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Germans Are Poor and Italians Are Frugal. Huh?

April 9, 2013 by Leave a Comment

FRANKFURT — The Italians are the most prudent people in Europe. Spaniards and Greeks are not as badly off as their homelands’ dismal economic statistics would suggest. And pity the Germans. They are poorer than the Cypriots they are helping to bail out.

Taken at face value, those are some of the surprising findings of an extensive survey of household debt and wealth conducted by researchers for the European Central Bank and published Tuesday.

But the first-ever survey, designed to promote better monetary policy by filling a major gap in knowledge about household finances in the euro area, came laden with caveats. Much of the data are several years old and it could be risky to draw too many conclusions.

For example, the data may make some countries appear richer than they really are, the E.C.B. study warned, because of differences in the number of people typically sharing a home and other factors. Cypriots have some of the largest households in the euro area, while Germans, on average, have the smallest. The survey of 62,000 households measured wealth, income and debt for households, not individuals, so a country with larger families living together might appear wealthier.

As a result, the figures should be “interpreted with caution,” the E.C.B. report said.

In addition, fewer than half of German households own their homes, in part because it is one of the few countries in the euro zone that does not grant a tax deduction for mortgage interest payments. Since homes tend to be Europeans’ most valuable asset by far, the prevalence of renters makes Germans appear to have less net wealth than otherwise hard-pressed Spaniards. The rate of home ownership in Spain is more than 80 percent.

The average net wealth of households in Spain is €291,000, or $380,000, compared with €195,000 for Germany. But it would be hard to argue that Spain, with official unemployment of 26 percent, is better off than Germany, with a rate of 5.4 percent.

And despite average net wealth of €671,000 per household, few would envy the Cypriots, whose banking system is in ruins and where the economy may be headed into severe recession. Wealth in Cyprus is also concentrated among a relatively small group.

Interviewers began collecting the data as early as 2009, so they do not capture most of the severe economic decline that has since taken place in countries like Greece, Spain and Portugal. In addition, survey participants were asked to estimate the value of their homes and might not have been accurate in countries like Spain where there have been huge declines in real estate values. The survey contains no data for two of the 17 members of the currency union: Ireland and Estonia.

But the survey does suggest that differences in standards of living in the euro area may not be as great as they are often assumed to be.

The survey challenges some other stereotypes as well. Although the Italian government suffers from a reputation for frivolous spending and dysfunctional politics, Italian households are the least likely in the euro zone to borrow money. About 75 percent of Italian households have no debt at all, according to the survey.

The survey could also fuel the sense of injustice among European policy makers when criticized by their American counterparts about their handling of the debt crisis. By coincidence, the study appeared as the U.S. Treasury secretary, Jacob J. Lew, was touring European capitals urging leaders to do more to promote growth.

According to the E.C.B. data, Americans are the ones with too much debt. In the euro area, 44 percent of households have some kind of debt, compared with 75 percent in the United States. In addition, Americans as a group devote a much larger share of their income to paying interest on debt.

The E.C.B. said in a statement that the data would provide a more nuanced view of household finances and promote better monetary policy. For example, the E.C.B. will be able to better calculate the effect of an increase in interest rates on household finances.

“The ongoing and long-lasting economic crisis has made it more evident than ever that large structural imbalances may remain hidden” without such detailed data, the E.C.B. said.

Article source: http://www.nytimes.com/2013/04/10/business/global/germans-are-poor-and-italians-are-frugal-huh.html?partner=rss&emc=rss

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O.E.C.D. Warns Slovenia on Banking Crisis

April 9, 2013 by Leave a Comment

LJUBLJANA, Slovenia — Slovenia, trying to avoid becoming the euro zone’s next bailout victim, may have ‘’significantly’’ misread the cost of fixing its troubled banks, the Organization for Economic Cooperation and Development said Tuesday.

Following the messy rescue of Cyprus last month, Slovenia, a country of 2 million perched on Italy’s northeast border, is facing intensifying market pressure while seeking funds to heal its state-owned financial sector.

The O.E.C.D., which includes 34 developed countries, said in a report that Slovenia should save state-owned banks that are viable and sell them into private hands, and allow those that are not viable to fail.

According to an assessment made last year, the local banks, mostly state-owned, are burdened with 7 billion euros, or about $9 billion, in bad loans — a fifth of Slovenia’s gross domestic product.

The country risks falling behind in its race to catch up with Western living standards, the Paris-based organization said.

The report predicted a second straight year of economic contraction, by 2.1 percent. It also said that Slovenia’s public debt had more than doubled since 2008 to 47 percent of gross domestic product and that it could rise to 100 percent by 2025 if no changes are made.

