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Latvia Is Endorsed to Adopt the Euro

June 5, 2013 by Leave a Comment

FRANKFURT — The small Baltic nation of Latvia received official endorsement for membership in the euro currency union Wednesday, in a move that European leaders clearly hoped would demonstrate the endurance of the euro zone despite its dismal economic performance and damaged reputation.

“Latvia’s desire to adopt the euro is a sign of confidence in our common currency and further evidence that those who predicted the disintegration of the euro area were wrong,” Olli Rehn, the European Union’s commissioner for economic and monetary affairs, said in a statement.

Both the European Commission, the European Union’s main policy-making body, and the European Central Bank said that Latvia had met the requirements for membership, which include limits on inflation and government debt. Latvia also had to demonstrate that its laws on issues like central bank independence are in line with European Union standards.

Latvia’s application still requires review by the European Parliament and endorsement by European Union political leaders, a process that is likely to result in formal approval in July.

Latvia would join on Jan. 1, becoming the 18th European Union country to adopt the euro.

The country, with 2.2. million people and economic output last year worth about 20 billion euros, is often held up as a model for advocates of austerity because the country responded to a severe banking crisis in 2008 by slashing government spending.

Economic output plunged, unemployment soared and wages fell, but the Latvian economy gradually recovered. The country’s economy grew 1.2 percent in the first quarter of 2013 compared with the previous quarter, second only to neighboring Lithuania among European Union countries.

“Latvia’s experience shows that a country can successfully overcome macroeconomic imbalances, however severe, and emerge stronger,” Mr. Rehn said.

However, opinion polls indicate that most Latvians are reluctant to join the euro, even though they have a powerful political incentive to do so. Like Estonia, another Baltic nation, which was the most recent country to join the euro in 2011, Latvia is anxious to tie itself to Europe and distance itself from its former Russian masters.

The Latvian government did not hold a voter referendum on euro membership. In many ways, the country is already a de facto member. The country has kept its currency, the lat, closely tied to the euro. And Latvian bank loans are commonly denominated in euros.

In its report, the European Commission said it had concluded that Latvia “has achieved a high degree of sustainable economic convergence with the euro area.”

The European Central Bank was also generally positive about Latvia, but expressed some concerns about the country’s readiness.

About half the deposits in Latvian banks come from outside the country, primarily Russia. That raises the risk of a sudden exodus of money in the event of a crisis. Earlier this year, Cyprus, another tiny euro zone member, was forced to limit withdrawals to prevent a bank run by Russian depositors.

But Latvia is considered less vulnerable to a Russian deposit flight than Cyprus because most of the money is linked to genuine business ties. Cyprus was regarded as a place where Russians parked their money to avoid taxes or because of fears that Russian authorities might one day seize assets.

The European Central Bank also expressed some concern whether Latvia could continue to meet the inflation targets required of euro members. While inflation has been well below 2 percent lately, Latvia has experienced huge swings in prices during the last decade, the central bank said, ranging from deflation to annual inflation of more than 15 percent.

The governor of the Latvian central bank will automatically join the European Central Bank’s governing council and have a vote in decisions on interest rates and other monetary policy issues. It is unclear who that person will be, since the term of the current governor, Ilmars Rimsevics, expires at the end of this year.

Historically, though, Latvia has stuck to the kind of conservative policies favored by Germany, Finland and other northern European countries. Government debt last year equaled about 41 percent of gross domestic product, well within limits set by treaty and much lower than Western European countries like France or Italy.

Still, recent experience with countries like Greece and Ireland has shown that nations can have trouble maintaining fiscal and economic discipline after they have joined the euro club.

“The temporary fulfillment of the numerical convergence criteria is, by itself, not a guarantee of smooth membership in the euro area,” the European Central Bank said in its report.

James Kanter reported from Brussels.

Article source: http://www.nytimes.com/2013/06/06/business/global/latvia-is-endorsed-to-adopt-the-euro.html?partner=rss&emc=rss

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British Study Raises Warning on Scottish Banks

May 18, 2013 by Leave a Comment

LONDON — An independent Scotland could find its banks too big to rescue in the event of another crisis, according to a British government report that compares the Scottish financial sector to those of debt-laden Iceland and Cyprus.

