bailout

Monte Dei Paschi, Banking House of Siena, Stumbles

February 22, 2013 by NewsMaker Leave a Comment

Since the days of the Medici family in Florence, 40 miles to the north, the banking house of Monte dei Paschi has rained wealth on the people of Siena. For 541 years, it has endured war, plague and panic, and it stands today as the world’s oldest operating bank.

But beyond the arched entrance of the Salimbeni palace, inside the stately offices of Monte dei Paschi di Siena, a thoroughly modern fiasco has done what the centuries could not. Monte dei Paschi, founded in 1472, has been brought to its knees by 21st-century finance.

To howls across Italy, the government hastily arranged a bailout worth $5.1 billion. Now, the widening troubles, which began at a time of growing economic distress in Italy, have boiled over into an issue in nationwide elections to be held on Sunday and Monday.

Nowhere is the shock greater than in Siena. For many here, Monte dei Paschi is more than a bank. It is “Babbo Monte,” or Daddy Monte, the city’s largest employer and greatest patron. For as long as anyone can remember, its money has helped pay for charities and civic works, including Siena’s signature annual event, the colorful Palio horse races around the Piazza del Campo each summer. Indeed, the bank’s largest shareholder, the charitable Monte dei Paschi Foundation, has long operated as a sort of shadow government here.

Now, everyone wonders what will happen without Babbo Monte’s money.

“Nothing falls from the sky anymore,” said Mario Marzucchi, president of Misericordia di Siena, which provides health care to the city’s poor and operates a fleet of ambulances. The charity is struggling to maintain its services and to renovate its clinic, located in a former Benedictine monastery.

Caterina Barbetti, president of a cooperative that operates nursery schools, said she had been forced to reduce free child care for the city’s poor. She used to depend on Babbo Monte, too. “Now,” she said, “he has left.”

Monte dei Paschi has occupied its palace in Siena’s old town since the bank was founded, although it has added modern trappings like bulletproof glass doors. The bank’s archives are in a vaulted room once used to store weapons. In the piazza out front stands a statue of Sallustio Bandini, an 18th-century Tuscan economist who was an early advocate of free trade.

Where Monte dei Paschi goes from here will be determined largely by its chairman, Alessandro Profumo, a prominent banking executive brought in from Milan. Mr. Profumo, 56, is no stranger to controversy. In 2010, he was ousted as chief executive of another Italian bank, UniCredit, after the Libyan government acquired a large stake in that bank.

Seated in an office decorated with a fresco, begun in the 1400s, of the Virgin Mary protecting the citizens of Siena, Mr. Profumo said Monte dei Paschi had been undone in part by its dealings with several large international banks. JPMorgan Chase and others helped arrange transactions that ultimately hurt the Italian bank. The foreign banks have not been accused of wrongdoing, but Mr. Profumo suggested they profited at Monte dei Paschi’s expense.

“Clearly, many investment banks made a lot of money on Monte dei Paschi,” he said. “I would say too much money.”

The picturesque setting aside, the outlines of what went wrong here are all too familiar. In Siena, as in much of Europe, banks controlled by politicians provided loans and jobs in return for votes, and sponsored charities and civic organizations to buy good will. Vincenzo Loi, chief financial officer of A.C. Siena, the city’s soccer team and another longtime beneficiary of Monte dei Paschi’s largess, likened the system to the way the Roman emperors kept their citizens happy with bread and circuses.

Monte dei Paschi’s troubles have been exploited by both the right and the left in Italian politics. At a meeting of the bank’s shareholders in January, Beppe Grillo, a comedian turned populist political leader, delivered a tirade about Monte dei Paschi’s longtime connections to the Democratic Party, which for decades was the dominant political force in the city.

The bank’s real problems began in 2008, when it acquired Antonveneta, a small regional bank, from Santander of Spain. Analysts regarded the price of 9 billion euros ($11.9 billion) as wildly inflated even then, and to compound the problem, Monte dei Paschi paid cash. Stretched, it turned to a series of transactions to raise money without compromising its capital base, a development that would run afoul of banking regulations.

This article has been revised to reflect the following correction:

Correction: February 22, 2013

A caption in an earlier version of this article misspelled the city in which Monte dei Paschi is based. It is Siena, not Sienna.

Article source: http://www.nytimes.com/2013/02/23/business/global/the-patron-of-siena-monte-dei-paschi-stumbles.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: bailout, medici family, nursery schools

Euro in the Spotlight Ahead of Meetings

February 11, 2013 by NewsMaker Leave a Comment

LONDON — The euro rose on Monday, but its value was vulnerable to political and fiscal uncertainty in the euro zone and growing unease among some European leaders worried about currency’s recent gains.

