Spain Meets Bond Target While French Borrowing Costs Fall

Spain Meets Bond Auction Target as French Borrowing Costs Fall

The Spanish Treasury sold 2.52 billion euros of bonds, exceeding its maximum target.

The Spanish Treasury sold 2.52 billion euros ($3.31 billion) of bonds, exceeding its maximum target. Still, Spain had to pay 4.037 percent to sell debt for three years, up from 2.617 percent at a March 1 sale.

The auction was the first long-term debt sale since Standard & Poor’s lowered the nation’s credit rating last week, leaving Spain three notches from junk status. The effect of the European Central Bank’s 1 trillion-euro three-year refinancing operation is also fading, leaving a clearer indication of demand.

“This is a proper, good, honest market now,” Peter Chatwell, a bond analyst at Credit Agricole SA in London, said in a telephone interview. “Expectations of big, blow-out auctions need to disappear. The yields are all sub-5 percent, that’s a comfortable level.”

The yield on Spain’s existing five-year benchmark declined 7 basis points to 4.7 percent at 12 p.m. in Madrid, and the yield on the benchmark 10-year bond fell 3 basis point to 5.82 percent. Spain also sold two five-year bonds at 4.752 percent and 4.96 percent.

France held its final auction before the nation chooses its next president in a final round of voting on May 6. The Treasury sold 3.32 billion euros of 10-year bonds at an average yield of 2.96 percent, down from 2.98 percent on April 5, as part of an auction of 7.43 billion euros of government debt. France’s 10- year bond yield fell 3 percent to 2.92 percent after the sale.

Rating Cut

S&P cut Spain’s credit rating two levels to BBB+ from A on April 26, citing concerns that losses buried in the country’s banking system may overwhelm government efforts to shore up public finances. The government has embarked on a third attempt to clean up the banking industry since a real estate bubble burst in 2008, leaving them hobbled with bad loans and overvalued assets.

Spanish bonds were the worst-performing of 26 sovereign- debt indexes tracked by Bloomberg and the European Federation of Financial Analysts Societies in April, with losses of 1.8 percent. Italian securities were second worst, dropping 1.3 percent, after gaining 11 percent in the first quarter.

In February, the Spanish government increased the ratio of provisions to be set aside for land to 80 percent, while raising the ratio on unfinished developments to 65 percent and to 35 percent for other troubled assets including finished houses. The new provisioning rules cover about 180 billion euros of assets.

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EU ministers close to deal on new bank rules

Denmark’s finance minister says she and her European Union counterparts are close to a deal to force banks to build up bigger capital cushions against financial shocks.

Early Thursday, after more than 15 hours of debate, Margrethe Vestager said only a few “technical issues” needed to be ironed out before the ministers’ next meeting in two weeks.

The EU is in the process of writing an international agreement on capital defenses for banks into European law that regulators hope will prevent a repeat of the 2008 financial crisis.

The so-called Basel III deal would force lenders to increase their highest-quality capital gradually from 2 percent of the risky assets they hold to 7 percent by 2019. An additional 2.5 percent would have to be built up during good times.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP’s earlier story is below.

BRUSSELS (AP) _ European finance ministers were divided Wednesday on how the region’s banks can protect themselves from future financial shocks.

The European Union is in the process to writing an international agreement on capital defences for banks into European law. This would determine the level of risk Europe’s banks can take and what regulators can do to ensure that financial crises like the one brought on by the collapse of U.S. investment bank Lehman Brothers in 2008 do not happen again.

The so-called Basel III deal would force banks gradually to increase their highest-quality capital _ such as equity and reserves _ from 2 percent of the risky assets they hold to 7 percent by 2019. An additional 2.5 percent would have to be built up during good times.

But several countries, including the U.K. and Sweden, want to require their banks to build up even higher defenses without having to go to the European Commission, the EU’s executive arm in Brussels, for approval. There was also some disagreement over what should count as capital. Some countries are warning that Europe could be seen as softening banking rules at a time when it is already under close scrutiny from international investors.

