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S.&P. Error on French Credit Rating Sets Off Investigation

November 12, 2011 by Leave a Comment

BRUSSELS — Just days before it was to propose sweeping regulations for credit rating agencies, the European Commission on Friday joined calls for an investigation into Standard Poor’s after the company erroneously sent out an e-mail suggesting that it had lowered the rating on France’s sovereign debt.

Michel Barnier, the commissioner responsible for financial regulation, described the episode as serious and said it strengthened his belief in the need for “strict and rigorous rules” to govern the ratings agencies and other financial actors.

The episode briefly upset markets on Thursday as it raised questions about the creditworthiness of France’s debt.

In a statement, Mr. Barnier said he did not want to discuss the case in detail but added that it showed “that in the current tense and volatile market situation, market players must exercise discipline and demonstrate a special sense of responsibility.”

He also said, “This is all the more important since we are not talking about just any market player but one of the biggest rating agencies, which, as such, has a particular responsibility.”

According to a draft of the plan scheduled to be introduced next week, European supervisory authorities would be able to temporarily prevent the issuing of ratings on countries in “a crisis situation.”

Investors would also gain a framework to take legal action against agencies “if they infringe intentionally or with gross negligence” on their obligations. A ratings agency would also have to disclose information about its rating methodologies.

To prevent conflicts of interest, the new regulations would impose limits on owners of more than 5 percent of one agency who wanted to invest in others.

On several occasions, European leaders have said the agencies worsened the debt crisis, most notably in July, when the president of the European Commission, José Manuel Barroso, criticized the decision to downgrade debt in his native Portugal to junk status.

As the European debt crisis starts to engulf Italy, President Nicolas Sarkozy of France has been striving to ensure that it does not spread to his country. A priority of his coming re-election campaign is ensuring that his country’s AAA rating stays intact, a challenge that has intensified as France’s share of the bill for helping to contain the crisis grows.

The loss of the top rating would also deal a serious blow to the euro zone’s rescue fund, which is seeking to increase its firepower.

After S. P. reported the mistake Thursday, France’s finance minister, François Baroin, demanded an investigation into “the causes and eventual consequences of the error.” Within half an hour, the nation’s stock market regulator said it would open an inquiry. It also notified the European financial market authority, which oversees “the professional obligations of the ratings agencies.”

S. P. attributed the message to a technical error and affirmed that the rating was unchanged. But the yield for France’s 10-year benchmark bond jumped more than a quarter point, to 3.48 percent, and the spread between French and German bonds of that duration reached 1.7 percentage points, a euro-era record, according to Bloomberg News.

The erroneous S. P. message went out just before 4 p.m. Paris time, and the correction was issued almost two hours later, after most European markets had closed.

Stephen Castle reported from Brussels and Liz Alderman from São Paolo, Brazil.

Article source: http://www.nytimes.com/2011/11/12/business/global/europe-to-propose-restrictions-on-ratings-agencies.html?partner=rss&emc=rss

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Economist Lucas Papademos Named Prime Minister of Greece

November 11, 2011 by Leave a Comment

The announcement came after four days of often chaotic negotiations that put the feuding among Greece’s political parties on full display.

Mr. Papademos, who has a low-key, avuncular manner, emerged from the presidential office building shortly after the statement about his new post was released at midday and spoke briefly with reporters, striking an optimistic note.

“The course will not be easy,” he said. “But the problems, I’m convinced, will be solved. They will be solved faster, with a smaller cost and in an efficient way, if there is unity, agreement and prudence.”

Mr. Papademos has only a few weeks to persuade Greece’s creditors in the so-called troika — the European Union, the International Monetary Fund and the European Central Bank — to release its next block of aid, $11 billion, before the country runs out of money. Then he must begin fulfilling the painful terms of an even larger loan.

He will have to move swiftly to reassure the European leaders there will be no repeat of the shock they suffered in October, when the former prime minister, George A. Papandreou, after negotiating a new $177 billion loan, decided without warning to submit the bailout package to a referendum. The move infuriated the Europeans, who had concocted the Greek bailout as part of a painstakingly negotiated broader effort to stabilize the euro. It also started the clock on the end of Mr. Papandreou’s tenure.

