January 26, 2021

News Analysis: In Europe, Focus Begins to Shift to Speed of a Recovery

A year ago, many people seriously doubted whether the euro would still exist by now. On the threshold of 2013, the debate is more about how long it will take for the euro zone economy to recover and what must be changed to avoid future crises.

Europe still has plenty to worry about. Economic output is shrinking in nine of the 17 nations that use the euro. European banks remain weak, and many have yet to confront their problems decisively.

Many businesses in Spain, Italy and other distressed countries cannot obtain credit, hampering a recovery.

On top of that, with national elections coming in Italy in February and Germany in September, leaders there may be more focused on the narrow concerns of their voters than the cause of European unity.

“At the moment the crisis seems to have calmed down somewhat,” Jens Weidmann, president of the Bundesbank, the German central bank, said in an interview with the Frankfurter Allgemeine newspaper published on Sunday. “But the underlying causes have by no means been eliminated.”

But consider some of the doomsday situations that did not occur in 2012. Greece did not leave the euro zone or set off a financial disaster like the one sparked by the collapse of Lehman Brothers. Spanish and Italian bond yields, rather than succumbing to contagion from Greece, retreated from levels that had threatened their governments with bankruptcy. And nowhere did populist, anti-euro political parties gain the upper hand.

All of these things could still happen, but the probability of catastrophe has fallen substantially because of a fundamental change in the way that European leaders are dealing with the crisis.

Under its president, Mario Draghi, the European Central Bank has promised to buy the bonds of countries like Spain, if needed, to control their borrowing costs.

That vow, which cooled the crisis fever of late summer, bought time for elected officials to begin creating the superstructure needed to make the euro more credible, including a permanent fund for rescuing stricken member countries and a unified system for overseeing banks.

“In 2012, the euro area leaders finally got the diagnosis right,” said Jacob Funk Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington. “It wasn’t about Greek debt or Irish banks. It was about some very fundamental design flaws that needed to be fixed. That’s what markets were looking for.”

Even though European political leaders seem to argue endlessly, they have made enough progress to keep speculators at bay. Investors surveyed by UBS recently ranked the chances of a breakup of the euro zone well behind the potential danger from a combination of spending cuts and tax increases scheduled to take effect in the United States next month or a hard landing by the Chinese economy.

“There is more of a perception that nobody is better off if this thing breaks up,” said Richard Barwell, senior European economist at Royal Bank of Scotland.

The question in 2013 will be whether a fragile calm in Europe holds long enough for economic growth to resume, for banks to rebuild their balance sheets and for leaders to make progress creating a more durable currency union.

Here are some of the main things to watch:

ECONOMIC PERFORMANCE The euro crisis, arguably, will be over the day that all of the stricken countries are generating economic growth. Ireland, one of the first countries to get into debt trouble back in 2008, might already have turned the corner. Its gross domestic product grew 0.2 percent in the third quarter from the period a year earlier.

Spain, Italy and Portugal are still deep in recession, and Greece is in a de facto depression. But there are some signs of progress in one crucial measure: trade balances. All of the distressed countries have increased exports this year and reduced trade deficits. That is a sign their products have become more competitive on world markets.

Article source: http://www.nytimes.com/2012/12/31/business/global/in-europe-debate-slowly-shifts-to-speed-of-a-recovery.html?partner=rss&emc=rss

News Analysis: As European Nations Teeter, Only Lenders Get Central Bank’s Help

Since the beginning of the financial crisis, the central bank has been lending euro area banks as much money as they want, trying to maintain the liquidity — or continual flow of money — that is the lifeblood of the global financial system.

But because the central bank has refused to offer the same easy lending service to countries like Italy and Spain, it is not confronting the euro area’s most fundamental problem — a sell-off of debt from the troubled countries that is pushing their borrowing costs to dangerous levels.

Investors pushed up interest rates on Italy’s debt to record-high levels last week during the political crisis there. And even Monday, after the supposedly calming effect of a new, technocratic prime minister in Rome, lenders were demanding that Italy pay interest rates at levels high enough to eventually bankrupt the country.

In an auction of five-year bonds, Italy had to pay a rate of 6.29 percent, compared with 5.32 percent at a similar auction a month ago.

And Italy’s 10-year bonds, which crested well above 7 percent last week in the secondary market, were still dangerously high on Monday, at 6.77 percent — more than three times what Germany must pay on comparable bonds. In a further sign of investor anxiety about the weaker links in the euro chain, Spanish 10-year bond yields rose above 6 percent for the first time since August.

It is an atmosphere of mistrust reminiscent of the aftermath of the Lehman Brothers collapse in 2008. European banks are demanding higher interest rates for the overnight lending to one another that is essential to keep money circulating.