“If we duck the challenge of implementing Basel we could face very important challenges to confidence in Europe this year,” warned George Osborne, the U.K.’s Treasury chief.

Basel III was agreed by the world’s leading economies after the 2008 financial crisis demonstrated that many banks did not have enough of a capital cushion to absorb sudden losses on loans and other risky activities. Once agreed, the new rules would apply to more than 8,300 banks in Europe, forcing them to build up billions in extra capital by selling shares or assets or reining in bonuses and dividends.

The 2008 financial panic that followed Lehman’s collapse hit Europe hard. Between 2008 and 2010, governments across the 27-country-bloc spent (EURO)4.6 trillion ($6.1 trillion) propping up struggling banks.

What complicated efforts even more was that the open borders in the EU allow banks to operate freely across the bloc, but when lenders ran into trouble it was national governments _ and taxpayers _ who had to foot the bill. While the EU is now striving for a single set of banking rules, there is still no pan-European bank resolution fund that could relieve national governments.

The U.K., which had to save three major banks, has seen its debt load almost double since 2007. Meanwhile much smaller Ireland had to seek an international bailout to help stem the losses of its domestic lenders. And many economists fear that the economic recession in Spain may soon reveal massive bank losses there.

Now, the U.K. is leading a group of countries that want to be able to force their own banks to have bigger defenses than the ones prescribed by the pan-European rules without first getting approval from Brussels.

“We should make it clear that the crisis did not originate exclusively from weak fiscal policy. It originated also from insufficiently strong banks,” said Polish Finance Minister Jacek Rostowski. “So therefore a group of countries including Poland, the Czech Republic, Sweden and the United Kingdom are very determined to see that banking systems in the future should be as healthy as we expect the fiscal side, the budgetary side, to be kept.”

That demand is opposed by France and the Commission, which fear that jacking up capital requirements in one country could force banks based there to cut down lending by their foreign subsidiaries. That, they argue, could hurt small states that don’t have a big domestic banking system.

To bridge the divide between the two camps, Denmark, which currently holds the EU presidency, has proposed a compromise that would allow national regulators to require an extra capital buffer of 3 percent. Anything beyond that would have to be approved by the Commission in Brussels, which would examine not only the level of risk in the home state but also the potential impact in neighboring countries.

After several hours of public discussion, finance ministers retreated into bilateral talks. A possible compromise could include requiring not the Commission, but another European supervisor _ the European Systemic Risk Board, which is led by the European Central Bank President Mario Draghi _ to approve higher national buffers.

If they cannot find agreement Wednesday, several ministers said they hoped a deal could be struck at their next meeting in two weeks. Once finance ministers have struck a deal, they have to negotiate a final agreement with the European Parliament.

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EU slams governments for not enacting growth laws

BRUSSELS  — The 27 member countries of the European Union have been slammed for not implementing laws designed to boost growth on the crisis-hit continent.

The President of the European commission Jose Manuel Barroso delivers his statement on how to combat the economic crisis, at the European Parliament Wednesday, April 18, 2012 in Strasbourg, eastern France.

The criticism, from the president of the European Union’s executive Commission, comes as the EU finds itself increasingly under pressure to do more to get its economy growing again as many of its members slash government spending, pushing some states into recession.

International bodies like the Organization for Economic Cooperation and Development have long pointed out that the EU’s internal market — which in theory should allow people and businesses to move as freely in Europe as they can in the U.S. — often falls short in practice.

“It is incomprehensible that member states are still not fully implementing growth-friendly legislation we have in place,” European Commission President Jose Manuel Barroso told the European Parliament in Strasbourg, France.

The European Commission for years has been pushing states to remove administrative barriers that prevent workers from taking jobs and companies from offering services in other EU countries.

The EU’s internal market “is probably the largest engine for growth within the European Union,” Barroso said. “It gives European business unfettered access to other companies and half a billion consumers and allows them to develop the scale to compete globally.”

