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Portugal Praised for Progress on Financial Overhaul

August 13, 2011 by Leave a Comment

But as international lenders were delivering an upbeat review of Portugal’s progress, the country’s finance minister announced a steep increase in the tax on electricity and natural gas consumption to ensure that Portugal cuts its budget deficit this year by more than a third.

Vitor Gaspar, the Portuguese finance minister, warned that the government was still short of its deficit-to-gross domestic product goal for the full year, by about 1.1 percentage points.

To be on track, he said Friday, the government needed to increase its tax proceeds by an additional 100 million euros ($142 million) in the fourth quarter by raising the value-added tax on electricity and natural gas to 23 percent from 6 percent.

Still, officials from the International Monetary Fund, the European Commission and the European Central Bank said during a televised news conference in Lisbon that they were confident Portugal would meet its goal of reducing its budget deficit to 5.9 percent of G.D.P., from 9.1 percent in 2010.

“We have observed some public expenditure overruns, but we don’t expect these to continue in the fourth quarter,” said Jürgen Kröger, the chief negotiator for the European Commission.

Analysts at Barclays Capital wrote in a note to investors that the review was “marginally positive news” and added that new spending controls would be needed eventually. Offsetting spending increases with one-time tax increases is “certainly not helpful at a time when economic activity is in the process of declining to an already large planned fiscal contraction,” they wrote in the note.

The officials representing international lenders were in Lisbon this week to complete their first quarterly review of Portugal’s progress since they agreed on the terms of the bailout in May. Their favorable assessment paves the way for the government to receive another installment of financial assistance in September, of 11.5 billion euros ($16.4 billion).

Portugal has already received about 20 billion euros ($28.4 billion) of the bailout financing, which the previous Socialist government requested in April to meet debt refinancing obligations and avoid a default.

The international lenders also insisted that Portugal’s three-year overhaul program was not under immediate threat because of the deepening concerns about the euro debt crisis and the financial difficulties of larger European economies like Italy and Spain.

“I am very confident that there will be no need for new money” for Portugal, said Poul Thomsen, who has been leading the bailout negotiations on behalf of the I.M.F.

Mr. Thomsen also argued that “even if the headwinds are stronger,” Portugal’s position had been strengthened by the agreement in July among Europe’s leaders to ease financing terms for Greece and other rescued euro economies.

“The decision of European leaders means that the ball is in Portugal’s court,” Mr. Thomsen said. “Europe will do whatever it takes as long as Portugal pursues the reforms.”

The jump in the natural gas and electricity tax comes as Portuguese households already face a recession that the government and other institutions expect to last until the end of 2012. The decision could also raise concerns that the center-right government was relying heavily on punishing tax increases rather than on spending cuts to improve its budgetary situation.

To stick to the deficit target, Pedro Passos Coelho, who was elected prime minister in June, also recently announced a one-time tax on the traditional Christmas bonus paid to Portuguese employees, to raise 800 million euros ($1.1 billion).

Still, officials representing the lenders said they expected the government to put much more emphasis on spending cuts next year as more structural changes are made. Over all, they noted, Portugal is committed to delivering about two-thirds of its budgetary improvement through spending cuts.

“Without comprehensive structural reforms, there is a clear risk that the program becomes all about cutting and not growth, which is what it should be about,” Mr. Thomsen warned.

The international lenders also praised Portugal’s efforts to strengthen its banking sector despite unhappiness among domestic bankers about having to meet by year-end core capital requirements that are above those set under international banking rules.

“The authorities are off to a good start,” said Rasmus Rüffer, an official from the European Central Bank. “It is important to continue to strengthen the capital buffers of the banks and bring about an orderly deleveraging.”

Article source: http://www.nytimes.com/2011/08/13/business/global/europe-likes-portugals-progress-on-financial-overhaul.html?partner=rss&emc=rss

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Investors Fret at Costs if Rescues Are Needed

August 12, 2011 by Leave a Comment

But as bank shares plummeted this week, the question on investors’ minds was not whether governments would rescue their banks if necessary. It was how much a bailout might cost them.

Whether it is Société Générale in France, UniCredit in Italy or Santander in Spain, the fear is that already indebted countries will find themselves in deeper trouble if they are forced to rescue some of their biggest banks.