Facing uncertain costs to bail out its lenders, continued pressure on its exports from the euro zone crisis, and a rise in lending costs after Cyprus’s bailout, Slovenia has one of the worst economic outlooks in the O.E.C.D., the organization’s report said.

‘’Against this difficult background and with a possible further deterioration in the international environment, Slovenia faces risks of a prolonged downturn and constrained access to financial markets,’’ the report said.

It recommended that the government increase the powers of the competition office, gradually raise the retirement age, wean wealthier citizens off family benefits, cut unemployment and other benefits, and improve efficiency in education and health care.

Slovenia is the only former communist European Union state that declined to sell most of its banking sector into private hands, a strategy that led to political influence, mismanagement and disastrous lending that has now put the lenders at risk.

‘’Slovenia is facing a severe banking crisis, driven by excessive risk-taking, weak corporate governance of state-owned banks and insufficiently effective supervision tools,’’ according to the report.

Last year’s estimate of the level of bad loans in the banking system is outdated and was created by methodology that was weak and nontransparent, so the real damage could be worse, the organization said.

‘’Capital needs are uncertain and could in fact be significantly higher,’’ it said.

The O.E.C.D. said it welcomed a plan by the Slovenian government to create a so-called bad bank to take nonperforming loans away from state banks, but it said that ‘’lack of transparency and potential political interference pose risks.’’

It added that weak corporate governance and credit misallocation could potentially be attributed to corrupt behavior.

The organization also urged the government to start new stress tests of the banking sector based on a more robust methodology, and to publish the results before recapitalizing distressed but viable banks, preferably through share issues.

But it said market valuation showed that equity in state banks had been ‘’virtually wiped out,’’ and that Slovenian banks that were nonviable should be wound down, with holders of subordinated debt and lower-ranked capital instruments absorbing losses.

Slovenia should then privatize the banks, the Organization for Economic Cooperation and Development said. It criticized a plan being discussed by the current left-of-center government for the state to retain a blocking minority, saying such a move could lead to political interference and new problems.

It said failure to pursue the changes pledged when the government in Ljubljana tapped the dollar debt market last year could ‘’significantly raise borrowing costs,’’ as could a higher-than-expected bill for recapitalizing banks. All of this has put pressure on growth, the report said.

‘’Potential growth has fallen significantly since the outset of the crisis,’’ it said. ‘’As a result, Slovenia is unlikely to resume the catching up toward more developed O.E.C.D. countries soon.’’

Article source: http://www.nytimes.com/2013/04/10/business/global/oecd-warns-slovenia-on-banking-crisis.html?partner=rss&emc=rss

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Emerging Asian Economies on Track for Solid Growth, Development Bank Says

April 9, 2013 by Leave a Comment

HONG KONG — The economies of developing Asia appear to have settled into a new growth path that will allow the region to expand by between 6 percent and 7 percent a year — a pace that is significantly slower than that seen before the global financial crisis, yet represents a firm trajectory that could last over the next decade.

“It looks like we’re in a new trend,” said Changyong Rhee, the chief economist of the Asian Development Bank, which on Tuesday released its new forecasts for emerging Asia. The region spans developing countries like China, India, Indonesia and Thailand, but not Japan.

After relatively muted growth last year, when the region expanded by 6.1 percent, developing Asia is expected to pick up speed again with growth of 6.6 percent this year and 6.7 percent next year, according to the bank’s projections.

“The era of double-digit growth is over,” Mr. Rhee said. But, he added in an interview in Hong Kong, the United States is showing signs of recovery, and the euro zone likely to “muddle through” its debt crisis for the foreseeable future. That backdrop leaves developing Asia enjoying a relatively stable growth that was not yet visible just six months ago, when the development bank made its last projections for the region.

Faster growth in China — by far the region’s largest economy — and what Mr. Rhee called the “remarkable” resilience of southeast Asian economies have been the main drivers of growth there growth, lifting domestic consumption and intraregional trade, and in the process also reducing the region’s reliance on the world’s advanced, and slower-growing, economies.

Growth, however, will be very uneven, with China likely to grow at between 7 percent and 8 percent; the Asean region, comprising countries like Thailand and Malaysia, growing around 5 percent; and more developed economies like Hong Kong, Singapore or Taiwan expanding at little more than 3 percent.

Moreover, events in other parts of the world continue to pose major potential risks to Asia.

Among them, the development bank said, are the wrangling over the U.S. debt ceiling and the struggles to implement austerity measures in Europe. Border disputes within Asia, potential asset bubbles inflated by the monetary stimulus efforts of the world’s developed economies, and the possible reversal of capital inflows once that monetary stimulus ends also represent risks to Asia.

