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G20 summit: US ‘encouraged’ by eurozone plans

US President Barack Obama has said he is encouraged by European leaders’ plans to tackle the eurozone crisis, as the G20 summit in Mexico ends.

In a final communique, world leaders said they would take “all necessary measures” to protect the euro area.

Leaders said they welcomed Spain’s plans to recapitalise its banks, according to the communique.

The talks were being held as Greece seeks to form a coalition government and Spain’s borrowing costs soared.

Speaking to reporters at the end of the summit, President Obama said that European leaders recognised that “bold and decisive” action was needed to address Europe’s debt crisis.

“Euro Area members of the G20 will take all necessary measures to safeguard the integrity and stability of the area”

“What I have heard from European leaders during these discussions, they understand the stakes, they understand why it’s important for them to take bold and decisive action, and I am confident they can meet those tests,” he said.

President Obama said that while there was no “silver bullet” to solve Europe’s crisis, “each step points to the fact that Europe is moving towards further integration rather than break-up”.

“I am confident that over the next several weeks, Europe will paint a picture of where we need to go,” he added.

‘Concrete steps’

As the summit came to a close the European leaders pledged to maintain stability in the eurozone and to work with the next Greek government towards reform and sustainability.

“Euro area members of the G20 will take all necessary measures to safeguard the integrity and stability of the area, improve the functioning of financial markets and break the feedback loop between sovereigns and banks,” the joint statement said.

“We support the intention to consider concrete steps towards a more integrated financial architecture,” it continued.

“The European Union members of the G20 are determined to move forward expeditiously on measures to support growth”.

But German Chancellor Angela Merkel stressed that Greece must hold up its end of the deal.

“It’s obvious that the reforms that were agreed in the past are the right steps and that they therefore must be implemented,” Mrs Merkel told reporters.

She added that world leaders had “very balanced” talks on growth.

“We need the right mix of budget consolidation… and at the same time efforts for growth.”

In the closing discussions of the summit, leaders also agreed not to introduce new protectionist measures until 2014.

But Russian President Vladimir Putin said that the imposition of trade barriers could be a vital tool in protecting Russian jobs.

Meanwhile, the “Brics” economies (Brazil, Russia, India, China and South Africa) also pledged to increase their contributions to the International Monetary Fund (IMF) – which has been seeking to boost its finances to prevent any future financial crisis.

The five Brics nations all offered to contribute $10bn (£6.4bn) to the IMF each in exchange for voting reforms that would give them greater influence in the organisation.

China also pledged $43bn (£27bn) to the IMF’s crisis intervention fund, which has almost doubled to $456bn (£366bn).

The BBC’s diplomatic correspondent Bridget Kendall, at the Los Cabos summit, says the offer of billions of dollars from the developing economies is perhaps the most tangible result of the two-day-long talks.

The funds, which would be released by the IMF if the eurozone crisis spreads, are a sign of support but also indicate how fragile many fear the economic situation in Europe to be, our correspondent adds.

G20: How their economies are faring

Country Growth (% GDP change, 2010-11) Unemployment (% 2011) External debt (% GDP, end of 2011)
Source: Principal Global Indicators
Argentina flagArgentina 8.9 7.5 7.6
Australia flagAustralia 2.2 5.1 86.6
Brazil flagBrazil 2.7 6 17.2
Canada flagCanada 2.4 7.5 70.2
China flagChina – mainland n/a 4.1 n/a
EU flagEuropean Union* 1.5 10.1** 120.0
French flagFrance 1.7 9.3 191.2
Germany flagGermany 3 6.5 159.4
India flagIndia 6.9 n/a 17.2***
Indonesia flagIndonesia 6.5 6.6 26.5
Italy flagItaly 0.4 8.4 115.1
Japan flagJapan -0.7 4.6 52
Mexico flagMexico 3.9 5.2 26.1
Russia flagRussia 4.3 6.6 27.7
Saudi Arabia flagSaudi Arabia 6.8 n/a n/a
South Africa flagSouth Africa 3.3 24.9 29.4
South Korea flagSouth Korea 3.6 3.4 34.9
Turkey flagTurkey 8.5 9.8 42.7
UK flagUK 0.9 8.1 421.9
US flagUS 1.7
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Return of the euro crisis After the sugar rush – PFG Special Report