The Group of 7 nations were considering issuing a statement this week that reaffirmed their commitment to “market-determined” exchange rates in response to heating rhetoric about a currency war, two Group of 20 officials said on Monday.

Some analysts said the euro could edge lower before a meeting of euro zone finance ministers later Monday and a G-20 meeting later in the week, given tensions over whether some countries are deliberately trying to weaken their currencies to improve export competitiveness.

Pierre Moscovici, the French finance minister, said on Monday that euro zone countries need closer cooperation on exchange rate policy and the bloc’s finance ministers would discuss the issue when they meet.

The euro recovered from a session low of $1.3358, which was close to a two-week low, at around $1.3385. Morgan Stanley strategists said the euro could pull back toward $1.3260, its 50-day moving average.

Against the yen, the euro rose 1 percent to 125.39 yen, pulling away from Friday’s one-week low of 123.43, but still some way off the 34-month high of 127.71 yen hit on Feb. 6.

“While the speed of the euro recovery was probably overdone, this correction down is also likely running out of steam,” said Ulrich Leuchtmann, head of foreign exchange research at Commerzbank. “There are however risks with the Italian elections (and) Cyprus and we could see some pullback today” with the finance ministers’ meeting.

Concerns about the terms of a bailout for Cyprus, which will be high on the finance ministers’ agenda, would cap the euro’s gains, analysts said.

The euro sold off last week after Mario Draghi, the European Central Bank president, kept alive expectations of rate cuts and said the bank would monitor the economic impact of the strengthening currency.

The euro had gained around 5.5 percent against the dollar since the beginning of January to its peak of $1.3711 on Feb. 1. Since then. it has shed about 2.5 percent.

Much of Asia was shut for the Lunar New Year holidays, keeping volumes on the lower side.

Article source: http://www.nytimes.com/2013/02/12/business/global/euro-in-the-spotlight-ahead-of-meetings.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: bailout, euro zone, exchange rate policy

‘Hidden’ State Guarantees Add to Europe’s Debt Worries

February 5, 2013 by NewsMaker Leave a Comment

Perhaps they should be.

It is easy to be lulled because these two newer members of the euro zone rank among the more fiscally responsible of the club’s 17 members in terms of debt relative to the size of their economies. By that measure, even the euro zone’s presiding debt disciplinarian, Germany, fares worse — at least according to official figures.

But official figures can deceive. Even as Europe’s newfound sense of financial calm continues, the hawks who watch government debt — ratings agencies, global regulators and bond lawyers — are starting to focus on what they consider the underreported financial obligations of countries like Slovenia, Malta and others.

They warn that if the risks posed by nearly insolvent banks and unprofitable state-owned companies are factored in, government debt ratios would show a sharp increase that could well unsettle investors holding these countries’ bonds.

That is because, more than ever before, euro zone governments — not only in Slovenia and Malta, but in financially troubled spots like Cyprus, Spain, Ireland and Italy — are guaranteeing the bonds issued by banks and other state-owned entities as a way of backing important segments of the economy without adding to the official tally of debt. If any of those banks or companies have trouble paying back their debts, it is the countries themselves that would be on the hook.

“These guaranteed bonds represent a clear and present danger to sovereign governments that is not reflected on their balance sheets,” said Lee C. Buchheit, a sovereign debt lawyer at Cleary Gottlieb Steen Hamilton.

No one expects any immediate need for additional national bailouts as a result of these lurking liabilities. Only Cyprus, whose problems are well documented, is in bailout talks. And Greece continues to occupy its own special sick ward.

Still, there have been a few tremors lately.

Last month, when Standard Poor’s reduced Malta’s bond rating by a notch, to BBB+, the ratings agency cited the implicit liabilities of government guarantees. In particular, S. P. highlighted the increasingly weak financial condition of Malta’s state-owned energy giant, Enemalta. That company’s debts represent 60 percent of the 1.1 billion euros ($1.5 billion) in loans that Malta has backed.

To include those obligations would lift Malta’s debt load from its current moderate level of 74 percent of gross domestic product to a much more worrisome 90 percent.

Meanwhile, Slovenia’s debt-to-G.D.P. figure would increase to 80 percent, up from the official 50 percent figure, if the calculation included 3 billion euros of loan guarantees for businesses. They include DARS, a highly indebted though profitable company that builds and manages the country’s highways. There are also a number of unprofitable banks like Nova Ljubljanska Banka that are dependent on the government for their survival.

Pointing to the bank liabilities in particular, the ratings agency Moody’s Investors Service knocked down Slovenia’s debt rating last August, to Baa2 from A2, just two notches above “junk” status.