The Asian Development Bank also issued a stark warning on Asia’s rapidly growing energy needs. The region, the bank said, is moving along a “dangerously unsustainable energy path” that “could result in environmental disaster” and increase the region’s reliance on the oil-exporting nations of the Middle East.

“Asia could be consuming more than half the world’s energy supply by 2035, and without radical changes carbon dioxide emissions will double,” Mr. Rhee said. “Asia must both contain rising demand and explore cleaner energy options, which will require creativity and resolve, with policymakers having to grapple with politically difficult issues like fuel subsidies and regional energy market integration.”

Article source: http://www.nytimes.com/2013/04/10/business/global/emerging-asian-economies-on-track-for-solid-growth-development-bank-says.html?partner=rss&emc=rss

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In Europe, Lew Will Press for More Growth, Less Austerity

April 7, 2013 by Leave a Comment

WASHINGTON — Jacob J. Lew began his first trip to Europe as Treasury secretary on Sunday, a four-city tour in which he is expected to try to persuade finance ministers to pursue a little more growth and a little less austerity to improve the economic fortunes of the Continent and the world.

Growth is again at the top of the Obama administration’s agenda as Mr. Lew meets over a 48-hour period with high-ranking leaders representing the European Union, Germany and France. Europe’s sovereign debt crisis continues to simmer for its fourth year, most recently in Portugal over the weekend, and European unemployment rates are still rising. The euro zone economy shrank in the fourth quarter of 2012, with the large economies of Germany, France, Spain and Italy all contracting.

“Our European partners need to safeguard the stability they have achieved so far,” a senior Treasury official said, noting that the problems in the euro zone reduced global growth by three-tenths of a percentage point last year.

“In light of the reality that countries representing one-third of euro area G.D.P. are shrinking their budgets and restructuring their economies, it is vital to see rebalancing within the euro area with surplus economies contributing more to demand,” said the official, who insisted on anonymity in discussing the Treasury secretary’s plans.

Some European officials have also said they are concerned about a potential cycle of austerity and recession, with budget cuts leading to shrinking economies, making it harder and harder to meet budget goals.

The “economic outlook for the euro area remains subject to downside risks,” Mario Draghi, the president of the European Central Bank, said at a news conference last week. Mr. Lew is scheduled to meet with Mr. Draghi on Monday.

“The risks include the possibility of even weaker than expected domestic demand and slow or insufficient implementation of structural reforms in the euro area,” Mr. Draghi said. “These factors have the potential to dampen the improvement in confidence and thereby delay the recovery.”

But countries like Germany have shown little willingness to ease the constraints of austerity for peripheral European countries, or to engage in stimulus spending themselves. And for years, European officials have bridled at being lectured by officials from Washington — particularly because many feel that their financial crisis was largely caused by American financial products exported around the world by American banks.

Though Mr. Lew will travel to Europe with a familiar message from Washington, it may not be delivered as urgently as in the past. The European crisis continues to weigh on American growth, cutting into exports, but many economists believe that the United States has entered a cycle of self-sustaining economic growth driven by a turnaround in housing and improving household budgets.

Moreover, American companies have over the last few years steeled themselves against Europe’s financial woes, and the risk of contagion is perceived to be relatively low.

Europe was the primary international concern for Timothy F. Geithner, Mr. Lew’s predecessor as Treasury secretary and a familiar face on the Continent. But perhaps as a sign of Europe’s diminishing threat to United States economic stability, Mr. Lew’s first overseas trip as Treasury secretary, last month, was not to Paris or Berlin or Brussels, but to Beijing.

European leaders are expected to press Mr. Lew on an eagerly anticipated free-trade agreement. A study by the European Commission found that a deal could increase European Union exports to the United States by as much as 28 percent, a boost for the flailing European economy.

“The European Commission is ready with a proposed mandate for the future negotiations,” Karel De Gucht, the European trade commissioner, said in a statement last month. “We can now roll up our sleeves and get down to the business of preparing negotiations.”

The Treasury official said: “We will seek an ambitious, comprehensive and high-standard agreement.” The official added that such an agreement would include “full elimination of tariffs, reductions in nontariff barriers and disciplines that address emerging challenges such as state-owned enterprises and localization barriers.”

Financial regulations, including a proposed European tax on financial transactions, are expected to be a major subject of negotiations as well.

But concerns over growth, austerity and stability in the euro zone looked certain to be the central topic of negotiations yet again.

