european banks

DealBook: UBS Expects ‘Modest’ Profit Despite Trading Scandal

October 4, 2011 by NewsMaker Leave a Comment

Toby Melville/ReutersKweku M. Adoboli, appearing in a London court last month, is accused of costing UBS $2.3 billion.
Interactive Timeline: Struggles at Swiss Banking Giant

The embattled Swiss bank UBS said on Tuesday that it would post a third-quarter profit despite a $2.3 billion loss from unauthorized trades discovered last month.

In addition to a “modest” profit, UBS said it continued to attract net new money to its wealth management operation in the quarter, which ended Sept. 30. The company is set to report detailed third-quarter earnings on Oct. 25.

“UBS expects to report a modest net profit for the group and positive net new money in its wealth management business,” the bank said in a statement before European markets opened.

Financing Drought for European Banks Heightens Fears

September 22, 2011 by NewsMaker Leave a Comment

On the contrary, debt issuance by banks has slowed to a trickle at the same time that short-term interbank lending is drying up. The financing drought raises questions about whether banks will have enough money to refinance their own long-term debt and still meet demand for business and consumer loans.

Less lending could further depress growth in Europe, which is already teetering on the edge of recession. “The euro zone economy has stalled and as the recent financial stresses feed into the real economy, it is likely to get worse still,” analysts at HSBC wrote in a note to clients Thursday, after the release of data showing that pessimism among manufacturers has reached levels not seen since the 2009 recession.

Banks’ fund-raising problems stem directly from the sovereign debt crisis, which is having an insidious effect in more ways than first meet the eye.

Not surprisingly, investors are wary of banks that could suffer losses if Greece defaults on its debt, as seems increasingly likely. But the crisis has also raised fundamental doubts about the underlying health of the European banking system, and whether governments would be able to step in to rescue their banks in the wake of another financial catastrophe.

“Banks certainly do not have enough capital in relation to their government bonds,” said Dorothea Schäfer, an expert in financial markets at the German Institute for Economic Research in Berlin. She has calculated that the 10 largest German banks would need to raise €127 billion, or $171 billion, to bring their capital reserves to 5 percent of gross assets — a level she considers barely adequate.

“That could substantially heighten trust, I would even say would bring it back,” Ms. Schäfer said. But raising that additional capital would be politically fraught, because it would probably require another taxpayer-financed bailout. Many of the banks that need capital most are already owned by government entities and, because they are not listed on stock markets, cannot sell new shares to increase their capital.

The banking industry is also fighting requirements that would require them to keep more ample reserves, which would cut into profits.

According to the standard used by regulators, banks are much better capitalized than they were in 2008. Banks in Europe had so-called core Tier 1 capital — the most durable form of reserves — equal to 10.6 percent of their assets at the end of June, according to calculations by analysts at Nomura. That compares with a previous low of 6.4 percent.

For that reason, some analysts say that the alarm about bank financing is overblown.

“I don’t think we’re overly concerned yet,” said Jon Peace, a banking analyst at Nomura. But he added, “Definitely we are watching the data week by week.”

He said that banks in Northern Europe, where government debt is less of a problem, are having an easier time raising money.

Ms. Schäfer argues, though, that current measures of capital reserves are “useless” because they do not capture the risk from holdings of government bonds, which the International Monetary Fund this week estimated at €300 billion for European banks.

Regulations still treat European government debt as if it were risk free, though it obviously is not. As a result, banks are not required to set aside extra capital to cushion against a government default. And holdings of government bonds are excluded from the calculation of capital ratios.

Sophisticated investors are well aware of these shortcomings, which helps explain the drastic drop in debt issuance recently. Since July, sales of bonds and other debt instruments has plummeted 85 percent compared with the period in 2010, according to Dealogic, a data provider in London.

“A lot of money has been lost,” said Kenneth Rogoff, a Harvard professor and former chief economist at the I.M.F., during an appearance in Frankfurt on Thursday. Greek default is inevitable, said Mr. Rogoff, author of a history of sovereign defaults. “Banks and governments may not have put it in their books,” he said of the losses, “but it’s gone.”