Barroso spoke after the Commission approved a series of initiatives to boost jobs and growth in the crisis-hit bloc. Many of the proposals in the 27-page plan have been made before but have failed to overcome resistance by governments.

The push to free up jobs has become increasingly urgent as unemployment in Europe has jumped to more than 10 percent as the continent struggles with a series of debt crises that have caused Greece, Ireland and Portugal to seek a bailout .

Joblessness varies widely from country to country, however. In Spain and Greece, unemployment stands above 20 percent and among young people almost one out of two is looking for a job. In rich countries like Germany, Austria or the Netherlands the unemployment rate is below 6 percent.

But getting a job in Germany or Austria is difficult for a Greek or Spaniard. Not only do most jobs require workers to speak the local language, there are also practical and administrative barriers.

The Commission called Wednesday for an easier way to transfer a worker’s pensions from country to country and the way cross-border workers are taxed to be simplified. Job seekers should be able to receive their unemployment benefits for up to six months while they are looking for work in another country and non-nationals should be hired for jobs in a country’s public sector, it added.

Getting governments to implement such initiatives is not easy. Citizens are often wary of foreign workers — even in countries with relatively low unemployment — and some rich states have seen nationalistic parties rise in the polls.

The EU has also come under fire from unions for its push to make the labor market more flexible — making it, they argue, easier to fire workers. The Commission argues that knowing they can easily get rid of workers during a slump would encourage businesses to hire more in good times. However implementing the reforms in the middle of an economic crisis can create more pain in the short-run. Critics also warn that shifting taxes away from income to consumption on things like energy — as the Commission has long favored — will effectively leaves workers with less money as their bills rise.

Laszlor Andor, the EU’s commissioner for employment and an outspoken critic of the focus on austerity, said governments needed to do more to ensure people who work full-time make enough money to live.

Even when adjusted for varying price levels, minimum wages range for less than €300 a month in countries like Bulgaria to almost €1,500 in rich states like Luxembourg — leaving many workers below the poverty line. Some countries, such as Germany, don’t have a minimum wage at all.

While low wages can make country’s exports more competitive, they also hurt consumption in rich states.

In addition to strengthening its internal markets, Barroso said the EU should try to improve its trade relations with non-European countries, including the United States.

“The United States is our largest economic partner,” Barroso said, adding that trade between the EU and the U.S. was worth almost €450 billion last year and that they had invested more than €1 trillion in each others’ economies.

“Any further gains, including through reducing non-tariff barriers, would be significant for both sides,” Barroso said. “We are exploring ways in which to broaden and deepen these ties.”

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Debate Grows as Europe Fears Return of a Crisis

Angela Merkel, the Chancellor of Germany

Angela Merkel, the Chancellor of Germany (Photo credit: Wikipedia)

BERLIN — The European financial crisis has shown signs of reigniting in recent days, sharpening the debate between the champions of austerity and a growing chorus urging more expansionary policies to promote growth.

Even the traditionally hard-line International Monetary Fund called on Tuesday for stronger European nations to ease the fiscal brakes by stretching out budget cuts over a longer period. But if that message was intended foremost for Germany, it seemed destined to fall on deaf ears: with two state elections coming up next month, Chancellor Angela Merkel is unlikely to shift her position, popular with voters, against additional help for the economies of struggling European partners.

“We don’t see the need that perhaps other countries see to boost growth through additional increases in expenditures,” said a senior official in the German Finance Ministry, speaking on the condition of anonymity.

“Instead, we see quite clearly, and will remind our partners about their responsibilities from Toronto,” the official said, referring to commitments made at the Group of 20 summit meeting in June 2010, “to cut their deficits in half and stabilize their debt levels.” At the same time, the official said that Germany hoped other countries would join in increasing the International Monetary Fund’s resources to help it combat the crisis.

Politics as much as economics is adding to the sense of uncertainty in Europe. President Nicolas Sarkozy of France, who is trailing the Socialist candidate François Hollande in the polls before the first round of the presidential election on Sunday, has joined his opponent in promoting pro-growth policies. In Greece, nationalist anti-German fringe parties are gaining strength ahead of next month’s parliamentary election.

