed them to protect their profits.

ANZ is the pick of the big banks for David Liu of ATI Asset Management.

”ANZ is at the top because of its growth profile due to its strategy of growing its business in Asia,” Liu says.

The strategy does not come without risks but it is the best relative value from among the big banks, Liu says.

It is also on a good yield of more than 8 per cent after franking credits.

For Garth Rossler of Maple-Brown Abbott, Westpac is the favoured bank. ”Westpac has been a little bit ignored by the market, though its share price has come back in the last month or so,” he says.

It is on a high yield and in a strong capital position.

Among the resources companies, Martin Conlon of Schroders says he has been surprised by how badly BHP Billiton and Rio Tinto have done relative to the market and to other resources companies.

A portfolio needs to have exposure to resources and Conlon favours the big miners.

He says there are risks that commodity prices could fall and investors want to be exposed to the miners that have the lowest operating costs and the best mines.

He leans towards BHP Billiton ”primarily because we are more cautious on iron ore than other people,” he says.

About 40 per cent of Rio Tinto’s earning are from iron ore. Morningstar’s Andrew Doherty prefers BHP Billiton to Rio Tinto because it is more diversified with more exposure to energy, for which demand will keep increasing.

Read more: http://www.smh.com.au/money/investing/safe-haven-stocks-for-rocky-times-20120522-1z1uq.html#ixzz1wh4XraNn

Dollar sinks, stocks to fall after US data disappoints
June 2, 2012

The Australian dollar sank to its lowest mark against the greenback in almost eight months overnight and local shares are poised to resume their slide after weak US jobs figures added to concerns about the strength of the global economy.

The Aussie dollar hit 96.34 US cents before clawing back to trade near 97 US cents, capping five weeks in a row of losses against the greenback.

Local shares are set to sink when they open on Monday, with SPI200 futures down 58 points, or 1.4 per cent, to 4012. A loss of that amount would drag the ASX200 index near the key 4000-point mark, a level it’s not breached since November 28 last year.
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The renewed slump on global markets will add pressure on the Reserve Bank to cut its cash rate again when it meets to set interest rates on Tuesday. Investors view the likelihood of another 50 basis-point cut as a 50-50 chance, with a 25 basis-point reduction deemed a certainty. Economists, though, are divided on whether the central bank will lower the cash rate or leave it at 3.75 per cent.

Jobs disappoint

The latest round of market turmoil was triggered a rise in the US unemployment rate in May to 8.2 per cent, from 8.1 per cent, after the world’s biggest economy added the fewest jobs in a year.

The poor US employment result capped a week of disappointing economic numbers from Europe and China, and raised doubts that the American economy will be able to drive a global revival.

“The picture is getting more worrisome,” said Bruce Kasman, chief economist for JPMorgan Chase, which lowered its 2012 growth forecast to 2.1 per cent from 2.3 per cent after the jobs report. “The US economy is going to be somewhat softer over the next couple of quarters.”

On Wall Street, the Dow Jones Industrial Average lost 2.2 per cent, the broader S&P 500 shed 2.5 per cent and the Nasdaq sank 2.8 per cent on the jobs figures.

European markets also retreated, with London’s FTSE100 falling 1.1 per cent, France’s CAC40 dropping 2.2 per cent and Germany’s Dax dived 3.4 per cent.

BHP, Rio

Australian resource producers may have a rough start to next week, particular those in the energy sector, after oil prices sank 3.8 per cent in New York to the lowest level in eight months.

BHP Billiton shares fell 0.8 per cent in New York trading, while Rio Tinto’s US-listed shares fell 1.2 per cent.

Gold miners, though, may buck the downward trend after prices for the precious metal surged by the most in 10 months on expectation that the faltering US economy will prompt the Federal Reserve to embark on another round of monetary easing to spur growth.

Gold futures leapt 3.7 per cent to $US1622 an ounce, reversing much of May’s 6 per cent retreat.

Australian shares posted their worst month in May for two years, shedding about 7.3 per cent or some $100 billion, as concerns about Greece’s potential exit from the eurozone flared.

Australia’s biggest export market, China, is also showing signs of slowing, denting commodity prices and cutting demand for the Australian dollar.

BusinessDay with Bloomberg

Read more: http://www.smh.com.au/business/markets/dollar-sinks-stocks-to-fall-after-us-data-disappoints-20120602-1zo06.html#ixzz1wgnceBW1

How could Spain’s ‘secure’ banks descend into crisis?