Still, banks are feeling the pressure to reduce costs and raise capital in the face of Europe’s sovereign debt crisis. UniCredit, the largest Italian bank, said on Monday that it would raise $10.3 billion and eliminate 5,200 jobs in Italy over the next few years as part of a strategic overhaul.

Some banks have even gone so far as to refuse to make overnight loans to other banks at all, fearing others’ vulnerability to the debt of Italy, Spain and other beleaguered countries. For that reason, the central bank has been willing to lend to the banks as needed.

But the biggest fear — the one implicit in all the talk of “contagion” and a potential “Lehman moment” — is not that any one bank will succumb to a liquidity crisis. It is that an entire country might do so, if it can no longer obtain the credit it requires to stay in business.

And at least so far, the central bank has not done the one thing that could help calm that fear: declare that it stands ready to be the de facto lender of last resort to national governments.

If the fear that sent Italy’s borrowing costs to record highs last week becomes a chronic condition, the country could lose the liquidity it needs to keep paying the holders of its 1.9 trillion euro ($2.6 trillion) debt. That would be the Italy Moment — the point at which Rome’s liquidity problem would quickly become everyone else’s.

“We are approaching the point where the E.C.B. has to show its hand and accept its role as a lender of last resort,” analysts at Credit Suisse said in a note to clients Friday. “The question is how much further turmoil is required for it to do so.”

Mario Draghi, the new president of the European Central Bank, which is based here in Frankfurt, has insisted that countries must help themselves by cutting spending and taking steps to make their economies more competitive.

Jens Weidmann, president of the German Bundesbank and an influential member of the central bank’s governing council, went further Monday, saying it would be illegal to use the central bank to solve government budget problems.

“The increasing demand being placed on monetary policy is dangerous,” Mr. Weidmann told an audience of bankers in Frankfurt. “Monetary policy cannot and may not solve the solvency problems of governments and banks.”

What the markets want to hear, though, is not only prescriptions for long-term overhauls but also assurances that the central bank will do whatever it takes to prevent a near-term panic.

This article has been revised to reflect the following correction:

Correction: November 15, 2011

An earlier version of this article mischaracterized the practices of the United States Federal Reserve.  It does not buy government bonds directly from the United States Treasury; it does so on the open market.

Article source: http://feeds.nytimes.com/click.phdo?i=faa065f851cede809ed3f74dbe39ff14

Shares Rise After European Interest Rate Cut

Equity markets in Europe accelerated their gains and Wall Street opened up on the move by the E.C.B., which came after the Organization for Economic Cooperation and Development earlier this week added its voice to the chorus calling for lower borrowing costs to stimulate growth. Bond prices fell.

Hours later, amid continued uncertainty over his political future, Prime Minister George Papandreou of Greece called off his plan to hold a popular vote on Greece’s new loan deal with foreign creditors. The referendum was seen as a risky move that could have had serious repercussions for the entire euro zone.

Mr. Papandreou reversed course after meeting with his French and German counterparts in the south of France, where President Obama and other leaders from the Group of 20 nations were holding a summit meeting focused on the European sovereign debt crisis.

The Euro Stoxx 50 index, a barometer of euro zone blue chips, closed up 2.5 percent, with Germany’s DAX up 2.8 percent and the CAC 40 in Paris up 2.7 percent. The FTSE 100 index in London rose 1.1 percent.

At 4 p.m., the Standard Poor’s 500 index was up 1.9 percent, the Dow Jones industrial average gained 1.8 percent, and the Nasdaq rose 2.2 percent.

Treasury prices fell. The United States Treasury’s benchmark 10-year note was up to 2.063 percent in yield from 1.99 percent on Wednesday.

Investors are closely watching some of the more highly indebted countries with struggling economies in Europe.

The Italian bond yield rose to a high of 6.353 percent on Thursday before pedaling back to 6.167. Spanish bond yields were 5.463 percent, slightly higher than on Wednesday.

“It is obvious that the E.C.B. has caught the crisis virus and is trying everything it can to prevent a full-fledged recession,” Carsten Brzeski, an economist with ING in Brussels, wrote in a report.

The question now, he added, “is whether the E.C.B. is also willing to do everything to prevent a further escalation of the sovereign debt crisis, becoming the unconditional lender of last resort of the euro zone.”

The sovereign debt troubles have overshadowed global markets for more than a year. Most recently, equities markets have bounced around since an agreement reached in Europe last month, staging a strong rally before falling back as uncertainty grew about the details of the plan.

While the latest developments in Greece were seen as supportive for stocks, “the big thing was the European rate cut and that is what is driving the market,” said Doug Cote, chief strategist at ING Investment Management. “Investors are going to start nibbling around and going back to risk.”

The E.C.B had raised its benchmark interest rate twice this year, to 1.5 percent from 1 percent. On Thursday, the bank cut it to 1.25 percent.

