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Europe Set for Worst Quarter Since 2008

September 30, 2011 by Leave a Comment

The euro retreated and was on course for its biggest monthly drop in nearly a year, dipping on weak retail sales data from Germany a day after approval from the country’s parliament of new powers for Europe’s bailout fund gave the currency only a fleeting boost.

Fears the debt crisis will spiral and the global economy slow caused investors to slash bets on risky assets in the quarter to the end of September.

The pan-European FTSEurofirst 300 index fell 1.1 percent on Friday, on course for its worst quarterly loss since the months following the collapse of Lehman Brothers three years ago.

“Short-term, we still have the same prospects: the timing of a (likely) Greek default, the nature of it, how shared or otherwise; the uncertainty of whether the (second Greek bailout) package needs to be revisited,” said Philip Isherwood, head of equity strategy, Europe and UK, at Evolution Securities.

The MSCI world equity index fell 0.8 percent. It has dropped more than 16 percent over the quarter, the biggest drop since the last three months of 2008.

Asian equities also extended the worst monthly performance since the most volatile days of the global financial crisis in October 2008. Chinese shares racked up sharp losses amid fears of a property market correction.

The euro fell to fresh session lows against the dollar, with traders also saying comments from German Economy Minister Philipp Roesler that the Bundestag did not seem willing to approve leveraging the euro zone’s bailout fund were weighing on the single currency.

The euro was last down 0.6 percent against the dollar at$1.3504, having fallen to a day’s low of $1.3486 earlier.

“We don’t expect any concrete decisions from next week’s Eurogroup (finance ministers’) meeting. But we could get a positive statement that policymakers will help the euro zone periphery, which could help sentiment,” said You-Na Park, currency strategist at Commerzbank in Frankfurt.

She said any euro gains on such optimism would likely be capped around $1.37.

The retreat in riskier assets helped safe-haven German government bonds higher after five consecutive sessions of losses as investors rebalanced their portfolios on the last day of the month and quarter.

German 10-year government bond yields were down 4 basis points at 1.97 percent, tracking benchmark U.S. Treasury yields which were 3 bps lower at 1.97 percent.

(Additional reporting by Simon Jessop and Naomi Tajitsu; Editing by John Stonestreet)

Article source: http://www.nytimes.com/reuters/2011/09/28/business/business-us-markets-global.html?partner=rss&emc=rss

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News Analysis: Even if Europe Averts Crisis, Growth May Lag for Years

September 29, 2011 by Leave a Comment

What is going on?

The problem, say close watchers of both the subprime financial crisis in 2008 and the European government debt crisis today, is that many investors think there is a quick and easy fix, if only government officials can come to an agreement and act decisively.

In reality, one might not exist. A best case in Europe is a bailout of troubled governments and their banks that keeps the financial system from experiencing a major shock and sending economies worldwide into recession.

But a bailout doesn’t mean wiping out the huge debts that have taken years to accumulate — just as bailing out American banks in 2008 didn’t mean wiping out the huge amount of subprime debt that homeowners had borrowed but couldn’t repay.

The problem — too much debt — could take many years to ease.

”Everybody has been living beyond their means for nearly the last decade, so it is an adjustment that will be painful and long, and it will test the resilience of societies socially and politically,” said Nicolas Véron, a senior fellow at Bruegel, a research organization in Brussels.

This isn’t to say that the discussions in Europe are moot. If governments can’t agree on how to rescue Greece from its debilitating government debt, some fear the worst case could happen — a collapse of the financial system akin to 2008 that would ricochet around the world, dooming Europe but also the United States and emerging countries to a prolonged downturn, or worse.

Just like the United States, Europe built up trillions in debts during the past decades. What is different is that while in the United States more of the borrowing was done by consumers and businesses, in Europe it was mainly governments that piled on the debt, facilitated by the banks that lent them money by buying up sovereign bonds.

Now, just as the United States economy is held back by households whose mortgages are still underwater and won’t begin to spend again until they have run down their debts, Europe can’t begin to grow again until its countries learn to live within their means. That means running down their debts during years of austerity and tax increases.

In short, it still means years of painful adjustment.

“We have adjust to lower growth,” said Thomas Mirow, president of the European Bank for Reconstruction and Development, referring to Europe as well as the United States. “It is of course going to be very painful. But leaders have to speak frankly to their populations.”