It avoided toxic derivatives and helped to rescue Britain’s lenders. But the Spanish banking sector was so laden with property debt that the eurozone’s fourth largest economy is near collapse

Heather Stewart and Jill Treanor
The Observer, Sunday 3 June 2012

A team of International Monetary Fund (IMF) experts will fly to Madrid this week. They are meant to be there for the routine annual check-up the fund carries out on all members, but it looks increasingly likely that before they leave, they will have had to draw up plans for an emergency bailout of the eurozone’s fourth largest economy. This would catapult the debt crisis into a new and dangerous phase.

Until last week, it was the prospect of make-or-break Greek elections in a fortnight’s time that was giving Europe’s politicians sleepless nights, but Spain’s bungled bailout of its fourth largest bank last weekend has forced its shaky finances to the top of the agenda.

Bankia, which has already been rescued once by the Spanish government, announced last weekend that it needed an alarming €19bn (£15bn) to patch up its finances, battered by the Spanish property crash. This was four times what had been estimated only a fortnight earlier.

With its bank bailout fund running dangerously low, the government initially proposed filling the hole with its own bonds, which Bankia could exchange with the European Central Bank (ECB) for cash. That smacked of desperation – and strayed too close to a direct bailout of the Spanish government to be acceptable to Germany and other eurozone governments, or to the ECB itself.

Without the ECB’s help, it is unclear where the cash will come from. Bankia’s plight, which is far more serious than the markets had suspected, raised questions about the rest of the country’s banking sector, which was once the bedrock of Spain’s economy.

Yields on Spanish bonds – a proxy for the rate Madrid must pay to borrow – shot up through 6.6%, well above the level usually thought to signal an imminent budget crisis. And investors have continued to withdraw assets from Spain. Latest ECB figures show that €97bn of capital, equivalent to about 10% of Spain’s GDP, was pulled out in the first three months of 2012. The yield on German bonds, however, continued to hit new lows, as nervous investors desperately sought a safe home for their cash.

Charles Wyplosz, professor of international economics at the Graduate Institute in Geneva, said: “I believe that we have reached the point of no return, where the markets have decided this is a hopeless case.”

Robert Zoellick, the outgoing president of the World Bank, warned in the Financial Times on Friday that Europe might be approaching a break-the-glass moment, “when one smashes the pane protecting the emergency fire alarm”.

This is a dramatic reversal. At the start of the crisis Spain’s banks had been held up as a bastion of strength. In the UK, as the crisis was beginning, Santander salvaged Alliance & Leicester and was used by the Labour government to help rescue Bradford & Bingley after the collapse of Lehman Brothers.

Spanish regulators were hailed for their wisdom in preventing local banks from embarking on off-balance-sheet ventures, such as the “structured investment vehicles” that came to symbolise the 2007 credit crunch. The regulators had also forced banks to amass extra capital in the good times as a cushion against bad times – a policy the UK is now trying to emulate.

But this crisis has gone on longer than any such policy could have prepared for. Analysts at investment bank UBS reckon the Spanish banking system could need as much as €120bn of fresh capital to cope with the damage being caused not by arcane credit-crunched investments but by plain bad property lending. And because they went into the crisis stronger than other banks, when others were raising capital, Spanish banks were not.

Jonathan Loynes, chief European economist at Capital Economics, says: “The Spanish banking system looks pretty hopeless: not just Bankia… It looks as though there may be other institutions hiding losses.”

Banking analysts also worry that Spain’s banks are still reliant on the wholesale money markets, something UK banks are being weaned off. Their loan-to-deposit ratio – a measure of how much banks need on top of their deposits to support their lending – is 150%.

As in other troubled member states, Spain’s banks and its public finances are locked together: banks’ balance sheets are stuffed with their own governments’ bonds. As foreign investors have avoided Spanish government bonds, the local banking sector has filled the gap.

This is potentially alarming. Loynes says: “Spain are still trying to tell us that they can muddle through on their own, but that looks very unlikely.”

A Spanish crisis has always been a far more worrying prospect than the troubles of much tinier Greece, which could still spark a serious crisis. Simon Derrick, currency strategist at BNY Mellon, says: “The problem with Spain is that it’s an order of magnitude larger than Greece. You’re talking about the eurozone’s fourth largest economy; you’re talking about a very large amount of money.”

