Archive for October, 2011

The two halves of the eurozone are locked in a broken marriage

One by one, the democracies of Southern Europe are being broken on the wheel of monetary union.

Greek ministers are now cruelly depicted in cartoons knuckling to German orders or delivering the Nazi salute. The yearly march commemorating the struggle against the Axis was blocked in Thessaloniki by protesters shouting “traitor” at Greece’s aging president, himself a teenage resister.

I do not wish to be anti-German, since Germany itself is the chief diplomatic victim of EMU’s unfolding tragedy. But this is what happens when you insert words such as “monitoring capacity on the ground” into EU summit texts.

Europe’s inspectors are to establish an occupation office in Athens to ensure “full implementation” of austerity policies. Greece has been stripped even of the pretence of sovereignty, reduced to a Sanjak again.

Yes, Greece has gained debt relief: €100bn (£87bn) if pension funds “volunteer” to join banks in accepting a 50pc haircut. This will leave Greece with a public debt of 120pc of GDP in 2020 after nine years of depression, if all goes perfectly.

In Spain, unemployment is just shy of five million, or 21.5pc. There are 1.4m households where no family member has a job.

The latest job losses have been in health care and schools, a foretaste of what will happen once the EU-imposed guillotine drops after this month’s elections.

It is an unhappy starting point for an economy tipping back into recession. “We can’t go on like this. It is impossible to get out this crisis with austerity alone,” said Socialist leader Alfredo Rubalcaba, calling on Europe’s Left to force a change in EU policy.

Meanwhile, Germany’s jobless rate has fallen steadily to 6pc, and there lies the rub. EMU convergence never happened. What exists instead is a 30pc or 40pc North-South currency misalignment, the cause of all the grief.

The two halves are locked together in a broken marriage. The structural gap cannot be closed by debt-deflation in the South. It could arguably be mitigated by ECB reflation, yet the central bank has done the opposite, blighting the chances that Spain might just be able to struggle back to viability.

Spain is cutting stoically. The ECB did not have to have make matters worse by tightening monetary policy as well. It chose to do so, knowing that core inflation is tame and that Europe’s banks are about to shrink their balance sheets drastically.

Portugal is already under EU-IMF administration, or “a state of occupation” in the words of Labour leader Carvalho da Silva. The unions have called a general strike this month.

This honourable nation, which pays its debts, has seen its external capital accounts swing from surplus to a deficit of 104pc of GDP under the perverse effects of EMU. The current account deficit is 8pc of GDP.

What Portugal needs is a 40pc devaluation against Germany. Instead, premier Pedro Passos Coelho is attempting an “internal devalution”, with swingeing cuts to pay, pensions, welfare, and health. You cannot deflate an economy back to viability where total debt is 350pc of GDP. It is mathematical suicide.

Italy in turn has been told to balance its budget by 2013, even though it has a primary surplus and one of the lower debt levels (public and private) in the OECD club. This risks pushing Italy into a slump that sets off the destructive debt dynamic so widely feared.

It misdiagnoses the problem. Italy is in crisis because it cannot compete. It is in the wrong currency.

The EU refuses to confront the core issue, instead seeking to buy time for the South by conjuring a €1.2 trillion bail-out fund (EFSF) that seeks uber-leverage through “first loss” insurance of bonds.

This concentrates risk for creditors. It further endangers France’s AAA rating, the foundation of the fund. It almost guarantees faster contagion to euroland’s core. Europe has resorted to this twisted device because Germany has vetoed all moves to fiscal union, Eurobonds, debt-pooling, or ECB activism. It is a Hail Mary pass, a last gamble when all else fails.

Chancellor Angela Merkel warns that euro failure threatens a thousand plagues. “No one should think that another half-century of peace and prosperity is assured.”

She has the matter backwards. The euro itself has become an engine of destruction and cross-border rancour. Europe will not be happy again until this misguided experiment is shut down.


Leaders agree eurozone debt deal after late-night talks

Jose Manuel Barroso: "We need to show our citizens there is hope"

European leaders have reached a “three-pronged” agreement described as vital to solve the region’s huge debt crisis.

After marathon talks in Brussels, the leaders said private banks holding Greek debt had accepted a loss of 50%.

Banks must also raise more capital to protect them against losses resulting from any future government defaults.

The deal is aimed at preventing the crisis spreading to larger eurozone economies like Italy, but the leaders said work still needed to be done.

It also approved a mechanism to boost the eurozone’s main bailout fund to about 1tn euros (£880bn; $1.4tn).