Mr. Papademos will have to deal with 2011 budget shortfalls and the passage of a 2012 budget that is expected to call for another round of austerity measures in a climate of growing social unrest. He will also have to start what are expected to be difficult negotiations with private sector banks that have agreed, in principle, to write off 50 percent of the face value of their Greek bond holdings as part of the rescue plan.

As if to underscore the problems, the national statistics authority reported on Thursday that unemployment had jumped to a record high 18.4 percent in August, a month when the tourist season normally lowers the rate, from 16.5 percent in July.

Mr. Papademos almost did not get the job. After Mr. Papandreou agreed on Sunday to step aside once a new coalition government had been formed, the parties could not seem to stop fighting long enough to settle on a candidate. With new elections expected early next year, all sides were maneuvering for strategic advantages. On Wednesday evening, Mr. Papandreou went on television to give his farewell speech as prime minister and was expected to announce a different successor.

But some 50 members of his party, and members of the opposition as well, pressed for Mr. Papademos, seen as an outsider to the old-boy political networks — a technocrat, perhaps able to take Greece on a new path. But it was not an easy sell. Some analysts here have said that the political parties were reluctant to embrace him because he would be an unknown, and perhaps a rival, at election time.

Only after another five hours of negotiations on Thursday morning did the president’s office issue a written statement confirming that Mr. Papademos would take on the task of trying to bring Greece’s economy back from the brink. It was unclear on Thursday night what his cabinet might look like.

News reports earlier this week said that Mr. Papademos had also set certain conditions before he was willing to take the post that had added to some of the reluctance to embrace him. The reports said he wanted a term of at least six months; earlier, the major political parties had agreed to new elections in just 100 days.

Other reports said that Mr. Papademos was insisting that members of the main opposition New Democracy party play a significant role in the unity government. It was widely reported that the opposition, headed by Antonis Samaras, had resisted participating, not wanting to be linked to deeply unpopular reforms with an election around the corner.

But standing outside the presidential palace, Mr. Papademos said he had not made any demands before accepting the job. He also said the new unity government would be “transitional,” and its priority would be to make sure that Greece stayed in the euro zone. “I am convinced that Greece’s continued participation in the euro zone is a guarantee for the country’s stability and future prosperity,” he said.

Whether he will succeed remains an open question. But some analysts said they considered his appointment to be Greece’s best shot.

Niki Kitsantonis and Dimitris Bounias contributed reporting.

Article source: http://www.nytimes.com/2011/11/11/world/europe/greek-leaders-resume-talks-on-interim-government.html?partner=rss&emc=rss

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Sovereign Debt Turns Sour in Euro Zone

November 11, 2011 by Leave a Comment

Now, the political and financial crisis engulfing the Continent has turned much of that European sovereign debt into the latest distressed asset, sending tremors through global financial markets not seen since the demise of the investment bank Lehman Brothers more than three years ago.

This week, shortly after European leaders formally conceded that Greece could not pay its debts and forced banks to accept losses, the shock waves reached Italy, the third-largest economy in the euro zone after France and Germany. And despite frantic efforts by politicians to contain the damage, market analysts said that France, one of the strongest countries in the euro zone, may soon feel the impact.

“When people started buying more European sovereign debt, there was not a cloud in the sky,” said Yannis Stournaras, director of the Foundation for Economic and Industrial Research, based in Athens. Now, he said, “This crisis is going to last because the perceptions of risk have changed dramatically.”

European banks face tens and possibly hundreds of billions of dollars in losses on loans to nations that use the euro. Worried about even greater losses if the crisis worsens, the banks have been scrambling to reduce their holdings of an investment that, like triple-A-rated subprime mortgage bonds, was once thought to be bulletproof.

The French bank Société Générale, for instance, this week marked down 333 million euros of its Greek sovereign debt holdings and in October slashed its exposure to that country to 575 million euros, from 2.4 billion euros at the beginning of 2011. Another French bank, BNP Paribas, has cut its holdings of Italian government debt 40 percent since July, to 12.2 billion euros.

How European sovereign debt became the new subprime is a story with many culprits, including governments that borrowed beyond their means, regulators who permitted banks to treat the bonds as risk-free and investors who for too long did not make much of a distinction between the bonds of troubled economies like Greece and Italy and those issued by the rock-solid Germany.