A recent report from the Institute of International Finance, which represents the world’s banks, suggested that on the basis of the experience of Ireland, which also saw a property bubble fuelled by reckless lending, Spain’s banks could suffer losses of up to €260bn, and preventing a full-blown banking crisis could cost €60bn. Other analysts, such as those at UBS, believe the price tag could eventually be double that.

That is money that the Spanish government, already struggling to meet deficit targets set by Brussels, does not have. And the rules of the eurozone’s €500bn rescue fund, the European stability mechanism (ESM), which is due to come into full operation next month, do not allow it to lend directly to financial institutions – only to governments.

Madrid is understandably reluctant to accept that it needs a bailout from the ESM. It would probably be made in concert with the IMF and, like the “rescue” of Greece, Portugal and Ireland, would come with painful conditions. A bailout would also exacerbate the already fragile mood in the markets, with investors fretting about each other’s potential losses and which European country might be the next domino to fall.

Mariano Rajoy, Spain’s prime minister, on Saturday proposed the creation of a new fiscal authority in the eurozone that would control and harmonise member states’ national budgets and debts.

For Angela Merkel and her colleagues, seeing Spain accept a loan would be not only damaging to confidence across the eurozone, but politically painful. Unlike Greece – IMF boss Christine Lagarde told the Guardian last week that that country’s plight was “payback time” for years of tax-dodging – Spain has more or less played by the rules. Rajoy is not a reckless spender, but a right-of-centre leader who has largely followed the prescription set down by his European partners for austerity and reform – at least until the grim state of the economy made it impossible to meet the deficit targets.

Merkel last week described Spain as an ally, and said Rajoy had been handed “a difficult inheritance”. Optimists hope this natural political sympathy will help to soften Germany’s approach to embattled eurozone countries.

The European Commission last week urged leaders to allow the ESM to act directly to rescue banks, and to form a eurozone-wide “banking union” to avoid governments with weak banking sectors being picked off by financial markets. But both these proposals would require a dramatic attitude shift in Berlin.

Mario Draghi, the president of the ECB, was clearly exasperated at German intransigence last week when he told the European parliament that leaders need to show more vision: “Can the ECB fill the vacuum of lack of action by national governments on fiscal growth? The answer is no. Can the ECB fill the vacuum of lack of action by national governments on the structural problem? The answer is no.”

The Frankfurt-based bank has, by default, become the first line of defence in tackling the crisis, buying billions of euros of bonds from Italy and Spain to bring down their borrowing costs, and releasing €1tn of cut-price three-year loans to banks in December and again in February to prevent a credit crunch.

With an ECB policy meeting scheduled for Wednesday, Draghi could decide that the severity of the situation requires more emergency action, but his outburst last week suggested that he would now like to see leaders take over the situation, before it spirals out of control.

Derrick at BNY Mellon says: “He staved off a banking crisis; he bought time for the politicians to do something. The problem is, they haven’t done anything with the time he bought them.”

There is an EU summit planned for this month, but it looks increasingly as though leaders will have to take action before then to secure Spain’s finances and demonstrate that the situation can be controlled – before it spreads to Italy, or even France, and threatens the very survival of the eurozone.

June 2, 2012
In Economic Deluge, a World That’s Unable to Bail Together
By FLOYD NORRIS

Less than four years ago, with the world’s financial system in danger of collapsing, major countries managed to come together on a coordinated course that averted a global depression.

Central banks pumped vast amounts of cash into economies, and banks were bailed out, with vows that they would be subject to stronger regulation.

By early 2009, financial markets had bottomed out and begun strong recoveries. Economies were slower to follow; by last year, slow growth seemed to be the global pattern, spurring hope that the crisis had passed.

But within the last few weeks, much of that hope seems to have faded.

In Europe, the crisis has grown worse, not better, and the disputes among European leaders have intensified as much of the Continent appears to have drifted into a new recession. In China, growth remains robust by Western standards. But concern is rising over the possible end of a property boom that had been fueled in part by local government borrowing and spending.

In the United States, which had been an oasis of relative calm with a growing economy and rising employment, job growth in May, reported Friday, was a puny 69,000. To make the outlook even gloomier, earlier numbers were revised lower. That capped a series of three disappointing monthly reports.

