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Cyprus Bailout Wins Easy Approval From Germany

April 19, 2013 by Leave a Comment

Wolfgang Schäuble, Germany’s finance minister, warned lawmakers ahead of the vote that despite its tiny size, Cyprus could still endanger the broader economy of the European Union if its troubles were ignored.

“We must prevent that the problems in Cyprus become problems for other countries,” Mr. Schäuble said. He added that if Cyprus were allowed to go bankrupt, there was a “significant risk” of contagion to Greece and other vulnerable countries in the euro zone.

As expected, a clear majority of 487 out of 602 lawmakers casting ballots voted in favor of the package, which includes €9 billion, or $11.7 billion, in contributions from European Union members. The International Monetary Fund is to contribute an additional €1 billion.

German law requires parliamentary approval of all financial assistance the country extends to other European Union members.

In a separate vote, the German lawmakers also approved seven-year extensions on loans previously granted to Ireland and Portugal.

Germans were further rattled by news last week that Cyprus would need to raise €13 billion — nearly twice the amount the government initially estimated only a month ago — to keep its debt and deficit from spinning out of control and to meet the terms of the bailout. German taxpayers worry they will be called upon to come up with even more money to aid Cyprus.

Germany had insisted in the bailout negotiations that Cyprus reduce the size of its banking industry, that the European contribution be limited in scope and that depositors and investors in Cypriot banks be forced to share the burden. On Thursday Mr. Schäuble underlined that the European contribution would not be expanded, or made directly available to the struggling Cypriot banks.

Compared with most of its European Union partners, Germany continues to achieve economic growth, even if it has been only slight lately. Officials in Berlin said this week that the export-driven economy and the country’s solid public finances would enable Germany to achieve a budget surplus in 2016 — a sharp contrast to the deficits projected for weaker members in the euro zone. Even by next year, Germany expects to have a balanced budget, according to the annual stability program it plans to submit to the European Commission.

On Thursday, Moody’s maintained Germany’s triple-A credit rating, praising its “advanced, diversified and highly competitive economy and its track record of stability-oriented macroeconomic policies.”

Many Germans have grown weary of providing financial support to their fellow Europeans. A report last week by the European Central Bank suggesting that some of the weaker countries have higher wealth per household than Germany stoked public anger, which Mr. Schäuble sought to ease on Thursday.

“In our country, where we do not feel the euro crisis is our daily life, we have to remember that the people in Ireland, Portugal, Spain and Greece are living through a difficult time,” he said. “There are no viable shortcuts on this path, but for those affected it is difficult.”

Article source: http://www.nytimes.com/2013/04/19/business/global/german-lawmakers-back-cyprus-bailout.html?partner=rss&emc=rss

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Second Thoughts in Europe as Fear Spreads in Cyprus

March 18, 2013 by Leave a Comment

Outside, the A.T.M. coughed up 50-euro bills, as few as two or four at a time — a relief, since banks will remain closed through Wednesday. Yet it was still not enough to assuage fears.

“How can I trust any bank in the euro zone after this decision?” asked Andreas Andreou, 26, an employee at a trading company.

“I’m lifting all my deposits as soon as the banks open. I’d rather put the money in my mattress.”

In this windswept capital, and in the halls of power elsewhere in Europe, much of the day was given over to cross-border arguing and a public reluctance for anyone to take responsibility — some might say blame — for a decision that suddenly seemed like it might not be such a great idea, after all.

As a plan to tax deposits in exchange for a 10 billion euro financial lifeline for this troubled nation frayed nerves, it quickly set off tremors far beyond Cyprus’s shores. Stock markets around the world fell Monday — though American markets remained calm — amid the stark realization that Europe’s policy makers had made a significant departure from past efforts to keep the euro zone together.

Economists said the Cyprus plan set a worrisome precedent that could backfire. The plan “risks setting off a bank run and contagion,” said Michael T. Darda, chief economist at MKM Partners.

For the first time since the onset of the sovereign debt crisis in Europe and the bailouts of Greece, Portugal and Ireland, ordinary bank depositors — including those with insured accounts — were being called on to bear part of the cost, to the tune of 5.8 billion euros, about $7.5 million, of the 10 billion euro package.

