March 18, 2019

German Lawmakers Back Cyprus Bailout

BERLIN — Germany’s lower house of Parliament approved the bailout package for Cyprus on Thursday, bringing to an end to months of debate in Berlin.

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.”

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Wall Street Stocks Higher on Fresh Labor Data

A drop in oil prices and strong bond auctions in Europe drove stocks to a slightly higher close Thursday. The Standard Poor’s 500-stock index rose for the fourth straight day.

Materials and industrial companies led the gains. Caterpillar and Alcoa rose the most in the Dow. Stocks drove higher in the last hour and a half of trading after oil prices dropped below $100 a barrel for the first time this year. Oil fell on rumors that Europe would delay an embargo on Iranian oil. Crude oil futures for March delivery settled down $1.78 to $99.31 on the New York Mercantile Exchange.

Also pushing stocks were strong bond auctions in Italy and Spain. European markets ended mostly higher after Italy and Spain held highly successful bond auctions, easing worries about Europe’s debt crisis. Italy’s benchmark stock index rose 2.1 percent.

In Italy’s first bond auction of the new year, the country was able to sell one-year bonds at a rate of just 2.735 percent, less than half the 5.95 percent rate it had to pay last month. That’s a signal that investors are becoming more confident in Italy’s ability to pay its debts.

Spain was able to raise double the amount of money it had sought to raise in its own bond sale as demand for its debt was strong. Both auctions were seen as important tests of investor sentiment.

Investors have been worried that Italy and Spain, the third- and fourth-largest countries in the euro area, might be dragged into the region’s debt crisis. Greece, Ireland and Portugal have been forced to get relief from their lenders after their borrowing costs spiked to levels the countries could no longer afford.

The euro rose nearly a penny against the dollar, to $1.28, as worries eased about Europe’s financial woes. The currency, which is shared by 17 European Union countries, fell to a 16-month low against the dollar the day before. An auction of 30-year United States Treasury bonds drew meager interest from investors as cash flowed back into European debt.

The Dow Jones industrial average gained 21.57 points, or 0.2 percent, to end at 12,471.02. It was down most of the day, losing 64 points in the first hour of trading, following a rise in unemployment claims and a weak report on December retail sales.

The S. P. 500 finished up 3.02 points, or 0.2 percent, at 1,295.50. The Nasdaq composite rose 13.94 points, 0.5 percent, to 2,724.70.

The Treasury’s 10-year note fell 6/32, to 100 21/32. The yield rose to 1.93 percent, from 1.91 percent late Wednesday.

It was the latest day of quiet trading in the stock market. There have been six consecutive days with moves of less than 1 percent in the S. P. 500.

Ralph Fogel, investment strategist and partner at Fogel Neale Partners in New York, said the moderate moves were an encouraging sign after the steep rises and sudden declines that were typical of last summer. “This is a much healthier market than we’ve seen,” he said.

Unemployment benefits spiked last week to the highest level in six weeks, mostly because companies let go of thousands of holiday hires, the government reported. Retail sales barely rose in December and were lower than analysts were expecting.

Despite the mixed news on the economy, investors are starting to focus on the corporate earnings season, which got under way this week after Alcoa, the aluminum maker, predicted stronger demand for its products and surprised the market with higher revenue than analysts expected.

“There’s a fair amount of pessimism out there but I also think that investors are slowly becoming immune to the bad news,” said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. “As long as the stuff you can sink your teeth into, like corporate profit, is improving, I think it bodes well for the markets this year.”

Chevron fell 2.6 percent after the world’s second-largest publicly traded oil company said its income would be “significantly” below its fourth-quarter results in the prior quarter because of narrower margins on refining and selling fuels.

The business software company CA Inc. jumped 4.2 percent after the hedge fund Taconic Capital disclosed in a regulatory filing that it has taken a 5.1 percent stake. It also said it was pressing CA to return more cash to shareholders and increase its profit margins.

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Bucks Blog: The Latin American Alternative

The stock market has been volatile, to say the least, for much of this year, as investors follow each bit of news about the finances of countries in the euro zone. Some investors, looking for an alternative, have started to consider Latin America, Paul Sullivan writes in his Wealth Matters column this week — quite a turn of events since the 1990s and early 2000s, when countries there were in dire financial straits.

The question now, he writes, is whether Latin America’s economies are now on solid footing or whether they’re in the midst of a boom and bust cycle, typical of the past.

Have you looked at Latin American investments lately? The investment strategists he spoke to agreed that investors there had to keep their eyes open. What do you think?