Speaking at a conference in China on Sunday, Christine Lagarde, the managing director of the International Monetary Fund, also reiterated her concerns about growth. “Low and lopsided growth is not enough,” Ms. Lagarde said at the Boao Forum for Asia annual conference, citing the continuing troubles in Europe. “It is not enough of a real recovery. It is not enough of a global recovery.”

In Brussels on Monday, Mr. Lew will meet with Herman Van Rompuy, president of the European Council; José Manuel Barroso, president of the European Commission; Olli Rehn, commissioner for economic and monetary affairs; and Michel Barnier, commissioner for internal market and services.

He will also meet with Mr. Draghi in Frankfurt. On Tuesday, he will travel to Berlin and Paris to meet with his counterparts, the finance ministers Wolfgang Schäuble and Pierre Moscovici.

Article source: http://www.nytimes.com/2013/04/08/business/economy/in-europe-lew-will-press-for-more-growth-less-austerity.html?partner=rss&emc=rss

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In Portugal, More Cuts on Way to Ease Debt Crisis

April 7, 2013 by Leave a Comment

Just weeks after European leaders tamped down a banking crisis in Cyprus, troubles in the euro zone have again reared their ugly head, this time in Portugal.

In an address to his beleaguered nation on Sunday, Prime Minister Pedro Passos Coelho warned that his government would be forced to cut spending more and that lives “will become more difficult” after a court on Friday struck down some of the austerity measures agreed to in exchange for a bailout package two years ago.

The renewed tension in Portugal raised the specter of further trouble elsewhere in the euro zone, where ailing members have struggled to rebuild economic growth after enduring wrenching spending cuts.

“The risks in the euro zone have increased markedly over the past six weeks or so,” wrote Nicholas Spiro, managing director of Spiro Sovereign Strategy, a London-based consultancy that assesses risk on sovereign debt.

The flash point for the latest trouble took place on Friday, when Portugal’s Constitutional Court struck down four of nine contested austerity measures that the government introduced last year as part of a 2013 budget that included about 5 billion euros, or $6.5 billion, of tax increases and spending cuts. The ruling left the government short about 1.4 billion euros of expected revenue, or more than one-fifth of the 2013 austerity package.

Specifically, the court, which began reviewing the legality of the government’s austerity measures in January, ruled as unconstitutional and discriminatory the government’s plans to cut holiday bonuses for civil servants and pensions, as well as to reduce sick leave and unemployment benefits.

Since Greece’s bailout in 2010, spikes in the borrowing costs of troubled euro countries have spread from one country to another as investors have tried to anticipate possible problems elsewhere in the currency union.

With that contagion risk in mind, politicians in Spain wasted no time over the weekend trying to distance their country from the latest turmoil in Lisbon.

Esteban González Pons, a senior official of the governing Popular Party, told a gathering of the party on Sunday that “Spain is not in the situation of Portugal.” He added: “If Portugal is in worse shape than Spain, it is because they have not taken the necessary measures that we have taken in our country.”

In May 2011, Portugal became the third euro zone country, after Greece and Ireland, to negotiate an international bailout. Lisbon received 78 billion euros from the International Monetary Fund and European creditors in return for introducing spending cuts and tax increases. Since then, however, Portugal has failed to meet its promised budgetary goals. Its economy has instead continued to sink into one of Europe’s most severe and prolonged recessions, spurring labor strikes and huge street demonstrations.

But Mr. Passos Coelho, in his first public address since the court ruling on Friday, defended the track record of his nearly two-year-old government and pledged to do “everything to avoid a second bailout.” He ruled out, however, introducing tax increases.

The prime minister addressed the nation on Sunday after an emergency meeting of his cabinet on Saturday, as well as talks with the Portuguese president, Anibal Cavaco Silva.

Cyprus received a bailout of 10 billion euros from international creditors last month. It may need even more to save its banks, a top German policy maker said on Sunday.

“The situation in Cyprus has stabilized in the last few days,” Jens Weidmann, president of the Bundesbank, the German central bank, told Deutschlandfunk radio. “However, I wouldn’t rule out that the need for liquidity in Cyprus could increase.”

The crisis in Cyprus reflects how urgent it is for the euro zone to establish a means to shut down failed banks without burdening taxpayers or endangering the financial system, Mr. Weidmann said.

“There continues to be a problem with banks that may be too connected and too big to wind down without creating a danger for the financial system,” he said.

Jack Ewing contributed reporting from Frankfurt.