The plan also would wipe out so-called junior bondholders in Cypriot banks, who would give up 1.4 billion euros in holdings. Only senior bondholders, who have paid a premium to be first in line for repayment of their investments, would be fully protected.

Under the terms of Cyprus’s bailout, the government must raise 5.8 billion euros by levying a one-time tax of 9.9 percent on depositors with balances of more than 100,000 euros, or $129,500. Those with balances below that threshold would pay 6.75 percent, an asset tax that would still hit pensioners and the lowest-income earners hard.

Cyprus’s president, Nicos Anastasiades, accused European Union leaders of using “blackmail” to get him to agree, and sought Monday to compel policy makers in Brussels to soften the terms.

As lawyers in Cyprus questioned the legality of both taxing deposits that are supposed to be insured up to 100,000 euros, and confiscating sums above that, Mr. Anastasiades postponed a parliamentary vote on the package until Tuesday, as signs emerged that lawmakers might not approve.

In Brussels, the club of 17 euro zone finance ministers that had signed the bailout plan for Cyprus held an emergency conference call Monday evening and tiptoed back from terms of the arrangement, by agreeing to consider a new deal that could lighten the burden for less well-to-do Cypriots.

In a statement, they said small depositors “should be treated differently from large depositors,” and said they were open to modifying the tax on those with less than 100,000 euros. It also appeared from comments made by officials that the I.M.F. was leaning that way as well.

But Jeroen Dijsselbloem, the Dutch finance minister who serves as the president of the Eurogroup, suggested that any new arrangement still would need to deliver 5.8 billion euros.

The brinkmanship followed a protest of about 800 people gathered in front of the presidential palace, shouting angrily at Mr. Anastasiades and inveighing against Germany and European leaders as he entered the building to meet with his cabinet.

“Merkel, U stole our life savings,” read one banner tied to a bus stop. “EU, who is next, Spain or Italy?” read another.

Liz Alderman reported from Nicosia, Cyprus, and Landon Thomas Jr. from London. James Kanter contributed reporting from Brussels, Andrew Siddons from Washington, and Andreas Riris from Nicosia.

Article source: http://www.nytimes.com/2013/03/19/business/global/19iht-cyprus19.html?partner=rss&emc=rss

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Political Economy: It’s Too Soon to Be Sure of a Euro Zone Happy Ending

January 13, 2013 by Leave a Comment

Mario Draghi, the president of the European Central Bank, did not quite coin a new phrase last week, but he certainly popularized the expression “positive contagion.” After years in which the euro zone has been suffering from plain old contagion, Mr. Draghi now thinks a positive dynamic is in play.

The term contagion has tended to be used in financial markets to refer to the way that problems in one country (like Greece) can so unnerve investors that they cause difficulties in other countries (like Italy, Portugal and Spain). Mr. Draghi, though, seems to be using the word more broadly to cover the whole panoply of vicious cycles that had been sucking the euro zone into a whirlpool.

The E.C.B. president is right that the vicious cycle in financial markets has given way to a virtuous one. The best measure of this is how peripheral governments’ bond yields have dropped since he said last July that the E.C.B. would do whatever it took to preserve the euro — “and believe me, it will be enough.” Spanish 10-year yields have fallen to 4.9 percent from 7.4 percent, while Italian ones are down to 4.1 percent from 6.4 percent. The Stoxx 50 index or euro zone stocks, meanwhile, is up 12 percent.

But vicious cycles do not apply only to financial markets. They also affect the real economy and politics — and flip back into the world of finance. Until the economies of Italy and Spain stop shrinking, the risk of tipping back into negative contagion remains.

Remember, too, how financial markets can be fickle. Only a year ago, confidence was buoyed by the central bank’s decision to lend struggling banks €1 trillion, or $1.3 trillion, in low-cost, three-year loans. But then Greece’s indecisive first election and Spain’s dithering over its banking overhaul led to the most dangerous episode yet in the euro crisis.