By one measure, according to a recent report from the Peterson Institute for International Economics, 90 of Europe’s biggest banks hold 4.7 trillion euros ($6.7 trillion) in short-term loans that must be repaid over the next two years. That burden alone is more than half of the combined gross domestic product of the 17 nations that share the euro currency.

“This problem has become cancerous,” said Stephen Jen, a former economist at the International Monetary Fund who runs a hedge fund in London. “France will not hesitate to fiscalize its banks — but it will be very expensive.”

Shares of European bank stocks were volatile on Thursday. Société Générale, which has been the focus of the greatest fears, ended the day up 3.7 percent. But its stock price is still down 16 percent this week — and off almost 43 percent for the year.

Shares of Santander climbed 3.2 percent and UniCredit rose 3.4 percent Thursday. But they, too, were rebounding slightly after big recent sell-offs.

In another danger signal, commercial bank reliance on the European Central Bank for short-term loans spiked to a three-month high on Wednesday. Banks borrowed 4 billion euros, or $5.7 billion, compared with 2 billion euros the day before, according to figures released on Thursday. That would indicate the banks are becoming wary of lending to one another, preferring to borrow from the central bank.

“What strikes me in the crisis of the last few weeks is the large content of self-fulfilling prophesies,” said Paul De Grauwe, an economist in Brussels who advises the president of the European Commission, José Manuel Barroso. “The fear that something bad will happen increases the probability that the something bad occurs.”

Heightening market anxiety is the realization that the banks that have promised to participate in the Greek debt restructuring may face larger losses than expected. Société Générale, which has one of the larger Greek exposures among major European banks, already announced a 268 million euro charge early this month.

What is more, Europe’s latest plan to address its bank problem — endowing its rescue fund, the European Financial Stability Facility, with the power to recapitalize banks — will take at least another month to become functional. Parliaments of the euro area countries must vote on the rescue fund’s new charter, and approval is by no means guaranteed.

Despite statements this week by Société Générale that it is in good condition, unconfirmed rumors have swirled through the markets that some of its lenders — including Singapore and the United States — were threatening to cut their exposure.

Addressing the issue head on, the governor of the French central bank, Christian Noyer, said on Thursday that the latest results of so-called stress tests on French banks demonstrated their health and that they had adequate capital to ride out any difficulties.

“Recent stock market movements won’t affect the financial stability of the banks or the resilience they have shown since the beginning of the crisis,” Mr. Noyer said.

And the agency that regulates French financial markets took pains to warn that “the dissemination of unfounded information is subject to sanction.”

The attacks on French banks began amid speculation that French government debt was about to lose its gilt-edged AAA credit rating.

France’s three largest banks — BNP Paribas, Société Générale, and Crédit Agricole — have bulging portfolios of French government bonds that represent substantial portions of their core capital. The latest worries, focused on the prospect of a lower rating for those bonds, could put pressure on the banks to raise more capital almost immediately if a downgrade occurred.

Jack Ewing contributed reporting from Frankfurt.

Article source: http://www.nytimes.com/2011/08/12/business/global/investors-fret-at-costs-if-european-banks-need-rescues.html?partner=rss&emc=rss

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As Market Tension Builds, World Leaders Ponder Response

August 7, 2011 by Leave a Comment

As the shock of Friday’s downgrade of United States debt reverberated dangerously with anxiety about European liabilities, central bankers and national leaders were under pressure to try to do something to restore confidence before Asian markets opened, and to prevent an extension of the rout that began last week.

As Group of 20 leaders conferred by phone, the governing council of the European Central Bank was holding an emergency conference call late Sunday. The central bank was likely to discuss whether to buy Spanish and Italian bonds to prevent borrowing costs for those countries from becoming unsustainable. But with signs of slowing growth in the United States and Europe, and government budgets and central bank balance sheets stretched to the limit, the policy options were dwindling.

Some analysts said that the European Central Bank would itself need help from other central banks and nations because of the scale of the problem.

“They just can’t allow the Italian economy to go down the tubes. It would be a Lehman-type situation,” Uri Dadush, a senior associate at the Carnegie Endowment for International Peace, said on Sunday. He was referring to the collapse of the investment bank Lehman Brothers in 2008, which touched off the global financial crisis.

Mr. Dadush put the cost of a bailout of Italy at $1.4 trillion, with Spain requiring another $700 billion. Those amounts would be a challenge for even the most solvent European countries, foremost among them Germany.