The framework for the new fund is to be put in place in November.

The BBC’s Chris Morris in Brussels says the deal is not as ambitious as some had hoped but as much as could be achieved.

Meanwhile EU leaders welcomed Italian Prime Minister Silvio Berlusconi’s pledge to balance his country’s budgets and implement reforms to bring down its 1.9tn-euro debt.

“All of these calculations, commitments and expressions of determination can be dismissed if Europe’s weakest countries do not return to growth” — Gavin Hewitt

Correspondents say Mr Berlusconi had been under huge pressure to prove he was serious about austerity measures.

‘Ambitious response’

Nicolas Sarkozy: "We have been negotiating for long hours, but I believe the result will relieve the whole world"

The announcement of the deal helped lift the euro, with investors reacting positively to the outlook for the region’s growth and single currency.

“The eurozone has adopted a credible and ambitious response to the debt crisis,” a visibly tired French President Nicolas Sarkozy said at a news conference early in the morning in the Belgian capital.

Fears about the state of the eurozone’s finances and the threat of a break-up of the single European currency have been stalking markets for months.

Critics have accused policymakers of not doing enough to resolve the issues, contributing further to problems and fuelling uncertainty.

Leaders of the 17 eurozone nations had been in meetings since Wednesday trying to hammer out a deal to help Greece put its national finances in order and underpin other European economies such as Italy.

Speaking after the deal was agreed, Mr Sarkozy said that “the complexity of the files, the necessity to get everybody to agree, means that we have been negotiating for long hours”.

He said he believed the result would be a relief for “the whole world”, which had been expecting a strong decision from the summit.

Because banks have agreed to shoulder losses on Greek bonds, the country’s burden has been reduced, cutting its debt down to 120% of its gross domestic product by 2020.

‘Marathon not sprint’

Greek Prime Minister George Papandreou hailed the deal, saying: “We can claim that a new day has come for Greece, and not only for Greece but also for Europe.”

The eurozone leaders also said the firepower of the main euro bailout fund – known as the European Financial Stability Facility (EFSF) – would be boosted from the current 440bn euros to about 1tn euros.

Bank recapitalisation – the third key element of the package – was agreed earlier.

The banks would now be required to raise about 106bn euros in new capital by June 2012, and governments may have to step in despite the unpopularity of further bank bail-outs.

It is hoped that this would help shield them against losses resulting from any government defaults and protect larger economies – like Italy and Spain – from the market turmoil.

“The package that we have agreed tonight, a comprehensive package, confirms that Europe will do what it takes to safeguard financial stability,” said the President of the European Commission, Jose Manuel Barroso.

Eurozone deal

  • Private banks holding Greek debt accept a 50% loss
  • European Financial Stability Facility (EFSF) to be boosted to 1tn euros ($1.4tn:£880bn)
  • Banks told to recapitalise by 106bn euros

“I’ve said it before and I’ll say it again, this is a marathon not a sprint.”

German Chancellor Angela Merkel, who was a key negotiator in thrashing out the deal, said: “I think we were able to meet expectations and we have done what needed doing” for the euro.

IMF chief Christine Lagarde, who was also at the Brussels summit, said she was “encouraged by the substantial progress made on a number of fronts”.

However, the leaders acknowledged that some of the details remained to be resolved and that much more work needed to be done in the coming weeks.

Analysts will now pore over the fine print of the deal, and many technical details will not emerge for some weeks, our correspondent says.

But initially it was given a cautiously positive reception by markets and investors.

The euro climbed to a seven-week high against the US dollar on the news of the deal.

Stock markets climbed across Asia, with Japan’s Nikkei adding 0.5%.

Europe is a key export market for Asian companies, while nations such as China hold large amounts of euro-denominated assets.

Deutsche Bank third-quarter profits beat forecasts

Deutsche Bank is Germany's biggest bank

Deutsche Bank’s third quarter profits have beaten expectations as gains in retail banking and asset management offset its exposure to Greek debt.

Pre-tax profits were 942m euros ($1.3bn; £820m) compared with analysts’ forecasts of about 500m euros.

A year ago it reported a loss of 1.21bn euros, related to the purchase of Deutsche Postbank

Earnings at the consumer banking unit rose 27% to 310m euros, helped by the acquisition of Postbank.

The takeover of Postbank doubled the number of its customers to about 29 million.

Deutsche’s asset and wealth management arm saw profit double to 186m euros.

The bank also wrote down 228m euros worth of Greek bonds, whose value has fallen during the eurozone’s sovereign debt crisis.