Still, before looking at the remaining risks, it is important to acknowledge progress in the underlying situation and in confidence.

The fundamental causes of the crisis were uncompetitive economies, excessive government borrowing and weak banks.

All three problems have been partly remedied. For example, labor costs in Spain and Greece have been falling, improving their industries’ competitiveness — so much that Spain has had a current account surplus for the past three months. Meanwhile, fiscal deficits across the periphery of the euro zone have been cut, although they are still too high. Finally, Irish, Greek and Spanish banks have been stuffed with capital.

Confidence, too, is returning. It is not just the sovereign debt yields that have fallen. Capital flight has reversed and banks depend less on the E.C.B. for funding.

Positive contagion could set in when there is a growing conviction that the euro zone is addressing its problems and will not break up, which could strengthen confidence in financial markets. As borrowing costs in peripheral countries fall and their banks feel they are no longer on the precipice, companies and individuals will face less of a credit squeeze. Ultimately, businesses would invest and individuals would spend. Measures taken to restore competitiveness would also encourage investment and increase exports.

All this would bring the recession to an end, which would further bolster the confidence of investors, businesses and consumers. With interest rates falling and tax revenue rising, fiscal deficits would fall — kicking off another virtuous circle, as governments would no longer be under pressure to tighten their belts with further rounds of austerity.

Unfortunately, it is still too soon to be sure of such a happy ending — largely because the measures taken to improve competitiveness and the effect of the better mood in financial markets on the real economy both operate with a lag. Meanwhile, the austerity measures are still crushing activity. The concern is that, in the interim, as unemployment continues to rise, the political situation in one or more countries could get nasty.

The political outlook is fairly benign because the two most vulnerable countries — Greece and Spain — have recently had elections and are not supposed to have new ones for several years. The German election this year could even be positive, if it leads to a grand coalition with Angela Merkel as chancellor, but including the Social Democrats, who may be more willing to help their struggling southern partners. The same could be true if the Italian election in February results in a stable coalition led by the center-left Pier Luigi Bersani and involving Mario Monti’s centrist movement.

There are, admittedly, short-term risks. One is that Greece’s fragile coalition does not survive an intensification in the economic gloom. Another is that the former Italian prime minister, Silvio Berlusconi, somehow pulls off a victory in the Italian elections.

But the biggest risk is that Spain, Italy and Greece, in particular, might be still mired in recession this time next year. Deficits would remain stubbornly high and debt-to-gross domestic product ratios would still be rising, as would unemployment. Markets might then start worrying again about the sustainability of both public finances and governments’ reform policies, kicking off a vicious cycle.

The euro zone is witnessing the early stages of positive contagion. But politicians should not be complacent. They must do everything in their power to maximize the chances of this virtuous cycle’s taking hold. This means keeping up their long-term structural reforms while trying to do whatever they can to mitigate the short-term austerity.

Hugo Dixon is the founder and editor of Reuters Breakingviews.

Article source: http://www.nytimes.com/2013/01/14/business/global/14iht-dixon14.html?partner=rss&emc=rss

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Euro Finance Ministers Struggle to Reach Accord on Greece

November 26, 2012 by Leave a Comment

The haggling continues against the background of a financial catastrophe unfolding in Greece, where the economy has shrunk by about one-fifth in three years and unemployment is hovering at around 25 percent. The unrelenting gloom means suffering for the Greek public and also makes it increasingly improbable that the country can pay back its debts in full.

Ministers said ahead of the meeting that they had made strides in a teleconference on Saturday toward reaching a joint position. “All the parameters of the solution are on the table,” the French finance minister, Pierre Moscovici, said on arriving at the meeting.

But diplomats in Brussels said they expected the meeting to be long and stormy and run late into the night — as did a similar gathering last week — as the parties try to find alternative ways of giving Greece relief in light of opposition by major creditors like Germany and the Netherlands to forgiving some Greek debt.

To reach a deal, the I.M.F. may also have to compromise, loosening its budgetary expectations for Greece and accepting that the country will not be able to hit a target of reducing debt to 120 percent of gross domestic product by the end of the decade.