Finance ministers of the Group of 7 and Group of 20 nations were conferring on Sunday, Reuters reported, but it was not clear whether there was enough support for a substantial coordinated intervention in the markets — or even whether that would be a good idea.

“I don’t know if there is a policy response that makes sense, except support the banks,” Carl B. Weinberg, chief economist of High Frequency Economics in Valhalla, N.Y., said on Sunday. He said the European Central Bank, which has already expanded its cheap loans to banks, should make even greater sums available so that institutions could survive a decline in the value of their holdings of Spanish and Italian debt.

In a sign of the acute tension after Standard Poor’s lowered the rating for long-term United States debt to AA+ from AAA, stock markets in the Middle East fell in Sunday trading, and the Tel Aviv exchange delayed opening for the first time since the collapse of Lehman Brothers in 2008.

Market circuit breakers kicked in after opening prices were down more than 5 percent. The Israeli benchmark stock index closed down 7 percent.

The European Central Bank on Thursday intervened in European bond markets for the first time since March. But it appeared that the bank was buying only relatively small amounts of Portuguese and Irish bonds. The central bank may have intended a warning shot to signal its resolve, but markets seemed to have interpreted the modest intervention as a sign of weakness.

The move also reopened divisions on the bank’s governing council, with Jens Weidmann, president of the German Bundesbank, and several other members opposing the bond purchases.

“This type of bond market intervention is unlikely to achieve much,” Antonio Garcia Pascual, an analyst at Barclays Capital, said in a note. Even if the central bank starts buying Italian and Spanish bonds, “this begs the question of how far the E.C.B. is ready to go down that route — a proposition that markets may be testing in the weeks ahead.”

Mr. Weinberg said that even the European Central Bank would be hard-pressed to buy enough bonds to hold down yields on Spanish and Italian debt in the long term and to prevent the countries’ borrowing costs from reaching levels that would eventually prove ruinous.

Judy Dempsey contributed reporting from Berlin, and Liz Alderman from Paris.

Article source: http://www.nytimes.com/2011/08/08/business/global/as-market-tension-builds-world-leaders-ponder-response.html?partner=rss&emc=rss

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E.U. Monetary Official Blames Poor Communication for Market Jitters

August 5, 2011 by Leave a Comment

BRUSSELS — The European Union’s top finance official said Friday that a failure by leaders to adequately explain how a second bailout for Greece and other reforms would work was partly to blame for the recent market turmoil.

Olli Rehn, the economics and monetary affairs commissioner, also suggested that more determined efforts were needed to make good on an agreement last month to expand the main bailout mechanism for the euro zone. And he promised to issue a report soon on the feasibility using so-called euro bonds as another way of shoring up beleaguered European economies.

Speaking at a news conference, Mr. Rehn suggested that E.U. leaders had failed to explain adequately the “comprehensive, detailed and technically complex” agreement on Greece reached at a summit in Brussels last month.

“There were expectations in financial markets that all elements could be implemented immediately,” he said. “While these expectations were clearly unrealistic, markets have nevertheless been disappointed.”

“All of us who are in responsible positions in Europe will have to do much better in order to ensure verbal discipline and rigor,” he said.

European officials were “working night and day to put flesh on the bones” of the July 21 agreement, he said. “Once investors understand that all this work is underway behind the scenes, they will be reassured,” he said.

“It is not as if the fundamentals of the Italian or Spanish economies have changed overnight,” he said, referring to widening spreads on Spanish and Italian bonds in recent days.

Mr. Rehn also urged member countries and national parliaments to give a final green light to expanding the lending capacity and scope of the European Financial Stability Facility, or E.F.S.F., the region’s rescue fund.

He would not enter “into the numbers game“ or guess at the future capitalization of the fund, but said the technical and political details should be completed by early September.

Mr. Rehn also said the commission’s report on common bonds guaranteed by some or all euro zone members would examine whether such bonds “could contribute to fiscal discipline and increase liquidity in the bond markets in Europe so that the countries enjoying highest credit rating standards would not see their borrowing costs” rise, Mr. Rehn said.

But the idea of euro bonds has met with deep skepticism in Germany, and Mr. Rehn signaled some caution.

“Let’s not jump the gun nor rush to conclusions in that regard,” he said.