The document, to be published Monday, is the latest of three studies by the British government meant to sway opinion in Scotland ahead of next year’s planned referendum there on independence.

Last month the British government suggested that an independent Scotland would not be able to keep the pound sterling and would have to either adopt its own currency or embrace the euro.

The new study, a summary of which was made available ahead of publication, highlights the size of Scotland’s banking sector — much of which had to be rescued by British taxpayers after the financial crash — relative to the rest of the Scottish economy. The sector stands at 1,254 percent of Scotland’s gross domestic product, compared with banking assets in Britain worth 492 percent of G.D.P., the Treasury document says.

“By way of comparison, before the crisis that hit Cyprus in March 2013, its banks had amassed assets equivalent to around 700 percent of its G.D.P. — a major contributor to the cause and impact of the financial crisis in Cyprus and the ability of the Cypriot authorities to prevent the systemic effects when it hit,” the study says.

The document adds that by the end of 2007 Icelandic banks had amassed consolidated assets equivalent to 880 percent of Icelandic G.D.P.

It cites the verdict of the Organization for Economic Cooperation and Development, which said that “the banks grew to be too big for the Iceland government to rescue.

“Banking in these circumstances became very dangerous when the global financial crisis deepened,” it said.

The study says that “a serious banking crisis in an independent Scotland could pose a significant risk to Scottish taxpayers,” with the potential economic fallout amounting to about 65,000 pounds ($98,600) per capita.

The paper concludes that Scottish banks could either have to accept higher risks and costs associated with volatility or restructure and diversify their assets.

John Swinney, finance secretary of the Scottish government, which supports independence, dismissed that document as “a discredited, feeble attempt to undermine confidence in Scotland’s ability to be a successful independent country” adding that “it will not work.”

Mr. Swinney said that he had viewed a leaked draft of the paper and that much of it “seems to be based on a flawed, outdated view of the world which takes no account of the substantial banking reforms which have been ongoing across Europe since 2008.”

The Treasury’s study counted Scottish banks as all those registered in Scotland, including the Royal Bank of Scotland — but excluding NatWest, which is part of the group but is registered in London, and excluding assets of RBS’s foreign subsidiaries.

Bank of Scotland, which is part of the Lloyds Banking Group, is included as a Scottish institution as it is registered in Scotland.

Untangling Scotland’s banks from the broader British financial sector would be a highly complex task were Scots to vote for independence, because both RBS and Lloyds Banking Group were bailed out by British taxpayers after the financial crash.

The British government owns 80 percent of RBS and 40 percent of Lloyds, which are both run from London. That would almost inevitably require some changes in ownership in the event of independence.

Nevertheless the Treasury’s study argues that the total support provided to RBS in 2008 would have been the equivalent of 211 percent of Scotland’s G.D.P. By contrast the total British interventions across the whole banking sector were 76 percent of the country’s G.D.P.

The document also adds that any attempt at shared regulatory arrangements between an independent Scotland and the continuing United Kingdom would be “significantly more complex than those that currently exist” and would be likely to increase the costs for firms of complying with this regulation.

Article source: http://www.nytimes.com/2013/05/20/business/global/british-study-raises-warning-on-scottish-banks.html?partner=rss&emc=rss

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Spanish Central Bank to Face Suit Over Bankia Bailout

May 9, 2013 by Leave a Comment

MADRID — The Bank of Spain is facing an unprecedented lawsuit over its alleged failure to warn investors of the problems at Bankia, a giant mortgage lender that was nationalized a year ago, setting off a banking crisis that obliged Spain to seek a bailout from Europe.

A group estimated at 400 investors will seek about €200 million, or $260 million, in compensation from the Spanish central bank and the country’s other supervisory authorities for losses incurred when Bankia shares they had bought for €3.75 a share in 2011 devolved into a penny stock.

In a written complaint sent to the Bank of Spain this week, Cremades Calvo-Sotelo, a Spanish law firm representing the disgruntled investors, accused the bank and other authorities of failing to adequately oversee Bankia, from its formation to its listing in July 2011 and then its nationalization last May.

“The measures used to contain the deterioration of Bankia in the context of a severe economic recession provoked exactly the opposite,” according to the complaint, which the law firm used to inform the parties that a suit would be filed. “The entire process of restructuring and intervening in Bankia demonstrates a behavior on the part of the financial authorities that was fully contrary to the standards of prudential regulation.”