The seemingly endless round of meetings over Greece is a sign that after nearly three years of crises, the politicians are still trying to contain contagion in the euro zone, which began with a huge hole in Greek accounts, even as that country’s debt prospects continue to worsen.

For Greece, the immediate goal is unlocking a loan installment worth €31.5 billion, or $40.8 billion, from an international bailout program.

If ministers reach a deal, Greece is likely to get a larger amount of about €44 billion because two additional installments are due by the end of the year under the program.

In June, creditors froze aid from the current program, worth €130 billion, after determining that Greece was failing to meet the conditions of that bailout, its second.

“Greece has fully delivered its part of the agreement, so we expect our partners to deliver their part too,” Yannis Stournaras, the Greek finance minister, said Monday ahead of the meeting.

The complication that has led to further delays and acrimony among lenders — as well as to the flurry of meetings — are conflicting views about how quickly Greece can grow its economy, lure investors, pay down its towering debt and return to the markets to borrow money once aid programs expire later this decade.

Since June, the Greek economy has worsened and social problems in the country have become more acute as employment has climbed. Those factors have already led Greece’s lenders to agree that the government in Athens will need two years longer than previously agreed, or until 2016, to meet its budget targets.

But that concession will cost more money because of a range of factors including revenues from privatizations that will not be as large as expected. The cost could come to nearly €33 billion on top of existing bailouts to help Greece reach a primary budget surplus, which excludes debt repayments.

The prospect of paying more to Greece has perturbed a number of lenders, particularly Germany, where transferring more wealth to the poorer-performing economies of Southern Europe is politically toxic, particularly as Chancellor Angela Merkel gears up for a re-election fight next year.

Rather than being willing to write down their countries’ Greek holdings, ministers on Monday were instead discussing other options of making Greece’s debt more manageable — like lowering interest rates, lengthening the deadlines for debt repayments, allowing the country to buy back its bonds at a steep discount and asking national governments to return profits made on bonds held by the European Central Bank.

Many analysts regard those measures as necessary but insufficient to remedy Greece’s problems. They say that Germany and other reluctant creditors will have to take politically unpalatable losses, or haircuts, on their holdings of Greek debt to keep the country in the euro area, even if they are able to agree on other measures to reduce the size of the country’s deficit and reform the economy.

The result is a standoff, with Germany trying to keep the bill for Greece as low as possible at least until after the German elections in 2013.

Those concerns were on display over the weekend. Jörg Asmussen, a member of the E.C.B.’s Executive Board, told the German newspaper Bild that a write-down of Greek debt should not be part of the deal, echoing repeated statements from the German finance minister, Wolfgang Schäuble, who said it would be illegal.

Maria Fekter, the Austrian finance minister, seemed to agree, saying Monday, “That’s not on the agenda at the moment.”

“A debt cut for the public bodies, and in fact the taxpayers, was not wanted by any country,” she said.

On the other side is the I.M.F., which insists that fresh money, or even a write-down, will be needed to put Greece on a pathway to manageable debt by the end of the decade. By its own rules, the I.M.F. can lend money only if the debt is “sustainable” or can be paid back by a recipient country, like Greece.

On Monday, the Fund was pressing ministers to agree that Greece’s debt should immediately be cut by 20 percent of G.D.P. through methods like lowering interest rates and extending maturities on loans, and to pledge further reductions in future, with the aim of reaching sustainable levels.

Christine Lagarde, the managing director of the I.M.F., has insisted that Greece pare its debt to 120 percent of gross domestic product by 2020. But that target has steadily become considered unfeasible.

Greek debt is now estimated at 175 percent of G.D.P., and its economy could shrink again, pushing that figure to 190 percent next year, and even up to 200 percent by 2014, according to some E.U. officials.

That means the I.M.F. will almost certainly have to make concessions to help keep Greece afloat by loosening its debt target, perhaps to around 124 percent by the end of the decade.

Arriving at the meeting in Brussels on Monday, Ms. Lagarde pledged “to work towards a solution that is credible for Greece,” and added, “We are going to work very intensely on that.”