For the better part of a decade, euro zone countries have used sovereign, or government, guarantees as a way to let strategically important state-owned companies — including railway groups in Greece or car companies in France — raise money by issuing bonds in international markets. With the start of the financial crisis, this practice was extended to banks, which in many cases were no longer able to borrow on their own.

The thinking has been that since the guarantee is contingent only on these businesses failing, the liability need not be added to the country’s existing pile of debt. But as the debts of these companies and banks have soared, and as the financial health of the countries backing them has deteriorated, the debt specialists are beginning to take note.

Article source: http://www.nytimes.com/2013/02/06/business/global/lurking-state-guarantees-add-to-europes-debt-worries.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: bailout, guaranteed bonds, newfound sense

Cyprus Complicates German Quest to Save Euro Zone

February 3, 2013 by NewsMaker Leave a Comment

But eight months before a crucial election in Germany, Chancellor Angela Merkel is facing charges that Europe is doing just that as the tiny island of Cyprus, a haven for Russian cash, threatens to become the next point of contention in the euro crisis.

In recent days, Germany has signaled that it is reluctantly edging toward a bailout for Cyprus, after lifelines have been extended to Greece, Ireland and Portugal to prevent potentially calamitous defaults. While Cyprus makes up just a sliver of the euro zone economy, it is proving to be a first-rate political headache.

“I don’t think that Germany has ever in the history of the euro zone crisis left itself so little wiggle room,” said Nicholas Spiro, the managing director of Spiro Sovereign Strategy in London. “But Germany wants the euro to succeed and survive, and they are saying we can’t afford a Cyprus bankruptcy.”

But giving a bailout to Cyprus is trickier than it seems. Cyprus’s politicians would prefer not to take European money, which comes with the harsh austerity conditions that have spread misery in Greece. And they can argue that Cyprus was doing relatively well until Greece’s second bailout, when Greek government bonds — of which Cypriot banks held piles — lost considerable value.

The question of keeping the euro together had seemed to be conveniently fading for Ms. Merkel, who in the fall put her full backing behind the euro zone, quieting fears of a breakup. But Berlin seems to have been caught off guard by the political tempest stirred up by Cyprus, which has been shut out of international bond markets for a year but has been kept afloat by a $3.5 billion loan from the Russian government.

With that money running out, Germany and its European partners have been locked in a fierce debate over whether and how to throw Cyprus a lifeline. The problem is, most of the money lost by Cypriot banks was Russian, and the worry is that most of the bailout money could wind up in the hands of Russian oligarchs and gangsters. That fear, backed by a recent report by German intelligence, has stoked a furor even among some of Ms. Merkel’s political partners. “I do not want to vouch for black Russian money,” Volker Kauder, a prominent member of her conservative bloc, said recently.

The Russian presence is thick on Cyprus, a picturesque Mediterranean island and a onetime British colony. The bustling, large city of Limassol has an enclave of restaurants, shops and fur boutiques so packed with Russians that locals call it “Limassolgrad.”

Officials in Cyprus say there is no proof that the Russian cash in its banks is of dubious origin, and they insist that they cracked down on money laundering before joining the European Union. The officials point to an evaluation by the Organization for Economic Cooperation and Development showing that Cyprus is compliant with more than 40 directives against money laundering.

While any lifeline for Cyprus would be small — about $22 billion compared with about $327 billion for Greece — the quandary has reverberated in Europe’s halls of power, and especially in Berlin, which appears to have been backed into a corner by Ms. Merkel’s commitment to keep the euro zone together no matter what.

The outspoken German finance minister, Wolfgang Schäuble, recently cast doubt on whether Cyprus should even be considered for a bailout, given its small size and the stark reality that it is not nearly as vital to the euro’s existence as the larger economies of Spain or Italy. His blunt assessment reportedly drew an admonishment from Mario Draghi, the president of the European Central Bank, which has spent hundreds of billions of euros on a program intended to discourage financial market speculators from attacking euro zone countries.

“We have reached a point of relative stability in the euro zone crisis, so letting Cyprus go could stir up the waters again and trigger another wave of speculation,” said Hubert Faustmann, an associate professor of history and political science at the University of Nicosia in Cyprus.

With Russia refusing to provide any further financing unless the so-called troika of creditors — the European Central Bank, the International Monetary Fund and the European Commission — provides most of the bailout, the Cypriot government has few options. It signed a memorandum of understanding in November with the troika, setting off a wave of austerity measures that are already starting to hit the enfeebled Cypriot economy.