Article source: http://www.nytimes.com/2011/08/06/business/global/eu-monetary-official-blames-poor-communication-for-market-jitters.html?partner=rss&emc=rss

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European Central Bank Buys Bonds to Reassure the Markets, to Little Avail

August 5, 2011 by Leave a Comment

The show of force initially bolstered Italian and Spanish bonds. But the move appeared to backfire as stock markets in Europe and the United States fell sharply after Jean-Claude Trichet, the central bank’s president, warned of dangers ahead, while the modest scale of the bank’s bond-buying apparently fell short of what investors considered adequate.

Compounding the tension, a top European official said that a deal reached two weeks ago to ease the debt crisis was not working and urged leaders to consider bolstering the region’s existing bailout fund.

European leaders decided last month to authorize the European Financial Stability Facility — the European Union’s bailout fund — to buy bonds in open markets, relieving the central bank of that responsibility. But it will take months before the rescue fund is able to start making purchases. In addition, European leaders did not increase the size of the fund, leaving questions about whether it would be up to the task if a country as big as Italy or Spain needed help.

The European Commission president, José Manuel Barroso, has been pushing euro zone leaders to do more. In a letter released Thursday, he called for a “rapid reassessment of all elements” related to the stability fund, so that it was “equipped with the means for dealing with contagious risk.”

He also criticized European politicians for “the undisciplined communication and the complexity and incompleteness” of the package agreed to at the summit meeting on July 21.

“Markets remain to be convinced that we are taking the appropriate steps to resolve the crisis,” he wrote. “Whatever the factors behind the lack of success, it is clear that we are no longer managing a crisis just in the euro area periphery.”

As part of its response to the crisis, the central bank also moved to prop up weaker banks that may be having trouble raising cash, expanding its lending to euro zone institutions at the benchmark interest rate. The central bank left that rate unchanged at 1.5 percent, while the Bank of England left its benchmark rate at a record low of 0.5 percent.

Mr. Trichet declined to say what bonds the bank was buying or how much. He said the bank acted in response to “renewed tensions in some financial markets in the euro area.” It was the first such intervention since March.

Traders said the central bank had bought Irish and Portuguese government debt during the day. But the bank did not buy bonds of Italy and Spain, two countries with huge bond markets and now seen as most vulnerable in the region.

The move to buy Portuguese and Irish debt made little sense, given that they are insulated by their official bailouts and no longer have to raise money on the market, said Michael Leister, a fixed-income analyst at WestLB in Düsseldorf, Germany.

Mr. Trichet, however, had “opened the door to acting on behalf of Spain and Italy,” he added. The yield on 10-year Italian debt rose 11 basis points, to 6.19 percent. Yields on 10-year Spanish bonds rose three basis points, to 6.28 percent. Earlier, Spain sold 3.3 billion euros, or $4.7 billion, of bonds due in 2014 with demand more than twice the level of supply. But the average yield rose to 4.813 percent from 4.037 percent at a comparable auction in June.

“Over all, sentiment hasn’t changed yet,” Mr. Leister said after the central bank had acted. “Everyone’s afraid that the debt spiral will become a self-fulfilling prophecy. And the E.C.B. is the only institution with the firepower to stop the situation in the short term.”

The central bank first began buying bonds in the open market in May 2010 but tapered off the interventions earlier this year, a move investors may have interpreted as a lack of resolve. Michael T. Darda, chief economist at MKM Partners in Stamford, Conn., warned Thursday that half-hearted forays into the bond market “will fail, just like they did last year.”

“In each case, the debt crisis got worse instead of better,” he wrote in a note.

Jack Ewing reported from Frankfurt and Matthew Saltmarsh from London. Julia Werdigier contributed reporting from London and Rachel Donadio from Rome.

Article source: http://feeds.nytimes.com/click.phdo?i=c948eca5010fa388e3871223e7455649

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Carmakers Back Strict New Rules for Gas Mileage

July 29, 2011 by Leave a Comment

On Friday, when President Obama is scheduled to announce even stricter standards — in fact, the largest increase in mileage requirements since the government began regulating consumption of gasoline by cars in the 1970s — the chief executives of Detroit’s Big Three are expected to be in Washington again.

But this time they will be standing in solidarity with the president, who will also be surrounded by some of Detroit’s highest-tech — and most fuel-efficient — new vehicles.

While the American carmakers, as well as their Asian rivals, once argued against even minimal increases in government fuel rules, they are acquiescing without protest to an increase to 54.5 miles per gallon by 2025, from the current 27 miles per gallon.