Banks had further incentive to overlook the perils of individual euro zone countries because of the fees they earned for underwriting sovereign debt sold to other investors. Since 2005, several dozen banks in Europe and the United States have earned $1.1 billion in fees from selling bonds for European governments, according to Thomson Reuters and Freeman Consulting Services.

Like other investors, banks clung for a long time to the seemingly inviolable belief that all the countries using the euro would make good on their debts. For years, Greek and Italian bonds did not pay much more than German ones, but banks were always hungry to chase even a fraction of additional profit. For much of the last decade, they bought the higher-yield bonds, ignoring the growing political and fiscal problems of those countries as well as other peripheral euro zone nations like Ireland, Spain and Portugal.

Regulators bear much of the responsibility. Before 1999, when Europe forged its monetary union, regulators permitted banks to treat as risk-free the debt of any country that belonged to the Organization for Economic Cooperation and Development, a club of developed nations that includes the United States and most of Europe.

“There was encouragement from European authorities for banks to load up on more debt, because it was seen as safe,” said Nicolas Véron, a senior fellow at Bruegel, a research firm in Brussels. “In hindsight, it was unwise risk management.”

Some regulators realized that allowing banks to set aside no capital for sovereign defaults could be a problem and moved to address it in a 2006 accord known as Basel 2. They mandated that big, complex banks use their own models to determine if individual countries were at risk and hold some capital against them. But the European Union never enforced the stiffer regime. And amid the subprime mortgage crisis, Europe’s regulators added to the problem by demanding that banks hold more safe assets, much of it sovereign debt.

As a result, banks were not discouraged from placing their most liquid assets “into the worst possible government debt,” Achim Kassow, a former Commerzbank board member, wrote in a study published by the European Parliament.

Liz Alderman reported from Paris and Susanne Craig from New York.

Article source: http://www.nytimes.com/2011/11/11/business/global/sovereign-debt-turns-sour-in-euro-zone.html?partner=rss&emc=rss

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Hitches Signal Difficulties for the Euro Zone

October 29, 2011 by Leave a Comment

Italy was obliged to pay the highest rate in more than a decade to sell a new bond issue, a sign that investors remained wary of the country’s political paralysis and a debt load equal to 120 percent of yearly economic output. If Italy’s borrowing costs become unsustainable, the country is potentially a much greater threat than Greece to Europe and the world economy.

“The current Italian government has lost the confidence of investors,” said Alessandro Giansanti, a rates strategist at ING in Amsterdam.

Elsewhere in the troubled euro zone, a big loss by an Austrian bank served as a reminder of the fragility of financial institutions, while a German supreme court decision scrambled efforts to speed up political decision making. In the meantime, the head of Europe’s bailout fund turned to China to invest in the fund.

The shift in mood Friday was sudden and stopped a rally only a day after it began.

On Thursday, major European indexes soared and bank shares rebounded after an all-night session in Brussels by European leaders that produced the boldest response yet to the debt crisis.

While major European stock indexes on Friday largely held on to their gains from the day before, investors seemed to be reflecting on the unanswered questions in the latest rescue package.

The plan, which was short on details, includes measures to bolster the resiliency of banks, to ease Greece’s crushing debt load and to turbocharge the euro area’s $623 billion rescue fund.

The benchmark indexes in Frankfurt, Paris and London were little changed at the end of trading Friday, while Italian shares fell 1.8 percent. The euro barely budged, trading at about $1.42.

The Euro Stoxx 50 index of euro zone blue chips closed down 0.6 percent, while markets in Britain and Paris were also slightly lower. Germany’s DAX was up 0.13 percent.

In the United States, the Standard Poor’s 500-stock index registered a microscopic increase of 0.04 percent, ending the week up more than 3 percent, mainly on Thursday’s lift from the summit meeting in Brussels and a report of growth in the American economy.

European technocrats are now charged with working out in the weeks ahead the specifics behind the broad outlines of Thursday’s plan. The pace is unsettling for markets, but that is the methodical way that European leaders are determined to operate. Elected officials are focused on their reluctant voters, not on investors impatient for bold initiatives.

“If you ask someone on the street, they’ll say they want the Deutsche mark back,” said Martin Lueck, an economist at UBS in Frankfurt. “This is why the politicians need to move in a piecemeal fashion. They need to keep people on board.”