The salaries of public sector workers have since been slashed by up to 15 percent, state pensions are to be cut by up to 10 percent and the value-added tax is set to rise. “The island has been hard hit, and there is an atmosphere of fear,” Mr. Faustmann said. “People are not sure if they will keep their jobs, and if they do, how long they will have them.”

Mr. Faustmann estimated that it would take at least a half-decade for the Cypriot economy to recover — assuming that the conditions required by Germany and the troika do not send Russian money fleeing from the banks. “If that happens,” he said, “then Cyprus is dead.”

Nicholas Kulish contributed reporting from Berlin, and Jack Ewing from Frankfurt.

Article source: http://www.nytimes.com/2013/02/04/world/europe/cyprus-complicates-german-quest-to-save-euro-zone.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: bailout, greek government, wiggle room

DealBook: Dutch Government Takes Control of SNS Reaal

February 1, 2013 by NewsMaker Leave a Comment

The Dutch government took control of one of the country’s biggest financial institutions, SNS Reaal, after the troubled company failed to find a private-sector buyer.

The Dutch finance minister, Jeroen Dijsselbloem, said the government would spend 3.7 billion euros, or $5 billion, in taxpayer money to clean up the bank, which has struggled for years with unprofitable real estate loans. The government will also require the country’s top three banks — ING, ABN Amro and Rabobank — to contribute 1 billion euros next year in a one-time payment, he said.

The moves comes as Europe continues to deal with a sluggish economic and debt problems. Last year, Spain took over Bankia, a mortgage lender also hurt by property deals.

Problems at SNS Reaal, which is based in Utrecht, had intensified in the last two weeks as depositors began losing faith, fearing talks with potential buyers would fail. The company had been reportedly negotiating possible investments with CVC Capital Partners and other funds in the hope of averting disaster.

Mr. Dijsselbloem, the finance minister, said in a statement that the takeover ‘‘was made necessary by the extreme situation’’ of the bank and the ‘‘serious and immediate threat posed by that situation to the stability of the financial system.’’

Shareholders and subordinated bondholders of SNS Reaal will be wiped out, effective immediately, Mr. Dijsselbloem said. The holders of senior debt will be repaid and depositors will not lose their money.

Three top executives of SNS Reaal said in a statement that they were stepping down, as ‘‘they do not want to and cannot take responsibility for the nationalization scenario.’’ The three — Ronald Latenstein, the bank’s chief executive, Rob Zwartendijk, the chairman, and Ference Lamp, the chief financial officer — said they had done ‘‘everything in their power’’ to avoid a bailout.

‘‘The persons in question do not advocate the chosen solution, but respect the choice of the Ministry of Finance,’’ according to a statement.

The announcement is the latest in a spate of recent bad news about European banks. On Thursday, Deutsche Bank posted a surprise fourth-quarter loss of 2.2 billion euros, and problems continue at Monti dei Paschi di Siena, which received a bailout from the Italian government last year.

The case of SNS Reaal also adds urgency to efforts to set up procedures to identify and wind down terminally ill banks in a way that does not burden taxpayers.

The move also signaled the transfer of another of the Netherlands’ biggest financial institutions into state hands. The Dutch business of ABN Amro was nationalized in October 2008 after the collapse of Lehman Brothers sent the world financial system into shock.

ABN Amro had been taken over and split up by Royal Bank of Scotland, Fortis and Santander in a 2007 deal that has since come to epitomize the worst excesses of the credit bubble. Both Royal Bank of Scotland and Fortis, once the biggest Belgian financial house, were laid low by the debt burdens they took on for the ABN Amro deal when the credit crisis struck.

The ABN Amro deal also marred SNS Reaal, which needed a bailout in 2008 after it acquired the broken-up lender’s property business. That bailout has not been fully repaid.

As part of the deal announced Friday, the state will forgive 800 million euros of the unpaid bailout loans, inject 2.2 billion euros into SNS and write off 700 million euros from the bank’s property portfolio. ING estimated that its share of the cost of bailing out SNS Reaal would come to 300 million to 350 million euros, but said the impact on its finances would be limited.

This post has been revised to reflect the following correction:

Correction: February 1, 2013

An earlier version of the article incorrectly spelled the name of the nationalized company. It is SNS Reaal, not SNS Reall.

Article source: http://dealbook.nytimes.com/2013/02/01/dutch-government-takes-control-of-sns-reaal/?partner=rss&emc=rss

Filed Under: Global Business Tagged With: bailout, depositors, financial institutions

Cyprus Rises on Agenda of Overseers of the Euro

January 20, 2013 by NewsMaker Leave a Comment

BRUSSELS — Finance ministers who oversee the euro are planning to meet here Monday and are expected to choose a new president for their group, as concerns mount about how to rescue Cyprus, which is the fourth country in the euro area to need a bailout.