The uncertainty about Europe’s future has been driving the gyrations of financial markets since the summer. Earlier this week, stocks rallied on euphoria that a new and more powerful bailout was near, but the rally fizzled Wednesday when cracks began to appear among European nations over the terms of money being given to Greece.

On Thursday, markets were mixed after the German Parliament approved the 440 billion euro ($600 billion) bailout fund aimed at keeping the crisis from hurting large European countries.

The trouble is that even this fund, which requires the approval of all 17 nations in the euro currency zone, is already seen as inadequate for the scale of Europe’s woes. Instead, a new idea is to bolster the fund by allowing an institution like the European Central Bank to use it as a guarantee for much greater lending, perhaps up to a couple of trillion euros.

This is the cause of the new optimism in markets, but some worry that even that idea may not fully address one of Europe’s most dangerous problems: fully recapitalizing its banks.

“We’re not seeing any real acknowledgment of the scale of the banking sector problem,” said Simon Tilford, the chief economist at the Center for European Reform in London. And even if the fund were enhanced with a couple of trillion euros of firepower to buy up troubled government debt from the financial system, that would still only shift the debt from European banks to taxpayers and do nothing to pay it off.

“Clearly something is cooking, but the markets will eventually choke on the taste,” said George Magnus, an economist at UBS in London. “It is about getting banks off the hook, but the darker side is it’s not doing anything real.”

Josh Brustein contributed reporting.

This article has been revised to reflect the following correction:

Correction: September 29, 2011

An earlier version of this article used an incorrect unit in converting Europe’s 440 billion euro bailout fund to dollars. It is $600 billion, not $600 million.

Article source: http://www.nytimes.com/2011/09/30/business/global/even-if-europe-averts-crisis-growth-may-lag-for-years.html?partner=rss&emc=rss

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Expanded Euro Bailout Fund Clears Hurdle

September 28, 2011 by Leave a Comment

The 103-66 vote in the Finnish Parliament, with 30 legislators absent, still leaves seven of the 17-member euro group yet to ratify a bailout fund that, despite expanded resources and power, is considered much too small to fend off further market attacks on Greece and other wounded countries.

The German Parliament is scheduled to vote Thursday on the fund, the European Financial Stability Facility, in what is seen as a crucial test for Chancellor Angela Merkel. Austria is scheduled to vote Friday. The remaining countries are Cyprus, Estonia, Malta, the Netherlands and Slovakia.

European leaders hope that the rest will give their approval by mid-October, about three months after representatives of the 17 countries in the euro zone agreed to give the E.F.S.F. more money and power. The expanded fund will be able to loan up to €440 billion, or about $600 billion, and issue guarantees for €780 billion.

The laborious approval process, which can be held up by objections from any one of the countries in the euro area, has highlighted deep flaws in euro area decision-making, which José Manuel Barroso, president of the European Commission, warned on Wednesday must be addressed.

“We are today faced with the greatest challenge our union has known in all its history,” said Mr. Barroso in his annual “state of the union” speech at the European Parliament in Strasbourg, France. “If we don’t move forward with more integration we will suffer more fragmentation. This will be a baptism of fire for a whole generation.”

Finland continues to demand that it receive collateral from Greece in return for aid to that country. But Finnish leaders argued that approval for the E.F.S.F., which will also provide aid to Ireland, Portugal and other countries, was a separate issue. That reasoning cleared the way for the Finnish Parliament to approve the bill.

Finland continues to negotiate on the collateral issue with its European partners, and officials in Helsinki have expressed optimism that a solution will be found to address Finnish sensibilities without undermining the aid package.

Mr. Barroso said that changes needed to secure the euro’s future might require reopening the E.U.’s governing treaty. He reiterated that Greece would stay in the euro area.

Mr. Barroso confirmed that the European Commission will speed up a feasibility study on the possibility of issuing euro bonds, common debt that would be guaranteed by all members of the euro zone. He gave his clearest support to the idea yet.

“Once the euro area is fully equipped with the instruments necessary to ensure both integration and discipline, the issuance of joint debt will be seen as a natural and advantageous step for all,” he said.

But other European leaders have ruled out euro bonds, notably Angela Merkel, the German chancellor, who reiterated her opposition Tuesday. It is unlikely that euro bonds could be introduced without German support.

However, leaders in Berlin are likely to welcome Mr. Barroso’s call for a change in the euro zone treaty to remove national vetoes that prevent nations that want to proceed with closer integration from doing so.