Spanish regulators almost entirely wiped out the already heavily reduced value of Bankia’s equity in March, part of a cleanup that required Spain to use €18 billion of its €100 billion European bailout in order to keep the bank afloat. Over all, Spain has thus far used €41 billion of its bailout to rescue its banks.

The lawsuit against the Bank of Spain — the first of its kind against the country’s central bank — would be extended to Spain’s Economics Ministry as well as its stock market regulator, said Javier Cremades, the chairman of the law firm.

“Bankia’s handling and supervision shows some very serious mistakes on the part of the Bank of Spain and the other financial authorities and it is essential to hold them liable if we want citizens and investors to recover their confidence in our system,” Mr. Cremades said.

The approval of Bankia’s listing also helped “spread the disease indiscriminately,” according to the complaint sent to the Bank of Spain, creating distrust among investors toward the entire Spanish financial sector.

The Bank of Spain had no immediate comment.

Bankia’s collapse has already triggered separate litigation. Last July, Rodrigo Rato, the former executive chairman of Bankia, appeared in court after he was named along with 32 other former Bankia executives and board members in a criminal inquiry into potentially misleading accounts at the time of Bankia’s listing, which involved tens of thousands of the bank’s retail clients buying into the stock offering.

Mr. Rato and the others denied wrongdoing and have not been formally charged with any crime.

In February, Bankia reported a loss of €19.2 billion for 2012, a record for the Spanish banking industry. It forecast a swift return to profit, following the bailout and a cleanup of its balance sheet. Still, Standard Poor’s, the credit rating agency, downgraded Bankia, noting that the bank was likely to remain dependent on financing from the European Central Bank for the foreseeable future.

Article source: http://www.nytimes.com/2013/05/10/business/global/spanish-central-bank-to-face-suit-over-bankia-bailout.html?partner=rss&emc=rss

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Cypriot Finance Minister Resigns

April 2, 2013 by Leave a Comment

President Nicos Anastasiades accepted the decision by Mr. Sarris to step down, and the government quickly appointed Harris Georgiades, the deputy finance minister, as his replacement.

On the heels of Cyprus’s 10 billion euro, or $13 billion, bailout announced last week, a political blame game has broken open in the halls of power. Mr. Sarris has faced strong criticism for his handling of the crisis and had been under pressure from some factions in the Cypriot Parliament to step down.

He is also one of several people now facing an investigation by Cypriot officials over his role in the country’s banking crisis. Before taking the helm as finance minister in the new government that came to power in February, Mr. Sarris had presided over Laiki Bank, which effectively collapsed last week. Laiki is being merged into the Bank of Cyprus in a deal that will see depositors lose up to 60 percent of their savings in excess of 100,000 euros.

Under his watch, a stint of eight months through August 2012 in which he attempted to salvage Laiki, the bank suffered steep losses, mostly on a mountain of loans to Greek and Cypriot businesses and individuals that have now turned toxic. Cypriot banks also took a hit from their heavy holdings of Greek government bonds, which incurred big losses in the international bailout of Greece.

On Tuesday, some of the curbs Cyprus imposed on removing money from banks were softened. The restrictions had particularly hurt businesses that were not permitted to make large payments on debts they owed in the past two weeks.

The Finance Ministry lifted the ceiling on transactions between accounts and other banks to 25,000 euros from 5,000 euros. Other restrictions remain in place, including 300 euro daily withdrawal limits.

Mr. Anastasiades on Tuesday appointed a three-judge panel to look into how and why Cyprus edged close to a financial disaster that threatened to make it the first country to exit the euro. In a speech, he said the crisis arose from inept actions and omissions by people in charge of the banking sector and the economy.

Mr. Sarris had been at the front lines of the bailout negotiations, which led to one abortive deal more than two weeks ago in Brussels, followed by the final agreement early last week.

The most controversial decision in the first deal, which the Parliament rejected, would have imposed a 6.75 percent tax on bank deposits of less than 100,000 euros. Before it was abandoned, the plan was roundly criticized by economists in Europe and elsewhere as threatening the integrity of the deposit insurance system throughout the 17-country euro zone.