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Finland Agrees to Europe Bailout Fund

The vote, which was 103 to 66, with 30 legislators absent, still leaves seven countries that have not yet ratified the bailout fund. Even after it is approved, the fund, despite expanded resources and power, is considered much too small to fend off further market attacks on Greece and other indebted countries.

The laborious approval process, which can be held up by objections from any one of the 17 countries in the euro zone, has highlighted deep flaws in the bloc’s decision-making. Every initiative must traverse an obstacle course, and each hurdle can jostle financial markets anew.

On Wednesday, the top stock market indexes in Europe fell after three consecutive sessions of gains.

Though Finland can now be checked off the list, the next holdout may prove to be Slovakia, where there was talk that a vote on the bailout fund might be delayed until late October, past the unofficial midmonth deadline set by Olli Rehn, the European commissioner for economic and monetary affairs. Many Slovakians resent having to help bail out Greece, which, despite its problems, is wealthier.

José Manuel Barroso, president of the European Commission, warned Wednesday that countries in the euro zone must move toward greater unity for the alliance to survive.

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

Leaders in Germany and elsewhere played down speculation that they were working on bolder responses to the crisis, like a mechanism that would multiply the borrowing power of the bailout fund, the European Financial Stability Facility. Officials said they were preoccupied with gaining parliamentary approval for existing measures.

But the euro zone countries face intense pressure from the United States, China and other countries to more forcefully address the sovereign debt problem before the meeting of the Group of 20 leading economies that begins Nov. 3 in Cannes, France.

“The euro area has been given an ultimatum to put its crisis once and for all behind its back over the coming six weeks,” Jacques Cailloux, chief European economist at Royal Bank of Scotland, wrote in a note to clients.

In an initial effort to impose more spending discipline on euro zone members and to prevent future crises, members of the European Parliament voted Wednesday in favor of rules that would impose fines on countries that broke budget and deficit rules.

Members of the euro zone are supposed to hold their budget deficits below 3 percent of gross domestic product, and total debt below 60 percent of G.D.P., but few do.

Under the new rules, countries that exceed those limits will be pressed to make a cash deposit — in an account that pays no interest — equal to 0.2 percent of G.D.P. If they still fail to rein in spending, they will forfeit the deposit.

While finance ministers would still need to agree to punish countries, the voting system has been adjusted to make it significantly more difficult to block sanctions.

In addition, national budget plans will come under greater scrutiny, and there will be an alert system to try to detect looming problems like the housing bubbles that helped create the debt crises in Spain and Ireland.

The German Parliament is scheduled to vote Thursday on the bailout fund, in what is seen as a crucial test for Chancellor Angela Merkel.

Austria is scheduled to vote Friday. Still to vote are Cyprus, Estonia, Malta, the Netherlands and Slovakia.

There were indications that Slovakia’s Parliament might not vote until Oct. 25, although Beata Skyvova, a spokeswoman for the Slovak Parliament, said that one party in the governing coalition was pressing for an earlier vote and that more negotiations would take place before a final date was decided.

That would be about three months after euro zone representatives agreed to give the rescue fund more money and power. The expanded fund will be able to lend up to 440 billion euros, or about $600 billion, and issue guarantees for 780 billion euros.

Mr. Cailloux said that the fund needed about 2 trillion euros to be effective.

Jack Ewing reported from Frankfurt and Stephen Castle from Brussels. Niki Kitsantonis contributed reporting from Athens.

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Expanded Euro Bailout Fund Clears Hurdle

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Stephen Castle reported from Brussels

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Borrowing Costs Stubbornly High at Spanish Auction

FRANKFURT — As Spain pulled off a successful — if expensive — bond sale Thursday, a top official of the European Central Bank rejected criticism from Germany that the bank has exceeded its authority by aiding Greece and other beleaguered countries in the euro area.

A day after the leaders of France and Germany promised to support Greece’s continued membership in the currency bloc, the German Chancellor, Angela Merkel, adopted a scolding tone, telling indebted countries to “do their homework.”

Appearing at the Frankfurt Motor Show, Mrs. Merkel said it is “worth every effort” to preserve European unity in the debt crisis, but insisted that troubled countries are still responsible for tackling their own problems, according to The Associated Press.

Speaking in Rome, Lorenzo Bini Smaghi, a member of the E.C.B. executive board, said it would be a mistake to leave countries at the mercy of financial markets, which he said are not functioning properly anyway.