“We need to complete our monetary union with an economic union,” Mr. Barroso argued. “It is an illusion to think we could have a single currency and a single market with national economic approaches.”

Other governments will be wary. Such a treaty change would require ratification by member states and might trigger a referendum in some.

Mr. Barroso also announced a proposal for a Europe-wide tax on financial transactions, a move which is supported strongly in Germany and France but which nations such as Britain, the Netherlands and Sweden say they would support only if it was agreed at a global level — something unlikely to happen given opposition from the United States.

Stephen Castle reported from Brussels

Article source: http://feeds.nytimes.com/click.phdo?i=e3124b2bff6780a1ab4a53d9cbc42ae1

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Germany Set to Back Euro Zone Bailout Fund

September 28, 2011 by Leave a Comment

Mrs. Merkel needs parliamentary support to carry out decisions made more than two months ago in Brussels, and to bolster her case she met with the Greek prime minister, George A. Papandreou, on Tuesday evening in Berlin. It was a kind of morality play, intended to show to skeptical German voters how the Greek government intends to keep its promises to continue cutting public spending and services to meet stiff deficit requirements, despite increasing political opposition.

Mr. Papandreou spoke again of the “great will for change” in Greece, while Mrs. Merkel talked once more of her “confidence” that her wavering parliamentary coalition would vote on Thursday for an expansion of the European bailout fund, which was agreed to more than two months ago in Brussels.

By the time the entire process is finished, about mid-October if all goes well, Europe’s leaders will have a newly expanded European Financial Stability Facility that most analysts say will be, at $600 billion, grossly inadequate to extinguish the crisis, since it lacks the means to cope with the larger economies of Italy and Spain.

It seems another example of too little, too late on the part of the leaders of the 17-nation euro zone. But it is also another example of sharply differing analyses of the core problem of the euro, making a solution hard to reach.

The German analysis, shared by the Dutch and others in prosperous northern Europe, like the Finns, sees as the main problem the indiscipline and profligacy of others, especially in the south, like Greece, Portugal, Italy and Spain, which have run up high debts or fiscal deficits.

To rebuild confidence, this analysis says, the sinners must repent, restructure their economies and fix themselves. The road to redemption requires hard work, discipline, sacrifice and pain, even punishment for previous misbehavior.

Mr. Papandreou, acutely aware of this strain of thought and the threat it poses to Greece, sought on Tuesday to calm passions. “We must stop blaming each other for our different weaknesses and unite together with our different strengths,” he said in a speech to a business group in Berlin. “Even Germany depends on Europe, its biggest trading partner, for growth and jobs.”

The problem with the German analysis, notes Simon Tilford, chief economist for the Center for European Reform in London, is that it is not simply self-righteous, ignoring the bad loans German banks made to the troubled nations, but arguably wrong. It is “probably incompatible,” he added, with the survival of the euro zone, which all leaders insist is their aim.

Growth is the key, the counter-argument goes, not austerity.

Everyone agrees that countries like Greece need to cut their deficits. But if everyone is cutting at the same time, and in an uncoordinated way, the result may be a fierce economic contraction for Europe as a whole. And without growth, there is very little hope of getting out of the “debt trap,” whereby more cuts in government spending result in recession, lower tax receipts and larger deficits.

“If there is austerity everywhere, where is the engine for growth?” said Jean-Paul Fitoussi, professor of economics at the Institute of Political Studies in Paris. “If there is no consumption, no reason to invest, difficulty in accessing the credit market, where is the growth? The only engine that is functioning in this view is the engine of depression, and this will worsen the sovereign debt and deficit problem.”

The Germans and northerners, Mr. Fitoussi said, still believe that austerity and recession eventually will lead to stability, confidence and growth. “But there is no way what the Germans are saying can be true without divine intervention or a belief in miracles,” he said. “No austerity program can lead to growth in a period of discontinuity in the global economy and slowing economic activity everywhere.”

Mr. Fitoussi has just done a study of economic growth in France, which is currently nearly flat, and which will have a growth rate of about 0.8 percent in 2012 if little changes, he said. “But if all the countries in Europe follow this austerity program,” Mr. Fitoussi said, France also will fall into recession, and its economy will shrink by 1 percent.

Nicholas Kulish and Stefan Pauly contributed reporting from Berlin.

Article source: http://www.nytimes.com/2011/09/28/world/europe/europe-nears-agreement-on-bailout-fund-that-may-be-inadequate.html?partner=rss&emc=rss

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Rally in Stocks, Euro Fades as Debt Crisis Drags

September 28, 2011 by Leave a Comment

The dollar rose and core euro zone government bond yields were flat.