Article source: http://www.nytimes.com/2013/04/08/business/in-portugal-more-cuts-on-way-to-ease-debt-crisis.html?partner=rss&emc=rss

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Fundamentally: Europe’s Markets, No Longer in Lock Step

April 6, 2013 by Leave a Comment

Money managers point to signs like these: Investors barely flinched during the banking crisis last month in Cyprus, an indication that the Continent may be moving past its manic phase. The Vstoxx index, a measure of stock market volatility in the euro zone, is about half of what it was in the fall of 2011, when the region’s debt crisis spread to Greece and Italy. And Europe has actually been the best-performing major overseas market since the start of 2012, with equities surging nearly 19 percent.

“The markets get that it’s not 2011 anymore,” said Edward A. Gray, a co-manager of the Delaware International Value Equity fund.

But impressive as that change has been, the hard part may be coming now.

That’s because, until recently, the European market has followed a fairly simple, predictable pattern. When investors sensed that the fiscal crisis there was worsening, as in the late summer of 2011, European stocks sold off in lock step. Conversely, investors raced back into the region’s equities anytime there was better-than-expected economic news — like that of the second Greek bailout, in the first quarter of 2012.

Now that European stocks appear to be past these extreme swings, investors are “much more fundamentally focused and discriminating,” said Harry W. Hartford, president of Causeway Capital Management. That means European stocks “are not a homogeneous entity anymore,” he added.

Consider the performance of European stocks in the first quarter. While stock funds that invest broadly in the region returned 2.6 percent, on average, the stock markets of individual countries were all over the map. Greece, for instance, finished the quarter up more than 14 percent and Switzerland gained more than 10 percent. Germany, meanwhile, was flat, while Spain sank 6 percent and Italy fell nearly 10 percent.

Future success in Europe will require investors to distinguish not only among markets, but among sectors and individual stocks as well, money managers say. But it is becoming harder to find decent values among European stocks, said Kimball Brooker Jr., a co-manager of the First Eagle Overseas fund.

Broadly speaking, European equities still trade at lower valuations than domestic or Japanese shares. Yet the broad market’s price-to-earnings ratios don’t necessarily paint an accurate picture of the investment landscape, Mr. Brooker said.

For instance, a few years ago, it was fairly easy to find shares of high-quality multinational companies in the region that were trading at discounted prices relative to their American counterparts, simply because they were based in Europe. Today, those types of industry-leading companies — those with pristine balance sheets that generate a large portion of their sales in faster-growing areas like emerging markets — are becoming expensive.

These are companies like L’Oréal, the beauty products giant based outside Paris, and Diageo, the spirits maker based in London, said Charles de Vaulx, chief investment officer at International Value Advisers. Both stocks are trading at P/E ratios well above 20.

“These stocks are very pricey, but deservedly so,” he said, owing to their strong finances and geographic reach. But that leaves fewer apparent opportunities for value-minded investors looking to put new money to work.

“To find generally cheap stocks in Europe, you have to look for cyclical businesses that require you to believe that we’re on the verge of a major economic recovery,” Mr. de Vaulx said. “Unfortunately, we worry that European economies are decelerating.”

THIS explains why only about 57 percent of the assets in the IVA Worldwide fund, for which Mr. de Vaulx is a co-manager, are currently in equities. That’s down from 71 percent a year ago. Furthermore, only about 145 percent of the total portfolio is in European equities, with double that stake held in the United States.

European stocks are facing increasing competition for global investment dollars now that Japan’s stock market is finally rebounding, said Mark D. Luschini, chief investment strategist at Janney Montgomery Scott.

Japanese stock funds, in fact, soared 15 percent in the first quarter, more than their gains in all of 2012. And over the past six months, the MSCI Japan stock index has climbed by nearly 42 percent.

For European equities to continue to rally in the face of such stiff competition, from both Japan and the United States, “it’s going to require some kind of positive catalyst,” Mr. Luschini said.

In the short run, he said, he does not know whether any economic indicators will provide such a lift.

But over a five-year horizon, he says he thinks European markets could still turn out to be among the more attractive foreign destinations, especially if European companies can keep increasing their profitability while the economy slowly heals.

Paul J. Lim is a senior editor at Money magazine. E-mail: fund@nytimes.com.

Article source: http://www.nytimes.com/2013/04/07/your-money/europes-markets-no-longer-in-lock-step.html?partner=rss&emc=rss

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E.C.B. Chief Says Cyprus Shows Commitment to Euro

April 4, 2013 by Leave a Comment

“Cyprus is no turning point in euro policy,” Mario Draghi, president of the E.C.B., said at a news conference. And he rejected suggestions that Cyprus or any other country might leave the euro, or be better off if it did.

There is “no Plan B,” Mr. Draghi said.