Article source: http://www.nytimes.com/2012/11/27/business/global/euro-finance-ministers-confront-a-standoff-over-greece.html?partner=rss&emc=rss

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Italy Pulls Off Another Strong Debt Auction

January 13, 2012 by Leave a Comment

The Italian Treasury sold a total of about €4.8 billion, or $6.1 billion, of medium-term debt, including €3 billion of three-year bonds priced to yield 4.83 percent, down sharply from the 5.62 percent it paid at the last auction of such securities in late December. The bid-to-cover ratio, a measure of demand, was 1.2 times, below the 1.36 times at the last sale.

The European Central Bank last month began a massive new funding program to backstop banks, which has helped to restore a semblance of stability to the battered market for euro zone sovereign debt. In Madrid, the Spanish government on Thursday sold €10 billion of bonds — twice the targeted amount — with yields falling about 1 full percentage point from previous auctions.

Yields rise as the price of the underlying bonds falls, so lower yields suggests investors have more confidence in the debtor’s ability to repay its borrowings.

The Spanish auction, as well as a successful Italian auction Thursday of 12-month bills, had lifted hopes for another strong showing by Italy on Friday. But another confidence gauge — the gap, or spread, between Italian and German 10-year bonds — barely budged. Rome’s long-term borrowing costs are still more than three times higher than Berlin’s.

The cost of financing Spanish and Italian debt has been in the spotlight since last year, when contagion from the euro crisis that led Greece, Portugal and Ireland to seek bailouts began to spread.

Though Italy’s public sector deficit is actually much smaller than in many other countries, including Britain and the United States, its public debt — a legacy of past spending and slow growth — is seen as dangerously high.

European banks have been borrowing heavily from the E.C.B. since the central bank announced its longer-term refinancing operations last month, under which it lent €489.2 billion for three years at its 1 percent benchmark interest rate.

E.C.B. data released Friday
showed that banks had deposited a record €489.9 billion — almost the same amount lent under the three-year program — in a reflection of the continuing stresses in the interbank funding market.

A bank that borrows from the E.C.B. at 1 percent and then parks the funds with the central bank gets just 0.25 percent in interest, meaning institutions are losing money on their deposits.

The Bank of Spain said Friday that Spanish banks borrowed €132.4 billion in December, Reuters reported, up from €106.3 billion in November and close to the €140 billion record of July 2010.

Article source: http://www.nytimes.com/2012/01/14/business/global/italy-pulls-off-another-strong-debt-auction.html?partner=rss&emc=rss

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Political Uncertainty Lingers in Greece

November 6, 2011 by Leave a Comment

Prime Minister George Papandreou took the first steps Saturday to try to form a unity government with the opposition, which he said was necessary to steer the country out of danger. But by Saturday evening, the two sides seemed locked in position, with the prime minister making no immediate move to leave power — a key demand of the opposition — and the opposition leader reiterating his call for early elections and branding Mr. Papandreou “dangerous for the country.”

While such stands may be nothing more than clever negotiating strategies to win concessions, any sign that Greece may be headed for a poisonous stalemate is sure to rattle other European leaders — and creditors — craving stability.

The continued political upheaval comes at a time when Europe can least afford it.

The European Union wants the Greek Parliament to approve a new debt deal as quickly as possible to guarantee continued foreign support and avoid the risk of default on its debts. To the extent that the financial crisis is partly a matter of perception, any delay would be problematic. But with Italy already at risk, analysts say, further delay could be disastrous, allowing the contagion to spread there.

“It’s not just about Greece, it’s about the whole situation of overhung debt in Europe, of Italy and others which are more capable of bringing down the system,” said Ian Lesser, the executive director of the German Marshall Fund’s Brussels office.

Some of the damage has already been done.

Fears over Greece have already helped to compromise Italy’s position, pushing its borrowing costs to 6.5 percent, a record high since the country adopted the euro and a burden the country might not be able to bear for long. High borrowing costs helped tip Greece, Portugal and Ireland into deep enough trouble that they needed bailouts.