It was agreed to by Mr. Anastasiades in consultation with Mr. Sarris, who presented the deal to the Cypriot public during a televised news conference from Brussels on March 16.

After the Cypriot Parliament roundly rejected that plan, Mr. Sarris flew to Moscow to seek alternative sources of funding for Cyprus and its teetering banks. Those talks went nowhere.

‘’Mr. Sarris’s credibility was at near zero both nationally and with foreign lenders after he supported the first failed plan to tax depositors and then returned empty-handed from Moscow,’’ said Mujtaba Rahman, a senior analyst at Eurasia Group.

The main provisions of the bailout deal will remain in place, including the breakup of Laiki Bank and the overhaul of Bank of Cyprus.

But the Cypriot Parliament must still vote on a memorandum of understanding with the so-called troika of international organizations — the European Central Bank, the European Commission and the International Monetary Fund — that agreed to the bailout.

That memorandum, still being drafted, will outline the budget cuts and other conditions Cyprus would have to meet to receive its allotments of money. A parliamentary vote is expected in coming weeks. The governments in Germany and Finland, under their national rules on bailout loans, are also expected to seek the approval of their parliaments.

The memorandum will probably be the subject of heated debate in Nicosia. Many lawmakers, already unhappy with tough capital controls that have been slapped on bank accounts for the better part of a month, are dismayed by what they see as harsh terms that will tip the already enfeebled economy in Cyprus over the edge.

But Mr. Sarris’s resignation should ‘’help the Cypriot government win approval for the bailout program in the Cypriot parliament,’’ said Mr. Rahman, the analyst.

Michael Olympios, chairman of the Cyprus Investor Association, is among the many critics of the bailout deal because it wiped out the shareholders in Bank of Cyprus and will impose losses of up to 60 percent on depositors with more than 100,000 euros in their accounts.

‘’The troika is pushing us from recession to depression,’’ Mr. Olympios said, adding that the country may yet need to leave the euro zone. ‘’It doesn’t matter if Mr. Sarris leaves and someone new comes in. If you don’t change the policies that are being imposed on us, then forget it.’’

Liz Alderman reported from Paris and James Kanter from Brussels.

Article source: http://www.nytimes.com/2013/04/03/business/global/cypriot-finance-minister-resigns.html?partner=rss&emc=rss

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S.&P. 500 Breaks Through 2007 Closing High

March 28, 2013 by Leave a Comment

The Standard Poor’s 500-stock index rose above its previous closing high, set in October 2007, in morning trading on Thursday.

The benchmark index was recently trading over 1,565.15 points, up 0.2 percent, despite a report of rising claims for unemployment benefits.

The blue-chip Dow Jones industrial average, which was up 0.3 percent Thursday in afternoon trading, already passed its 2007 milestone earlier this month, but the S.P. 500 is widely considered to be a broader-based reflection of the American stock market. The Nasdaq composite index of largely technology stocks added 0.1 percent Thursday.

The benchmark index has repeatedly come close to reaching its own record level in recent days, but has pulled back each time as investors grappled with concerns about the banking crisis in Cyprus. European stock markets rose on Thursday after Cypriot banks opened for the first time in two weeks with less turmoil than expected.

The new high caps a four-year run for the S.P. 500 that began in 2009 after the near collapse of the American financial system. The index rose to a high on Oct. 9, 2007, but then fell 57 percent to hit an ominous intraday low of 666.67 on March 6, 2009, and a closing low of 676.53 three days later.

The surge in the S.P. 500 this year still puts the index only slightly above where it was back in the heady days of 2000, when technology stocks were leading the market higher. Factoring in inflation, the S.P. 500 is still well below the highs reached in 2000 and 2007. The index is also still below the intraday record level of 1,576.09 hit on Oct. 11, 2007.

The current rally has been fed by bond-buying programs begun by the Federal Reserve, which helped nourish a recovery in corporate profits.

The gains have not generally been enjoyed by Americans without stock portfolios, leading to widespread skepticism about the sustainability of the market’s rise. But more recently there have been signs that the economic recovery may be broadening out into the rest of the economy.