The new standards are seen by the Obama administration as critical to reducing oil consumption and cutting consumer expenses at the pump, and the White House made it clear to Detroit executives that the changes were coming and they needed to cooperate.

It is an extraordinary shift in the relationship between the companies and Washington. But a lot has happened in the last four years, notably the $80 billion federal bailout of General Motors, Chrysler and scores of their suppliers, which removed any itch for a politically charged battle from the carmakers.

And the auto companies have gotten a lot better at building popular small cars that are fuel efficient — thanks to gas-electric hybrids and advances in battery technology — and consumers are responding. Six of the 10 best-selling vehicles in America are small or midsize cars, and one of the most popular pickup models on the market is a Ford F-Series with a high-mileage, six-cylinder engine.

Still, the industry’s meek acceptance of what are considered extremely challenging fuel-economy goals is a marked retreat from years past, when the companies argued that consumers would not be willing to pay for the technology needed to meet higher mileage requirements.

“The auto companies’ level of vitriol and rhetoric has changed,” said Dan Becker, director of the Safe Climate Campaign, a group that works to mitigate global warming. “We welcome all epiphanies.”

The new mind-set in Detroit has been helped by some give and take on the government’s side. G.M., Ford and Chrysler pressed for less onerous mileage goals for their profitable pickup trucks and got them. And the administration agreed to revisit the new requirements halfway through their course, with the possibility of adjusting them.

In the end, though, Detroit was faced with an undeniable political reality: there was no graceful way to say no to an administration that just two years ago came to its aid financially.

“This was no time to fight these regulations,” said one Detroit executive, who spoke on condition of anonymity because of the nature of the closed-door negotiations. “And you’re starting to see these fundamental shifts in the market that play a huge role in this.”

Environmental groups find themselves in the unusual position of lauding the automakers for making fuel economy a priority in virtually all their newest products, from the tiniest subcompact to the heaviest pickup.

“These proposed standards can be met using well-known technologies such as better engines, lower-cost hybrids and electric cars,” said Roland Hwang, transportation program director at the Natural Resources Defense Council.

The proposal to be introduced by the president calls for a 5 percent annual increase in fuel economy for cars from 2017 to 2025. The gains are more modest for the light-truck category, which includes sport utility vehicles — 3.5 percent a year through 2021, and then 5 percent annually in the next four years. The standards announced four years ago run through 2016, requiring a corporate average of 36 miles per gallon by then.

Over all, the new standards will require a 54.5 miles per gallon corporate average for 2025. That standard will be made more easily achievable by credits that automakers can earn by producing battery-powered vehicles, hybrids and alternative-fuel models. Details of how the credits will work have not yet been made public, but the intention is to encourage the development of cars with far lower emissions.

Initially, the White House floated a much more aggressive target of 62 miles per gallon by 2025. It reduced that twice before agreeing on the final number.

Nick Bunkley contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=fadf61b69ad4615100fefd30ef4ce11a

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In Ford’s and Chrysler’s Earnings, Auto Industry Comeback Shows Slowdown

July 27, 2011 by Leave a Comment

Two of Detroit’s Big Three, Ford and Chrysler, reported tepid second-quarter earnings on Tuesday, providing more evidence that the industry revival had slowed to a crawl.

Both companies said that revenues increased in the second quarter compared with the first quarter of this year, but profits dropped partly because of higher costs.

In Chrysler’s case, the company posted a loss as a result of paying off government loans associated with its 2009 bailout and bankruptcy.

In addition, the mediocre results underscored market conditions in which demand had fallen short of expectations.

Rebecca Lindland, an analyst with the research firm IHS Automotive, said, “2011 was originally slated to be a recovery year.” She added, “Instead, it’s just become sort of a get-through-it kind of year.”

Some of the slowdown can be attributed to product shortages in the wake of the March earthquake and tsunami in Japan, which disrupted the automakers in that country. However, weak employment numbers and high vehicle prices have also contributed to the lower sales.

Through the first six months of the year, overall United States sales have been running at a rate below 13 million for the full year. While that represents a solid improvement over the 11.6 million vehicles sold in 2010, it is not yet the recovery the industry had hoped for.

“The market is not as buoyant as one could possibly expect,” said Sergio Marchionne, the chief executive of Chrysler and its parent company, the Italian automaker Fiat.