Those costs could ease on Monday. But analysts say coming up with a workable plan in Greece — or even just papering over its problems — will be necessary to buy time for Italy, which is mired in its own deep political troubles and which would be much more difficult to bail out because its economy is larger.

Charles Grant, the director of the Center for European Reform, a research institute in London, said that if Greece defaulted or prepared to leave the euro zone before the bloc could build a big enough bailout mechanism “and before there’s a credible Italian government,” it could “bring down the whole euro system.”

“That is why Merkel and Sarkozy will do anything they can to persuade whoever is running Greece to take things slowly, to follow the medicine, to carry on pretending they can pay the debt when everyone knows they can’t,” Mr. Grant said, referring to Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France.

The proposal for talks to form a unity government followed a roller-coaster week of intense brinkmanship. Mr. Papandreou proposed a referendum on Greece’s new debt deal with the European Union — roiling world markets and spooking Europe — before coercing the opposition to back the deal and just as quickly calling off the referendum plan.

But as the dust settled Saturday, it was still unclear whether Mr. Papandreou’s referendum gamble was a brilliant strategy to hasten passage of the debt deal, which is Europe’s best hope to create a firewall around Greece, or whether it achieved a short-term political gain while dooming the government’s ability to work with opponents to approve the agreement.

It dictates the approval of a series of austerity measures the government has already agreed to and imposes a permanent foreign monitoring presence. Amid growing social unrest, the Socialist government might not have the ability to pass the necessary legislation on its own, hence Mr. Papandreou’s appeal for broader consensus.

Article source: http://www.nytimes.com/2011/11/06/world/europe/political-uncertainty-lingers-in-greece.html?partner=rss&emc=rss

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Wall Street Rebounds on Europe Hopes

September 26, 2011 by Leave a Comment

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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I.H.T. Special Report: Global Agenda: More Stimulus May Not Be an Option for China

September 22, 2011 by Leave a Comment

Yet with inflation high — food prices in August were 13.4 percent higher than a year earlier — the family is still finding it difficult to pay the bills. This year they had to sell much of their farmland near the town of Lichuan to the local government for a low price, as officials across the country rush to buy land to finance local development.

The changing fortunes of Ms. Qun’s family echo the changes in China since 2008, when the government enacted a 4 trillion renminbi, or $626 billion, stimulus program to help the economy weather the global financial crisis.

Those changes also show why China is reluctant to introduce another stimulus package now, despite growing nervousness about the possible domestic impact of Europe’s debt crisis. Stimulus would only add to inflation, as well as spur more local borrowing to finance development, which would pump air into an already bubbly real estate market.

As China travels to the annual meetings of the International Monetary Fund and World Bank this weekend, it is deeply concerned about contagion from economic difficulties in Europe, its biggest trading partner, and in the United States, one of its largest debtors.

But Beijing’s main message to the multinational lending community is likely to be a pragmatic one: we may be growing, but we have our own worries, so don’t expect much help from us.

“The government will be relatively cautious and take a wait-and-see attitude” at the meetings, said Wang Tao, a Hong Kong-based economist for UBS. Until there are clear signs of global growth tumbling, she added, “they are unlikely to do anything” to stimulate growth at home and thus demand from foreign markets.

China’s economy is robust, Ms. Wang said, despite the fact that indications of a slowdown in global demand have led senior officials to predict growth of less than 9 percent for 2012, and banks estimate 8.7 percent or even 8.4 percent.

“Who says China has to grow at over 9 percent a year?” Ms. Wang asked.

“China’s not going to collapse,” she continued. But the country has “other concerns, such as inflation, debt and asset bubbles in the property market.”

Stephen Green, an economist in Shanghai for Standard Chartered, said “China is facing a bunch of challenging issues.” He, too, singled out local government debt and inflation, both burgeoning in large part because of the last stimulus plan.

Consumer prices in August rose 6.2 percent on average across the country. That figure is down from the July average of 6.5 percent, but still high.

Local government debt is growing at a pace that alarms some economists. The government says local debt stands at 10.7 trillion renminbi, but Moody’s Investors Service has estimated the total local debt at 14.2 trillion renminbi.