The Commerce Department said Thursday that the economy grew at a 0.4 percent annual rate in the fourth quarter of 2012, which was faster than the 0.1 percent that the government previously estimated. The number of people filing for unemployment benefits rose 16,000 last week, more than predicted, but longer-term numbers have pointed to a recovery in the labor market. The overall unemployment rate dropped to its lowest level in four years in February.

The market gains on Thursday were relatively broad based, with 333 stocks in the S.P. 500 rising.

Article source: http://www.nytimes.com/2013/03/29/business/daily-stock-market-activity.html?partner=rss&emc=rss

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DealBook: London Wants to Tap Chinese Currency Market

January 16, 2012 by Leave a Comment

The London offices of financial firms such as Swiss Re and Lloyd’s of London.Chris Ratcliffe/Bloomberg NewsThe London financial district.

LONDON — Britain plans to turn London into a major foreign exchange trading center for the Chinese renminbi to benefit from faster growth in Asia while strengthening the city’s position as a financial center in the wake of the banking crisis.

George Osborne, the chancellor of the Exchequer, said during a visit to Hong Kong on Monday that he was working with Chinese and British banks to establish London as a new hub for the renminbi market.

“London is perfectly placed to act as a gateway for Asian banking and investment in Europe, and a bridge to the United States,” Mr. Osborne said in a speech to the Asian Financial Forum in Hong Kong. “This is not just an accident of time zone, or our language, although both are important. It reflects London’s strength in product development, its regulatory structure, and the depth, breadth and international reach of its financial markets.”

The pledge comes as Britain is increasingly feeling the effects of an economic slowdown across Europe, and some British banks have threatened to move their headquarters abroad in light of stricter financial regulation.

The government hopes that steps toward creating a Chinese currency hub in London will help strengthen the city’s role as a financial center vis-à-vis New York and Hong Kong, while helping Britain attract Chinese investments in other sectors, including infrastructure.

Mr. Osborne said London was already the largest foreign exchange market in the world, adding that the growing use of the renminbi would “bring substantial benefit to Chinese economic development and the wider world economy.”

The Chinese currency’s share of the global foreign exchange market was 0.9 percent in June last year, Mr. Osborne said. That compares with China’s share in worldwide trade of 11 percent in 2010. “It is clear that there is scope for substantial expansion of the renminbi market in the coming years,” Mr. Osborne said.

Sébastien Galy, a foreign exchange strategist at Société Générale in London, agreed with Mr. Osborne that London’s geographical position allowed it to play a role in the expansion of the currency market, but he said it would take time for that market to grow to a sizable volume.

“It could take decades to achieve that, which doesn’t mean that the renminbi wouldn’t increase in trading volumes in the meantime,” Mr. Galy said. “There are regional issues, their markets are not developed enough yet and also you need a floating currency.”

In a first step to expand the currency trading, Hong Kong has decided to expand the operating hours of its renminbi settlement system by five hours. China has been using its currency more in international trade to reduce its reliance on the dollar.

Article source: http://feeds.nytimes.com/click.phdo?i=b4f7bffda1aa3701034258fa8318557e

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Europe Steers Into a Zone of Uncertainty

September 9, 2011 by Leave a Comment

Economists and financial analysts point to a series of land mines that lie ahead.

Growth is slowing, even in Germany, where exports are down and imports are stagnant. A team of experts stalked out of Greece last week to force Athens to live up to its debt-cutting promises as its bills continue to mount. The Italian government is applying fiscal Band-Aids to its deficit instead of surgery, while there is new budgetary pressure on Rome and Madrid, considered too big to bail out.

On Thursday, the Organization for Economic Cooperation and Development provided only the latest gloomy assessment of the prospects for a new recession and a European banking crisis. “The sovereign debt crisis in the euro area could intensify again,” the group said, urging the recapitalization of some European banks and better financial management in the 17-nation euro zone.

And the German finance minister, Wolfgang Schäuble, scolded Athens, warning that European aid would be provided only “if Greece actually does what it agreed to do.”

“The situation is extremely grave,” said Julian Callow, chief European economist for Barclays Capital. “Despite a sharp slowdown in economic activity, especially on the export side, you still have to push governments with large deficits to cut them to levels that are sustainable. That’s the key challenge, and the economic environment is much less favorable now for fiscal consolidation in the euro zone. And the Greek situation is like a ticking bomb.”