Equity markets have rallied over the past few sessions on expectations that European officials will aggressively tackle the debt crisis in its peripheral economies, notably Greece, by boosting the euro zone’s 440 billion euro rescue fund.

But the plans face opposition in Germany and there are signs of a split within the currency bloc over the terms of Greece’s next bailout.

European Commission President Jose Manuel Barroso, however, indicated Greek banks could receive more help.

The uncertainty was enough to take the air out of the tentative global stock rally.

World stocks as measured by MSCI were down 0.1 percent with the FTSEurofirst 300 opening sharply lower before stabilising around a half a percent down.

The European index has lost close to 17 percent this year.

Japan’s Nikkei earlier closed flat.

“The market has obviously got enthusiastic about discussions about the European Financial Stability Fund,” said Andrea Williams, fund manager at Royal London Asset Management.

“But we are a long way from it being concluded.”

International auditors were heading for Athens to continue discussions on the next tranche of agreed aid, while Germany suggested a new bailout may be renegotiated.

EURO LEVELS

The euro rose 0.1 percent to $1.3607, paring some of the previous day’s gains when it rose to a high of $1.3668.

It has lost 5.6 percent so far this month but is off an eight-month low of $1.3361 hit on Monday.

“We saw a late reversal of some of last night’s big risk on moves on reports that European leaders were not completely united on the planned policy response,” ANZ said in a note.

The dollar was slightly higher against a basket of major currencies.

German Bunds reversed early losses and briefly turned negative on the day after Barroso spoke.

“There were comments from Barroso on considering a wider lending mechanism to help the Greek banking system and that’s knocked Bunds a bit and also we have the five-year (German) supply coming up,” a trader said.

Germany will sell 6 billion euros of new 5-year bonds later in the day.

(Reporting by Jeremy Gaunt; editing by Anna Willard)

Article source: http://www.nytimes.com/reuters/2011/09/26/business/business-us-markets-global.html?partner=rss&emc=rss

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Wall Street Rebounds on Europe Hopes

September 26, 2011 by Leave a Comment

In late afternoon trading, the Dow Jones industrial average was up 212.93 points, or 1.97 percent, to 10,984.91. The Standard Poor’s 500-stock index rose 16.79 points, or 1.48 percent, and the Nasdaq composite index was up 10.90 points, or 0.4 percent, to 2,494.13. Meanwhile, gold prices were down for a fifth consecutive day. They trading at $1,592.50 an ounce, down from a peak of nearly $1,900 on Aug. 22. Analysts attributed the drop to investors looking for cash, but some also described it as a correction for a commodity that has reached historic highs in recent weeks. Analysts said that Wall Street investors were looking for evidence that European governments would grapple with the Continent’s debt crisis.

A spokesman for the European Commission confirmed that discussions were under way on plans to extend the effectiveness of the bailout fund. Commission officials said part of the plan would expand the borrowing power of the euro area’s bailout fund but not the amount of money that nations were contributing. But as has often been the case, European leaders on Monday seemed to have different perceptions of what was being discussed and how likely it was that the proposals would find support.

Markets were likely to remain unsettled until it became clear that European governments would take concrete action, said Kevin H. Giddis, the executive managing director and president for fixed-income capital markets at Morgan Keegan Company.

“It’s going to be every day, all week long, until the market understands exactly what direction this is headed, and whether it can be stopped with one country or is the beginning of a contagion,” he said.

Monthly new-home sales in the United States hit a six-month low in August, at a seasonally adjusted annual rate of 295,000 homes, down from 302,000 in July. Prices were down 8.7 percent, the Commerce Department reported. Separately, a forecast of third-quarter earnings based on data by Thomson-Reuters predicted that the earnings of S.P. 500 companies would rise 13.7 percent, down from an earlier forecast of 17 percent.

But analysts said that the markets have grown somewhat numb to news of weakness in the American economy, so the negative news had a negligible impact.

The deadlock over the federal budget may also be a drag on investors still smarting from the debt-ceiling debate this summer, said David Joy, chief market strategist with Ameriprise Financial.

“I think it’s impossible with that backdrop for investors’ confidence to moderate and rise,” he said.

The Nasdaq lagged behind the other major indexes after a report from Bloomberg News that Apple was cutting orders to vendors who supply parts for the iPad. Apple’s shares were down as much as 3.2 percent before recovering somewhat.