 

April 14, 2012

Mathieu Armand
European Regional Managing Director – Asset Management

Spanish bond yields have risen as the effect of cheap ECB cash wears off

THE high is over. The European Central Bank’s two long-term refinancing operations (LTROs) in December and February saw commercial banks borrow over €1 trillion ($1.3 trillion) of three-year money at the ECB’s main interest rate, which it had cut to 1%. Ostensibly a scheme to keep euro-area banks afloat, the LTROs also boosted flagging public-debt markets in the zone’s southern periphery, as banks used some of the cash to buy high-yielding bonds. That effect has faded.

Spain’s ten-year government-bond yield has been rising since the second tranche of three-year ECB cash was doled out. This week it reached almost 6%, the highest level since November (see chart 1). The U-turn owes a lot to the shifting dynamics of the euro-zone bond markets, which have also affected Italy. Missteps by Spain’s new government have not helped. Beneath all this lie deeper fears about Spain’s injured banks, the stringency of the government’s fiscal plans, and the impact of both on an already weak economy.

Start with the bond-market dynamics. With tacit support from regulators, the stock of government bonds held by Spanish and Italian banks rose by €122 billion between November and February. Prices

surged and yields fell. Hedge funds which had sold borrowed bonds in the hope that prices would fall were forced to buy them back. The rally lured others in.

This virtuous cycle turned vicious in early March. Some investors say the buying petered out once yields fell below 5%, when the bonds might no longer be considered cheap. But the conclusion of the second and last LTRO may have been the main trigger. Banks which bought periphery bonds have used up their ammunition. “The minute the ECB says ‘no more,’ the bank bidder is lost,” says a hedge-fund manager. Since there are few committed buyers of bonds beyond such banks, the smart money bet that yields would rise again. Brokers are less willing to take bonds off sellers’ hands in the hope that buyers eventually turn up, says Andrew Balls of PIMCO, a fund manager. In thinly traded markets, bond prices can suddenly shoot up if only a few investors take fright and start selling.

The clumsy handling of Spain’s 2012 budget may have persuaded some to sell. The newish Spanish government delayed it until after local elections in March; it also announced that its deficit target would be 5.8% of GDP, not the 4.4% agreed with European leaders (the compromise was a goal of 5.3%). The budget minister, Cristóbal Montoro, and the economy minister, Luis de Guindos, “contradict each other all the time”, complains a Spanish economist.

Yet Spain has deeper problems than muddled messages. The 2011 budget deficit was 8.5% of GDP, not the goal of 6%, in large part because of overspending by Spain’s autonomous regions. The economy is in recession—industry shrank by 5.1% in the year to February according to figures released on April 11th. Attempts to cut the deficit by 3.2% of GDP in a year will make things worse. Reforms to the jobs market, making it cheaper to fire workers and easier to set pay locally, will benefit Spain’s economy in time but not now.

Anxiety about Spain’s banks worsens the outlook further. A messy end to Spain’s long construction and mortgage boom means a lot of bank loans have already turned sour. More are likely to. Property prices have not yet fallen as far as in Ireland, the euro zone’s other housing black spot. Investors fear that the state will be called on to recapitalise Spain’s banks.

To complicate matters, much of Spain’s huge private debt is owed indirectly to foreigners via its banks. Spain’s net investment deficit—the sums owed to foreigners by firms, householders and the government, less the foreign assets they own—comes to 93% of GDP, the accumulation of a long series of current-account deficits. The increasing home bias of euro-zone investors makes it harder for countries with foreign debts to roll them over. Greece and Portugal have similar foreign debts but have higher borrowing costs (see chart 2).

Spain and Italy could not live with today’s borrowing costs for long unless the outlook for their economies were to improve dramatically. So they may have to look to outside help. But it would be hard for the ECB to sanction another LTRO so soon, reckons Laurence Boone of Bank of America. The ECB could restart direct bond purchases: Benoît Cœuré, a member of the bank’s six-strong executive board, suggested on April 11th that it might, which helped push Spain’s bond yields down a bit. But that would make existing investors worry more about subordination to the ECB in the event of a restructuring. In any case Mario Draghi, the bank’s president, has recently said high yields are the bond markets’ way of asking governments to implement promised reforms.