But Europe works in incremental steps, driven by crisis and the domestic politics of its nations. Any sweeping solution to the problems of the euro — like an “economic government,” or a pan-European Treasury or Finance Ministry, or collective “euro bonds” — is many months, if not years, away.

Still, most experts agree that Europe’s crisis will persist until it adopts a far tighter fiscal and monetary union, expels weaker economies or divides into two, with different currencies.

“You either go forward to more European economic governance or backward,” said Edwin M. Truman of the Peterson Institute for International Economics. “And if you go backward, you go backward pretty far, to the fragmentation of Europe.”

Mr. Callow said that the mood among European central bankers and German officials, too, was “centralize or die.”

For now, Europe is working on ratifying the changes made to its economic system at a meeting on July 21. To go into effect, even those limited changes must be approved by all euro-zone countries and their parliaments, which may take until mid-October, further unnerving markets.

The hope among experts and economists is that the changes, if carried out with skill, may allow Europe to further isolate Greece and its unsustainable debts from other countries, reducing the risk of contagion and buying time for other countries to fix their budgets and work on how to better centralize control of fiscal policy. Though abstract on the surface, the changes will provide more flexibility to bail out or further restructure Greek debt, to aid Italy and Spain with their bond sales and even to recapitalize some European banks, weakened by their exposure to sovereign debt in the form of Greek, Portuguese, Spanish and Italian bonds.

Changes in the European Financial Stability Facility, which will be expanded to $610 billion of collective financing from the 17 euro-zone states, should also allow it to act as a kind of bank. That would help relieve the European Central Bank from its current role as the buyer of last resort for Italian and Spanish bonds, a decision it reluctantly made to keep down the borrowing costs of those governments and prevent Greece’s problems from infecting the rest of Europe.

The facility itself is already a form of stealth euro bond, in that its obligations are shared by all euro-zone members.

Article source: http://www.nytimes.com/2011/09/09/world/europe/09europe.html?partner=rss&emc=rss

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After Test Results, European Banks Are Urged to Bolster Reserves

July 16, 2011 by Leave a Comment

The high pass rate under the exams did not satisfy analysts’ hopes for a bolder accounting that would help restore confidence in the health of the European Union financial system and remove doubt about the effects of a default by Greece on its government debt.

After a vast data-crunching exercise by regulators, only eight of 90 banks were deemed too weak to survive economic shocks like a further deterioration in the sovereign debt crisis.

A ninth bank, Helaba of Germany, would have failed, but refused to disclose its data. An additional 16 passed narrowly, and will be asked to take steps to “promptly” increase their resilience, by raising more capital for example, the regulators said.

“The publication of these results will not assuage investors’ fears over the resilience of the E.U. banking sector,” Marie Diron, an economist who advises the consulting firm Ernst Young, wrote in a note.

Of the banks that failed, five were in Spain, two in Greece and one in Austria, said the European Banking Authority, which conducted the tests.

All were relatively small players. But the stress test results could also put pressure on some giant banks that have been regarded as healthy, including Deutsche Bank in Germany, UniCredit in Italy, and Société Générale in France. Capital reserves at all three were uncomfortably close to the level where they would have been formally asked to either raise more capital or reduce risk.

The test results come amid rising anxiety that Greece is on the verge of defaulting on its debt, an event that could provoke a banking crisis because so much of those bonds are parked on the balance sheets of European financial institutions. As a result, the stress tests have clear implications for the overall health of the euro zone.

“To me the real question is not stress in the institutions, but the ability of states to control the sovereign debt” problem, Paolo Bordogna, head of financial services in Europe for the consulting firm Bain Company, said ahead of the release of the results.

Analysts had been skeptical that the tests this year were rigorous enough to clear up doubts about the European banking system and to encourage institutions to begin lending to each other again rather than relying on the European Central Bank for funds.

The European Banking Authority, for example, did not examine what would happen if Greece proved unable to pay its debts, which critics saw as a major flaw.

“This year’s tests still did not include the impact of a formal debt default by a European government, which is the single greatest risk facing the European banking sector at present,” Ms. Diron wrote.

But European officials argued that, even if people thought the test was too forgiving, they now had a huge amount of data they could use to run their own stress evaluations, including detailed information on bank holdings of government debt.