Moreover, there seems to be little willingness — or perhaps little ability — for the major countries to act together again. Squabbles have grown, some countries are in fiscal distress, and others face daunting domestic problems. The European situation is the most pressing. Banks are under pressure in many countries, for a combination of reasons. They did not raise as much capital as they might have when markets were more buoyant last year. In some cases, they appear to have been slow to recognize their real estate loan losses.

But the most important factor may be that national governments are weak — in every way possible. There is no doubt that some countries could not afford to bail out their banks again; some, in fact, now rely on those same banks for loans to keep the governments functioning at a time when private investors are unsure about their creditworthiness. The president of the European Central Bank, Mario Draghi, suggested last week some type of common European deposit insurance and bank regulation, but there seems to be no consensus.

Nearly every major government in Europe has been thrown out by unhappy voters when an election rolled around, the latest being France. It is not a matter of left versus right. The only major leader to have been re-elected since 2008 is Chancellor Angela Merkel of Germany, but recent state elections there have been won by the opposing party, and even the German economy seems to be losing strength.

The most worrying electoral situation is in Greece, which seems to be mired in permanent recession and unable to comply with the rigid demands for austerity made by its European partners. With one election ending in deadlock among a variety of parties, it will try again on June 17. Many fear that the result could be a disorderly exit for Greece from the euro zone. Others think it could lead to the end of the euro altogether.

For governments that need to borrow money, this is either the best or the worst time ever. It is hard to believe just how low rates are for Germany and the United States. The yield on two-year United States Treasury notes is about one quarter of 1 percent. But comparable German notes this week were yielding one one-hundredth of a percent. At that rate, the government could borrow a million euros and pay 100 euros a year in interest.

But other countries have difficulty borrowing money at all, and pay far higher interest rates to get what money they can. It is not that anyone thinks the yields available on German and United States government bonds are attractive. It is that those bonds are deemed safe by fearful investors.

If throwing cash at the problem was the solution to the last crisis, now many deem that the cause of the current problems. Greece spent its way into its predicament while failing to collect the taxes it was owed and hiding the problem from the rest of Europe. But Spain was running budget surpluses before its own real estate bubble burst, leaving the government reeling. Yet all the troubled countries are being told — largely by Germany — to adhere to rigid austerity. With a common currency, it is hard to see how some of the countries can return to international competitiveness.

In the United States, the ease of borrowing has not made it politically easier to increase the pace of spending. Instead, there is the possibility of “Taxmageddon,” the threat that the unwillingness of politicians to compromise could lead to a combination of big automatic spending cuts and tax increases in 2013 that could devastate economic growth. All this is taking place in the midst of an election campaign that is widely expected to be the nastiest ever.

Moreover, the consensus that financial regulation should be strengthened and standardized has evaporated. In Europe and the United States, banks say that institutions across the Atlantic have unfair advantages, and regulators complain that the other continent has not taken the needed steps.

In the United States, a major push by the banks to weaken rules may or may not have been badly damaged by the multibillion-dollar trading loss suffered recently by JPMorgan Chase. But many in Congress, primarily but not exclusively Republicans, have gone back to the old belief that it was excessive government regulation that created the problem.

The widespread pessimism could dissipate as rapidly as it accumulated. Some surprisingly good economic news in the United States and China would help. More important would be for Europe’s leaders to reach agreement on a course of action that offered hope for recovery in the most stricken areas of the Continent while assuring that the common financial system would have the support of common institutions if needed. Europe has previously managed to cobble together something when disaster appeared to loom, and perhaps it could do so again.

Germany — the country that would have to pick up most of the bill to rescue its neighbors — could decide that not spending the money created greater dangers. The United States could find ways to help out despite fiscal pressures and Congressional hostility to foreign aid. A new consensus on common bank regulation could emerge. But, for now at least, the outlook is far darker than it seemed to be only a couple of months ago.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Irish Approve Fiscal Pact in Referendum
Sealed ballot boxes in Dublin during the vote count on Friday. Zoom
AFP

Ireland has approved the European fiscal pact in a closely watched referendum, averting a possible setback for a key element of Chancellor Merkel’s approach to fighting the euro crisis. Although analysts say it’s a sign of support for Europe, they point out that Ireland still has more serious problems to worry about.

Amid all the doom and gloom of the escalating euro crisis, there was a rare piece of good news for European leaders on Friday, when Irish voters backed the fiscal pact in a closely watched referendum.

