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Italy’s Borrowing Costs Fall, but Pressures Remain High

December 29, 2011 by Leave a Comment

Last week, Mr. Monti won final approval of a $40 billion spending package that includes tax increases and a pension change aimed at eliminating Italy’s budget deficit by 2013. But with Italians starting to feel the pain and dissent growing in Parliament, he must act swiftly to stimulate Italy’s economy, which is already in recession and is expected by some forecasters to shrink in 2012.

On Wednesday, the day his cabinet met to discuss measures to spur economic growth, Mr. Monti appeared to receive some breathing room when interest rates on six-month Treasury bills, a barometer of investor worry about Italy’s creditworthiness, dropped in half to 3.2 percent and rates on 10-year Treasury bonds dropped to 6.91 percent from above 7 percent, which was near the level at which other euro-zone countries like Ireland and Greece needed bailouts.

“Of course it’s an important and comforting signal,” said Massimo Giannini, the business editor and deputy editor of the center-left daily La Repubblica, adding that the government had been concerned that the borrowing rates remained high even after it passed the austerity measures.

“But the pot is still boiling,” Mr. Giannini said, meaning that Italy’s economic travails remain acute and a challenge for the Monti government. “The problem is that we need to relaunch economic growth, but there isn’t a lot of money to do this. It’s a huge problem, and they don’t know how to do it.”

Market analysts said the drop in borrowing rates on Wednesday partly reflected Italian bond purchases by the European Central Bank and other European banks, which received a large infusion of low-interest capital from the European Central Bank this month.

Analysts said a bigger test for Italy will come in a larger bond auction on Thursday. Italy, the euro zone’s third-largest economy, must refinance almost 200 billion euros in government debt by April, and if borrowing rates remain high, the country could face a solvency crisis that could threaten the stability of the euro.

In many ways, the fluctuations in Italy’s borrowing rate only compound the country’s political complexities. Analysts doubted that the lower rates seen on Wednesday would buy Mr. Monti more time. Moreover, they said, his government needs a certain amount of market pressure to help push through politically unpopular structural changes in the economy that the parties nominally backing him in Parliament are not eager to carry out.

Yet if the market pressure becomes too high and the borrowing rates remain too onerous, Italy risks a default.

“A part of the political class thinks that if the market pressure lets up, we can also lessen the sting of cleaning up the economy, to do weaker economic measures,” Mr. Giannini said. “But by now I think there’s a broad awareness, at least on the part of the government, that we have to do these measures regardless of the euro and regardless of the commitment we made with Europe.”

In August, Italy agreed to eliminate its budget deficit by 2013 and enact structural changes to its pension system and labor markets in exchange for purchases of Italian government debt by the European Central Bank.

The People of Liberty, the largest party supporting Mr. Monti’s government in Parliament, believes that its former leader, Silvio Berlusconi, was swept out of office by market forces, not traditional democratic processes, and in recent weeks has attempted to gain political ground by capturing Italian discontent at the austerity measures.

“There’s no clear link between the decisions taken by the government and the markets,” Angelino Alfano, the leader of the People of Liberty and Mr. Berlusconi’s political heir, told a group of reporters last week. Calling on Europe to take broader action, he asked: “No matter how illuminated the choices are of the Italian government, can they change the course of the euro crisis or the destiny of Europe?”

In recent weeks, Mr. Monti, too, has been calling on Europe — which is to say Germany, the euro zone’s biggest and strongest economy — to help provide more institutional support for the euro.

Germany has adamantly opposed what it sees as rewarding the bad behavior of southern rim countries like Italy, Greece, Spain and Portugal, which amassed high public debts and where tax evasion is rampant. But it has also been vehemently opposed to changes that many economists and the Obama administration say are necessary to ensure the stability of the euro, such as allowing the European Central Bank to become a lender of last resort like the Federal Reserve in the United States.

The troubled backdrop to Italy’s economic challenge is neighboring Greece, where nearly two years of austerity measures — tax increases and wage cuts — demanded by the country’s foreign lenders have pushed the country into a deep recession and led to deep cuts in basic services like health care.

Article source: http://feeds.nytimes.com/click.phdo?i=6e875b54aad605415c534bcc14b03a3e

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Italy’s Borrowing Costs Plummet, Easing Pressure

December 28, 2011 by Leave a Comment

The sale of 9 billion euros ($11.8 billion) of six-month Treasury bills was seen as the first postholiday indication of the condition of the beleaguered euro zone, the 17 members of the European Union that use the euro.

The bills were sold at a yield of 3.251 percent, down from 6.504 percent at a previous auction in late November. Demand was 1.7 times the amount offered, compared with 1.47 times previously.

In an auction of two-year bonds, which raised 1.7 billion euros, the yield fell to 4.853 percent from 7.814 percent last month. The auctions raised a total 10.7 billion euros.

The lower borrowing costs appeared to reflect the adoption of a new austerity package in Italy, as well as a huge infusion of low-cost, long-term liquidity into euro zone banks by the European Central Bank last week.