The German state elections may not directly affect the federal government in Berlin, but they distract from Continent-wide concerns and crisis management while thrusting parochial issues to the forefront. The German government does not have a mandate to share further the burden of the common currency on less competitive economies like those of Greece, Portugal, Ireland and, increasingly, Spain and Italy.

What seems certain, however, is that the crisis will continue to fester until new measures are taken to address its root causes. Borrowing costs for struggling southern European countries like Spain and Italy have begun to rise again as the effect of the European Central Bank’s injection of about $1.3 trillion in cheap loans into the banking system in December and March has faded much faster than expected. The three-year loans were meant to buy time for struggling governments and financial institutions, but the breathing room appears likely to be measured in months rather than in years.

The recent shift has underscored that there have been no substantive fixes beyond promises by countries to reduce their budget deficits. “It looks like it’s coming back with a vengeance, largely because none of the underlying problems have been solved,” said Philip Whyte, a senior research fellow at the Center for European Reform.

Mr. Whyte said that despite two years of crisis management, the fundamental structure of the euro zone remained intact, with lower-productivity economies in the south yoked to higher-productivity economies in the north, which prevents the laggards from competing through a currency devaluation.

“The E.C.B. bought time, but what it ended up doing was simply tightening the link between national banks and their sovereigns,” Mr. Whyte said. “They made the system more vulnerable if markets started losing faith in debt sustainability in countries like Spain.”

Yields on Spain’s 10-year bonds climbed above 6 percent on Monday, though they fell slightly on Tuesday after a successful auction of short-term debt by Spain’s treasury. Spain has emerged as the central test this year after missing its deficit targets as it slips back into recession. The government in Madrid has had a difficult time reining in spending by the 17 regional governments.

A bailout of Spain would be much costlier than one for smaller economies like those of Greece, Portugal or Ireland, testing the resources of the euro zone countries. Many economists, particularly in the United States, have argued that Spain has to stimulate its economy with additional spending if it hopes to return to economic growth, an argument rejected by the German government.

In an interview with the German newspaper Frankfurter Allgemeine Zeitung on Tuesday, Christine Lagarde, the managing director of the International Monetary Fund, said she was concerned about the health of Spanish banks and warned against slashing spending too quickly. It is not a view shared here in the German capital.

In an interview with Reuters on Tuesday, Germany’s finance minister, Wolfgang Schäuble, praised Spain for making difficult economic changes. “You don’t win back trust overnight,” Mr. Schäuble said, adding that Spain was following the right path by cutting spending. German officials have also recommended changes in labor markets as a longer-term strategy to promote growth.

As deficits balloon in countries across Europe, Germany continues to watch its deficits and financing costs fall. In another sign of Germany’s recent strength, the Bundesbank said on Tuesday that the country’s debt had fallen to 81.2 percent of gross domestic product in 2011, compared with 83 percent in 2010. That is still far above precrisis levels: in 2007, German debt was 65.2 percent of the size of the country’s economy.

“The problem with the crisis in Germany is that we know we have a crisis, but we don’t feel it,” said Eckart D. Stratenschulte, a political scientist and the director of the nonprofit European Academy Berlin.

Even as the European Central Bank loans improved market conditions, European leaders, including Ms. Merkel, were clear that they did not believe that the crisis was over. Many in Germany argue that a sense of crisis — and the elevated borrowing costs that come with it — is necessary to end out-of-control spending in the heavily indebted nations and to push through the economic liberalization they need to restore growth.

But the higher borrowing costs and austerity measures cut into growth, critics say, lowering government revenues in a self-defeating downward spiral and leading to higher interest rates and further budget cuts. “It’s concerning that the markets are again running out of patience and driving yields higher,” said Thomas Mayer, chief economist at Deutsche Bank in Frankfurt. “That creates further head winds.”

The I.M.F. on Tuesday raised its forecast for global growth slightly for the year. In Europe, the fund projected recovery in the second half of 2012, except for Spain, Italy, Greece and Portugal, where substantial improvement is not expected until next year.