The gathering of the Eurogroup, as it is known, will be its first monthly meeting this year. And though problems in Cyprus loom large, the ministers are expected to meet in an atmosphere of relative calm.

E.U. officials said Friday that the ministers could decide to hold a vote as soon as Monday night to elect Jeroen Dijsselbloem, 46, the Dutch finance minister as the Eurogroup’s next president. He is the only official candidate to replace the current office holder, Jean-Claude Juncker, the prime minister of Luxembourg.

As president, Mr. Dijsselbloem would play a coordinating role among finance ministers when they make critical decisions like giving political approval for bailouts and pressing governments to shore up their finances to preserve the stability of the euro.

Assuming he is elected, Mr. Dijsselbloem will have Cyprus at the top of his agenda as it seeks to recover from a crisis partly triggered by its banking sector’s heavy exposure to Greek debt. Cypriot lenders took a body blow when those holdings were written down to help Greece manage its debt.

The amount needed to rescue Cyprus is about €16 billion, or $21 billion, which is small compared with the needs of Greece, which has been given or promised about €240 billion in bailout money so far. And yet, to Cyprus, it is a huge amount. Cyprus has a gross domestic product of only about €18 billion raising questions about how Cyprus could ever pay the money back.

But for the Eurogroup, it is a relatively manageable matter, compared with the turmoil of late last year, when the Eurogroup was forced to hold a series of emergency sessions to overcome a series of problems — most notably, sharp differences between Germany and the International Monetary Fund on restarting aid to Greece.

Another sign that a period of acute crisis has passed — for now, at least — will be the absence of Christine Lagarde, the managing director of the I.M.F., which with the European Commission and the European Central Bank makes up the so-called troika that has already overseen bailouts for Greece, Ireland and Portugal.

Ms. Lagarde, who is not a member of the group, regularly sat in on meetings last year, partly to push creditor nations like Germany to do more to keep financial problems in countries like Greece from festering and jeopardizing the stability of the broader European economy.

Mr. Dijsselbloem, in informally campaigning for the Eurogroup presidency, has already made his case to governments during a tour of capitals this month and has been endorsed by Mr. Juncker and other leaders.

But the French government has insisted that Mr. Dijsselbloem explain to the other 16 finance ministers in the Eurogroup how he intends to carry out the job before a vote is held on Monday.

A chief concern for the French is that the Dutch are among those Europeans who have made the toughest demands for fiscal rigor by countries in the euro currency union. The French president, François Hollande, has questioned continued austerity as a solution to the crisis.

The negotiations over Cyprus have been complicated by President Dimitris Christofias, who is the only communist leader in the European Union and is an opponent of raising money through the kinds of privatization of government assets that would be demanded by the troika. European officials also harbor concerns about the extent to which the island country, with its low taxes and lax bank regulation, has become a hub for Russian influence and for money laundering.

“The Cypriot case has all the ingredients to raise questions about the consistency of the euro project again,” Martin Lueck, an economist at UBS, wrote in a briefing note on Friday.

No agreement with the Cypriot government in Nicosia is expected until after the departure of Mr. Christofias, who will not be running in elections scheduled for Feb. 17. If necessary, a second round of voting in Cyprus will be held Feb. 24. International creditors want to wait to negotiate a rescue program with the winner, who is likely to be Nicos Anastasiades of the Democratic Rally, a center-right party.

But even then there would be numerous hurdles to overcome before Cyprus could secure a rescue package.

Chancellor Angela Merkel of Germany and some other European leaders face pressure to shield taxpayers from paying the bill for further bailouts during an election year. Meanwhile, the I.M.F. will probably need to be satisfied that the terms of any deal with Cyprus give the country a reasonable chance of paying back its loans.

One of the most potentially explosive issues is whether to force depositors in Cyprus including wealthy Russians to take haircuts, or losses, on their holdings, to help reduce the burden of recapitalizing and restructuring Cypriot banks.

Holders of Greek sovereign bonds were forced to take losses on their holdings, under the most recent terms of Greece’s bailout. But any move to penalize bank depositors, as is under discussion in the case of Cyprus, would be a new twist in the euro bailout narrative. The measure would be sure to unleash opposition from authorities in Cyprus and in other countries with vulnerable banking systems, who would fear a flight of bank deposits to more secure jurisdictions.

But imposing haircuts “would fit nicely into the populist political discussion that has been gaining momentum in creditor countries, especially Germany,” Mujtaba Rahman, an analyst with the Eurasia Group, wrote in a briefing note last week. “This populism reflects concerns about the very integrity of the Cypriot banking system, the nature of the business it has been involved in, and the government and financial system’s proximity to Russia,” he wrote.