With the central bank now charging only 1 percent interest on three-year loans, banks can take the cash, buy short-term securities and earn a quick profit.

In anticipation of the loans, Spain’s borrowing costs fell drastically at an auction on Dec. 20. And the central bank will offer the three-year loans again in late February.

On Thursday, Italy plans a sale of 8.5 billion euros ($11 billion) in long-term debt, which analysts said would be a more significant indicator of market sentiment.

The brighter outlook for Italy was reflected elsewhere in the debt markets, where Spain’s long-term borrowing costs fell to almost 5 percent. German bonds, a benchmark for the euro zone, edged lower to 1.89 percent.

“The target size of the auction was in line with the intended amount,” analysts at IFR Markets wrote in a note after the Italian debt sale, “so over all a smooth auction.”

The sale of long-term debt on Thursday probably will “go the same way,” they added, “as domestic players come in to support” the bonds.

Nevertheless, there was evidence that the financial system remained stressed. The central bank reported that banks in the euro zone had deposited a record amount of overnight funds for the second day in a row. Banks parked 452.03 billion euros ($584 billion) for 24 hours, beating a previous record of 411.8 billion euros set on Tuesday.

The heavy use of the deposit facility indicates that banks in the euro zone remain wary of lending to one another, although analysts note that market activity has been muted because of the year-end holidays, and there is more cash in the system after the central bank’s action.

Italy has been in the spotlight as a result of slow growth combined with escalating borrowing costs and a debt equal to 120 percent of gross domestic product. It needs to raise 450 billion euros ($582 million) in 2012.

Italy suffered its biggest decline in Christmas retail sales in 10 years, according to data released this week by the consumer group Codacons.

Article source: http://www.nytimes.com/2011/12/29/business/global/italys-borrowing-costs-drop-sharply-at-auction.html?partner=rss&emc=rss

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Banks Retrench in Europe While Keeping Up Appearances

December 22, 2011 by Leave a Comment

That includes Santander, the Spanish banking giant that European regulators say has the biggest capital hole to fill: at least 15 billion euros.

So why, then, is Santander still planning to pay its shareholders 2011 dividends worth at least 2 billion euros in cash and even more in stock? That question goes to the heart of the economic challenge that Europe faces in the year ahead. A combination of government austerity, and the imposition of bigger capital safety cushions that are leading banks to retrench, seem all but certain to plunge the Continent back into recession less than three years after emerging from the last one.

 

But many banks are taking actions that will only intensify the blow. To preserve their allure as global brands, while trying to compensate for their battered share prices, big European banks like Santander remain intent on maintaining rich dividend payouts to shareholders. At the same time, they are selling assets, curbing lending and taking other belt-tightening measures to satisfy regulators’ demands for more capital.

 

“Our dividend is a sign of our expected future profits,” said José Antonio Alvarez, the chief financial officer of Santander. “Unless our expectations change we try not to cut the dividend.”

Santander, though by many measures the most generous, is not the only bank paying dividends as it scrambles to raise capital.

Its rival, the Spanish lender BBVA, plans to pay out nearly half its profits to shareholders, despite being under regulators’ orders to raise 6.3 billion euros in capital. To a lesser but still significant extent, Deutsche Bank and BNP Paribas will also be paying out dividends as they try to take in money to build their capital cushions.

All this is a sharp contrast to the way capital-short banks in the United States slashed dividends to conserve cash during the depths of the financial crisis that followed the Lehman Brothers collapse in 2008. The American government also injected cash into the banks, as Britain did with its weaker institutions.

So far, European governments have shown no inclination to do likewise for their banks. And critics say the contrast with the American experience shows how much European regulators are out of step, or even out of touch, with the banks they supervise — with potentially disturbing ramifications for the European economy.

“I do not think Europeans understand the implications of a systemic banking crisis,” said Richard Koo, the chief economist at the Nomura Research Institute in Tokyo and an expert on the financial stagnation in Japan in the 1990s. “When all banks are forced to raise capital at the same time, the result is going to be even weaker banks and an even longer recession — if not depression.”

A paper Mr. Koo wrote on the subject has gone viral on the Web, with many picking up on his recommendation that the banking crisis will not be solved until European governments inject large amounts of money into their banks.

“Government intervention should be the first resort, not the last resort,” Mr. Koo said in an interview.

There is little doubt that European banks need shoring up right now. That fact was made clear Wednesday, when 523 banks tapped the European Central Bank for a record 489 billion euros (nearly $640 billion) in loans. Compared with their American peers, they have been much more dependent on borrowing in recent years to finance their lending binges.

On average, European banks’ loan books exceed their deposits by 1.2 times. In the United States the average loan-to-deposit ratio is 0.70. The upshot is that it will probably take much longer for Europe’s banks to unwind their bad loans and debt than it has for American banks.