He said criticisms of the bank are “the result of inadequate economic analysis, of insufficient knowledge of the crisis in which we find ourselves and of anxiety resulting from experiences in the distant past that are not relevant to the current situation” — an apparent reference to the hyperinflation of the 1920s, which still influences German attitudes toward price stability.

His comments were thus an implicit riposte to German critics who have accused the E.C.B. of betraying its mandate by buying government bonds of Greece, Italy, Spain and other euro area countries to help control their borrowing costs.

Disagreements about E.C.B. crisis policy broke into the open last week after Jürgen Stark, the only German member of the E.C.B. executive board, last week unexpectedly said he would resign. Mr. Stark was a well-known opponent of the bond purchases, which he saw as improper interference by the E.C.B. in government finances.

On Thursday, Spain raised €3.95 billion, or $5.4 billion, of bonds maturing in 2019 and 2020, just short of its maximum target of €4 billion.

But the yields remained near record highs. The bond due Oct. 31, 2020 was sold at an average yield of 5.16 percent, compared with 5.2 percent when it was last sold on Feb. 17. That was also the level at which it was trading on the secondary market before the auction.

The auction was covered two times, a level of bidding that “compared favorably to the last two Spanish auctions,” said Chiara Cremonesi, a fixed-income strategist at UniCredit. “Taking into consideration the current environment, the auction result was not too bad overall.”

As its borrowing costs have soared, the Spanish government has been struggling to rein in spending to avoid being forced into seeking a bailout, as has happened in Greece, Ireland and neighboring Portugal.

On Friday, the Spanish government is set to re-introduce a wealth tax that it removed in April 2008, shortly after José Luis Rodríguez Zapatero was re-elected as prime minister.

Elena Salgado, the finance minister, on Thursday estimated that the tax could yield about €1.08 billion in additional revenue from about 160,000 of Spain’s richest taxpayers.

In 2007, the last year that the wealth tax was collected, revenue from the wealth tax reached €2.12 billion, after more than 900,000 people were charged between 0.2 and 2.5 percent of their declared assets.

In his speech, Mr. Bini Smaghi lowered expectations that the bank might take more radical steps to contain the sovereign debt crisis. Some economists have said the E.C.B. should effectively print money to prevent deflation and a downward spiral caused by government austerity programs and slower growth in the indebted countries.

In a clear response to Germans who say the bank has gone too far already, however, Mr. Bini Smaghi said that there is no evidence that “any of the interventions implemented have undermined the ability of the E.C.B. to maintain price stability in the euro area in the years to come.”

Mrs. Merkel said that Germany has a “duty and responsibility to make its contribution to securing the euro’s future.” But, in a statement that could reinforce perceptions that political leaders are determined move at their own pace and not be driven by financial markets, she said that stabilizing the euro area “won’t happen overnight or with any one-time thunderbolt.”

She once again rejected proposals for euro bonds, or debt backed jointly by all 17 euro-zone nations.

In Spain, Mr. Zapatero’s government has pledged to lower the budget deficit to 6 percent of gross domestic product this year, from 9.2 percent last year. However, that target was set on the assumption that the economy would grow 1.3 percent this year, but the most recent data suggests that growth will in fact fall short of 1 percent for the full year.

The wealth tax is likely to be the last legislative measure taken by the Socialist government before a general election on Nov. 20. Opinion polls indicate that Mariano Rajoy, leader of the main center-right opposition Popular Party, will defeat the Socialist candidate, Alfredo Pérez Rubalcaba, and replace Mr Zapatero as prime minister.

Even though the revived wealth tax will be more narrowly focused than before, the plan has added to tensions over fiscal strategy between the federal government and regional governments that will be collecting the wealth tax on behalf of Madrid. Economists have also questioned the benefit of such a narrow tax — it will affect about 0.7 percent of Spanish taxpayers — at a time when the euro crisis is deepening.

Some regional government controlled by the Popular Party have already declared their opposition to collecting what they consider to be a misguided wealth tax. Mr Rajoy, however, has refused to say whether he would abolish such a tax if elected in November.

Most regional governments are expected to fall short of their budget deficit targets this year, after only eight of the country’s 17 regional governments met last year’s target. Fitch, the credit rating agency, this week lowered the ratings of five regions, warning that “considerable efforts” were still required “in the area of cost control.”

Raphael Minder reported from Madrid.

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German Leaders Reiterate Opposition to Euro Bonds as a Way to Ease Crisis

Mrs. Merkel told ZDF television in an interview broadcast Sunday that the so-called euro bonds would be an option only in the distant future.