Earlier this month, Deutsche Bank said it would miss its full-year profit target – which was expected to be about 10bn euros – and said it planned to cut about 500 jobs at its corporate banking and securities division.

Eurozone crisis ‘real danger to all of Europe’ says George Osborne as he arrives for Brussels summit

George Osborne warned European colleagues they were running out of time to send a 'clear signal' that they were dealing with the eurozone crisis.

The eurozone crisis is ‘a real danger to all of Europe’s economies’ said George Osborne as he arrived in Brussels for a summit to try and sort out a fix.

If EU finance ministers finally agree what to do it would be the biggest boost for the British economy this autumn, said the Chancellor.

‘What we’re going to be arguing for at this meeting is a comprehensive solution to this crisis. We’ve had enough of short-term measures, sticking plaster that just gets us through the next few weeks.’

Mr Osborne repeated the government’s case that a secure and stable euro is as important for the UK as it is for the single currency member states:
‘The crisis of the eurozone is a real danger to all of Europe’s economies, including Britain’s.

‘We need to address the root causes of the problem with a lasting solution that will help all of Europe’s economies.’

A hectic series of EU meetings likely to last until at least Wednesday began last night with talks between the 17 eurozone finance ministers.

Amid growing fears that the Greek crisis is even worse than feared, they approved another slice of bail-out aid – about £7billion and, according to eurozone leader and Luxembourg prime Minister Jean-Claude Juncker, paved the pay for a massive 50 per cent write-down of Greek debt to ease the country’s burden.

Today all 27 finance ministers were assessing the broader picture and abscessing the risk of ‘contagion’ from Greece to other, much bigger economies, including Italy. They are also finalising plans for a recapitalisation of banks, making them better placed to withstand future economic shocks.

Tomorrow Prime Minister David Cameron flies in to join other EU leaders for a summit already downgraded by a Franco-German decision to hold another one, probably next Wednesday. The key to success could be a private meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy in Brussels later today. They are in the driving seat but have clashed in the last few days over the details of shoring up the euro and persuading jittery financial markets that single currency is solid.

In particular they differ over boosting an existing €440billion (£383billion) bail-out fund possibly four-fold to about €2trillion (£1.74 trillion).

Mr Osborne said resolving the crisis was now ‘critical’ – the single biggest issue which could boost the British economy and revive growth not just in the eurozone but across the world.

But the effective downgrading of Sunday’s EU leaders’ summit means the weekend meetings will merely pave the way for a hoped-for deal at Wednesday’s planned summit, also in Brussels.

However, some ministers, including Mr Osborne, have set the ultimate deadline as a G20 summit in Cannes in less than a fortnight, when world leaders gather to discuss the global financial crisis.

Host will be President Sarkozy, who is desperate to deliver EU unity without agreeing a eurozone solution which will be rejected by his voters as too expensive. Chancellor Merkel is in the same boat, and the pair are determined to resolve their differences and produce a solution which ring-fences the worsening Greek crisis – and is seen as doing so by volatile financial markets.

‘The perception is as important as the reality’ said one EU official. ‘When deciding what to do ministers have to consider not just what they need to do financially but what they need to do to calm markets – and the two things are not necessarily the same thing.’

Greece MPs back austerity plans amid mass protests

Protesters set fires and continued to clash with police on Wednesday evening

The Greek parliament has given initial approval to new austerity measures, as clashes broke out between protesters and police in Athens.

As a 48-hour general strike paralyzed the country, a march by tens of thousands of people outside the parliament turned violent.

Parliament will vote a second time on the details of the bill, which includes pay cuts and tax rises, on Thursday.

Greece is saddled with a huge public debt and an economy in deep recession.

There are fears the government could default and set off a wider crisis that could engulf other struggling eurozone countries such as Spain and Italy.

With Greece unable to borrow long term on international bond markets to finance its debt, the EU and IMF have stepped in with two bailout packages.

But they have demanded tough budget cuts in return, which have angered many in Greece who say the medicine is killing the patient.

Running battles

As tens of thousands of Greek protesters marched to the parliament in Athens to protest the cuts, riots broke out.

Some protesters threw petrol bombs and stones at police who fired tear gas as running battles broke out.

The 48-hour strike, called by both public and private sector unions, has closed government departments, businesses, offices and shops and cancelled transport services.

Domestic and international flights were grounded as air traffic controllers staged a 12-hour walkout.