Nor is there, for now at least, a Plan B even for the European Union’s bigger, but moribund, economies. Survey data published Thursday showed a further slide in business confidence on the Continent.

The E.C.B. left its benchmark interest rate unchanged Thursday at 0.75 percent, while the Bank of England held its rate steady at 0.5 percent. With both central banks’ rates already at record lows, there might be little room to use interest rates as a stimulus. But the euro zone economies, like that of Britain, are stagnant and in need of help wherever they can find it.

Mr. Draghi said the E.C.B. was looking for new ways to stimulate lending in the weak euro zone economy, and could move quickly. It was unclear, though, what options might be available.

“We will assess all the data in coming weeks and we stand ready to act,” he said, without offering many clues about what measures he might have in mind.

The global financial crisis in recent years has forced central banks around the world to do much more than simply tweak the official interest rate as they had in the past. On Thursday, Haruhiko Kuroda, the new governor of the Bank of Japan, announced that it would seek to double over two years the amount of money in circulation, initiating a bid to end years of falling prices.

But the E.C.B., with its mandate to defend price stability above all else, is more constrained than its counterparts in other developed nations.

During the past year, Mr. Draghi has managed to quiet financial markets, cap government borrowing costs and contain the euro zone crisis by making it clear that the E.C.B. would not allow the 17-country euro currency union to unravel. He repeated those reassurances Thursday. But it is not clear what tools he sees at his disposal.

Making sure that “credit will flow to the real economy seems to be the E.C.B.’s number one priority,” Carsten Brzeski, an economist at ING Bank, wrote in a note to investors. “However, judging from today’s press conference, the E.C.B. looks rather clueless on how to tackle the problem.”

Mr. Draghi said there was a consensus among the 23 members of the central bank’s Governing Council not to cut rates even lower “for the time being.” The bank also discussed other, unconventional ways to help countries where credit remains tight, he said.

“We will continue to think about this issue in a 360-degrees way,” Mr. Draghi said. “The experiences of other countries tell us we have to think deeply before we can come up with something useful and consistent within our mandate.”

Large-scale purchases of corporate debt, which have been used by the Federal Reserve to stimulate lending in the United States, would be more difficult in Europe because most companies get their credit directly from banks, Mr. Draghi indicated.

With inflation already below the E.C.B.’s target of about 2 percent, some analysts have worried that, like Japan, the euro zone also faces a risk of deflation — a broad decline in prices that can be more destructive and difficult to cure than inflation. Mr. Draghi said, however, that risks to price stability were “broadly balanced,” indicating that he did not yet see a major risk of deflation.

Mr. Draghi found himself devoting much of the hourlong news conference trying to dispel fears that Cyprus represented an ominous new phase of the euro zone crisis.

He acknowledged that an initial decision by officials from the European Union, the International Monetary Fund and the E.C.B. to impose a tax on small bank deposits was “not smart, to say the least.” But he pointed out that euro zone officials quickly corrected that error.

Article source: http://www.nytimes.com/2013/04/05/business/global/european-central-bank-holds-steady-on-interest-rate.html?partner=rss&emc=rss

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Unemployment in Euro Zone Reaches a Record High

April 2, 2013 by Leave a Comment

The jobless rate reached 12 percent in both January and February, the highest since the creation of the euro in 1999, Eurostat, the statistical agency of the European Union, reported from Luxembourg.

The January jobless rate for the 17-nation currency union was revised upward from the previously reported 11.9 percent.

For the overall European Union, the February jobless rate rose to 10.9 percent from 10.8 percent in January, Eurostat said, with more than 26 million people without work across the 27-nation bloc.

European officials continue to hold out hope that the economy, which continued to shrink in the first quarter of 2013, will begin turning around in the second half of the year. Many private sector forecasters are more pessimistic, expecting a contraction of as much as 2 percent in the euro zone’s gross domestic product this year, after a 0.9 percent contraction last year.

While there is general agreement that the current course for addressing the euro crisis — heavily focused on budget- balancing measures that reduce overall demand — is not working, the need for emergency action like the recent bailout of Cyprus has appeared to inhibit any deep rethinking of economic policy.

In the absence of new measures to stimulate growth at the European and national levels, all attention will be focused Thursday on the governing council of the European Central Bank, which meets in Frankfurt to consider whether to maintain interest rates at their current record low or cut even further.

Britain, the largest E.U. economy outside the euro zone, had an unemployment rate of 7.7 percent in December, the latest available month.

In the United States, the jobless rate fell in February to 7.7 percent, the lowest since late 2008. The consensus among economists surveyed by Reuters is for U.S. nonfarm payrolls Friday to show a gain of 200,000 jobs in March, after a gain of 236,000 in February.