The crisis, Mr. Mayer said, is like “a manic depressive moving between euphoria and worries, and now we’re in the valley of worries again.”

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Economic crisis, a failing political class and the spectre of 1930s-style extremism across Europe

History suggests that in dire economic times which offer  no hope of improvement, extreme parties of the Left and Right will spring up and  attract widespread popular support. That was what  happened in much of continental Europe in the Twenties and early Thirties, most notably in Germany.

This time, it is not in Germany that political extremism is gathering force, no doubt because that country is at least, for the moment, largely insulated from the cold economic winds blasting much of Europe. No, the first disturbing signs of parties of the  far-Right and Left entering the political mainstream are to be found in France and Greece.

To be sure, France already had an established record of extremism in the shape of the semi-fascist Front National, whose leader, Jean-Marie Le Pen, was actually runner-up (admittedly a distant one) in the 2002 presidential elections. The party’s current and only marginally more moderate leader, his daughter, Marine Le Pen, commands around 14 per cent in the opinion polls ahead of the first round of this year’s presidential election on April 22.

Phenomenal success: Jean-Luc Melenchon appeals particularly to the young, desperate and unemployed with his rousing rhetoric and extreme Left policies Phenomenal success: Jean-Luc Melenchon appeals particularly to the young, desperate and unemployed with his rousing rhetoric and extreme Left policies

More surprising, and in a way more shocking, is the phenomenal success of a far-Left candidate called Jean-Luc Melenchon, who is slightly in front of Marine Le Pen in most polls. Think of a Gallic, more intelligent Arthur Scargill and you would not be very far off beam. He advocates confiscating the incomes above a certain level of the rich, raising the minimum wage immediately by 20 per cent, and  banning profitable companies from laying off workers.

M Melenchon’s rhetoric is even more alarming than his policies. He speaks approvingly of ‘civil insurrection’ and  tells delirious crowds, largely made up  of desperate, unemployed young  people, that they ‘will have to be the crater from which the new flame of revolution erupts’.

This kind of far-Left incendiary language has not been listened to in Europe for more than 30 years. The fall of the Berlin Wall was thought to have put an end to it. The far-Left is back in France as a formidable force, and M Melenchon’s wild policies and wilder words — which only ten years ago would have seemed hopelessly anachronistic — are being taken seriously in a country where youth unemployment is at least 25 per cent.

As is invariably the case with extreme Left-wing and extreme Right-wing politicians, Jean-Luc Melenchon and Marine Le Pen have much in common, railing against globalisation  and the European Union. Mme Le Pen has her own anti-immigration rhetoric, which speaks to the fears of many French people over the ‘Islamisation’  of France.

Neither of them will win this year’s presidential election, and both will almost certainly be knocked out in the first round. The ultimate victor will either be the present incumbent, the centre-Right Nicolas Sarkozy, or the Socialist Party candidate Francois Hollande, something of a Left-wing firebrand himself, whose policies put him to the Left of the British Labour Party.

But although neither of the extremist candidates will be president, they will together probably account for around 30 per cent of the vote on April  22. Moreover, their policies will influence the eventual winner. This is particularly likely if the socialist M Hollande emerges triumphant in the second round two weeks later, and there is talk of M Melenchon securing Cabinet seats or influencing policy if that happens.

In other words, extremism is becoming part of the mainstream. Who can say what will happen if the French economy continues to deteriorate? It is still a long way from the predicament of Greece, where draconian austerity measures demanded by the German government in the name of eurozone solidarity are provoking a deeply worrying political backlash.

According to opinion polls, the two established Greek parties may win less than 50 per cent of the vote in elections early next month. A majority  of voters seems likely to back  one of the small parties  which oppose the austerity measures, in particular the Greek Communist Party or  the far-Right Chrysi Avgi  (Golden Dawn).