Article source: http://feeds.nytimes.com/click.phdo?i=135a5250de09e1fd1500036f08114615

Filed Under: Economy News Tagged With: european banks, financial catastrophe, government bonds

News Analysis: Will a Powerful Bank Act the Part?

September 17, 2011 by NewsMaker Leave a Comment

FRANKFURT — The European Central Bank still has plenty of ammunition left in its monetary policy bandoleers. The question is whether it will use it.

The bank provided a clue Thursday when it said it would join with the United States Federal Reserve and three other major central banks in ensuring that hard-pressed European banks have a steady supply of dollar credit.

It was a more cooperative hands-across-the-water attitude than Europe’s main finance ministers displayed on Friday, when they reacted coolly to a bailout policy suggested by the Treasury secretary, Timothy F. Geithner. (American money speaks louder these days than American advice, evidently.)

The bank by agreeing Thursday to let euro zone banks borrow as many dollars as they want, indicated its willingness to deploy “nonstandard measures,” as the bank president, Jean-Claude Trichet, likes to call them.

The deeper issue is how far the bank will be willing to depart from precedent as it tries to hold the euro together. The departure would require the central bank to act much less cautiously than it has so far during the long-running euro debt crisis.

“The E.C.B. can stop this crisis in a minute if they want to,” said Guntram B. Wolff, deputy director of Bruegel, a research organization in Brussels. The bank, he said, could simply overwhelm bond markets by buying huge quantities of debt from Greece, which is effectively insolvent, as well as other countries that have come under attack, like Italy. End of crisis.

Some economists have argued that the bank could buy more than $1 trillion in sovereign debt if it needed to.

But such an action would provoke howls from Germany and countries like Finland, where the bank is seen as having gone rogue because of its relatively modest purchases of debt from a list of countries that also includes Spain, Portugal and Ireland. In those beleaguered countries, meanwhile, the bank is regarded as insufficiently supportive.

The bank is “in a very awkward position of trying to please everybody, which is impossible,” Mr. Wolff said.

Even though Europe’s sovereign debt crisis has mushroomed into a perceived threat to the world economy, the bank has so far been much more conservative than its peers. Worried about the prospect of inflation, the bank has raised interest rates this year, while the Fed and the Bank of England have kept theirs at rock-bottom levels.

The bank also stood on the sidelines while its counterparts in the United States and England flooded their economies with cash by way of so-called quantitative easing.

And the bank’s purchases of sovereign bonds for 143 billion euros, or $197 billion, so far, as part of a program to keep the recipient governments’ borrowing costs under control, is less than asset purchases by the Bank of England — which represents one country while the euro zone has more than 20 nations.

Right or wrong, the restrained policy means that the bank still has considerable firepower in reserve.

“If there is a risk of severe economic fallout, you could see the E.C.B. do more,” said Nick Matthews, an economist at the Royal Bank of Scotland. “There are more options it has not used up.”

The most obvious is the classic central bank tool: manipulating interest rates. The bank has raised its benchmark rate twice this year, bringing it to 1.5 percent from 1 percent. The increases were widely criticized as treating the wrong symptom — incipient inflation rather than depressed growth — especially after euro zone growth promptly slowed almost to nothing.

Some economists are now forecasting that the bank will reverse course on interest rates before the end of the year. And some think that Mr. Trichet may deliver a cut in October, his last month on the job before he retires.

The reasoning is that Mr. Trichet will want to make life easier for his successor, Mario Draghi, currently the governor of the Bank of Italy. Mr. Draghi might have trouble overseeing a rate cut soon after taking office in November because he will be eager to establish his credentials as a hard-liner on inflation.

But apart from interest rates, the bank has other tools it can use, Mr. Matthews pointed out in a recent research note:

¶ To help banks raise money to lend to consumers and businesses, it could resume purchases of commercial banks’ so-called covered bonds, which are generally considered low risk because they are backed by packages of loans as well as the guarantee of the issuing bank. That measure, already used by the bank in 2009, would make sense if banks in France or other countries ran into trouble selling bonds because of worries about creditworthiness.