Article source: http://www.nytimes.com/2013/01/21/business/global/21iht-euro21.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: bailout, finance ministers, prime minister

DealBook: U.S. and Britain Take Cooperative Approach on ‘Too Big to Fail’

December 11, 2012 by NewsMaker Leave a Comment

Andy Rain/European Pressphoto AgencyA Lehman Brothers employee exits the firm’s London offices in 2008.

It is one of the thorniest problems hanging over the financial system: how should authorities deal with the collapse of a sprawling global bank to protect the financial system at large?

In an attempt to find ways to address this problem, regulators in the United States and Britain said on Monday that they were cooperating on measures that would be used to seize an ailing financial company that does a lot of business abroad.

The intent is to avoid the problems that occurred when Lehman Brothers failed in 2008. The unwinding of Lehman was complicated by the fact that it had substantial operations in London that were subject to British law. The same problem could recur because most of the largest American and British banks have major subsidiaries in each other’s countries.

Cyprus Bailout Seen as Near, but Not Yet Done Deal

November 23, 2012 by NewsMaker Leave a Comment

Seeking to stave off imminent financial collapse, Cyprus said Friday that it had negotiated a multibillion-euro bailout with international lenders, only to have the claim contradicted later by a formal statement from those creditors.

The declaration by the European Commission, European Central Bank and International Monetary Fund, collectively known as the troika, said there had been “good progress towards agreement on key policies to strengthen public finances, restore the health of the financial system, and strengthen competitiveness.”

It added that “preliminary results of a bank due-diligence exercise, expected in the next few weeks, will inform discussions between official lenders and Cyprus” on the details of a bailout.

Those comments suggest that Cyprus has agreed to the austerity measures that will accompany the loans. But a lack of clarity over how much capital the country’s stricken banks may need is holding up a definitive agreement.

Cyprus is expected to receive about €16 billion to €17 billion, or $20.6 billion to $22 billion, in funds, a small amount by comparison with other European rescues but a sum roughly equal to the country’s annual gross domestic product.

Talks are continuing on how to unlock a €31.5 billion installment of loans for Greece from its international bailout program, money it needs to stave off bankruptcy. Euro zone finance ministers, who failed to reach a deal earlier this past week, will resume discussions Monday.

The deterioration of Greece’s finances in the midst of a recession has made the deal elusive; the economic slowdown is preventing the country from hitting its financial targets.

Greece’s finance minister, Yannis Stournaras, said Friday that a compromise was near in which the I.M.F. would agree that Greece’s debt could fall to 124 percent of G.D.P. by 2020 as opposed to a previous target of 120 percent.

The Eurogroup of euro zone finance ministers has already agreed on measures that would reduce Greece’s debt to 130 percent of G.D.P. by 2020, Mr. Stournaras said. He said that a further €10 billion of savings would need to be found to bring debt down to the level desired by the I.M.F. by 2020.

The austerity measures Greece has undertaken in exchange for its bailouts have pushed Cyprus to seek alternative forms of financial assistance from outside the European Union, including from Russia.

Before the lenders issued their statement Friday contradicting Cyprus, Cypriot officials said that a deadline laid down by the European Central Bank to recapitalize the country’s banks had forced them to agree to a bailout.

“The bailout deal includes unpleasant measures,” the government spokesman, Stefanos Stefanou, said without elaborating.

The conditions of the bailout have caused friction between government officials and international lenders in recent weeks, though financial markets have been relatively relaxed about the negotiations.

“In other circumstances this issue might have garnered more attention from markets but it has been swamped by events elsewhere, including in Spain and Greece in particular,” said Kenneth Wattret, co-head of European economics in London for BNP Paribas.

Mr. Wattret said that one reason for the lack of market reaction was that Cyprus seemed to be heading toward an agreement. A failure by politicians to reach a deal would have worried investors more than a bailout, he said, as it would have called into question the effectiveness of Europe’s crisis response.

“Still, once a deal has been struck, one potential source of event risk is removed” he added.

Meanwhile Fitch Ratings said Friday that it was cutting its credit ratings on three of the island’s banks — Bank of Cyprus, Cyprus Popular Bank and Hellenic Bank — which together have assets of €77.2 billion, equal to about 430 percent of G.D.P. The ratings agency said it believed that the failure of Bank of Cyprus and Cyprus Popular Bank was “imminent,” and that the two would require “sizeable” injections of capital.