Jean-Marie Le Pen and his daughter Marine Le Pen: Mme Le Pen has her own anti-immigration rhetoric, which speaks to the fears of many French people over the 'Islamisation' of FranceJean-Marie Le Pen and his daughter Marine Le Pen: Mme Le Pen has her own anti-immigration rhetoric, which speaks to the fears of many French people over the ‘Islamisation’ of France

As in France, though even more strikingly, many people are rejecting the failed orthodoxies of the mainstream in favour of the superficially alluring — though almost certainly impractical — quack remedies peddled by politicians who until recently would have been almost universally regarded as being beyond  the pale.

Of course, in Europe as a whole it would be silly to exaggerate a development that is still in its infancy, and is not bound to follow the pattern  of the Twenties and Thirties.  We are obviously still very far from the financial meltdown of the Weimar Republic which led to Hitler coming to power, trading as he did on the communist threat which terrified many middle-class Germans.

But it would be equally foolish to deny that recession and unemployment on a scale unknown since the end of World War II are helping to create the  conditions in which extremist parties can flourish. Nor should we be surprised that the movement is gaining traction  in France, cradle of revolutionary fervour.

Extremism reaches Britain? It is tempting to see the recent triumph of the populist Leftist George Galloway in the Bradford West by-election as a protest vote against mainstream orthodoxyExtremism reaches Britain? It is tempting to see the recent triumph of the populist Leftist George Galloway in the Bradford West by-election as a protest vote against mainstream orthodoxy

It is also tempting to see the recent triumph of the populist Leftist demagogue George Galloway in the Bradford West by-election as a similar protest vote against mainstream orthodoxy, though we can perhaps hope that this was a one-off victory that will not be repeated elsewhere. The British are not supposed to be drawn to political extremists.

If, like me, you think that the euro is the main — though not the only — cause of Europe’s woes, then there is at least a theoretical solution. The financial difficulties of  France, Spain, Italy, Portugal,  Ireland and Greece would be greatly ameliorated if they could be freed from the  uncompetitive exchange rate which membership of the euro imposes on them.

That, though, is not going to happen any time soon. Angela Merkel, Chancellor of Germany, is wedded to the notion that the future of a federal Europe and the survival of the euro are indivisible. The fear is that she could turn out to be entirely wrong, and the medicine being forced on Europe’s weaker economies could end up destroying the patient and tearing Europe apart.

What is certain is that while many young people in some European countries have no realistic hope of having a job, and they and their parents are subjected to never-ending austerity measures imposed by Berlin, there will be more politicians such as Marine Le Pen spouting their inflammatory nonsense, and others still like Jean-Luc Melenchon proposing lunatic economic measures that would only make things far worse.

When mainstream leaders are incapable of offering solutions to apparently intractable economic problems, extremists will step in. That is what happened in Europe in the Twenties and Thirties. Looking ahead to years of sclerosis which none of our leaders shows the slightest sign of knowing how to prevent, it would be a brave man who said the same thing could not happen again.

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US stocks higher on better global data

US stocks opened higher overnight helped by data showing the US trade deficit narrowed in February and positive indicators in Asia and Europe.

The Dow Jones Industrial Average rose 37.39 points (0.29 per cent) to 12,842.78 in the first five minutes of trade.

The broader S&P 500 gained 3.9 points (0.28 per cent) to 1372.61, while the tech-heavy Nasdaq climbed 8.21 (0.27 per cent) to 3024.67.

“Data around the globe has been generally better than expected, and that, coupled with the mixed Italian auctions, has aided global equity markets,” said Briefing.com.

Eurozone industrial production rose in February after being either flat or falling in previous months, official figures showed overnight.

Meanwhile the US trade gap shrank in February on the back of an unexpected drop in imports, mainly from China, according to Commerce Department data released overnight.

The US trade deficit fell to a seasonally adjusted $US46 billion ($44.78 billion), from a revised $US52.5 billion ($51.11 billion) in January, sharply below the average analyst estimate of $US53 billion ($51.59 billion).

Traders appeared to shrug off an unexpected rise in weekly data on initial unemployment claims, an indicator of the pace of layoffs.

 

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