Article source: http://www.nytimes.com/2011/09/17/business/global/will-the-ecb-use-its-firepower.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: bank act, european banks, treasury secretary

Hints of Progress in Europe Cap a Week of Gains

September 17, 2011 by NewsMaker Leave a Comment

The leaders took steps this week to show they were tackling the debt crisis, which has plagued markets for weeks, including coordinated central bank moves to give European banks greater access to financing in dollars.

Timothy F. Geithner, the Treasury secretary, urged European Union finance ministers to leverage their bailout fund to better tackle the debt crisis and to start speaking with one voice, but there was no agreement on what steps to take.

Still, the encouraging headlines out of Europe helped the S. P. 500 post a 5.4 percent gain for the week, its best since early July, and the five-day string of gains was the broad index’s strongest since the end of June.

The Nasdaq composite index registered its best weekly percentage advance since July 2009, reflecting strength in technology shares on Friday. The S. P. tech index rose 1 percent, while the S. P. consumer discretionary index also gained 1 percent.

“The market seems to be a little bit more reassured that support will not allow for a major disruption in Europe,” said Natalie Trunow, chief investment officer of equities at Calvert Investment Management in Bethesda, Md.

The Dow Jones industrial average finished up 75.91 points, or 0.66 percent, at 11,509.09. The Standard Poor’s 500-stock index was up 6.90 points, or 0.57 percent, at 1,216.01. The Nasdaq composite index was up 15.24 points, or 0.58 percent, at 2,622.31.

The Nasdaq gained 6.3 percent for the week while the Dow rose 4.7 percent.

Still, major obstacles must be overcome in solving the euro zone’s debt crisis.

Less than 75 percent of private sector creditors have signaled they will take part in a plan to buy back Greek debt, far less than the 90 percent target set by Greece. The shortfall could jeopardize the planned second bailout package for Athens.

Greece’s international lenders said on Friday they would delay a crucial visit to the country next week, and European finance ministers demanded that Athens fulfill its pledges to win further aid.

Among United States stocks, General Electric gained 1.6 percent to $16.33 after forming two new joint ventures in Russia that it said could generate $10 billion to $15 billion in new revenue over the next few years. One of the worst hit stocks, the BlackBerry maker Research in Motion, slid 19 percent to $23.93 a day after it reported a steep drop in quarterly profit and offered little hope of a quick turnaround.

United States economic data showed that consumer sentiment inched up in early September, but that Americans were gloomy about the future with their expectations for the economy falling to the lowest level since 1980.

Interest rates were lower. The Treasury’s benchmark 10-year note rose 8/32, to 100 20/32, and the yield fell to 2.06 percent from 2.08 percent late Thursday.

Article source: http://feeds.nytimes.com/click.phdo?i=5d220f3cf69f171197b162b0f780ef7d

Filed Under: Business News Tagged With: european banks, geithner, treasury secretary

France, Italy and Spain Extend Short-Selling Bans

August 25, 2011 by NewsMaker Leave a Comment

LONDON — French, Italian and Spanish stock market regulators decided Thursday to extend the temporary bans on short-selling introduced this month in a bid to stem market volatility.

Spain and Italy extended their bans through Sept. 30, regulators in both countries said in a statement. The French market regulator said its ban could last as long as Nov. 11.

The three countries, along with Belgium, imposed bans on short-selling, or bets on falling prices, of some financial stocks this month in an effort to stabilize markets after the shares of some European banks, like Société Générale, hit their lowest levels since the credit crisis of 2008. The restrictions cover the short-selling of shares and equity derivatives in some financial firms. Belgium’s financial markets regulator said Thursday that it would examine lifting its ban as soon as market conditions allow.