Officials of the European Union and the International Monetary Fund hoped that Thursday’s deal would soothe market anxiety by easing the terms of Greece’s debt repayments enough to avoid default, as well as by building a war chest for safeguarding the larger Italian and Spanish economies against possible contagion.

But the lack of confidence in the plan was evident in the rise in interest rates on the bonds of both Italy and Spain. Benchmark yields jumped 14.4 basis points (about one-seventh of a percentage point) to 6.01 percent in Italy and 17.7 basis points to 5.49 percent in Spain.

Italy was supposed to help its own case this week by producing concrete evidence that it was streamlining its economy and cutting public debt. But Prime Minister Silvio Berlusconi’s government, weakened by internal strife, delivered only promises, handing officials in Brussels a letter of intent describing hoped-for measures.

While Italy has a relatively low annual budget deficit, the ratio of total debt to gross domestic product is second-highest in the euro zone after that of Greece.

The market’s skepticism showed in the auction results Friday. The Italian Treasury sold 3 billion euros of bonds due in 2022 at 6.06 percent, the highest rate since the creation of the euro. Italy also sold 3.1 billion euros of bonds due in 2014 to yield 4.93 percent, up from 4.68 percent at their last auction on Sept. 29.

Elisabetta Povoledo and Gaia Pianigiani contributed reporting.

Article source: http://www.nytimes.com/2011/10/29/business/global/italys-borrowing-costs-rise-amid-uncertainty-about-rescue.html?partner=rss&emc=rss

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Memo From Rome: Italy’s Political Disarray Plays to Berlusconi’s Advantage

October 12, 2011 by Leave a Comment

On Tuesday, Mr. Berlusconi’s government hit its weakest point yet when it failed to garner a majority on a technical vote on last year’s budget review. Visibly shaken, Mr. Berlusconi left the lower house without speaking publicly, while members of the opposition called on him to resign.

It was unclear whether the upset marked the imminent demise of the Berlusconi government or whether it was just another nail in the coffin for a political era that is widely considered to be finished — by Italians, if perhaps not by the politicians who are desperately scrambling to stay in power.

Today, Italy’s political landscape is as byzantine as it has ever been in the nation’s postwar history, as scores of factions across the political spectrum scramble to form alliances strong enough to bring down Mr. Berlusconi — and to keep their seats the morning after. It is not easy.

Lately, most political ferment in Italy has been directed not at the economy or the budget, but at changing the electoral law to discourage weak parliamentary majorities like Mr. Berlusconi’s.

Even within Mr. Berlusconi’s own fractious center-right coalition, more members of Parliament are upset with him and see him as a growing liability to Italy’s economy and standing on the world stage, but so far no group has shown the muscle or the numbers to form a viable alternative government.

“They’re frustrated, they’re angry at him, but they have a love-hate relationship: they can’t free themselves from the monster,” said Stefano Folli, a political commentator for the daily business newspaper Il Sole 24 Ore. “It’s a psychoanalytic case.”

After Greece, it is Italy, with its staggering debt and zero projected growth, that is considered most at risk of default if European leaders fail to come up with a swift plan to save the euro. But as the long twilight of Mr. Berlusconi’s rule lingers on, the divide between external economic reality and internal political maneuvering has never been wider.

Last week, Moody’s downgraded Italy, as well as several regional governments and three of its largest blue-chip companies, Eni, Enel and Finmeccanica, precipitously driving up borrowing costs.

Foreign investors and many in Italy’s business community — and at least one prominent center-left leader, Walter Veltroni — hope for a government of technocrats led by a respected nonpolitician who could carry out the unpopular structural economic changes mandated by the European Central Bank in August in exchange for buying Italian debt and who would not worry about losing the next elections.

That happened in Italy in 1992, after the postwar political order collapsed in a major bribery scandal and the fall of the Berlin Wall, when Giuliano Amato, then the prime minister, pushed through structural changes during a one-year technocratic government.

But such a government would require a strong consensus in Parliament. Tuesday’s upset showed that Mr. Berlusconi’s majority was hanging by a thread. But by force of character, the prime minister has insisted he will not step down despite his slipping support and a host of embarrassing legal tangles.

“There is no alternative to our government,” he said in a video message to his supporters last Friday. He then flew to Russia on a private visit to celebrate the birthday of his good friend, Russia’s prime minister, Vladimir V. Putin.