Chrysler reported revenues in the second quarter of $13.7 billion, up from $13.1 billion in the first three months of the year. However, it reported a loss of $370 million, in contrast to a profit of $116 million in the first quarter.

The automaker would have reported a $181 million profit in the second quarter, but had to take a $551 million one-time charge for costs associated with the repayment of loans from the Treasury Department and the Canadian government.

Ford also reported higher revenue in the second quarter than in the first — $35.5 billion versus $33.1 billion. But its net income dropped to $2.4 billion, compared with $2.55 billion.

The lower profits were partly a result of higher prices for parts and materials, as well as Ford’s continued efforts to pay down debt and invest in new products.

Ford’s chief financial officer, Lewis Booth, said the overall United States market continued to be hurt by spotty demand and cautious spending by consumers.

“We never really expected to see a drastic recovery this year,” said Mr. Booth, adding that Ford still projected the full year to produce sales of 13 million to 13.5 million vehicles for the entire industry.

He said consumer demand was “getting pent up,” but declined to predict when buyers might return to new car showrooms in larger numbers. “Employment levels are one of the biggest things” needed for the market to improve, he said.

Mr. Marchionne said Chrysler was not expecting sales of more than 12.7 million vehicles for the year. The challenge for Chrysler, he said, is to continue to bring out fresh products that allow it to gain share in a bland sales environment.

“We have never been overly optimistic about 2011,” he said. “The car business will not have a tremendous year, but it won’t have a lousy year either.”

Industry analysts said companies were now resigned to the fact that the comeback was unfolding more slowly than predicted after miserable years in 2009 and 2010.

IHS Automotive, the research firm, is also projecting 12.7 million sales for the full year. Given that slow pace, the financial results by the Detroit companies is somewhat of a surprise. “It’s a minor miracle that they’re doing as well as they are,” said Ms. Lindland, the analyst.

General Motors, the largest American automaker, will not report its second-quarter results until early August.

While they grapple with slow market conditions, Ford and Chrysler are taking steps to improve their operations and position themselves for better times.

Ford reduced its automotive debt by $2.6 billion in the second quarter, to $14 billion, and increased its cash reserves by $700 million to $22 billion.

Chrysler has now paid off its entire $7.6 billion in loans to the American and Canadian governments, and is poised to merge more operations with Fiat, which owns a 53 percent stake in it.

Mr. Marchionne said Tuesday that he expected soon to announce a major management reorganization that would better integrate Fiat and Chrysler.

“What is important for us is that we start acting as a team that manages the business on a global scale,” he said.

Both companies, as well as G.M., are also opening talks this week on new contracts with the United Automobile Workers.

Ford’s chief executive, Alan R. Mulally, said Tuesday that the negotiations represented an opportunity for the company and the union to show “what we can do together to continue to improve the competitiveness of our business.”

Article source: http://feeds.nytimes.com/click.phdo?i=82fcdacfea8be9a1096ac42944513983

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Greek Bailout Negotiator Predicts Some Benefits for Banks

July 25, 2011 by Leave a Comment

Many analysts have been skeptical that the agreement reached Thursday by European leaders, which calls for banks to accept a 21 percent cut in the value of their Greek bonds, will bring lasting relief to Greece or ease market tensions.

But Charles H. Dallara, managing director of the Institute of International Finance, whose members include most large global banks, said the accord would help prevent fears about Greece from infecting other countries like Spain and Italy and undermining confidence in banks.

“The uncertainty swirling around this deal was catalyzing negative contagion in two directions,” Mr. Dallara said. “Now there is a sense that the losses are understood and broadly viewed as quite manageable.”

Mr. Dallara, who is based in Washington but spent five weeks in Europe before the deal was announced last week, said by telephone on Sunday that the rescue package would also give Greece a chance to turn around its dysfunctional economy.

“There is no other economy in Europe within miles of Greece in terms of distortions and imbalances,” he said. “If one can create conditions for growth, that will make all the difference. That will be the ultimate test of whether this will work.”

The Institute of International Finance has estimated that the deal will cost banks and other investors 54 billion euros, or $78 billion, but Mr. Dallara acknowledged that it was difficult to determine the real cost.

Some banks have had losses from holdings of Greek debt and others have not. Banks that swap their Greek bonds for new ones with lower interest payments, but more security, will take write-offs that will hurt earnings.