Short-sellers sell borrowed shares with plans to buy them back later at a lower price, a practice politicians and some investors blame for roiling markets. The initial restrictions introduced by France, Spain and Italy were temporary, lasting 15 days. Belgium’s is indefinite. Traders had worried that Germany might follow in the footsteps of France, Spain and Italy and ban short-selling. But on Thursday, Dominika Kula, a spokesman for BaFin, the German markets regulator, said the agency had “all the regulation in place” regarding the short-selling of equities.

The German Finance Ministry, which oversees BaFin, also denied talk that it planned to extend the country’s ban on naked short-sales to all transactions. In such transactions, a trader bets on a security’s fall without actually borrowing shares as in a normal short sale. That practice has been criticized for encouraging speculation.

German stocks and index futures tumbled Thursday as traders reacted to rumors that the country would widen its market controls, and also on a deteriorating outlook for the German economy.

By day’s end, the DAX index had pulled back 1.7 percent, after falling 4 percent earlier in the session.

Some market followers questioned the effectiveness of the bans, saying they would have little impact on equities. “Short-selling equities is not a significant danger to financial stability, so these bans are irrelevant,” Richard Portes, a professor of economics at London Business School, wrote by e-mail.

The bigger problem, said Mr. Portes, were derivatives that targeted financial institutions and government bonds. “The serious problem is speculation against financial institutions and sovereigns using naked credit default swaps,” he said, referring to derivatives that enable investors to insure themselves against default. “They should be banned.”

Euro Stoxx 50, a barometer of European blue-chip stocks, has gained less than 0.1 percent since Aug. 11, the day the bans were announced. It was down almost 1 percent on Thursday.

Article source: http://feeds.nytimes.com/click.phdo?i=b6190c1e81183b3fc9f5f4197b280570

Filed Under: Business News Tagged With: dominika, european banks, german markets

Anxiety About the Economy Sends Stocks Down Sharply

August 18, 2011 by NewsMaker Leave a Comment

The markets in the United States opened sharply lower and continued to slide, with the broader market as measured by the Standard Poor’s 500-stock index down more than 4 percent within the first hour and 3.9 percent before noon. The Dow Jones industrial average was down 423.41 points, or about 3.7 percent, and the Nasdaq was down more than 4 percent. Major indexes in Europe were down 4 to 6 percent.

Financial stocks were down 4 percent after declining as much as 5 percent earlier. Energy stocks, industrials and other key sectors were also sharply lower.

The yield on the Treasury’s 10-year note fell below 2 percent to a record low as investors turned to the safety of fixed-income securities.

The sharp drop in the equities market comes amid a period of high volatility that has been accentuated by low trading volumes, concerns over the euro zone sovereign debt and its potential impact on the banking sector, and recent data that has economists lowering their outlooks for global economic growth.

The Vix index, a measure of stock market volatility, jumped sharply. It rose by about a third to around 42 points. The measure, sometimes called the fear index, had risen during the turmoil last week but had eased over the past few days to around 31.5 points.

In a measure of how skittish investors are, there was alarm on Wednesday when a single bank, out of nearly 8,000 in the euro area, took advantage of a European Central Bank program that ensures institutions have ample access to dollars. The bank, which was not identified, borrowed $500 million from the central bank, a relatively modest sum. But it was the first time any bank had tapped the dollar pipeline since February.

A shortage of dollars for European banks was one of the features of the 2008 financial crisis.

Fears were inflamed further when The Wall Street Journal reported on Thursday that United States regulators are scrutinizing whether European banks will be able to continue funding themselves. The report cited people familiar with the matter.

“Currently many banks cannot access term funding markets at reasonable rates,” analysts at Morgan Stanley said in a note. “As a result, commercial banks continue to tighten their credit conditions, albeit marginally, to both their corporate and retail clients. If these term funding stresses continue well into the fall, the risks are rising that a lack of credit availability could dent domestic demand growth further.”

Some analysts counsel calm, saying that while there is clearly stress in the market it is still far from 2008 levels. “There is undoubtedly some tension around,” said Jon Peace, a banking analyst at Nomura in London. But he added, “I think the market is still overreacting to this funding issue.”