The European labor market has now declined for 22 straight months, making this the worst downturn since the early 1990s, Jennifer McKeown, an economist in London with Capital Economics, wrote in a note. In particular, she said, the rise in France’s February jobless rate to 10.8 percent from 10.7 percent in January “looks very worrying.”

“With fiscal tightening still putting downward pressure on disposable incomes and consumer confidence at very low levels, household spending is likely to fall further in the coming months,” Ms. McKeown said.

On Tuesday, a report by Markit Economics showed the euro zone’s manufacturing sector contracted again in March, with an index of purchasing managers activity dropping to 46.8 from 47.9 in February. An index level below 50.0 suggests contraction, while a level above that suggests expansion.

The manufacturing index has contracted every month since August 2011. Manufacturing activity in Germany and Ireland, which had been expanding, began to decline again.

The euro zone manufacturing sector shed jobs in March for a 14th consecutive month, Markit reported, with “steep rates of declines reported in France, Italy, Spain, the Netherlands, Ireland and Greece,” and only Germany and Austria bucking the trend.

Eurostat said Greece had the euro zone’s highest unemployment rate: 26.4 percent unemployment in December, the latest month for which data are available. A sovereign debt crisis, and the tax increases and spending cuts that followed it, have wrecked the Greek economy. An astonishing 58.4 percent of Greek youth were classified as unemployed, Eurostat reported.

Spain, where the economy has also contracted sharply following the collapse of the global credit bubble, posted the second-highest unemployment rate in the euro zone: 26.3 percent in February.

Austria’s jobless rate was the lowest, at 4.8 percent. Germany’s was near the bottom at 5.4 percent, while France’s was double its larger neighbor, at 10.8 percent.

Article source: http://www.nytimes.com/2013/04/03/business/global/unemployment-in-euro-zone-reaches-a-record-high-of-12-percent.html?partner=rss&emc=rss

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News Analysis: Calculating Impact of Cyprus’s Bank Bailout

March 31, 2013 by Leave a Comment

The magnitude of the losses, disclosed late Friday and confirmed Saturday by Cypriot officials, has provoked concern that depositors in second-tier euro zone banks in Slovenia and Italy might withdraw their savings from those institutions.

It has also raised fears that countries like Malta and Luxembourg, which like Cyprus have banking sectors many times bigger than their economies, might soon find it harder to gain access to international bond markets.

One relevant lesson might lie not elsewhere in the euro zone but in the carcass of a Los Angeles-based savings and loan institution, IndyMac Bancorp, that failed five years ago and required a bailout. IndyMac was about the size of the Bank of Cyprus, and its depositors ended up taking nearly as big a loss — 50 percent on deposits above the levels insured by the Federal Deposit Insurance Corporation. Rather than causing a panic and a bank run elsewhere, IndyMac’s debacle proved to be a largely contained disaster with little fallout.

“Just as you did not see mass panic and deposit runs in the U.S. after IndyMac, what happened in Cyprus is not going to spill over into Europe,” said Jacob Funk Kirkegaard, a specialist in banking and government debt at the Peterson Institute for International Economics in Washington.

IndyMac needed rescuing because, like the Cypriot bank, it placed a large bet just before one of the biggest recent credit disasters. For IndyMac, the calamity was the collapse of the subprime mortgage market in the United States. For the Bank of Cyprus, it was the collapse of Greek government bonds, in which it and other Cypriot banks had invested heavily, seeking an adequate return on the billions of euros of deposits that had inflated their balance sheets.

“How unique is Cyprus? Pretty unique actually,” Mr. Kirkegaard wrote in a research note.

He pointed out that compared with other countries with huge banking systems relative to their economies — notably Malta, at about eight times gross domestic product, and Luxembourg at more than 22 times G.D.P. — Cypriot banks had much lower levels of equity to cushion against failing assets. What is more, it is the subsidiaries of foreign banks, which have little or no exposure to the local economies, that make up the bulk of the Maltese and Luxembourg banking systems.

By comparison, many of the Cypriot banking assets that grew to be seven times the size of the country’s economy consisted of corporate, construction and mortgage loans to the Cypriot and Greek economies, which tied the health of these banks directly to those sagging economies.

As proponents of the Cypriot losses argue, just as it was fair that the large depositors that bankrolled IndyMac’s subprime excesses in 2008 pay the cost for the bank’s failure, so it is right that Cypriot savers — the largest of whom were Russian billionaires chasing high-yielding deposits — suffer a similar fate.

“There were stories of pain, too, at IndyMac, but in the U.S., we paid little attention to it,” Mr. Kirkegaard said. “This will impose a lot of pain on Cypriot society, but the outcome will not be that much different.”