The agency pointed out that the precedents set in other euro zone bailouts meant that the investments of senior bank creditors were likely to be protected.

On Wednesday Fitch downgraded Cyprus’s rating for its long-term sovereign debt to BB- from BB+, adding that the outlook was negative.

If Cyprus does reach a bailout agreement, it would follow in the footsteps of Greece, Ireland and Portugal, all of which had to be rescued by Europe and the International Monetary Fund. In addition, Spain has been offered up to €100 billion in aid for its crippled banking sector and may seek more help.

The economic crisis in Greece has spilled over to Cyprus. Cyprus’s economy, and particularly its banking sector, are heavily exposed to Greece and Greek institutions.

David Jolly contributed reporting from Paris.

Article source: http://www.nytimes.com/2012/11/24/business/global/cyprus-bailout-seen-as-near-but-not-yet-done-deal.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: bailout, creditors, imminent financial collapse

French Downgrade Complicates Life for Bailout Funds

November 22, 2012 by NewsMaker Leave a Comment

Moody’s on Monday cut its rating on French long-term sovereign debt by a single notch, from AAA to Aa1. The move had been largely expected, following a similar decision in January by Standard Poor’s and amid continuing economic stagnation. Markets greeted the news with a yawn.

But the European Financial Stability Facility, the euro zone’s temporary bailout fund, and its permanent replacement, the European Stability Mechanism, still enjoy AAA ratings at Moody’s — despite the fact that France, as the second-largest economy in the 17-nation euro zone, is on the hook for more bailout guarantees than any other member except Germany.

Many analysts say it is just a matter of time before Moody’s downgrades the bailout funds in turn, which could force them to pay more for their borrowing.

“We believe that a downgrade of the E.F.S.F. is coming in the next few days,” said Michael Leister, interest rate strategist at Commerzbank in London. “It was a surprise that it didn’t happen mechanically, at the same time as France.”

The bailout funds are crucial to fixing Europe’s sovereign debt problems. They have committed tens of billions of euros to Greece, Portugal and Ireland. The funds will also be part of a forthcoming recapitalization of the ailing Spanish banking sector, if not of a wider rescue of the country. Cyprus, too, is close to signing a bailout agreement.

In theory, credit ratings should reflect the risk that a lender will not be repaid, and are thus inversely related to the interest rate the lender demands to hold a debt. But with the global financial system fragile and central banks holding rates down, that relationship has been strained. Both France and the United States, which lost its AAA rating at Standard Poor’s in 2011, continue to borrow near record low levels.

Moody’s in fact warned in July that the outlook for the E.F.S.F. was negative, and that it might downgrade the fund if there were “a deterioration in the creditworthiness of the participating euro area member states,” including France.

Jessica Eddens, a spokeswoman for Moody’s, confirmed Thursday by e-mail that the E.F.S.F. and the E.S.M. continued to enjoy an AAA rating, with a negative outlook.

“Moody’s will assess the implications of the downgrade of the French government’s rating for the E.F.S.F.’s and E.S.M.’s ratings as a matter of course,” she said, “focusing in particular on whether the support available from the remaining AAA guarantors and shareholders is consistent with the E.F.S.F. and E.S.M. retaining the highest ratings.”

For the moment, the Moody’s downgrade of France is complicating life for the E.F.S.F., which has had to put its financing plans on hold while officials work through the implications of the French downgrade.

The fund had been preparing to sell three-year bonds, for which it said there was solid investor demand. But its rules require that new bond issues must be fully guaranteed by euro zone member states with better ratings than the E.F.S.F. The fund has now halted that planned offering, at least temporarily.

The E.F.S.F. “is currently unable to proceed until this technical aspect is resolved,” Christophe Frankel, the E.F.S.F.’s chief financial officer, said in a statement. He noted that the fund’s issuance of short-term bills had not been affected, as France’s short-term ratings have not changed.

The solution to the E.F.S.F.’s problem? Just wait.

Mr. Leister noted that once the E.F.S.F.’s credit rating has been cut, it will be at or below the French level, and, under the fund’s own rules, will once more able to issue debt— a rare case where an issuer hopes to be downgraded.

Wolfgang Proissl, a spokesman for the E.F.S.F., declined to comment on the potential for a downgrade of the fund and how that would affect its actions. “I can only tell you that we are carefully considering the situation,” he said.

Mr. Leister predicted that the impact on borrowing costs would be limited, as investors are prepared for the inevitable. “Yields on E.F.S.F. debt will go up,” he said, “but there’s not going to be a huge spike.”