“We are putting out a lot of information so that investors and analysts can make up their own minds,” Andrea Enria, the chairman of the E.B.A., said by telephone. Mr. Enria defended the integrity of the stress test. The test imagined that banks had to absorb a sharp recession and surge in unemployment, which implied banking losses that were twice as high as in 2009, the height of the financial crisis, he said.

The E.B.A. said that at the end of last year, 20 banks would have failed the test. But in the first four months of this year, banks raised about 50 billion euros ($71 billion) in new capital.

The release of the tests occurred after markets closed in Europe and had little effect on stocks in the United States. The Dow Jones industrial average rose 42.61 points, or 0.34 percent to 12,479.73, and the Nasdaq rose 27.13 points, or 0.98 percent, to 2,789.80. The dollar’s value against the euro was also little changed at $1.42.

Guy LeBas, the chief fixed-income strategist for Janney Montgomery Scott, said that the number of banks that failed was within expectations. “That was give or take the number the markets were betting on,” he said. It was also positive that most of the weak banks were in Spain, a country where the central bank has a good reputation for dealing with weak institutions.

Raphael Minder contributed reporting from Madrid and Christine Hauser from New York.

Article source: http://feeds.nytimes.com/click.phdo?i=6e5dc87a18ffaf10d9bbe03794af7c69

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Greek Banks Feel Hostage to Debt Crisis

June 21, 2011 by Leave a Comment

Unlike their government, Greek banks were seen as well managed and prudent before the crisis. But they became victims of their government’s debt woes, severed from international lines of credit and able to borrow only from the European Central Bank.

Now the banks complain that the E.C.B. is pressuring them to reduce their dependence on central bank funding, hurting not only the banks but Greek businesses and consumers who are unable to get credit.

Alexandros Manos, managing director of Piraeus Bank, argues that the E.C.B. should be doing just the opposite: lending the Greek banks more money to help the economy recover, lift tax revenue and increase the country’s ability to pay its debts.

“It is quite possible that the economy has hit bottom,” Mr. Manos said during an interview, citing data showing increased exports and tourism revenue. “If we were able to lend into the economy, it could have a substantial impact.”

There is little doubt that, though small by international standards, the Greek banks are crucial actors in the debt drama, which has flared in recent days with uncertainty over bailout payments and a reshuffled government that was facing a confidence vote Tuesday night. If the banks fail, so does the Greek economy — with dire repercussions for the euro area.

The ratings agency Moody’s Investors Service last week highlighted one way that a Greek banking crisis could ricochet around the Continent. Moody’s said it was reviewing whether to downgrade the French banks Société Générale and Crédit Agricole because both have subsidiaries in Greece.

Crédit Agricole came under scrutiny even though its subsidiary, Emporiki, has relatively modest holdings of Greek government bonds. Emporiki’s loans to the Greek private sector of €21.1 billion, or $30.3 billion, could be at risk if the government defaulted, Moody’s said.

“The secondary effects of a Greek default scenario could have a significant impact on the bank, owing to these direct exposures to the local economy,” the agency said.

Société Générale has €2.5 billion in Greek government bonds while its subsidiary, Geniki, has €3.3 billion in loans to the Greek private sector, according to the bank. The French bank has said the effects on it of a Greek default would be manageable.

Both Société Générale and Crédit Agricole supply their Greek subsidiaries with financing, putting them in a better position than the independent Greek banks. The fate of the independents depends heavily on the E.C.B., as Mr. Manos’s comments illustrate.

That dependence has become painfully clear in recent weeks, as the banks became hostages in a dispute between central bankers and political leaders. The E.C.B. implied that it might have to cut off financing to Greek banks if Germany insisted on requiring holders of Greek bonds to share the cost of the next aid package.

The E.C.B. feared that any change in repayment terms might be seen as a Greek default. Fitch Ratings said Tuesday that even if banks agreed voluntarily to buy new Greek debt when their existing bonds mature, that would be considered a “credit event,” or a default.

“All this uncertainty during the last couple of months has given the economy another kick,” said Paul Mylonas, head of strategy and chief economist at National Bank of Greece.

In an economy often derided for lack of competitiveness, the largest Greek commercial banks — like National Bank of Greece, Piraeus Bank, Alpha Bank and Eurobank — were regarded as exceptions.