The European Banking Authority, after a third round of stress tests in October, has ordered Europe’s fragile banks to raise more than 114 billion euros in fresh cash in the next six months. By June 2012, the region’s financial institutions will need to increase their so-called core Tier 1 capital ratio — the strictest measure of a bank’s ability to resist financial shocks — to 9 percent of assets.

That ratio, higher than the 5 percent preliminary target that the Federal Reserve set for American banks this week, reflects the acute capital strains that European banks are facing.

Article source: http://www.nytimes.com/2011/12/23/business/global/european-banks-retrench-while-keeping-up-appearances.html?partner=rss&emc=rss

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Russian Bailout Talk Helps Buoy European Markets

December 16, 2011 by Leave a Comment

Spain, which along with Italy is a euro zone member whose debt problems reverberate across the region, provided a measure of relief by raising $7.8 billion in a debt auction in Madrid at a lower-than-expected interest rate. Demand was brisk, perhaps on optimism for the new, conservative government that is about to be sworn in, and also because it was one of the last big bond auctions in Europe before the year-end holiday lull.

The yield on Italy’s debt was also modestly lower in trading Thursday, as the government in Rome called a confidence vote for Friday on a new austerity package.

Meanwhile, the euro currency regained some of its recent losses against the dollar. Stocks in Europe and the United States were also broadly higher.

Helping to buoy the markets, Russia said Thursday that it might pledge up to $20 billion via the International Monetary Fund to lend support to the euro zone’s financial markets and economy.

After meeting with European Union leaders here, the Russian president, Dmitri A. Medvedev, said his country was “interested in the European Union’s preservation as a dynamic economic and political force” and would consider assistance via the I.M.F. Though Russian leaders and officials face criticism for the conduct of recent elections, they arrived at the meeting in a strong position, knowing that Europe was seeking help from Moscow as well as courting other countries, like China and Brazil.

Mr. Medvedev’s economic aide, Arkady V. Dvorkovich, said Russia would be ready immediately to let the I.M.F. keep $10 billion from a commitment made in 2009 that, he said, was due to be reimbursed.

A possible second loan from Russia of up to $10 billion was dependent on clearer plans emerging for the financing of a firewall for still-vulnerable euro zone nations like Italy and Spain, Mr. Dvorkovich added.

Although such amounts would be relatively modest compared with the hundreds of billions of dollars of rescue reserves that many economists say might be necessary to maintain investor confidence in the euro zone, analysts saw at least symbolic significance in the Russian offer.

“There has been a sort of strategic inversion in relations between Russia and the E.U.,” said Thomas Gomart of the Institute for International Relations in Paris. “In 1998, Russia defaulted, and around 14 years later, Russia is in a position to finance Europe. Psychologically, that is a very big change.”

While Russia might be willing to pitch in, the head of the European Central Bank on Thursday repeated his recent assertions that the central bank would not respond to widespread calls that it provide a financial firewall for the region’s debt crisis by more aggressively buying government bonds.

In a Berlin speech, the bank’s president, Mario Draghi, said that the euro zone’s “firewall” was supposed to be the bailout fund set up by European governments.

And yet plans to increase the financial firepower of that bailout fund, the European Financial Stability Facility, to 1 trillion euros ($1.3 trillion) — the target set by European Union leaders — have fallen short. The I.M.F. is expected to help make up some of the shortfall, but the fund is still waiting to hear the details of how the euro zone will put together a new contribution of up to 200 billion euros to the I.M.F.

Another European Union summit meeting on the crisis has been tentatively scheduled for the end of January or beginning of February.

Where some analysts see the European Central Bank as being more effective lately is in the new medium-term lending program for commercial banks that it announced last week. In the program, which goes into effect next week, the central bank will start providing banks loans for three years, compared with a previous maximum of about one year.

The central bank last week also cut its benchmark interest rate target to 1 percent from 1.25 percent.

Those moves, more than any new-found confidence in Spain, might help explain the success of Thursday’s Spanish bond auction. Charles Diebel, head of market strategy at Lloyds Banking Group in London, said demand was probably driven in part by banks’ taking advantage of low borrowing costs.

Stephen Castle reported from Brussels and David Jolly from Paris.

This article has been revised to reflect the following correction:

Correction: December 15, 2011

An earlier version of this article gave a wrong date for when the European Central Bank’s new medium-term bank financing program, announced last week, goes into effect. It is next week, not Thursday.

Article source: http://feeds.nytimes.com/click.phdo?i=5c7b996a7d9a21867f27eef1a2300e59

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Economic Troubles in Europe and U.S. Start to Affect Asia

December 6, 2011 by Leave a Comment

HONG KONG — A rate cut in Australia and lowered economic growth estimates by the Asian Development Bank on Tuesday highlighted the extent to which the economic woes of Europe and the United States are spilling over into this part of the world.

Economic growth in much of Asia remains robust, the Asian Development Bank said. But trade and financial activity have already started to be hit by the turmoil in Europe and risk being undermined further if the sovereign debt crisis in the euro zone evolves into a full-blown financial and economic crisis of the kind seen after the collapse of Lehman Brothers in September 2008.