Yields on 10-year United States Treasury bonds rose to 1.90 percent after falling last week.

In Europe on Monday, the benchmark Euro Stoxx 50 closed up 2.8 percent, and the DAX in Frankfurt closed up 2.9 percent. The FTSE 100 in London rose 0.5 percent.

In the Asia-Pacific region, stocks declined, compounding the sharp falls they had suffered during the previous week. In Japan, the Nikkei 225 index dropped 2.2 percent, ending at 8,374.13 points. The Kospi in South Korea ended down 2.6 percent and the Taiex in Taiwan declined 2.4 percent on Monday. The Hang Seng was 1.5 percent lower.

A technical issue kept the Dow Jones industrial index from accurately updating for 12 minutes at the beginning of trading in New York. The index opened flat as its component stocks and other indexes rose in the minutes after the opening bell. A press officer for the index said the problem was fixed.

Matthew Saltmarsh contributed reporting from London and Bettina Wassener contributed from Hong Kong.

Article source: http://www.nytimes.com/2011/09/27/business/global/daily-stock-market-activity.html?partner=rss&emc=rss

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E.C.B. Takes Steps to Ease Cash Crunch at Continent’s Banks

September 21, 2011 by Leave a Comment

As leaders in Greece and Germany continued to debate how to escape the sovereign debt crisis, the I.M.F. estimated bank risk stemming from the crisis at roughly €300 billion, or $412 billion. Political infighting is partly to blame, the I.M.F. said in its Global Financial Stability Report.

“Political differences within economies undergoing adjustment and among economies providing support have impeded achievement of a lasting solution,” the I.M.F. said.

As if to illustrate the point, the Greek government tried Wednesday to sell its lawmakers on adopting additional austerity measures being demanded by international lenders. Without more aid, Greece could go bankrupt within weeks if not days.

The measures include placing some 30,000 civil servants on a so-called labor reserve program in which their wages would be cut for 12 months, a government spokesman said. The program has been condemned by the political opposition as “a backdoor to layoffs.” Taxes will also be raised on pensions over €1,200 a month and on some pensions for those under 55.

In Berlin, where aid to Greece has become a highly divisive political issue, changes that would expand the main European bailout fund made progress through the German Parliament. But expansion of the fund still faces numerous hurdles, including ratification by other reluctant countries, like Finland.

In its report, the I.M.F. said that some European banks would need fresh capital as insurance against losses stemming from the debt crisis, and some weaker banks might need to be “resolved” or shut down. Taxpayers may again be called on to bolster the banking system, the I.M.F. said.

“Any capital needs should be covered from private sources wherever possible, but in some cases public injections may be necessary and appropriate for viable banks,” the fund said.

One of the most damaging side effects of the crisis has been a reluctance by banks to lend to each other because of doubts about each other’s solvency. The E.C.B. took further steps to address that problem Wednesday, saying it would ease the terms on which it lends to banks at low interest. Most banks must continually refinance their long-term obligations, and some would collapse without access to short-term credit.

The central bank said it would expand its definition of the collateral that banks can provide to receive central bank loans at the benchmark interest rate, which is 1.5 percent. The E.C.B. dropped a requirement that securities placed as collateral should also be traded on an official exchange.

At the same time, the E.C.B. placed further limits on how much of their own bonds banks can use as collateral. Analysts said the limit was intended mostly as a signal that the central bank had not unduly lowered its standards to ensure that banks did not run out of cash.

The E.C.B. is saying “they are not willing to accept all the trash out there,” Carsten Brzeski, a senior economist at ING, told Reuters.

Indicators that banks have been reluctant to lend to each other have been rising for months. In what investors take as a particularly bad sign, a small number of banks have been borrowing emergency dollars from the E.C.B. On Wednesday, one bank borrowed $500 million, stirring fears that a large bank had been cut off by U.S. lenders and might be dangerously close to collapse. The E.C.B. does not disclose the identity of bank borrowers.

On Tuesday, European banks arranged €201 billion in one-week loans from the E.C.B., the most they had borrowed since February. Heavy borrowing from the E.C.B. is interpreted as a sign that the institutions are having trouble raising money at reasonable rates on the open market.

Inspectors from the I.M.F., the E.C.B. and the European Commission were to return to Greece next week after two teleconferences this week with the Greek government. The commission said “progress was made” in the calls on an agreement to pave the way for the release of the next portion of aid, totaling €8 billion.