The Irish government declared victory based on early results, which showed the fiscal pact passing by a margin of around 60 percent in favor to 40 percent against. Official results will be announced on Friday evening. Surveys ahead of Thursday’s referendum had predicted a “yes” vote.

The government’s reaction to its victory was restrained. “It’s a sigh of relief from the government rather than a celebration,” Transport Minister Leo Varadkar told reporters.

Declan Ganley, a prominent Irish euroskeptic and leader of the Libertas political party, admitted defeat for the “no” campaign. He said Europe now needed to repay Ireland’s trust. “The majority of the electorate here have expressed trust and faith in our partners in Europe to do the right thing by us,” he told reporters. “This was the only democratic exercise on this particular treaty to be carried out in Europe.”

“It is a message of support from Ireland to Europe,” said Dermot O’Leary, chief economist at the Irish firm Goodbody Stockbrokers in remarks to the Reuters news agency. He added, however, that politicians “won’t have long to celebrate” because of other issues in the euro zone that now need their attention.

The Socialist group in the European Parliament welcomed the result. Hannes Swoboda, the head of the group, said that the Irish had “taken their responsibility to Europe seriously.”

Turnout in the referendum was low, with fewer than half of Ireland’s 3.1 million registered voters bothering to cast ballots on Thursday.

‘The Treaty Will Solve Nothing’

The fiscal pact, a pet project of German Chancellor Angela Merkel, was agreed on by 25 of the EU’s 27 member states at a summit in January. Those nations are committing themselves to stricter budgetary rules, such as reducing their budget deficits to less that 0.5 percent of gross domestic product. Only 12 of the 17 euro zone countries are required to ratify the pact for it to enter into force, but an Irish “no” would have been a setback for the initiative. Ireland is the only country holding a referendum on the pact.

A clause in the treaty states that only countries that sign up to the pact will be granted access to money from the European bailout fund in the future — meaning a “no” vote would have cut Ireland off from possible emergency funding after the current bailout program expires. The government argued that Ireland needed to support the pact in the referendum to keep that option open, even though Dublin hopes to return to financing itself on the bond markets at the end of 2013.

“The treaty will solve nothing, but (…) we’re going to need European money next year, plain and simple,” one Irish “yes” voter told the Associated Press.

Analysts pointed out that the “yes” vote gives Ireland a better chance of returning to the bond markets, but that other problems with the Irish economy such as high unemployment and lack of growth remain. Ireland has been seen as the poster child among the euro zone’s crisis-hit countries, having dutifully implemented the conditions of its €85 billion ($105 billion) European Union/International Monetary Fund bailout. But it desperately needs economic growth if it is to reduce its public debt, which is set to reach a dangerously high level of 120 percent of gross domestic product next year.

dgs — with wire reports
ECB president: governments are taking worst approach to rescuing banks

Mario Draghi of European Central Bank says some governments have underestimated problems and ended up spending more

Heather Stewart
guardian.co.uk, Thursday 31 May 2012 19.11 BST

Mario Draghi, president of the European Central Bank (ECB), has urged Europe’s leaders to show “vision” in tackling the euro debt crisis, as rumours swirled about a potential International Monetary Fund (IMF) bailout for Spain.

Speaking to the European parliament, Draghi slammed governments – including Spain’s – for what he called the “worst possible” approach to rescuing struggling banks.

Singling out the bungled rescue of the Belgian bank Dexia and Spain’s current efforts to support troubled Bankia, Draghi said: “If you look back, the reaction of the national supervisors … is to underestimate the problem, then come out with a first assessment, a second, a third, fourth … That is the worst possible way of doing things, because everybody ends up doing the right thing but at the highest possible cost and price.”

After European stock markets had closed, Wall Street bounced when a rumour emerged in the Wall Street Journal that the IMF was drawing up “contingency plans” for a Spanish bailout.

An IMF spokeswoman said: “The fund’s job is to assess the economic situation, monitor developments and discuss different scenarios in all its member countries. That is part of the fund’s regular surveillance work.”

Economists have become increasingly convinced that Spain will have to be rescued, since it has struggled to explain how it will fill a €19bn hole in Bankia’s balance sheet.

Last weekend, Madrid floated the idea of handing the bank Spanish bonds, which it could then swap for money with the ECB; but that idea was rejected.

A European commission spokesman, Amadeu Altafaj, told Spanish national radio the government should spell out how exactly it planned to save Bankia – and whether other crisis-hit banks would also need help. Spain has just €5bn left in its bank bailout fund, and rising bond yields are pushing up the government’s borrowing costs.