Mr. Green, of Standard Chartered, puts the sum at around 14 trillion renminbi, or about a third of China’s 2010 gross domestic product of $6.05 trillion.

He also estimates that up to 9 trillion renminbi of that is nonperforming and will require a government bailout. If he is right — and he is not alone in his prediction — that raises an important question: after the United States’s debt crisis of 2008, and Europe’s of 2011, is China facing one of its own?

“I think we can only do things this way for about four or five years more, and then there will be a debt crisis,” said an economist based in China, who asked for anonymity because of political sensitivities. Debt levels since the 2008 stimulus have shown an “unsustainable pickup,” the economist said.

Some economists do think that China has the tools to avert a bust, or at least to mop up after one. That is because the central government, having in essence created the problem, can then take virtually unilateral action to solve it.

China’s debt problem isn’t “commercial loans that went bad because of an asset bubble popping,” but rather “public infrastructure financed through the banking system,” with local government support, Mr. Green said.

“At the central level it takes a lot of time to make a decision, but when they do they implement it with force,” he added.

Article source: http://feeds.nytimes.com/click.phdo?i=447cd55bb504957f4760ceeec4676eb5

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Anxiety Hits Shares of French Banks

August 10, 2011 by Leave a Comment

French banks are loaded up on the debt of Italy and Greece, among other troubled European countries that share the euro currency.

France has become the newest target in the game of Who’s Next on the shrinking list of nations with AAA debt ratings.

And even though the credit ratings agencies and the French government have insisted that France is not in danger of a downgrade, the market anxieties spread wildly Wednesday, engulfing Société Générale, the second-largest French bank. Its shares slumped as much as 21 percent before closing down 14 percent for the day. Stock in BNP Paribas, France’s largest bank, fell 9.5 percent.

Bank shares in Italy and across Europe also tumbled on worries that efforts by European authorities to stem the debt crisis may work for only so long. The cost to insure French sovereign debt against default jumped to a record.

Because Europe’s banks trade billions of euros and dollars daily with their American counterparts, contagion could easily spread, making the stock plunges all the more worrisome. In the United States, both Goldman Sachs and Morgan Stanley were down more than 7 percent in midday trading.

President Nicolas Sarkozy interrupted his vacation on the French Riviera to return to Paris for an emergency meeting Wednesday with finance officials to discuss “the economic and financial situation” of France, which is among the weakest of any big AAA-ranked nation.

“There has been a lot of market noise about France, rather than ratings agency noise,” said Gary Jenkins, a strategist at Evolution Securities. “On the other hand, there was market noise about the PIGS and the United States before they were downgraded,” he noted, using an acronym for the European countries swept up in the debt crisis — Portugal, Ireland, Greece and Spain.

In contrast to the problems of Lehman Brothers and Bear Stearns in the United States that nearly brought down the global financial system in 2008, this time it is fears about European banks that are driving the wave of selling.

Financial institutions across Europe have huge holdings of government and corporate bonds from Italy and Spain, so doubts about their stability are encouraging investors to flee shares of Europe’s biggest banks.

French banks are among the most exposed to Greek and Italian debt, and hold huge amounts of French sovereign debt. Rumors that French banks have been having trouble getting funds after American regulators discouraged United States banks from lending to their euro counterparts also weighed on shares.

Société Générale in particular was hit by rumors that a Groupama, a large French reinsurer that owns about 4 percent of Société Générale shares — the largest shareholder after BlackRock — needed to raise money. Groupama did not return calls for comment.

But David Thébault, head of quantitative sales trading at Global Equities in Paris, noted that many insurance companies and banks were scrambling after Standard Poor’s downgraded the United States to AA+ from AAA to replace those securities, because they were required to hold only top-rated sovereign debt.

“Volatility is very high — we’re in quasi-crisis mode,” Mr. Thébault said. “The markets are reacting to any little rumor.”

Société Générale issued a statement after the close of trading “categorically denying with the most extreme vigor” the “totally unsubstantiated rumors” that caused it shares to slump.