“Things are changing very rapidly — not just weekly and daily, but hourly,” Iwan J. Azis, head of the A.D.B.’s office of regional economic integration, said at a news conference in Hong Kong, as he presented the bank’s latest update on emerging East Asian nations.

The A.D.B. lowered its 2012 growth forecast for the emerging East Asia region — which includes China and much of Southeast Asia, but not India and Japan — to 7.2 percent, from a previous projection of 7.5 percent.

It also cautioned that growth could be as low as 5.4 percent if the West’s troubles escalated and tipped the United States and Europe back into recession.

Hopes of at least a modest upturn in the United States have risen after some better-than-expected manufacturing and job data in recent weeks, though unemployment there remains worryingly high.

The outlook for Europe, however, is grim, as austerity budgets and tighter lending by beleaguered banks constrain growth. Analysts at Nomura, for instance, said they expected the euro zone to contract 1 percent next year.

Top European policy makers are to assemble in Brussels on Thursday and Friday to try to come up with a solution for the region’s sovereign debt woes. Over the past weeks, the crisis has spilled beyond small peripheral euro zone nations and begun to undermine investors’ confidence in larger economies like Italy and even France.

The rapid deterioration has prompted a succession of support measures from international financial institutions in recent weeks: The European Central Bank lowered interest rates last month and is widely expected to stage another cut at its policy meeting Thursday.

In another bid to restore confidence, the two main leaders of the euro zone — Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France — said Monday that they would together push to remake the European Union into a more integrated political and economic federation, with tight legal restraints on how much debt national parliaments can issue.

The changes would effectively subordinate economic sovereignty to collective discipline enforced by European technocrats in Brussels.

It is unclear whether promises of future action will be enough to pacify the markets, which have been testing the resolve of European leaders for months.

Investors initially welcomed the proposed steps, sending stocks and the euro higher in Europe and the United States. But some of those gains were swiftly eroded after Standard Poor’s put 15 European nations on a credit watch, and stocks fell across the Asia-Pacific region Tuesday. The main indexes in Japan and Australia dropped 1.4 percent, and in Hong Kong, the Hang Seng index fell 1.2 percent.

Standard Poor’s said its warning of possible downgrades for core European nations had been prompted by its belief that “systemic stresses in the euro zone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the euro zone as a whole.”

“If the response of policy makers is not viewed by investors as robust, we believe market confidence could take another, possibly steep, drop downward,” the ratings agency said.

The Asia-Pacific region, meanwhile, is for the most part not burdened with the high government and household debt levels that are weighing on Europe and the United States. Asian banks also have little exposure to European debt, meaning that any defaults would not cause huge write-downs.

Still, much of the region depends on the West as a market for its products, and slowing demand in the United States and Europe has caused export growth from Asia to ease in recent months.

Economic growth in China has also slowed as Beijing’s efforts to cool down excessively rapid growth earlier this year have borne fruit.

The Australian central bank highlighted those concerns with its decision to lower interest rates
on Tuesday. The cut, the second in two months, took the main cash rate to 4.25 percent from 4.5 percent.

Trade in Asia is now “seeing some effects of a significant slowing in economic activity in Europe,” Glenn Stevens, the governor of the Reserve Bank of Australia, said in a statement accompanying the interest rate move.

“The sovereign credit and banking problems in Europe, to which European governments are still seeking to craft a full response, are likely to weigh on economic activity there over the period ahead.”

Analysts have also recently grown increasingly worried that beleaguered European banks could sharply scale back their lending in Asia.

Although there is little evidence at this stage of a full-scale withdrawal by such lenders, “there is a lot of scope for that to happen if the European situation worsens,” Rob Subbaraman, chief Asia economist at Nomura, said in a media conference call Tuesday.

Asian stock and bond markets have also seen portfolio outflows as nervous U.S. and European investors put their funds closer to home. This has caused currencies like the Indian rupee and the Indonesian rupiah to slump against the U.S. dollar.

The good news, however, is that policy makers in Asia have more flexibility than their Western counterparts to prop up flagging growth via interest rate cuts or tax incentives. Some, like Indonesia and Australia, have already cut rates, and analysts expect more such steps across the region next year. Such policy support, Mr. Subbaraman said, should help Asia to bounce back more rapidly from a downturn than other parts of the world.

Moreover, Mr. Azis of the A.D.B. said, banks in Asia have ample liquidity and could help fill financing shortfalls caused by a withdrawal of loans from European banks in the region. Despite the turmoil in the West, “Asia is in for a soft landing — not a hard landing,” he said.

Stephen Erlanger contributed reporting from Paris.

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Despite Praise for Its Austerity, Ireland and Its People Are Being Battered

December 5, 2011 by Leave a Comment

Having embraced severe belt-tightening to mend its tattered finances, Ireland is showing glimmers of a turnaround. A year after it received a €67.5 billion bailout, or $90.9 billion at current exchange rates, modest growth has returned and the budget deficit is shrinking.