Stanley Nabi, the chief strategist at Silvercrest Asset Management Group, said the E.C.B. had made a mistake when it raised rates, and was now correcting it in the context of a rapidly deteriorating situation in Greece and economic troubles in Europe.

“To an increasing degree every one of the countries in the euro zone is now experiencing a sluggish economy or is on the precipice of a recession,” he said. “I think what they are trying to do is just in case Greece pulls out of the euro zone or is thrown out, they want to build a moat around the other countries so that it won’t have a very deep impact on the global economy and European economies.”

Asian shares closed mostly lower. The Sydney market index S.P./ASX 200 fell 0.3 percent. In Hong Kong, the Hang Seng index fell 2.5 percent. Shanghai bucked the trend, with the composite index rising 0.2 percent. Tokyo markets were closed for a national holiday.

Officials meeting in Cannes were grappling with the growing possibility that Greece will leave the euro zone, leaving a trail of scorched lenders in its wake and possibly shifting the focus of market turmoil to bigger countries like Italy and Spain. But even as they address those questions, the disarray in Europe threatens to weigh more broadly on the global economy.

On Wednesday, the Federal Reserve offered a sobering outlook for growth in the United States, predicting the economy would expand 2.5 percent to 2.9 percent in 2012, down from its prior forecast of 3.3 percent to 3.7 percent. It said the unemployment rate would probably remain at 8.5 percent or above through the end of next year.

The euro was at $1.3845 from $1.3747 late Wednesday in New York.

David Jolly reported from Paris. Jack Ewing contributed reporting from Frankfurt, and Rachel Donadio and Niki Kitsantonis contributed reporting from Athens.

Article source: http://feeds.nytimes.com/click.phdo?i=9a94244d23ba369e646eaf8d2452a365

U.S. Stocks Reverse Back, Up 4%, on Economic Data

Stocks surged on Thursday, with the broader market rising more than 4 percent. It was the fourth day this week of major swings in stocks, following a drop on Monday, a sharp rise on Tuesday and steep declines on Wednesday.

Stocks have zigzagged to an extent that has not been seen for years. Thursday’s close was the first time that the S. P. 500 had a change of at least 4 percent for four straight trading sessions since 2008. It closed up 51.88 points, or 4.63 percent, at 1,172.64.

It was also the first time that the Dow Jones industrial average closed with a net change of 400 points or more for four straight sessions. It closed 423.37 points higher, or 3.9 percent, at 11,143.31.

Apart from calculating the records, analysts sought explanations. Some noted that the declines had reached such a point this week that stocks were buoyed by bargain-hunting investors. Others pointed to scraps of positive economic data. And some said the upturn in the market could have been caused by an easing of concerns about the financial health of some of Europe’s banks and what their problems might mean for banks in the United States.

Brad Sorensen, director of market and sector analysis at the Schwab Center for Financial Research, said those concerns appeared to have waned a bit.

“I think that has taken a little of that fear off the table,” he said.

The financial markets this week have been held hostage to worries about the global economy, Europe’s troubles and the implications of a ratings agency’s unprecedented downgrade of the United States’ credit rating. Benchmark United States bond yields have hit lows, while gold has swung above $1,800. On Thursday, the VIX index, also known as the “fear” index because it represents expectations of volatility, was down to 39 from 48 at the beginning of the week.

The market is “just a yo-yo,” said Myles Zyblock, chief institutional strategist and managing director for capital markets research at RBC Capital Markets. “I think the primary structure is still in place, and that is a structure of concern.”

“People are trying to bottom-pick today, and it might be the bottom,” said Mr. Zyblock. “I would like to see the collective message start to stabilize to give me confidence there is a hardened floor underneath this market.”

Eric Thorne, an investment advisor at Bryn Mawr Trust, called it a “shoot first, ask questions later” market.

“It is a very, very tense, emotional and momentum-driven market right now,” he said.

“Yes, the economy is slowing, but it is not anywhere near as bad as investors are acting right now,” he added. “Emotional selling that happens in periods like this is not pinpoint specific.”

Even as new economic data was released on Thursday, showing, for example, that weekly jobless claims were lower at 395,000, investors were hesitant to read too much into one piece of data in the bigger economic picture.

Some corporate results bolstered the broader market, like those of Cisco Systems. Its shares were up nearly 16 percent, helping to lift the technology sector.

The yield on the United States 10-year Treasury was at 2.33 percent, compared with 2.1 percent on Wednesday. A $16 billion auction for 30-year Treasury bonds on Thursday showed the first cracks in investor demand since Standard Poor’s downgraded the nation’s debt earlier this month. Foreign central banks, asset managers and other investors had been flocking to the safety of Treasury bonds amid the turbulent markets of the last few weeks.