Before the deal, the European Central Bank firmly opposed any plan that credit rating agencies would see as a partial default, as is the case with this plan. But Mr. Dallara said that banks and government negotiators realized early in the talks that a default would be hard to avoid.

Rather, the talks focused on finding a way for investors to contribute, as Germany demanded, but in a manner acceptable to the banks and other bondholders. Mr. Dallara said a turning point in the talks came at a meeting in Paris in mid-July, when European governments agreed to a plan for banks to swap Greek debt for new securities backed by collateral.

From that point, talks focused on details of the plan, Mr. Dallara said. In the days before the announcement of the deal late Thursday in Brussels, Josef Ackermann, chief executive of Deutsche Bank and chairman of the institute, used his political acumen to complete the package with European leaders.

Mr. Dallara noted that Greece still faced a huge struggle, but said, “I think this gives Greece the wind at its back that it needs.”

Article source: http://feeds.nytimes.com/click.phdo?i=1ec0650b4f4cee7264029d7ab8f767ae

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As Italy Moves to Calm Investors, Europe Delays Meeting on Greece

July 15, 2011 by Leave a Comment

The sale came just before an informal meeting in Rome by officials from the European Central Bank, the European Commission and private lenders to discuss a second Greek rescue plan that leaders hope to announce next week.

Investor worries about the deadlock among European leaders over a solution for the Greek debt crisis have pushed up borrowing costs in recent days for the much bigger European economies of Italy and Spain.

Earlier doubts about whether the Italian prime minister, Silvio Berlusconi, and his finance minister, Giulio Tremonti, would agree on new austerity measures compounded the uncertainty. The Italian Senate on Thursday approved a 70 billion euro ($99 billion) austerity plan; the lower house of Parliament is scheduled to vote on Friday.

The Italian Treasury said it had priced 1.25 billion euros of five-year bonds, the maximum it had earmarked for the sale, with a gross yield of 4.93 percent, up from 3.9 percent at an auction in June. It also sold a combined 3.7 billion euros of bonds with maturities of up to 15 years.

With Italy able to place the bonds, albeit at a higher cost, some analysts said the focus was shifting back to whether European policy makers would be able to agree on a Greek bailout.

“The Italians got away with what they intended to do and it did initially help to stabilize the markets,” said Eric Wand, a fixed-income strategist at Lloyds Bank Corporate Markets in London. “But the situation now is reverting back to European politics — and as politicians don’t seem to be in a desperate rush to get something out, the market is starting to really get nervous.”

That message was echoed by the International Monetary Fund, whose mission chief in Ireland, Ajai Chopra, said European leaders needed to act decisively to handle the crisis.

“What is critical now is for Europe to dispel the uncertainty of what is perceived by the markets as an insufficient response,” he said at a news conference in Dublin.

Ireland, whose credit rating was recently lowered to junk status, received a positive report from the I.M.F., the European Commission and the European Central Bank.

“What we need and what is lacking so far,” Mr. Chopra said, “is a European solution to a European problem.”

Mr. Chopra called for a quick end to the debate that has held up the construction of the new package: the extent to which private investors will have to make sacrifices as part of the new bailout of Greece.

With the E.C.B. resisting any solution that involves a selective default, and the German government pressing for private investors to share the pain, policy makers have been unable to construct a second bailout for Greece.

“We need to come to closure on this debate,” Mr. Chopra said, adding that it would be important to avoid the impression that any solution to the Greek case that involved private investors would be the template for other rescue packages.

The Institute of International Finance, which represents financial services companies, said Charles Dallara, its managing director, arrived in Rome on Thursday for discussions with Vittorio Grilli, an Italian Treasury official who is also the chairman of a high-level European committee on economic policy.

An Italian Treasury official, speaking on the customary condition of anonymity, said that the meeting would focus on the involvement of private investors, like banks and insurance companies, in a new Greek package and would give officials the chance to exchange opinions. No statement was expected after the meeting, the official said.

Frank Vogl, a spokesman for the Institute of International Finance, said that the talks represented a chance for the institute to update European governments on the status of recent, intense negotiations among Greece’s main creditors about the scale and method of private sector involvement in the next bailout. The talks would be focused solely on Greece, he added.