The bank, which reported a 1.6 billion-euro first-quarter profit last week, said it asked the French stock market regulator to open an inquiry into the source of the rumors.

The big fear in the markets, though, is the threat of contagion — whatever the reason for the tumult.

“We’ve been really cautious, and the sovereign crisis is now escalating,” said Philip Finch, global bank strategist for UBS. “It boils down to a crisis of confidence. We haven’t seen policy makers come out with a plan that is viewed as comprehensive, coordinated and credible.”

David Jolly contributed reporting from Paris, Nelson Schwartz and Louise Story from New York, and Landon Thomas Jr. from London.

Article source: http://feeds.nytimes.com/click.phdo?i=aec848c8d224d940cba9652d4613ec6c

Filed Under: Business News Tagged With: , ,

Markets Assault Spain and Italy Debt

August 2, 2011 by Leave a Comment

The grand European plan that came together barely two weeks ago, aimed at once again bailing out Greece and preventing its ills from spreading to bigger European economies, no longer seems so reassuring. Suddenly, the wolves are back at Europe’s door.

On Tuesday, traders renewed their attacks on Italy and Spain, the third- and fourth-largest economies in the 17-nation euro zone, pushing their borrowing costs, at least for now, to the tipping point that led Greece, Ireland and Portugal to apply for bailouts. Some people now fear that Italy and Spain could run out of cash to meet their debt obligations in a matter of months if, like the others, they are shut out of international markets.

“The problem is we have not stopped the contagion that is putting pressure on Italy and Spain,” said a senior European finance official involved in the rescue programs, who was not authorized to speak publicly. “We would be confronted with enormous problems if things got worse.”

The latest Marshall Plan for Europe was supposed to keep those nations safe from the spreading fire and, by extension, cushion the many European and American banks that hold their debt. While the economies of Greece, Ireland and Portugal are relatively small, European leaders would face challenges of a different magnitude if Italy and Spain were engulfed by the same forces.

With many Europeans off for their summer holidays, thin trading conditions may be exaggerating the market’s movements. Still, the sense of urgency was palpable in Rome, where Giulio Tremonti, Italy’s finance minister, held an emergency meeting of the country’s financial authorities as interest rates on Italy’s benchmark 10-year bond touched a 14-year high of 6.21 percent Tuesday. Without stronger economic growth, higher rates could make it too costly to service Italy’s heaving debt, which, at 119 percent of gross domestic, is one of the world’s largest.

A leadership vacuum at the highest levels of the Italian government has further unnerved investors. Prime Minister Silvio Berlusconi has been silent on the debt crisis for nearly a month as he battles a sex scandal and grapples with court cases. He was scheduled to address the matter Wednesday in a speech on the economy before Parliament.

In Madrid, Prime Minister José Luis Rodríguez Zapatero was taking no chances either. After agreeing last week to step down early to take responsibility for Spain’s economic crisis, he delayed the start of his vacation Tuesday to cope with Spain’s problems.

The yield for the Spanish 10-year bond rose to 6.45 percent, the highest level since Spain joined the euro club, before retreating a bit. The surge is ill timed because the government needs to raise as much as €3.5 billion, or nearly $5 billion, in a bond auction Thursday.

The governments of Germany and France, the euro zone’s largest economies, can hardly afford a bigger cleanup bill for Europe’s debt crisis. Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France hinted as much last month, telling Mr. Berlusconi in separate brief conversations that they felt sure he would do the right thing for the economy, according to a person with knowledge of the discussions.

Both Italy and Spain still need to tackle a mountain of debt and show they are making real progress toward straightening out their finances. Until that happens, investors are likely to keep driving their borrowing costs higher.

Markets are also unnerved by the prospect that creditors would share additional pain should other countries go the way of Greece. With German and French politicians pressured to show that taxpayers won’t be the only ones footing bailout costs, banks in those countries agreed to take some losses in the most recent bailout of Greece.

Article source: http://www.nytimes.com/2011/08/03/business/global/pressure-builds-on-italy-and-spain-over-finances.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,
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