Economic reports issued after the markets opened in New York accelerated the decline that had originated in the markets in Europe.

A monthly survey by the Federal Reserve Bank of Philadelphia showed that factory activity in the mid-Atlantic region plummeted to a reading of negative 30.7 points in August, indicating contraction and falling to the lowest level since March 2009. It was up 3.2 in July.

“This was obviously a terrible report, and, if sustained, readings like these would be consistent with recession,” said Joshua Shapiro, the chief United States economist for MFR. “Looking ahead, a good deal will hinge on the consumer, and therefore the path of the labor market recovery will be a central variable,” he said in a commentary.

But the jobs market has continued to show weakness. The latest data on Thursday showed initial jobless claims last week increased by 9,000, to a seasonably adjusted 408,000, and exceeding analysts expectations.

At the same time, the National Association of Realtors said home sales fell 3.5 percent last month to a seasonally adjusted annual rate of 4.67 million homes. This year’s pace is lagging behind last year’s total sales, which were the weakest in 13 years.

In another report, the Labor Department said consumer prices rose in July at the fastest rate in four months.

There is “ little support in the data for the Fed’s statement last week that ‘recently, inflation has moderated,’ ” RDQ Economics said in a research note.

Graham Bowley and Jack Ewing contributed reporting.

Article source: http://www.nytimes.com/2011/08/19/business/daily-stock-market-activity.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: european banks, Nasdaq, skittish investors

Global Jitters Gather Over State of Société Générale

August 13, 2011 by NewsMaker Leave a Comment

But Société Générale, France’s third-biggest bank, has been stirring financial markets once again on concerns about its big holdings of the debt of shaky European neighbors like Greece.

Although its shares closed slightly up on Friday, Société Générale’s stock has fallen more than 40 percent since mid-July and helped pull European bank stocks down earlier in the week. That volatility is a big reason that France on Thursday night imposed a temporary 15-day ban on short-selling — negative bets — against financial and insurance company stocks.

Why does Société Générale matter?

Jitters about the bank’s stability reverberate in New York and around the world because, among other things, Société Générale is one of the biggest global players in equity derivatives — financial instruments meant to protect investors against price plunges in stocks. It does business regularly with the likes of Goldman Sachs, JPMorgan Chase and Deutsche Bank.

“They have significant outstanding derivative exposures, which makes them systemically important,” said Kian Abouhossein, an analyst covering European banks for JPMorgan Chase. “They are important to the financial system, not just in the U.S. or Europe, but globally.”

What’s more, Société Générale has something of a history. It achieved notoriety during the last financial crisis when a rogue trader for the bank, Jérôme Kerviel, lost his employer 4.9 billion euros, or $6.7 billion.

Société Générale may be even better remembered for its disastrous entanglement of derivatives contracts with the giant insurer American International Group.

The A.I.G. contracts protected Société Générale from its large stake in troubled American mortgage securities — but only after the United States government bailed out A.I.G. in 2008 and agreed to pay companies like Société Générale 100 cents on the dollar. When Société Générale was eventually revealed to be one of the largest recipients of the A.I.G. bailout funds, some critics questioned why a French bank was allowed to cart home $11.9 billion in American government money.

The French government now, as it did back then, is playing a big role in trying to calm markets and protect Société Générale. Investors’ main fear is that the company’s exposure to Greece — it even owns the majority of a Greek bank — and other troubled European countries might cause a panic that drives away its trading partners and disrupts the derivatives market.

Some investors even worry that Société Générale’s holdings of French government bonds might become a problem if ratings agencies downgrade France’s sovereign debt. So far, though, the ratings agencies have been nearly as loud in their denials that they plan such a downgrade as the French government and Société Générale’s executives have been vociferous in insisting that the bank is on solid footing.

In any case, the rumor-driven run on Société Générale is already costing the company money. It has been forced to pay significantly more than some of its sturdier European banking peers to borrow, according to several market participants.

Analysts point out that Société Générale has a strong balance sheet, but they say that panic in the markets can undermine even strong financials.