Article source: http://feeds.nytimes.com/click.phdo?i=9a499df56845b7104b95a4e2114abee1

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News Analysis: As Greece Struggles, the World Imagines a Default

September 20, 2011 by Leave a Comment

As concerns grow that Greece may default on its government debt, economists are starting to map out possible outcomes. While no one knows for certain what will happen, it’s a given that financial crises always have unexpected consequences, and many predict there will be collateral damage.

Because of these fears, Greece is working frantically in concert with other European nations to avoid default, by embracing further austerity measures it has promised in return for more European bailout money to help pay its debts.

But some economists believe default may be inevitable — and that it may actually be better for Greece and, despite a short-term shock to the system, perhaps eventually for Europe as well. They are beginning to wonder whether the consequences of a default or a more radical debt restructuring, dire as they may be, would be no worse for Greece than the miserable path it is currently on.

A default would relieve Greece of paying off a mountain of debt that it cannot afford, no matter how much it continues to cut government spending, which already has caused its economy to shrink.

At the same time, however, there is a fear of the unknown beyond Greece’s borders. Merrill Lynch estimates that the shock to growth in Europe, while not as severe as in the aftermath of the financial crisis of 2008, would be troubling, with overall output contracting by 1.3 percent in 2012.

While other countries have defaulted on their sovereign debt in recent times without causing systemic contagion, analysts weighing the numbers on Greece note that its debt is far higher, so the ripple effects could be more serious.

Total Greek public debt is about 370 billion euros, or $500 billion. By comparison, Argentina’s debt was $82 billion when it defaulted in 2001; when Russia defaulted, in 1998, its debt was $79 billion.

Economists also warn that a Greek default could put further pressure on Italy, the euro zone’s third-largest economy, which, though solvent, is struggling to enact austerity measures and find a way to stimulate growth. Moreover, Italy’s government debt is five times the size of Greece’s, and concerns about Italy’s ability to meet its obligations could grow if Greece defaults.

In a new sign of trouble for the country, Standard Poor’s on Monday cut Italy’s credit rating by one notch to A, citing its weakening economy and limited political response.

“Orderly or not, we have no idea what the effect of a default would be on other countries, especially Italy,” said Peter Bofinger, an economist who advises the German Finance Ministry. “If there is just a 5 percent chance that this affects Italy, then you don’t want to do it.”

In part, what would happen in the wake of a Greek default would depend on whether European leaders could create a firewall to control the damage from spreading widely. That would require officials to come together in ways they so far have not been able to, because it is politically unpopular in some countries to spend many billions more bailing out Greece.

In particular, work on transforming Europe’s main financial rescue vehicle, the proposed 440 billion euro European Financial Stability Facility, would have to be fast tracked so that it would be in a position to buy European bonds and, crucially, provide emergency loans to countries that need to inject money into capital starved banks. Differences over the best way to go forward so far have delayed approval of the expanded fund.

Bailing out the banks will be crucial if Greece either defaults or imposes a hard restructuring, whereby banks would be forced to take a larger loss on their holdings compared with the fairly benign 21 percent losses that they are now being asked to accept as part of the second, 109 billion euro bailout package set for Greece in June.

Article source: http://feeds.nytimes.com/click.phdo?i=f915354362e40d3decfaf70538acd73f

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Europe Is Urged to Take Bolder Action on Debt

September 10, 2011 by Leave a Comment

The stock sell-off, which began in Europe and continued in the United States, was prompted by news that an important German member of the European Central Bank was resigning, creating new uncertainty for the euro monetary union’s ability to take unified action.

But adding to the gloom was a word of caution from one G-7 attendee, the United States Treasury secretary, Timothy F. Geithner, that headwinds from Europe’s deepening debt crisis risked hitting the United States at a time when its own economy was still weak.

He urged European leaders to take more forceful action to show they were committed to resolving their problems. But he did not say the United States was prepared to backstop them to prevent the crisis from spreading.

There were also admonishments from the chief of the International Monetary Fund, Christine Lagarde, who said it was time for Europe’s policy makers to take bold and unified action to see the global economy through what she described as a “dangerous phase.”

By the end of the day, the Europeans had acknowledged the seriousness of the situation and were eager to reassure markets.