“What you cannot do is maintain this uncertainty, which is what is dragging down market confidence,” Altafaj said.

Spain’s deputy prime minister, Soraya Saenz de Santamaria, is flying to Washington to discuss the crisis with the IMF’s Christine Lagarde, as well as the US treasury secretary, Tim Geithner, who has repeatedly called on Europe’s leaders to resolve the crisis in the eurozone.

May 31, 2012
U.S. Steps Up Pressure on Europe to Resolve Euro Crisis
By DAVID JOLLY
nyt
PARIS — President Barack Obama is putting increasing pressure on European officials to resolve the euro crisis, talking with the leaders of Germany, France and Italy to help lay the groundwork for action before a Group of 20 summit meeting to be held in June in Mexico.

Mr. Obama discussed the recent developments in Europe in video conference calls with the European leaders on Wednesday. Mr. Obama was following up on discussions he held at the recent Group of 8 meeting at Camp David with the German chancellor, Angela Merkel, the French president, François Hollande and Mario Monti, the Italian prime minister.

“Leaders agreed to continue to consult closely as they prepare to meet at the G-20 summit in Mexico next month,” the White House said in a statement. The meeting will be held June 18-19, beginning just a day after a Greek election that is being seen as a de facto referendum on that country’s euro membership.

The White House has also dispatched Lael Brainard, a Treasury under secretary, to Europe this week for talks with officials in Greece, Germany, Spain and France.

“The U.S. has doubts about its own pace of growth, it sees China slowing, and Europe is confronting a recession,” Hervé Goulletquer, head of fixed-income market research at Crédit Agricole, said. “If there is a deeper crisis in Europe, it will be an impediment for growth in the U.S., it will be a big issue for the country and for Obama as a candidate.”

Washington, is “pushing for more action in Europe,” Mr. Goulletquer said, “but I think everyone in Europe knows something has to be done.”

In Ireland, voters were going to the polls Thursday for a referendum on the European Union fiscal treaty for fostering budgetary discipline and growth. While polls have shown a small majority favoring the treaty, the Irish are already resentful of painful austerity measures, and success is not certain. A failure to back the agreement could mean that Ireland was unable to draw on European Union financing after 2013 if it needs another bailout and could further encourage anti-euro sentiment in Europe.

Final results will be known only on Friday.

The main concern on investors’ radar remains Spain, which is searching for a way to recapitalize its struggling financial sector. The government had to nationalize Bankia, a foundering mortgage lender, in May, and the bank said Friday that it would need 19 billion euros, or almost $24 billion, in new rescue funds. The austerity-strapped government has little in its arsenal to help other troubled lenders, and borrowing in the market has become prohibitively expensive, at around 6.5 percent for 10-year debt.

The situation has led to increasing capital flight, with the E.C.B. reporting that deposits in Spanish banks in April declined by 31.5 billion euros. Amadeu Altafaj, a spokesman for the European Commission, said the government in Madrid needed to move quickly to reassure investors.

“What you cannot do is maintain this uncertainty, which is what is dragging down market confidence,” The Associated Press quoted him as saying on Spanish National Radio.

“Spain is ‘too big to fail’ as far as the euro is concerned,” Charles Diebel, head of market strategy at Lloyds Banking in London, wrote in a research note. “And the funding issues and lack of viable bank resolution are causing an investor flight as seen before, but the numbers and magnitude are on a different level from anything seen thus far. We could be fast approaching a situation where the sanguine outlook maintained by some politicians in core countries cannot be sustained.”

Fitch Ratings on Thursday cut its ratings on eight Spanish regions, including Madrid and Catalonia, to one notch above junk, and said the outlook for all the regions was negative. Fitch said the action reflected “the negative economic and market environment in Spain, which has resulted in depressed fiscal revenues, and the structural fiscal deficits of the regional administrations, which will require considerable additional efforts to be reduced, and also the difficulties in accessing long-term funding.”

The Spanish deputy prime minister, Soraya Saenz de Santamaria, was in Washington on Thursday for talks with Treasury Secretary Timothy F. Geithner and the International Monetary Fund managing director, Christine Lagarde. Ms. Lagarde called her meeting with the Spanish official “very productive” and told reporters, as an I.M.F. spokesman in Washington had earlier, that Spain had not requested any financial assistance from the fund. “We are not doing any work in relation to any financial support,” Ms. Lagarde said.