But the effects of austerity have pummeled Ireland’s fragile economy, leaving scars that are likely to take years to heal. Nearly 40,000 Irish have fled the country this year alone in search of a brighter future elsewhere; the trend is expected to continue.

“This is still an insolvent economy,” said Constantin Gurdgiev, an economist and lecturer at Trinity College in Dublin. “Just because we’re playing a good-boy role and not making noises like the Greeks doesn’t mean Ireland is healthy.”

The German chancellor, Angela Merkel, recently praised the Irish prime minister, Enda Kenny, for setting an “outstanding example,” while the French president, Nicolas Sarkozy, declared that Ireland was already “almost out of the crisis.”

Underneath the surface, however, the grinding reality of Irish life belies those glowing commendations.

Salaries of nurses, professors and other public-sector workers have been cut around 20 percent. A range of taxes, including on housing and water, have increased. Investment in public works is virtually moribund.

On Monday and Tuesday, Mr. Kenny’s government is announcing an additional €3.8 billion in tax increases and spending cuts for 2012 that will hit health care, social protections and child benefits.

Retail sales fell 3.8 percent in October from a year earlier as spending was down even on things like school textbooks, shoes and other basic goods.

At a Spar convenience store in the center of Dublin, Samantha O’Donnell, a mother of two, picked up her shopping basket with some necessities, then put a few back on the shelf.

“A lot of people are just trying to get by week to week,” said Mrs. O’Donnell, who said her salary as a nursing assistant had been cut.

To Sean Kay, a professor of politics at Ohio Wesleyan University near Columbus, Ohio, and the author of a recent book examining Ireland’s crisis, Mrs. O’Donnell’s experience is typical. “The Irish are being praised for doing what they were asked to do, which is important for bringing investors back to the country,” he said. “But for the Irish people, it’s not paying off.”

There are signs of improvement. Compared with the previous year, exports are up 5.4 percent for the first nine months of 2011, fueled by gains from Pfizer, Intel, SAP and other multinational companies that were drawn to Ireland in the 1990s and 2000s by its low taxes, well-educated English-speaking work force and access to the European market. New information technology companies like LinkedIn and Facebook have recently joined the crowd.

Prospects for local technology companies are improving, too. Brian Farrell founded Tethras with a partner three years ago to develop mobile applications for smartphones. He now has 16 employees and hopes to double his work force in the next 18 months.

“Every time you turn the radio on, companies in I.T. are hiring,” Mr. Farrell said, referring to information technology.

Gross domestic product grew 1.2 percent in the second quarter from a year earlier, compared to a decline of 0.4 percent for all of 2010 and 7 percent in 2009.

The interest rates that Ireland would pay its international creditors if it were not on a financial lifeline have also fallen, to 8.7 percent today from 14 percent in August, in part because investors hope that European policy makers will resolve the broader debt crisis.

But that is still above the level that led Ireland to seek a bailout and too high to allow for sustainable finances.

Article source: http://feeds.nytimes.com/click.phdo?i=6aeae1ffdcd6700f412ec83050c78990

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Greece Selects a Prime Minister After Days of Wrangling

November 10, 2011 by Leave a Comment

The choice of Mr. Papademos, a former vice president of the European Central Bank, came after four days of tense negotiations that put Greece’s feuding political parties on full display.

A written statement issued by the office of President Karolos Papoulias was read on television in midafternoon confirming Mr. Papademos’s appointment and adding that the “chief role of the new interim administration will be the implementation of the decisions of the European Union summit of October 26 and the policies that are connected to this.”

Mr. Papademos appeared briefly shortly after the announcement. He said Greece still faced dire problems. But he struck an optimist note.

“The course will not be easy,” he said. “But the problems, I’m convinced, will be solved. They will be solved faster, with a smaller cost and in an efficient way, if there is unity, agreement and prudence.”

After months of domestic protests and building pressure from the European Union, Prime Minister George Papandreou agreed on Sunday to step down once a new coalition government had been formed. But the talks dragged on, apparently hostage to political maneuvering by all sides.

Mr. Papademos, however, is seen as outside the old-boy networks of Greek politics — a technocrat, perhaps able to take Greece on a new path.

News reports earlier this week said that Mr. Papademos was insisting on several measures he believed were crucial to his success, including a minimum of at least six months at the helm. Earlier, Greece’s major political parties had agreed to new elections in just 100 days.

The reports also said that he insisted that members of the opposition New Democratic party play a significant role in the unity government, which will have to impose additional austerity measures almost immediately.

The opposition, headed by Antonis Samaras, had resisted, not wanting to be linked to deeply unpopular reforms.

It was not clear immediately whether Mr. Papademos’s demands had been met.