IndyMac, when it was rescued by American regulators in July 2008, had become the ninth-largest originator of mortgage loans in the United States, relying largely on large, uninsured deposits to finance a lending spree in some of the riskiest areas of the housing market.

And while the American government backed savers with deposits of less than $100,000, those with more deposited at IndyMac were required to accept a loss of 50 percent when it declared bankruptcy. (The federal government helped prevent a broader panic by later raising the deposit insurance threshold to the current $250,000.)

As the Cypriot government begins investigating the misadventures of the Bank of Cyprus and the second-largest, Laiki, bankers and lawyers in Nicosia have begun to argue that the disastrous venture by the Bank of Cyprus into Greek bonds could well have been avoided.

Local bankers say the bank had more or less sold out of its Greek bond position by early 2010 as Greece’s problems became evident.

Article source: http://www.nytimes.com/2013/04/01/business/global/calculating-impact-of-cypruss-bank-bailout.html?partner=rss&emc=rss

Filed Under: Economy News Tagged With: , ,

Irish Legacy of Leniency on Mortgages Nears an End

March 29, 2013 by Leave a Comment

“I still deal with my lender, and they threaten with legal action now and again,” said Mr. Gilroy, whose electrical business failed in the crisis. With no income since, he has no hope of paying off the €310,000, or $398,000, loan on the four-bedroom house in Navan, north of Dublin, that he shares with his wife and three children.

The lender is “only threatening by letter at the minute,” said Mr. Gilroy, who is betting the odds are in his favor, for the time being at least. Although there are more than 143,000 delinquent home mortgages in Ireland, foreclosures have been so politically and legally difficult that, in the last three months of last year, they numbered 38.

That could change.

Under pressure from the international lenders who agreed to a €85 billion, or about $109 billion, bailout of the Irish economy in 2010, the law is being amended to overturn a legal ruling that has been restricting banks’ right to repossess property. As Ireland’s fellow euro zone member Cyprus may be about to learn, bailouts come with strings that can bind for years to come.

Besides pushing for changes to property-repossession law, Ireland’s creditors, collectively known as the troika — the European Commission, the European Central Bank and the International Monetary Fund — has also prompted the government to introduce the country’s first property tax in more than 15 years, a measure intended to raise €500 million a year.

Unlike Cyprus, where wealthier depositors are being forced to help pay for ruined banks, the Irish government picked up the tab for its broken lenders before it, too, had to seek help.

More than two years after the bailout, officials say that the dead weight of debt, mostly in bad property loans, is still hanging over the economy, stifling confidence and suffocating recovery. New rules that take affect later this year are designed to help troubled borrowers and cut their debt loads. But critics fear that the latest tightening could nonetheless cause thousands of Irish households to lose their homes and hamper the broader recovery efforts.

If people cannot make their mortgage payments, it is unlikely that many will suddenly be able to pay property tax bills. Mr. Gilroy has refused to open his assessment but thinks it would demand an additional €300 a year.

No one anywhere likes to lose their home, of course. But repossessions strike an especially resonant chord in Ireland, which has an acute memory of forced evictions under British rule.

“Being a country with a long history of colonial oppression, people being evicted touches a bit of a raw nerve with a lot of people,” said Paul Joyce, senior policy analyst at Free Legal Advice Centers, a rights organization that campaigns on debt and other issues. “The notion of people being put out of their homes is not one that sits too easily in Ireland.”

Mr. Gilroy, who represented a new party, Direct Democracy Ireland, in a parliamentary election Thursday — finishing fourth — came to prominence in part through You Tube clips of verbal confrontations with officials trying to seize properties.

He admits he was naïve in not checking the repayment terms on his mortgage, which he sought in a hurry to buy the house he coveted in 2008, a time when newly listed homes were often being snapped up within days. But his borrowing was not reckless, he said, adding that he had accepted a loan with high repayments on the basis that he could switch after six months, something he discovered too late was impossible.

“After three and a half years of not missing one payment, I was eventually broke, the business was failing, house prices were dropping,” said Mr. Gilroy. He said he and others would need 70 to 80 percent knocked off their mortgages to make them remotely affordable and reflective of current property prices.

He blames his plight on “criminal activity by the bankers” and “stupid” policies by the government which bailed out the banks at the taxpayers’ expense. Many other Irish share his anger, Mr. Gilroy contends.

Bankers see things a bit differently.

Article source: http://www.nytimes.com/2013/03/30/business/global/irish-legacy-of-leniency-on-mortgages-nears-an-end.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,
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