Mr. Abouhossein, for one, says he thinks the market fear is overblown — as is the risk to Société Générale, even if it were forced to take write-downs on the debt of other troubled euro countries, like Italy and Spain.

“French banks can always borrow money from the European Central Bank,” he said.

In fact, many European banks were doing just that this week. On Wednesday, commercial banks’ requests for short-term loans from the central bank spiked to a three-month high.

Société Générale officials have spent much of the week arguing that the market’s fears were unfounded. On Thursday, the bank’s chief executive, Frédéric Oudéa, described rumors that Société Générale was having trouble raising money as “fantasy.”

And in fact, on Thursday Société Générale was able to raise $2 billion in overnight money — although it reportedly paid higher interest than a more stable European bank like Barclays or Rabobank would have had to. The bank is also still lending out money in the overnight market, which is typically interpreted as a sign of strength.

Société Générale’s direct exposure to Greece is not nearly as large as the exposure it had to the American housing market going into the panic of 2008. Nonetheless, it has been unnerving investors with write-downs like the 268 million euro charge on its Greek holdings the bank announced early this month.

Just as many other large European institutions did, Société Générale bought into sovereign debt at a time when those purchases looked mostly risk-free.

It amassed about 18.2 billion euros of exposure to Portugal, Ireland, Italy, Greece and Spain — almost as large as the bank’s 19.2 billion euros in holdings of French debt, according to the European Banking Authority. The sovereign debt of most of those other countries has recently been downgraded, hitting the bank’s portfolio.

But analysts say Société Générale, like other European banks, can count on the support of regulators.

In the recent agreement for the latest Greek bailout, Société Générale was among the banks that agreed to forgive about one-fifth of the value of the country’s debt. As part of that deal, a pan-European fund is supposed to make money available to help banks that may need assistance covering their losses on Greece — although each of the 17 euro zone nations’ governments must still vote on whether to finance the bailout fund.

Société Générale, in other words, may be as solid — or not — as the euro union itself.

“I don’t think the euro is in danger,” Mr. Oudéa, Société Générale’s chief executive, said Thursday. “The governments are very attached to the single currency and lucid about the efforts that must be made.”

Eric Dash, Nelson Schwartz and Jack Ewing contributed reporting..

Article source: http://feeds.nytimes.com/click.phdo?i=ab773f670788d4f0d44fb0c4b2c234ab

Filed Under: Business News Tagged With: company stocks, european banks, giant insurer

Hedge Funds Seeking Gains in Greek Crisis

July 4, 2011 by NewsMaker Leave a Comment

Algebris, a $1.3 billion fund that focuses on global financial stocks, was down about 7 percent for the year through late June because of shares it held in European financial companies. Those stocks fell sharply recently amid fears they could have losses if Greece defaulted on its debt.

Still, undaunted by the risks that the Greek crisis could spread to other countries, managers at Algebris decided to buy more shares of European financial companies on the cheap.

“The volatility in the market gave us the opportunity to buy a number of stocks of European banks and insurance companies where we think there is tremendous value and the risk of systemic meltdown was very low,” said Eric Halet, a co-founder of the fund.

As Greece’s fiscal turmoil has rattled global equity, bond and currency markets, hedge funds have scrambled to figure out how to make the big score.

Last week, financial markets rebounded sharply on news that the Greek Parliament had approved a tough austerity package, a move that staved off a default and was a condition for further international assistance.

Over the weekend, European ministers agreed to finance Greece through the summer but deferred crucial decisions on a second bailout.

After a two-hour conference call late Saturday, the finance ministers from the 17 euro zone countries said they would sign off on an 8.7 billion euro, or $12.6 billion, loan to Greece, part of a 110 billion euro package agreed upon last year. The board of the International Monetary Fund was expected to approve its part of this installment, 3.3 billion euros, or $4.8 billion, within days.

Without the loans, the Greek government faced the prospect of insolvency in weeks. But with Greece still struggling to shore up its finances, European finance ministers also need to put together a second package of loans to help it through 2014. That bailout is expected to amount to 80 billion to 90 billion euros but, because of conflicts over the extent of private sector involvement in the effort, the package may not be agreed upon until September.