Parliament is due to vote on the details of the new round of cuts on Thursday. They include further cuts to pensions and salaries and temporary lay-offs of 30,000 public sector workers.

But the government is struggling to convince lenders that it is cutting effectively enough. Greece says it needs the next 8bn euros ($11bn; £7bn) of a bailout agreed to last year or it will soon be unable to pay its bills.

European leaders and global finance chiefs are in talks over the eurozone crisis ahead of an EU summit on the weekend.

French President Nicolas Sarkozy flew to Germany late on Wednesday to meet German Chancellor Angela Merkel and senior officials from the European Central Bank and IMF.

Neither leader gave any details about what had been discussed.

Categories: Uncategorized

Moody’s cuts Spain’s debt rating

There have been protests in Spain against austerity measures

Moody’s has downgraded the rating of Spain’s government bonds.

The ratings agency cut Spain two notches, two days after Standard & Poor’s took the same decision.

Moody’s said it had cut the rating because there had been no credible resolution to the eurozone debt crisis.

It also said that the debt crisis and difficulties faced by Spanish banks wanting to borrow money meant it had further scaled back its growth forecast for the country.

“Moody’s is maintaining a negative outlook on Spain’s rating to reflect the downside risks from a potential further escalation of the euro area crisis,” the agency said in a statement.

It added that while it assumed any new government to emerge after elections on 20 November would continue measures to reduce the deficit, it would downgrade Spain further if that turned out not to be the case.

Spain’s rating was cut from Aa2 to A1 with a negative outlook.

Earlier in the day, Moody’s warned that it was considering changing its outlook on France’s AAA rating from stable to negative, which knocked European markets.

Shares fall after Germany’s eurozone debt deal warning

European shares went into reverse after Germany cautioned that a eurozone debt crisis plan might not be ready by the end of the week.

Indexes had opened higher after a statement from G20 finance ministers and central bankers on Saturday.

They said an EU summit would address the “challenges through a comprehensive plan” when it meets on 23 October.

However, optimism waned after German officials warned against unrealistic expectations. Wall Street also fell.

“The chancellor has pointed out that the dreams building up that this package will mean everything will be solved and over by Monday cannot be fulfilled,” said Steffen Seibert, chief spokesman for Germany’s Chancellor, Angela Merkel.

German Finance Minister Wolfgang Schaeuble also warned that the summit in Brussels was not expected to deliver a definitive solution to the crisis.

Share indexes fell after the comments. Germany’s Dax had initially risen close to 1.9% in the first hour of trade, but ended the day 1.8% below its opening price.

France’s Cac40 gave up a 1.5% rise, to close 1.6% lower. The UK’s FTSE 100 lost 0.5%.

Wall Street was also unsettled, with the Dow Jones closing down 246.9 points, or 2.12%, at 11,397.6.

On the currency markets, the euro weakened against the US dollar. After hitting a one-month high of $1.3915 earlier in the day, it traded as low as $1.3739.

Misplaced confidence?

BBC business editor Robert Peston has cautioned that there is no guarantee EU leaders will agree a deal at the weekend and that even if they do it may be ineffective.

“When I talk to ministers, regulators, bankers and investors they all say, which is a statement of the obvious, two things: that such a rescue cannot be taken for granted; and [perhaps more importantly] that whatever is agreed will not solve the eurozone’s fundamental problem,” he said.

The meeting of EU leaders will be followed on 3 and 4 November by a G20 summit in the French city of Cannes.

The eurozone debt crisis is centred on Greece, the most indebted country in the region, and whether it will ultimately default on its debt.

However, the big concern is that the debt crisis could spread to other eurozone countries such as Italy and Spain, and the impact this would have on European banks exposed to eurozone government debt.

There is also concern that Greece may ultimately have to leave the eurozone, destabilising the euro and the region’s economy.

So far, Greece and two other eurozone nations, Portugal and the Irish Republic, have needed bailout loans from the European Union and International Monetary Fund (IMF).

G20 finance ministers said in a statement following their meeting on Saturday that the IMF had enough funds to make its contribution to solving the crisis.

Market Data

Last Updated at 02:27 GMT

Market index Current value Trend Variation % variation
Dow Jones 11397.61 Down -246.88 -2.12%
Nasdaq 2614.92 Down -52.93 -1.98%
FTSE 100 5436.70 Down -29.66 -0.54%
Dax 5859.43 Down -107.77 -1.81%
Cac 40 3166.06 Down -51.83 -1.61%
BBC Global 30 5514.89 Down -23.52 -0.42%