The G-7 finance officials issued a statement declaring its members were “committed to a strong and coordinated international response” to the crisis and the slowdown in global growth. But the group stopped short of taking explicit action to address tensions that have worsened in financial markets over the last month. Coordinated action might be left to the Group of 20 industrial and emerging economies, which includes China and has started to eclipse the G-7 in influence.

In the meantime, a senior American official said, until European parliaments vote later this month on whether to expand a bailout fund for the crisis, the European Central Bank has enough firepower to keep Spain and Italy from catching the contagion.

Some economists are not so sure of that.

“I do think the United States needs to try to prepare for what might happen if the European crisis is not resolved soon,” said Martin N. Baily, a senior fellow at the Brookings Institution and a former chief of the Council of Economic Advisors during the Clinton Administration.

In the financial crisis of 2008, he noted, the United States Federal Reserve lent a lot of money to the Europeans who needed it at that time. “I think they should work with the E.C.B. and the main governments of Europe now to make sure that we do not fall again into a liquidity crisis, a solvency crisis with the banks,” Mr. Baily said.

One nation that is not part of the G-7 but has the world’s second-biggest economy and its largest stash of foreign reserves — China — has been seen as a potential rescuer, if it were to help shore up the weaker European economies by buying up more of their government bonds.

But don’t count on it.

China already has apparently poured tens of billions of dollars worth of foreign reserves into euro-denominated investments this year. But Chinese officials are still cautious about taking big risks with the country’s $3.2 trillion nest egg. When considered in the context of China’s 1.3 billion people, that nest egg is not necessarily an infinite treasure.

“China is a poor country with only $4,000 per capita income,” Yu Yongding, a Chinese top economist and former member of the central bank’s monetary policy committee said in an interview in China. “To talk and think about China to rescue countries with $40,000 per capita incomes is ridiculous.”

China is ready to help, Mr. Yu said, “but European countries first should show that they have a clear road map and convincing policies to preserve the euro and solve their problems as well as the political will to make necessary sacrifices.”

And so, with mounting worries of a new recession in the United States and Europe, the G-7 finance ministers have little choice but to focus on restoring growth — even at the risk of running up further deficits and debt.

Keith Bradsher contributed reporting from Hong Kong and Landon Thomas contributed reporting from London.

Article source: http://www.nytimes.com/2011/09/10/business/global/g-7-faces-calls-for-urgent-action-to-spur-growth.html?partner=rss&emc=rss

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Request by Some for Collateral Is New Hurdle for Greek Bailout

August 18, 2011 by Leave a Comment

Though the three countries — Austria, the Netherlands and Slovakia — are small or midsize economies, accounting for little more than 10 percent of the new bailout of 109 billion euros ($156 billion), their intervention presents a headache for policy makers.

“If this spreads as we fear it could, it is not a minor complication,” said one European official who spoke on condition of anonymity.

The effort threatens to complicate negotiations on the second package of aid agreed to by euro zone leaders in July, creating an additional problem for officials seeking to bring the Continent’s debt crisis under control.

During negotiations on July’s bailout deal, Finland insisted on collateral being offered by the Greeks, and the country has negotiated a bilateral arrangement with Athens. That plan is now being discussed by officials from the other euro zone nations, whose approval is needed.

In a statement, Amadeu Altafaj Tardio, a European Commission spokesman, highlighted “the importance of rapid and full implementation” of the July deal “to safeguard financial stability in Europe.”

“The euro area member states also agreed that a collateral arrangement will be put in place where appropriate,” the statement said. “The euro area member states will now have to assess the outcome of these bilateral discussions between the Finnish and Greek finance ministers in light of these conclusions.”

He added that the commission had not been formally informed about any other requests by countries for a deal similar to that offered to Finland.

In the deal between Athens and Helsinki, Greece is offering Finland a deposit to back loans, and Finland has said that this cash plus interest would be comparable to its contribution to the rescue.

It is likely that Athens would struggle to find the capital for similar deals with other countries.

But political pressure is growing in creditor countries. In the Netherlands this week, Parliament debated the Dutch contribution to the second Greek rescue. Such debate has made it difficult for governments to explain why Finland is receiving preferential treatment.

The Austrian Finance Ministry said that it had made its position clear before and that its latest comments were in line with what euro zone leaders agreed to at the July 21 meeting. “If there is to be a model for collateral, Austria would also make a claim,” a spokesman, Harald Waiglein, said, according to Reuters.

Article source: http://feeds.nytimes.com/click.phdo?i=43dc4794a7d3cc06dd52cc5d0939b944

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