Spain could volunteer for the kind of support programme that Greece, Portugal and Ireland have signed up to. But Italy is scarcely in any less trouble and the euro zone’s meagre rescue fund could not stretch to a bail-out of both countries for long. A more likely outcome is that Spain is eventually forced to draw on the shared rescue fund to recapitalise its banks, which might in turn take pressure off its sovereign-borrowing costs. Meanwhile, some have turned to the next trouble spot. “France is our cheapest and biggest short,” says one hedge-fund manager.

 

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EU summit focuses on growth

EU leaders are now finally focusing on growth rather than austerity, at the lastest summit of all 27 EU countries. Britain and France disagreed on how growth can be achieved, with France still proposing a financial transaction tax, to help pay for growth.

This was the first summit in 2 years that did not have Greece as the main focus of discussion. The summit began on Friday, after the EU with the exception of the UK and Czech Republic voted for a new fiscalcompact treaty.

The benefits of the deal should be realized in 7-10 years. In the short term austerity will bite especially for countries not in the coreof the EU, like Portugal, Ireland and Greece. The Greek deal is a crucial short term measure to prevent default on its massive debts.Greek bond swap did not trigger a credit event,so noinsurance willbe paid on the credit default swaps,CDS.

The deal which will see 43% go to bailed out banks and bondholders with the remaining 57% to Greece, swapped shorter maturity bonds for longer term ones. The dealis being voted on by the 17 Eurozone member countries.

The Dutch and Finns were the latest parliaments in the Eurozone to approve the Greek bailout package, following Germany which ratified the package yesterday. The move came amidst the ECB passing out 529 Billion pounds of credit to European banks in its Long term repayment operation (LTRO) loan program.

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EU’s Van Rompuy warns over complacency in euro debt crisis

AMSTERDAM, March 4  – European Council President Herman Van Rompuy warned against complacency in handling the euro zone debt crisis and stressed the need for meeting budget rules and reducing deficits.
“The crisis is not yet fully over. We have come into calmer waters, true, but the next two years we have to make sure this crisis can never repeat itself,” Van Rompuy told Dutch television programme Buitenhof on Sunday.
An agreement for stricter budget rules, signed by European leaders on Friday, and a 1,000 billion euro ($1.3 trillion)liquidity injection by the European Central Bank (ECB) had helped to stabilise financial markets, Van Rompuy said.
Discussions about the euro zone’s disintegration had died down but governments still needed to reduce budget deficits and make plans to strengthen economic growth, he said.
“If a plan does not meet demands we will take sanctions. That has never happened in the union. We have to make this credible otherwise the crisis will repeat itself.”
As Council president, Van Rompuy chairs and prepares meetings of European Union leaders, working to build agreement among them, a role that has put him at the centre of efforts to resolve the debt crisis since his appointment in December 2009.
Van Rompuy warned that countries which would not meet deficit reduction targets might pay more for debt financing.
“One can think to take it easy with budget targets but financial markets can respond to this badly. What one hopes to gain by fewer budget cuts one loses by higher interest rates (on debt),” he said.
Spain set itself a softer budget target for 2012 on Friday than originally agreed under the euro zone’s austerity drive, and the country’s long-term cost of borrowing rose after the news.
Asked about a call from a Dutch politician and government ally, Geert Wilders, to hold a referendum about leaving the euro zone, Van Rompuy said such an exit would be the end of the EU.
“If one left the euro zone the Netherlands would not be the only country, and the euro zone would fall apart. Then the whole union would fall apart,” he said.
Dutch Freedom Party leader Wilders, who opposes euro zone bailouts and supports the Dutch minority government, on Saturday called for a referendum to let citizens choose to return to the guilder or keep the euro.
Dutch Prime Minister Mark Rutte, who relies on opposition parties to approve euro zone bailouts, opposes the idea of returning to the guilder, saying it would be disastrous for the Netherlands’ export-oriented economy.
A majority of the Dutch parliament has repeatedly supported bailouts and other rescue measures, citing the economic importance of having a single currency and the dangers of a euro zone country going bankrupt. ($1 = 0.7573 euros).
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