Wolfgang Schäuble, the German finance minister, said that the new program could “be completed before the release of the next tranche in the autumn — provided, as always, that the implementation of the program in Greece takes place as planned,” Reuters reported from Berlin.

“Greece has enough cash over the summer so the very acute worry that Greece would be unable to pay in July has gone,” said Nicolas Véron, senior fellow at Bruegel, an economic research institute in Brussels. “But Europe has not been proactive for some time, and it will probably remain in strong crisis management mode over the next few weeks.”

Constrained by the unpopularity of bailouts at home, political leaders appear able to act only at the 11th hour, when they have no alternative, Mr. Véron said.

“The E.U.’s institutions are not effective, and the bigger the crisis, the less effective they are,” he said. “Discussion is driven by governments accountable to domestic constituencies and not to the E.U. as a whole.”

The twists and turns of the crisis and the whipsaw market activity are making it tough for some hedge funds to maneuver.

While it is possible that a hedge fund received a hefty payday from betting that the euro would rise in value against the dollar or that Greece would not default on its debt, no big winners have emerged, several hedge fund investors and managers said.

Only nine out of the more than 300 hedge funds tracked by HSBC’s private bank through mid-June showed double-digit returns this year, and the best-performer, Jat Capital, which bets on high-flying technology and Internet stocks, was up about 19 percent. In a separate survey, hedge funds tracked by Lyxor Asset Management showed that almost every fund across nearly every strategy lost money in June.

Some investors said that many hedge funds appeared to have sat out much of the euro zone crisis, particularly in bets involving Greek sovereign debt, concluding it was a “no-win situation,” said Gerlof de Vrij, the head of the global asset allocation team at APG Asset Management in the Netherlands, which oversees $395 billion in investments for seven Dutch pension funds.

Stephen Castle contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=bb50a3d3689b68c1fb64664e6fde8519

Filed Under: Business News Tagged With: currency markets, european banks, meltdown

Worries Grow About Breadth of Debt Crisis

June 17, 2011 by NewsMaker Leave a Comment

The worry is that the worst case, a Greek debt default, would lead to damaging losses for European banks and spur a global panic, replaying the events of September 2008. Then, investors fled all but the safest government debt, unloading everything from corporate bonds to American and emerging country stocks. Global markets froze.

As European officials headed into a long weekend of critical talks, the European Union and the International Monetary Fund said that they were confident of a deal to secure a vital 12 billion euros ($17 billion) in outside aid needed to stave off an imminent Greek default.

The comments, reflecting belated advances in negotiations that have been going on for weeks, were aimed at calming anxious financial markets. But so far, the deepening concerns are stopping short of transferring forcefully to the United States. For the time being at least, investors seem to believe enough shock absorbers have been built in to comfortably withstand any default by Greece or other highly debt-ridden nation.

The interest rate on United States 10-year Treasury bonds remains below 3 percent. In contrast, Spanish bond yields rose to an 11-year high of 5.74 percent as anxious investors fretted that it could be next in the firing line after Greece.

“U.S. financial institutions are very cash-rich, so that means a liquidity crisis would have to be extraordinary before it affects them,” said Guy LeBas, the chief fixed-income strategist for Janney Montgomery Scott.

After a 179-point sell-off on Wednesday, American markets stabilized, with all the main United States indexes closing higher.

But the cost to investors of insuring their holdings of Greek government debt, to make sure they recoup their money in the event of a default, registered its single biggest one-day move.

An investor now has to pay about $2 million annually to insure $10 million of Greek debt over five years, compared with about $50,000 on the same amount of United States government debt, according to Markit.

Insurance rates on the debt of Irish and Portuguese governments, as measured by rates in the market for credit-default swaps, also climbed to record highs. In addition, Spain struggled to kindle investor interest on its auction of bonds, selling 2.8 billion euros ($4 billion), missing its top target and with average yields creeping up again. The fear is that a Greek default could threaten the integrity of the euro zone, require European countries to bail out banks that lent heavily to Greece and other deeply indebted countries, and spread panic across global markets.