European leaders on Wednesday put off a proposed summit meeting until next week to give themselves more time to settle disagreements over how to get private investors to share the pain in any future Greek bailout. Angela Merkel, the German chancellor, argued that a package of necessary measures was not yet ready.

Greece’s credit rating was cut three levels to CCC by Fitch Ratings late Wednesday. The ratings agency cited uncertainties about a Greek rescue and the role of private lenders in such a rescue.

Italy is expected to push through a four-year austerity plan and win support for the measures from opposition parties this week.

The Italian deficit as a share of gross domestic product was less than half of that of Greece’s share last year. But as investors become increasingly nervous about the possibility of containing Greece’s debt problems, borrowing costs for Italy have increased.

Mrs. Merkel said Thursday that she also wanted a quick solution to the Greek crisis, but that a special summit meeting of euro zone leaders could not be called before a plan was put together.

“The condition is that we are able to decide on a completed new program for Greece,” she told reporters during a visit to Nigeria, Reuters reported.

Matthew Saltmarsh and Gaia Pianigiani contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=c6417b6906c13ce35aee0e0fc566e2e5

Filed Under: Economy News Tagged With: , ,

S.&P. Warns Bank Plan Would Cause Greek Default

July 4, 2011 by Leave a Comment

PARIS — Greece risks being judged in default on its debt obligations if banks are forced to bear part of the pain, Standard Poor’s said Monday, suggesting that current proposals for rescuing the euro zone’s weakest member may have to be reconsidered.

In particular, a plan proposed by the French government and banks “could require private sector debt restructuring in a form that we would view as an effective default,” S.P. said in a statement.

The rating agency also said it was cutting its long-term rating on Greece three notches deeper into junk territory, to CCC from B.

Euro-zone finance ministers agreed over the weekend to provide Athens with financing of €8.7 billion, or $12.6 billion, from the €110 billion bailout agreed to last year, to help the Greek government function through the summer. The new aid eliminates the prospect of a near-term default.

But the finance ministers put off the question of how to provide a second bailout, reportedly valued at up to €90 billion, to keep the country operating through 2014, when it is hoped that Greece will be able to return to the credit markets.

The thorny issue of how to share the pain with the private sector suggests that discussion of the second bailout could continue for months.

Nicolas Sarkozy, the French president, announced June 27 that French banks had agreed to a plan under which the banks would reinvest most of the proceeds of their holdings of Greek debt maturing between now and 2014 back into new long-term Greek securities.

“If it wasn’t voluntary,” Mr. Sarkozy said at the time, “it would be viewed as a default, with a huge risk of an amplification of the crisis.”

Germany’s biggest banks have also agreed to roll over some of their Greek debt holdings.

But Standard Poor’s said Monday that it “views certain types of debt exchanges and similar restructurings as equivalent to a payment default”: when a transaction is seen as “distressed rather than purely opportunistic” and when it results “in investors receiving less value than the promise of the original securities.”

Both conditions would appear to be met by the French proposal, it said.

European officials are anxious to avoid setting off a default, Gilles Moëc, an economist at Deutsche Bank in London, said, because that could lead to a crisis in relations with the European Central Bank.

The E.C.B., which itself holds billions of euros worth of Greek debt, has said it could only accept the participation of bondholders in any restructuring if it were “entirely voluntary.”

The central bank — which has been helping Greece by buying its debt on the secondary market — “doesn’t want to jeopardize publicly its balance sheet anymore,” Mr. Moëc said. “It’s one thing to say they’ll accept Greek government bonds, it’s another thing to have something on their balance sheet that has ceased to pay, which is the definition of default.”

“It doesn’t mean the Greek securities are not going to be paid,” he said, adding: “The E.C.B. would be able to accept them if the final structure was relatively healthy. One thing the E.C.B. doesn’t want is any infringement of its right to decide on the collateral that it accepts.”

A finding by the credit ratings agencies of default would also require the E.C.B. to impose discounts, known as haircuts, on the Greek debt it has accepted as collateral. That would inflict more financial pain on banks holding that debt.

Angela Merkel, the German chancellor, has pointed to another problem, noting that default would trigger the repayment of credit default swaps — effectively, insurance policies — tied to Greek debt, with potentially devastating consequences for the world financial system.

Article source: http://feeds.nytimes.com/click.phdo?i=db2e836b6d5e199e9bd30b9dc126fbf9

Filed Under: Business News Tagged With: , ,
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