He faces a difficult task. He will have to move swiftly to reassure the country’s major foreign lenders — the so called troika comprising the European Commission, the European Central Bank and the International Monetary Fund — who were shocked when Mr. Papandreou decided without warning to submit the latest bailout package to a referendum, a move that eventually led to his demise.

Mr. Papademos must also persuade the Greek Parliament to pass the new austerity measures, which include more layoffs of government workers, in a climate of growing social unrest.

Mr. Papandreou went on national television on Wednesday evening to announce that a new interim government had been formed.

But he did not name his successor, and in the hours that followed, it became clear that  political confusion had set in once more. Television provided glimpses of some of the drama. A furious Giorgos Karatzaferis, the leader of the small far-right party Laos, stormed out the presidential office building shortly after Mr. Papandreou’s speech. He told waiting reporters that he had been summoned to a meeting with Mr. Papandreou; the president; and Mr. Samaras, but found himself sitting in a hall alone. Apparently, the other men were too busy arguing to meet with him.

Mr. Karatzaferis, one of the few politicians willing to risk the potential damage from supporting a new power-sharing government that must take on a host of unpopular tasks, said political games were being played. “This is unacceptable,” he huffed before leaving.

Some Pasok members appeared to push publicly on Wednesday for Mr. Papademos, a respected economist and former  vice president of the European Central Bank who is seen as being a dynamic and technically able choice.

But his strength made him a potential rival for those who have aspirations in the next elections, analysts said. In addition, Mr. Papademos had set several conditions for taking the job, including a six-month term and the ability to choose his own finance minister, which had troubled some members of both parties. In fact, Mr. Papademos was acting to remove one of the most powerful members of Pasok, the current finance minister, Evangelos Venizelos, who is likely to run for prime minister in the next elections.

Nonetheless, many of the younger politicians are eager for someone who will make quick progress in getting the country’s financial house in order. One prominent member of Pasok, Anna Diamantopoulou, the minister of education, issued a letter on Wednesday that was widely interpreted as public support for Mr. Papademos, the economist.

“The country needs a prime minister of high status and acceptance, both inside and out of the country, with deep knowledge of financial affairs,” she wrote.

Mr. Papandreou’s televised address served as a kind of valedictory speech, summing up moves in recent years to stabilize and help the country, expressing the country’s continued commitment to the European bailout plan and urging political parties to transcend their differences.

Ahead of the meeting with the Mr. Papoulias, Mr. Papandreou said the country’s new government would signal the “beginning of a new political mentality, a new political culture.”

“Today, we leave aside our differences,” he said, heralding “a common effort to ensure the country moves forward, not only to remain part of the euro zone but also to emerge from the crisis.”

He said the interim government would make the necessary efforts to “justify the sacrifices made by the Greek people over the past two years,” referring to a raft of wage and pension cuts as well as hefty tax increases. The chief goals would be to secure crucial rescue financing for the country and continue talks with foreign creditors, he said.

Some interpreted the tone of his speech as signaling his departure not only from Greek politics but also from the country itself.

“I never put my position above the national good,” he said. “For me, Greece is above everything. Wherever I go, I will carry the Greek flag in my heart.” He added that he would do everything he could to support the new prime minister and the new government.

Article source: http://www.nytimes.com/2011/11/11/world/europe/greek-leaders-resume-talks-on-interim-government.html?partner=rss&emc=rss

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Leaders in Greece Agree to Deal to Form a Unity Government

November 7, 2011 by Leave a Comment

The agreement appeared to break a political deadlock that had paralyzed Greece in the face of an acute financial crisis that threatened to infect other euro-zone nations, especially Italy. European leaders see the debt-relief deal struck with Greece on Oct. 26 as crucial to containing the crisis in Greece and insulating Italy, a much larger economy whose political leaders have also struggled to cut budgets and deal with heavy debt.

The agreement in Greece could not have come soon enough for its European partners, who have pressed the country hard to forge a broader political consensus behind the debt deal. But it was not clear whether the agreement would provide the certainty that skeptical investors are demanding to calm turbulent financial markets.

The debt deal requires that the Greek Parliament pass a new round of deeply unpopular austerity measures, including layoffs of government workers, in a climate of growing social unrest. It also calls for permanent foreign monitoring in Greece to ensure that it makes good on its pledges of structural changes to revitalize its economy, a requirement that many Greeks see as an affront to national sovereignty.

With a narrow and eroding majority in Parliament, Mr. Papandreou’s Socialist government found that it could not unify to push through such measures on its own, but Antonis Samaras, the leader of the conservative New Democracy party, opposed many of the debt deal’s provisions and demanded Mr. Papandreou’s resignation and a snap election. After days of frantic political wrangling, Mr. Papandreou survived a confidence vote in Parliament on Friday, setting the stage for Sunday’s compromise.

The new unity government, in which the major parties would share power, is widely expected to be led by a nonpolitician and to govern for several months, long enough to carry out the debt deal and pass a budget for 2011. The name of the new prime minister and the composition of the new cabinet are not expected to be announced until Monday, when the leaders will meet again, according to a statement Sunday night by the Greek president, Karolos Papoulias, who moderated the talks on Sunday.