“It will not be possible to solve the current crisis with euro bonds,” she said. She added that “politicians can’t and won’t simply run after the markets.”

“The markets want to force us to do certain things,” she added. “That we won’t do. Politicians have to make sure that we’re unassailable, that we can make policy for the people.”

The German finance minister, Wolfgang Schäuble, echoed Mrs. Merkel’s comments, saying that common debt would make it easier for governments to avoid pursuing responsible fiscal policies. In any case, he told the newspaper Welt am Sonntag, it would take too long for countries in the euro zone to amend the treaty on monetary union, which would probably be required to allow the issuance of such bonds.

“We have to solve the crisis within the existing treaty,” Mr. Schäuble said.

The statements by the German leaders are in tune with public opinion in Germany as well as in other countries, like the Netherlands. The Dutch finance minister, Jan Kees de Jager, told the magazine Der Spiegel in an interview published Sunday that Mrs. Merkel should remain firm in her opposition to euro bonds.

That is not what investors want to hear, however.

Stocks around the world plunged last week amid widespread concern that political leaders were unwilling to take bold steps to address the European sovereign debt crisis, at the same time that indicators were pointing to sharply slower growth in Europe and the United States. The benchmark Stoxx Europe 600 index dropped 6 percent last week, with banks suffering some of the biggest drops.

Any further drop in investor confidence could also put pressure on the European Central Bank, which has been intervening in bond markets to hold down yields on Italian and Spanish debt and keep borrowing costs for those countries from reaching dangerous levels.

So far the central bank’s bond market intervention, which began two weeks ago, has kept Italian and Spanish yields below 5 percent, Frank Engels, an analyst at Barclays Capital in Frankfurt, wrote in a note. In October, the European Financial Stability Facility, the bailout fund, will be able to buy government bonds. But that may not be enough to keep yields within bounds, he said.

Mr. Schäuble told Die Welt that he did not think it would be necessary to increase the size of the bailout fund. Such comments may come as a particular disappointment to investors because Mr. Schäuble is regarded as one of the most pro-European members of the German cabinet, and among the most willing to agree to national sacrifice in the interest of saving the common currency.

But Mr. de Jager, the Dutch finance minister, said he would be willing to increase the size of the bailout fund.

Since the beginning of the debt crisis, Mrs. Merkel has resisted being swayed by bond investors; she waited until pressure became intense before agreeing to aid for Greece and other measures that were unpopular with German voters.

She also said she saw “nothing that points to a recession in Germany.” She acknowledged that political leaders needed to regain the confidence of financial markets but said the best way to do that would be to reduce debt.

Mrs. Merkel expressed opposition to euro bonds after a meeting in Paris last week with the French president, Nicolas Sarkozy, during which they pledged to improve economic coordination among euro members.

In the interview with Die Welt, Mr. Schäuble said he personally would be willing to cede some control over fiscal policy to a European finance minister, as Jean-Claude Trichet, the president of the European Central Bank, has proposed. But Mr. Schäuble added, “We can only go as fast and as far as we can convince citizens and their representatives in Parliament.”

Separately, Der Spiegel reported that the German Finance Ministry had calculated that euro bonds would cost Germany an additional 2.5 billion euros, or $3.6 billion, in interest payments in the first year of issuance, and as much as 10 times that sum each year after a decade. Germany’s borrowing costs are typically among the lowest in the world, but could rise if the nation’s reputation for fiscal prudence was diluted by closer association with countries like Italy.

A Finance Ministry spokesman said he could not confirm the Spiegel report, which the magazine said was based on estimates by unidentified ministry experts.

Opposition to euro bonds is strong within German political circles and among the country’s conservative economics establishment because of the perception that the country would wind up subsidizing its neighbors.

But some economists argue that euro bonds would be cheaper even for Germany, because the volume of the bond market would rival that of United States Treasury securities and promote the euro as a reserve currency. That would increase demand for the bonds and lower interest rates.

There is some support for euro bonds in Germany. Leaders of the opposition Social Democrats and Green Party have spoken in favor of common European debt. In addition, the Frankfurter Allgemeine newspaper quoted several members of Mrs. Merkel’s governing coalition in Parliament on Sunday as saying that Germany should not rule out euro bonds forever.

While rejecting the bonds, Mr. Schäuble said that Germany would defend the euro “under all circumstances” and that the government categorically rejected suggestions that Greece should leave the euro zone, as some economists have proposed.

If Greece dropped out, he said, Europe would suffer “a dramatic loss of trust and influence.”

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