Article source: http://feeds.nytimes.com/click.phdo?i=0298e849972b4f0aa4da7dbc03a0a31e

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A Fragile Moment for the I.M.F. as It Manages Europe’s Debt Crisis

May 16, 2011 by Leave a Comment

Sinking under a mountain of debt, Greece is on the verge of requesting more help from the European Union and the international fund. Ireland’s economic recovery from its banking crisis remains a distant prospect at best. And once an international aid deal is concluded for Portugal, the question shifts to whether Spain’s much larger and increasingly stagnant economy may need a financial lifeline.

Indeed, the most bitter twist for Dominique Strauss-Kahn is that his personal crisis comes at a time that the I.M.F.’s influence globally is at a many-decades peak, especially within Europe, his own stomping ground.

During his tenure as managing director of the fund, Mr. Strauss-Kahn is widely credited with expanding the fund’s resources after the financial crisis, improving its governance and essentially restoring its relevance by replacing orthodoxy with pragmatism.

Before being taken into custody in New York on Saturday afternoon on charges related to sexual assault, Mr. Strauss-Kahn had boarded a flight to Europe to meet the German chancellor, Angela Merkel, to discuss in detail how Europe and the I.M.F. would respond to the deteriorating economic situation in Greece.

Mr. Strauss-Kahn was known to be a powerful voice arguing that continuing austerity measures in Greece would only make the situation worse. The Greek economy has shrunk by as much as 4 percent this year from a year ago, after the international community laid out guidelines for reducing its debt, raising taxes and reining in spending.

Mr. Strauss-Kahn’s view contrasts with a harder line in northern Europe, where voters are opposed to another bailout package for Greece. Northern politicians, as a result, have pushed to exact a higher price from Greece if more money were extended.

“The Greek government is concerned that a headless I.M.F. translates into a diminished bargaining power for the Greek side,” said Yanis Varoufakis, an economics professor and blogger at the University of Athens. “Despite the official unity between the I.M.F. and the E.U. on the Greek crisis, Dominique Strauss-Kahn has consistently showed greater sympathy for the plight of George Papandreou and a better grasp than the E.U. of the importance of not putting more pressure on Greece than the country can bear.”

Trailing after Hungary, Latvia and Iceland, Greece was one of the first euro zone countries to seek outside financial aid after the worldwide financial crisis. It proved to be a grand stage on which Mr. Strauss-Kahn would prove that the fund, after more than a decade of not doing much, could reinvent itself as a powerful global actor.

Former I.M.F. employees described Mr. Strauss-Kahn as a micromanager on European matters, especially on the three European bailouts that he oversaw — Ireland, Greece and Portugal.

Greek newspapers have reported recently that for many months before the Greek bailout last May, Prime Minister George Papandreou sought the counsel of Mr. Strauss-Kahn.

Mr. Strauss-Kahn, a French economist who was often cited for his deft political touch, also worked closely with Europe’s top leaders on the rescue plans, leveraging his relationships with leaders like Jean-Claude Trichet at the European Central Bank and France’s president, Nicolas Sarkozy — despite their political differences.

In restoring stature to the I.M.F., Mr. Strauss-Kahn managed to push his personal missteps into the background, including a 2008 affair with a co-worker at the fund, after which he acknowledged he had shown bad judgment. His success also allowed people to look past some inherent contradictions: a French socialist dedicated to solving global economic problems even as he favored the high life of elegant homes in Paris and Washington, fancy cars and lavish hotel rooms.

Simon Johnson, the former chief economist of the I.M.F., who is now a professor at M.I.T., said Mr. Strauss-Kahn had been revived by the global financial crisis. “The Europeans had been late in waking up to the economic problems,” he said. “But he coaxed rather than bullied them into action. In so doing, he used the crisis as an opportunity to rehabilitate the I.M.F.’s reputation, and put it front and center in a way that it had not been before.”

Indeed, finding someone with the kind of boardroom muscle in Europe that Mr. Strauss-Kahn displayed will be challenging.

Graham Bowley and Dan Bilefsky contributed reporting from New York.

Article source: http://feeds.nytimes.com/click.phdo?i=9d62da283d6b074d613891a4fbab090d

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