In a statement early Monday morning, the Greek Finance Ministry said that delegations from the Socialist Party and New Democracy met on Sunday “to discuss the time frame of the actions” to implement the debt deal, and added that the two parties regarded Feb. 19 as “the most appropriate date for elections.”

In reaching the agreement, Mr. Papandreou agreed to meet Mr. Samaras’s demand that he step down as prime minister, while Mr. Samaras agreed to back the debt deal and a seven-point plan of priorities proposed by Mr. Papandreou that would essentially commit the new government to the terms of the debt deal.

Mr. Samaras is not expected to play a role in the unity government, but would be New Democracy’s candidate for prime minister in the general election.

In many ways, a new interim government for Greece buys time for European leaders to put together a stronger bailout mechanism that would protect larger economies from the risk of default, chief among them Italy. High debt, low growth and the diminishing credibility of Prime Minister Silvio Berlusconi have made that nation increasingly vulnerable.

“The decision is very positive, because it will appease the markets and because it shows that Greek authorities are doing what foreign leaders want them to do — to get on with implementing the conditions for the E.U. debt deal,” said Athanassios Papandropoulos, an economist and commentator for the conservative Greek newspaper Estia.

Still, he said, he saw little chance that a unity government could get Greece back on the road to economic, political and social recovery. “I don’t think it will work,” Mr. Papandropoulos said. “It will last three months, then we’ll have elections, and then we’ll have the same problems all over again.”

Landon Thomas Jr. contributed reporting.

Article source: http://www.nytimes.com/2011/11/07/world/europe/pressure-mounts-on-greek-premier-to-resign.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Stocks and Bonds: Stocks Rally After Report Europe Might Recapitalize Banks

October 5, 2011 by Leave a Comment

The Standard Poor’s 500-stock index spent most of the day in bear market territory, defined as a 20 percent drop from the recent peak. Less than an hour before the close, the index was down 1.9 percent. But in the final 49 minutes of trading it rose 4 percent after a report said European officials were discussing plans to recapitalize the Continent’s banks.

The Standard Poor’s 500-stock index closed at 1,123.95, up 24.72 points, or 2.25 percent. The Dow Jones industrial average gained 153.41 points, or 1.44 percent, to 10,808.71, and the Nasdaq composite index rose 68.99 points, or 2.95 percent, to 2,404.82.

Analysts said that while the news from Europe might have been the immediate cause of the rally, the bigger story for the markets was their sustained volatility.

Investors remain jittery as they try to make sense of the debt crisis in Europe, an uncertain economic picture in the United States and a market that has fallen significantly, pushing stocks to levels that seem like bargain prices. In seven of the last 10 trading sessions, the Standard Poor’s index has moved more than 2 percent.

“It’s almost a schizophrenic view from investors. Have we fallen off a cliff, or have we hit the bottom?” said Richard J. Peterson of Standard Poor’s Capital IQ.

The rough ride will end only when some resolution is reached in Europe, Mr. Peterson said. But that day does not seem to be approaching very quickly. There are increasing signs that the economic situation in Europe is set to worsen.

The economy in the 17 countries that use the euro has already slowed to a standstill, and economists say they believe it could stay in a slump at least through the spring. There is widespread worry that austerity measures intended to reduce government debt will further choke Europe’s economies.

The price that European governments pay for credit-default swaps, which serve as insurance against default for their sovereign debt, rose sharply across Europe. After the markets closed in New York, Moody’s downgraded its outlook on Italian government bonds.

Interest rates rose slightly on Tuesday. The Treasury’s benchmark 10-year note fell 20/32, to 102 25/32, and the yield rose to 1.82 percent, from 1.75 percent late Monday.

Earlier in Europe, stocks declined sharply. In London, the FTSE 100 index fell 2.58 percent, the DAX in Frankfurt was 2.98 percent lower and the CAC 40 in Paris was down 2.61 percent.

Finance ministers from the 17 European Union nations that use the euro postponed moves to release the next installment of aid to Greece, which means that Greece will probably not receive the 8 billion euros ($10.6 billion) before November.

European banking shares fell sharply, led by Dexia, a financial concern based in Brussels whose value has plunged this week because of its exposure to Greek debt.

Traders pinned the late surge in United States stocks to a report on The Financial Times Web site that European Union finance ministers were looking at ways to reinforce the capital reserves of Europe’s banks as part of a broader move to contain the crisis.

Earlier, Ben S. Bernanke, the Federal Reserve chairman, voiced concern about the American economy when he addressed a Congressional committee. Mr. Bernanke called on Congress to take action on jobs, but also said that the Fed was prepared to make further moves to stimulate the economy. He said the turmoil in the markets was acting as a drag on the American economy.

Analysts noted the negative tone of his remarks.

“We’re no longer comparing it to what you would be expecting in a recovery — it’s that we’re not as bad as we were in 2008. He talks about the limits of what he can do,” said Eric Green, chief economist at TD Securities.