Thursday’s auction suggested the buying binge was over. Yields on 30-year bonds were 3.75 percent, about 0.13 percentage points higher than the preauction estimate of 3.62 percent. American money managers sharply cut back their purchases of 30-year bonds amid concerns about the economy and the fallout from the European debt crisis, according to market participants.

Demand was stronger for the two previous auctions of shorter-dated government securities. Earlier in the week, the government sold $32 billion of three-year notes and $24 billion of 10-year securities at record low yields.

The announcement that the leaders of Germany and France would meet might have helped stocks strengthen, said Paul G. Christopher, chief international investment strategist for Wells Fargo Advisors.

“The markets need to have reassurance from governments that they are going to take care of their budget deficits and going to backstop their banks,” he said.

European indexes had been mixed, but rallied after the market opened higher in the United States.

The FTSE 100 rose 3.1 percent. The CAC 40 in Paris closed 2.89 percent higher, and the Dax in Germany gained 3.28 percent. Société Générale shares rose 3.7 percent after earlier declines. On Tuesday the stock gave up almost 15 percent of its value amid worries about the debt and economic woes of Europe and the United States.

Frédéric Oudéa, the bank’s chief executive, told Le Figaro in an interview published Thursday that the bank had “suffered a series of attacks in the market,” on the basis of rumors about its financial condition that he denied “most vigorously.”

Société Générale called Thursday on French market regulators to “investigate the origin of these rumors that have gravely impacted the interest of its shareholders.”

Christian Noyer, the governor of the Bank of France and a member of the European Central Bank’s governing council, addressed the market concerns in a statement, saying the first-half results of French banks had “confirmed their solidity in a difficult economic environment, thanks to rigorous risk management and a universal banking model based on diversified businesses.”

In Asia, the Hang Seng index in Hong Kong fell almost 1 percent, while the Nikkei 225 in Japan closed down 0.6 percent.

Gold futures briefly topped $1,817.60 an ounce, its highest ever in nominal terms, before receding to about $1,738.60. Adjusted for inflation, the record gold price would be closer to $2,400 an ounce, according to Capital Economics.

Crude oil futures in the United States were up 2 percent at $84.89 a barrel.

Eric Dash contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=82e56a5d5a412c22f77971270a182d95

Moody’s Threatens Spain Rating Cut, Euro Falls

The euro sank and German Bunds jumped after Moody’s put Spain’s Aa2 government bond ratings on review, citing concerns over growth and saying funding costs would continue to be high in the wake of euro zone leaders deal on Greece last week.

Spain’s rating is still set at a high investment grade, far above those of Greece, Portugal and Ireland — the countries bailed out in the crisis so far.

But while Moody’s said any cut for Spain would likely be limited to one notch, it said the Greek package had signalled a clear shift in risk for bondholders across the euro zone.

“The rating agency … notes that challenges to long-term budget balance remain due to Spain’s subdued economic growth and fiscal slippage within parts of its regional and local government sector,” the agency said.

Its current rating for Spain is in line with SP’s AA setting, while Fitch has the country one notch higher at AA+.

International investors are concerned the euro zone’s fourth largest economy, hamstrung by anaemic growth rates and high unemployment, will fail to put its fiscal house in order and need a Greek-style bailout. Nerves about that have sent bond yields to their highest level in over a decade.

The euro fell more than 40 pips against the dollar on Moody’s announcement, nearing morning lows at $1.4281. Bund futures rose over half a point while early indications were of higher Spanish yields.

“The trigger is that the (Greek) deal last week has not really rebuilt confidence across the euro zone so Spain is still on their radar screens with costs rising,” said Giada Giani, analyst at Citi.

The Greek rescue package set a precedent for private sector participation in future sovereign debt restructuring in the euro area, Moody’s said. But it highlighted concerns prevalent in markets in recent days that it was unclear when the euro zone’s rescue fund would be empowered to intervene more strongly in the crisis.

“The package has not relieved market concerns over the position of such sovereigns because (i) it sets a precedent for private sector participation in future sovereign debt restructurings in the euro area, and (ii) while an expansion of powers has been proposed for the EFSF, it is not clear when the powers will be implemented,” the agency said.

Moody’s also placed the Aa2 rating of Spain’s bank restructuring fund, the FROB, on review for possible downgrade as its debt was fully and unconditionally guaranteed by the government of Spain.

The agency also downgraded the ratings of six Spanish regions.

The Spanish government has set a deficit target of 1.3 percent of gross domestic product for the 17 regions for this year and next, but some of their new governors say this will be impossible due to previous leaders’ fiscal mismanagement.

(Writing by Sonya Dowsett; editing by Patrick Graham)

Article source: http://www.nytimes.com/reuters/2011/07/29/business/business-us-spain-moodys.html?partner=rss&emc=rss