Article source: http://www.nytimes.com/2012/11/23/business/global/daily-euro-zone-watch.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: bailout, downgrades, yawn

E.U. Members at Odds on Banking Regulation and Greece

November 13, 2012 by NewsMaker Leave a Comment

Also Monday, the finance ministers postponed at least until Nov. 20 a decision on releasing a long-delayed installment of €31.5 billion in aid to Greece. The country’s finance minister warned that without the aid, the country’s risk of defaulting on its debt remained high.

A plan to establish a single banking supervisor under the aegis of the European Central Bank for the 6,000 lenders in the euro area dominated a second day of talks here. The meeting Monday concentrated on the plight of Greece, which still threatens to derail the euro zone after dragging on for more than two years.

The new banking supervisor is seen as a major step toward breaking the so-called doom loop in which frail banks can endanger national finances and push countries toward full bailouts.

Germany made the creation of the single supervisor a prerequisite for states to tap a newly created European bailout fund and use the money to recapitalize their banks directly.

But Luc Freiden, the finance minister of Luxembourg, said Tuesday that the system still could be months away.

“We shouldn’t be fixed to dates,” Mr. Freiden said. “If it takes three months longer, it’s no problem.”

Maria Fekter, the Austrian finance minister, asked whether the creation of the new regulator would require changes to the E.U. treaty, or “would be the better solution” in creating a banking union. “Speed kills when we don’t have the best solution,” she told ministers.

The European Commission has said a unified system of regulation could be up and running next year. Germany is among the countries that have urged caution, saying that rushing the process would risk creating new loopholes. Britain and Sweden say much work still needs to be done to ensure the system does not discriminate against E.U. countries outside of the euro area.

“We cannot see a compromise with only the current modalities on the table,” Anders Borg, the Swedish finance minister, said Tuesday. “The E.C.B. could be the supervisor but then we need to consider a treaty change. Either you must change the treaty so it’s clear that every member is treated equitably, or you need to move it outside of the E.C.B.”

Finance ministers also discussed creating a “Robin Hood tax” — a fee levied on equity trades.

Britain and Sweden are among the countries that have said they would not participate in such a tax, but 11 of the 27 E.U. countries have expressed interest in going forward with the plan. On Tuesday, Wolfgang Schäuble, the German finance minister, said plans for the tax “will gather momentum.”

In a sign that repairing the Greek economy and the euro would continue to be a rancorous process even after years of crisis, Jean-Claude Juncker, the prime minister of Luxembourg, and Christine Lagarde, the managing director of the International Monetary Fund, drew strikingly different conclusions late Monday about how long it should take to bring the towering Greek debt under control.

The disagreement is a hugely sensitive matter for Greece’s biggest creditors in the euro area and for Germany in particular. The government in Berlin wants to avoid the political fallout from the higher costs that would result from meeting the I.M.F.’s target for cutting Greek debt to 120 percent of gross domestic product by 2020. The debt is now estimated at 175 percent of G.D.P.

Mr. Schäuble said that meeting the I.M.F. target was “possibly a little too ambitious” given worsening economic conditions across Europe.

He also said that Greece’s creditors would find ways to help the country meet the higher costs resulting from giving it more time to meet fiscal goals now set for 2016, other than handing over more money.

“There are no considerations to top up the program,” Mr. Schäuble said. “In the end it will be all about guarantees, not transfer for Greece.”

Creditors could agree instead to “take some measures to reduce interest rates that will have an immediate effect” on the Greek budget, he said.

A draft copy of a report by the troika of international lenders — the European Commission, the European Central Bank and the International Monetary Fund — that was circulating at the meeting said the bill for allowing Greece more time would be €32.6 billion, or $41 billion.

Helping Greece through 2014 would require €15 billion, partly to make up for lower-than-expected proceeds from privatizations, according to the draft report.

An additional €17.6 billion would be needed for 2015-16 because Greece was expected to be servicing more debt than previously forecast and because the country may be unable to tap capital markets, the draft report said.

Late Monday, ministers put off a decision on releasing a €31.5 billion installment of aid to Greece until officials could assess the country’s progress in implementing measures Athens agreed to take as a condition for receiving two bailout packages totaling €240 billion.

Yannis Stournaras, the Greek finance minister, said that without the funding the country was still perilously close to defaulting on its debt.

“The risk of an accident is very great,” Mr. Stournaras told the European Parliament’s economic and social affairs committee. “Time is running out, society is exhausted.”

Even after euro zone finance ministers approve the aid, it still must be cleared by a number of national parliaments.

Niki Kitsantonis contributed reporting from Athens.

Article source: http://www.nytimes.com/2012/11/14/business/global/disagreement-over-banking-regulation-marks-second-day-of-eu-talks.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: bailout, loopholes, plight