In economic data, new factory orders were down slightly in August, but not as bad as most analysts had predicted, according to figures from the Commerce Department.

Andrew Wilkinson, chief economic strategist for Miller Tabak Company, said that the numbers were the latest in a series of economic indicators showing that the American economy was not slipping into recession. “It’s moving in the right direction, but it’s moving at a very slow pace,” he said.

Still, economists see the slowing economy in Europe as a troublesome sign for the United States. After the 2008 financial crisis, the American economy was fueled in part by exports. Interruptions in worldwide demand could cut off that road to recovery. A strengthening dollar could also be a concern, because it makes American exports more expensive.

The dollar rose to a fresh nine-month high against the euro, which fell as low as $1.3144, before recovering to $1.332.

Article source: http://feeds.nytimes.com/click.phdo?i=b02472c93d5267a8027ea415e7e9bbe2

Filed Under: Economy News Tagged With: , ,

Euro Debt Crisis Threatens to Touch Off a New Recession

October 5, 2011 by Leave a Comment

Greece, Ireland, Portugal and Spain are already in downturns or fighting to avoid them, as high unemployment and austerity belt-tightening take their toll. But in the last few weeks, even prosperous Germany and France, the Continent’s powerhouses, have started to be dragged down, hurt by the ebbing of business orders from indebted countries in the rest of Europe.

European stocks continued their latest plunge on Tuesday, as the German financial giant Deutsche Bank, buffeted by the debt crisis, reduced its profit forecast for the year. Investors were also jolted by news that the French-Belgian investment bank Dexia might be the region’s first large bank to need a government rescue as a result of the current debt crisis.

It is not just the Continent’s problem.

The United States, a major banking and trading partner with Europe, is stuck in its own rut — prompting the Federal Reserve chairman, Ben S. Bernanke, to warn Tuesday that “the recovery is close to faltering.” He told a Congressional panel that the economy could fall into a new recession unless the government took further action.

United States stocks ended up for the day, but had bounced wildly on jitters about Europe and rising fears that Greece would have to default on its sovereign — or government — debt. The Greek finance minister said Tuesday that the country could continue to pay its bills at least through mid-November, after other European finance ministers said Greece would not receive its next installment of bailout money before next month, if then.

A downturn in Europe, if it happens, could help tip America back into recession and would undoubtedly ricochet around the world. Europe’s banks are among the most interconnected in the world, and the euro is the world’s second-largest reserve currency after the dollar.

The 17 European Union nations that share the euro together account for about one-fifth of global output. And emerging markets that are important customers for European exports, like China and Brazil, are beginning to retrench.

“We are the epicenter of this global crisis,” Jean-Claude Trichet, the president of the European Central Bank, said on Tuesday at the European Parliament.

A growing chorus of analysts now predict that Europe is heading for an outright recession. “The sovereign debt crisis is like a fungus on the economy,” said Jörg Krämer, the chief economist at Commerzbank. “I thought it would be just a slowdown,” he said. “But I have changed my mind.”

Goldman Sachs predicted Tuesday that both Germany and France would slip into recession, although other forecasts are less grim.

Already, the euro zone economy has slowed to essentially zero growth. It could stay in a slump, many economists say, at least through next spring. If that happens, tax revenue is likely to fall and unemployment, already high, is expected to rise, making it even more difficult for Europe to address the sovereign debt crisis and protect its shaky banks.

In a sign of how quickly the ground is shifting, the European Central Bank might lower interest rates on Thursday — just a few months after it started raising them in what is now seen as a misguided effort to stem incipient inflation.

Distress is increasingly evident across Europe.

Philippe Leydier, a French businessman, had been feeling more upbeat until this summer, when orders for his company’s corrugated boxes suddenly began to slide. Orders fell further last month, as auto parts makers, electrical engineering firms, farmers and other industries reduced production.

“The euro crisis and the financial crisis linked to the debt of European countries is serious,” said Mr. Leydier, whose box and paper manufacturing firm, Emin Leydier, in Lyon, often provides an early signal of seismic shifts in economic activity. “European governments need to find a solution — and fast.”

In Italy, which has the euro zone’s third-largest economy, after those of Germany and France, a 45 billion euro austerity program aimed at reducing debt has many worried about a recession. On Tuesday, the ratings agency Moody’s downgraded Italian government bonds by three notches, to A2 from Aa2, and kept a negative outlook on the rating.

Paolo Bastianello, the managing director of Marly’s, an Italian clothing retailer, is increasingly discouraged.

Liz Alderman reported from Paris and Jack Ewing from Frankfurt. Raphael Minder contributed reporting from Lisbon, Gaia Pianigiani from Rome and Stephen Castle from Luxembourg.

Article source: http://feeds.nytimes.com/click.phdo?i=d72b58ce395b32cadc9abbf72384c9f2

Filed Under: Business News Tagged With: , ,
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