Inflation data raised the likelihood that the European Central Bank would cut its benchmark interest rate from the current 1 percent when the governing council meets in June. Euro zone prices rose 2.4 percent in May from 2.6 percent in April, Eurostat, the E.U. statistics agency reported.

While May inflation was above the E.C.B.’s target of just under 2 percent, the declining rate of increase and recent data showing slower lending might give the bank scope to cut rates. Still, the recent decline in the euro raises the prices of imports like petroleum, that are priced in dollars, and may give the central bank pause.

The E.C.B. president, Mario Draghi, said Thursday that the central bank had restored credit lines to Greece’s four largest banks after they received fresh capital from the European Union. The news could help to reassure Greek depositors, as the E.C.B. had cut Greek banks off from normal lines of credit because they had exhausted their capital reserves and were no longer eligible under the central bank’s rules.

Another central banker, the Bank of England deputy governor, Charlie Bean, on Thursday suggested that the British monetary authority was prepared to take new measures if the euro zone could not contain its problems.

“We have the scope to do more asset purchases,” Mr. Bean told The Eastern Daily Press, referring to a crisis program introduced in 2009 under which the Bank of England has bought 325 billion pounds, or about $500 billion, of “high-quality assets” to improve market liquidity.

“We will certainly do whatever we can to try and ensure that if events beyond our shores turn out badly we can minimize the impact on households and businesses over here and try and keep the economy recovering,” he added. “But it will be difficult.”

The Danish central bank, the Danmarks Nationalbank, on Thursday cut its main interest rate target by 0.15 percentage point to 0.6 percent, the second time in a week that it has eased amid fears that inflows of safe-haven investment from the euro zone will destabilize the Danish economy and drive up the currency, the krone, making the country’s exports uncompetitive.

European markets ended flat, with the Euro Stoxx 50 index, a barometer of euro zone blue chips, gaining 0.1 percent.

The dollar rose against major European currencies. The euro fell to $1.2360 from $1.2367 late Wednesday in New York, while the British pound fell to $1.5392 from $1.5478. The dollar rose to 0.9717 Swiss francs from 0.9710 francs. But the U.S. currency fell to 78.54 yen from 79.07 yen.

Asian shares fell. The Tokyo benchmark Nikkei 225 stock average declined 1.1 percent. The Sydney market index S.&P./ASX 200 fell 0.4 percent. In Hong Kong, the Hang Seng index declined 0.3 percent.

Europe’s sovereign bond market also calmed. The yield on the Spanish 10-year bond, an prime indicator of the government’s financing costs, fell 12 basis points to 6.49 percent. A basis point is one-hundredth of a percent.

Jack Ewing contributed reporting from Frankfurt.

This article has been revised to reflect the following correction:

Correction: May 31, 2012

An earlier version of this article misstated the dates of the Group of 20 meeting. It is being held June 18-19, not June 17-18.

ATHENS, May 30, 2012 (AFP)
Greece’s pro-bailout conservative party has a narrow lead over the anti-austerity radical leftists, an opinion poll said Wednesday ahead of a election crucial for the debt-hit country’s future.

The GPO poll for private Mega television gave the conservative New Democracy party 23.4 percent of the vote, just ahead of the leftwing Syriza with 22.1 percent.

The outcome of the June 17 election, the second in six weeks, will determine whether Greece is willing to complete vital reforms tied to a multi-billion EU-IMF loan agreeement that has so far shielded the country from bankruptcy.

Syriza wants to reject many of the austerity measures stemming from the loan agreement but European leaders have warned that Greece could be starved of bailout funds if this happens.

There is growing speculation that Athens could be forced to leave the 17-member eurozone if the reforms falter, raising fears for the future of the single currency.

Over 80 percent of respondents in the GPO poll said Greece must stay in the eurozone “at all costs.”

Some 52 percent said Greece should implement the rescue deal if if means keeping its place in the euro, but 77.8 percent want to amend the terms of the bailout — which many Greeks say has plunge the economy into recession.

Before leaving office this month, former prime minister Lucas Papademos warned Greece may run out of money by the end of June if international bailout funds are cut off following the election, a newspaper reported Sunday.

Other opinon polls on Sunday predicted a New Democracy victory with between 23.3 percent and 25.8 percent, a result that would require the party to seek partners to form a viable government.

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