The European Union’s top economic official, Olli Rehn, said he had reached a deal with the International Monetary Fund to avoid a Greek default through at least the fall.

But he warned politicians they must agree to new austerity measures or the program would be worthless.

The mood in the markets was made more nervous when Michael Noonan, finance minister of Ireland, said on Wednesday that the Irish government was ready to impose losses on senior unsecured bondholders of Anglo Irish Bank and the Irish Nationwide Building Society if the European Central Bank agreed. That added to fears that countries beyond Greece might be involved in a broader restructuring.

Also, some well-regarded economists say that a Greek default is almost inevitable. The chances of Greece defaulting are “so high that you almost have to say there’s no way out,” Alan Greenspan, the former chairman of the Federal Reserve, said on a “Charlie Rose” broadcast, shown on Bloomberg TV on Thursday night. He added that as a result, some American banks may be “up against the wall.”

The financial markets are watching nervously as the Greek government tries to push through austerity measures required to secure more international aid.

Greece “needs to better inform the markets as well as the Greek people that what’s being done is actually achieving results, which will help restore confidence,” said Claude Giorno, the senior economist for Greece at the Organization for Economic Cooperation and Development, based in Paris.

But the United States, for the time being, appeared insulated from the problems, and American assets remain a destination for anxious global investors, with the dollar and Treasuries rising.

The Standard Poor’s 500-stock index rose 2.22 points, or 0.18 percent, to 1,267.64. The Dow Jones industrial average closed up 64.25 points, or 0.54 percent, to 11,961.52. The Nasdaq composite index fell 7.76 points, or 0.29 percent, to 2,623.70.

Still, two Deutsche Bank strategists, Jim Reid and Colin Tan, warned in a report on Thursday that this Greek crisis had echoes of the collapse of the Lehman Brothers investment bank in September 2008, an event that plunged the financial system into chaos and required the commitment of trillions of dollars in government support to stave off another Great Depression.

“Everyone in every corner of global financial markets should be keeping a very close eye on upcoming Greek events,” they wrote. “The period is resembling the buildup to the Lehman collapse where, although markets were increasingly nervous, virtually everyone expected a last-minute buyer.”

One ugly scene that some analysts are imagining involves a default by Greece leading to losses inflicted on banks in other European countries that own large amounts of Greek debt. The European Central Bank, too, is a big holder of debt, and analysts said in the event of a default it might need to be recapitalized, another blow to confidence.

Those losses could then cascade to the United States because the American and European banking systems are so interlocked, lending billions of dollars to each other every day.

American banks and insurance companies may also be liable for the biggest share of default insurance payments to European institutions if Greece or other countries fail. And the trillion-dollar money market fund industry could also suffer.

About 44.3 percent of money-market fund assets are European bank debt, according to Fitch Ratings, although they may be a little insulated because they have sold much of their Spanish, Portuguese and Irish debt. The funds have never held Greek bank debt, which rarely met the funds’ credit rating standards. The markets are keenly watching for signs that contagion is spreading through the global financial system.

The renewed volatility in the markets has again trained a spotlight on the Chicago Board Options Exchange Volatility Index. The VIX, as it is known, measures the implied volatility of options on the Standard Poor’s 500-stock index. It rose to settle above 21 on Thursday for the first time since March.

Another pressure gauge under scrutiny is the overnight interbank lending rate. As of Monday, investors’ expectations for three months from now of the overnight interbank lending rate showed an increase of about 10 basis points to nearly twice its current levels.

Still, increases in those two measures so far pale in comparison to the spikes in both during last year’s flare-up in Europe.

Contributing reporting were Eric Dash, Stephen Castle, Matthew Saltmarsh and Liz Alderman.

Article source: http://www.nytimes.com/2011/06/17/business/17debt.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: corporate bonds, european banks, european officials