Last week, Italy was abuzz about how Mr. Berlusconi had joked about forming a new party called not “Forza Italia,” or “Go, Italy!” the name of his first political party, but rather substituting Italy with a vulgar term for the female anatomy.

The episode provided fodder for a burgeoning coalition of former Christian Democrats who, reportedly with the support of the Vatican, are putting increasing pressure on Mr. Berlusconi to step down.

But analysts say that the grouping has no clear political program and might not be able to cobble together a majority to form a government even if it did bring Mr. Berlusconi down. “A group of people who are upset could make him fall, but then there’s no other combination. He will always be able to destabilize the new government,” Mr. Folli said.

For its part, the nation’s center-left opposition is weak and divided, not least on economic policy, with its leaders ranging from neoliberals who favor loosening labor regulations to ex-Communists opposed to much of the austerity program that Italy passed in September.

While the economic storm continues to batter Italy, the government has deadlocked on whether a growth stimulus bill should include a tax amnesty that would allow Italians to pay only a percentage of their unpaid (or evaded) taxes, as well as an amnesty on illegal construction. Such amnesties are a longstanding tradition in Italian politics and are popular with many voters, but the Italian industrialists’ association has slammed the proposal as rewarding bad behavior.

Mr. Berlusconi is also openly sparring with Finance Minister Giulio Tremonti, whom he considers a political rival, despite a recent photo opportunity together. Mr. Tremonti arrived late for Tuesday’s parliamentary vote. (In a statement, his office said his absence had “no political significance.”)

That tension between the two men has been most evident over the nomination of a successor to Mario Draghi as president of the Bank of Italy. Mr. Draghi, who becomes president of the European Central Bank on Nov. 1, is backing his deputy at the Bank of Italy, Fabrizio Saccomanni. But Mr. Tremonti and the leader of the powerful Northern League party support Vittorio Grilli, director general of the Finance Ministry.

As the general stalemate lingers — and the economic storm grows — Italy’s elites are growing desperate. “Who’s managing the economy of Italy? At the moment, that’s a question without an answer,” Mr. Folli said. “Unfortunately, no one.”

Article source: http://www.nytimes.com/2011/10/12/world/europe/italys-political-disarray-plays-to-berlusconis-advantage.html?partner=rss&emc=rss

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Worries Rise Over Spain and Italy Debt

August 3, 2011 by Leave a Comment

Two weeks ago, the markets seemed to be on firmer footing after the new bailout of Greece was structured to prevent contagion. But on Tuesday, traders renewed their attacks on Italy and Spain pushing their borrowing costs, at least for now, to the tipping point that led Greece, Ireland and Portugal to apply for bailouts.

Some people now fear that Italy and Spain could run out of cash to meet their debt obligations in a matter of months if, like the others, they are shut out of international markets.

JPMorgan is warning its clients that Italy and Spain have thin margins of safety. The countries “will run out of cash in September and February respectively, if they lose access to funding markets,” the investment bank said. Those fears risk leading to “a self-fulfilling negative spiral,” the bank added.

The rescue fund negotiated last month as part of the bailout of Greece was intended to increase powers to assist countries that have not been bailed out, like Spain and Italy. It was described by some as a new Marshall Plan for Europe and was supposed to keep those nations safe from the spreading fire and, by extension, cushion the many European and American banks that hold their debt.

However, some skeptics had warned that the fund would not do enough, particularly if larger economies were devoured by the debt crisis. While the economies of Greece, Ireland and Portugal are relatively small, European leaders would face challenges of a different magnitude if Italy and Spain were engulfed by the same forces. For instance, if Italy’s economy stalls, higher interest rates could make it too costly to service Italy’s heaving debt, which, at 119 percent of gross domestic product, is one of the world’s largest.

With many Europeans off for their summer holidays, thin trading conditions may be exaggerating the market’s movements this week. Still, the sense of urgency was palpable in Rome, where Giulio Tremonti, Italy’s finance minister, held an emergency meeting of the country’s financial authorities as interest rates on Italy’s benchmark 10-year bond touched a 14-year high of 6.21 percent on Tuesday.

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

In Madrid, Prime Minister José Luis Rodríguez Zapatero delayed the start of his vacation Tuesday to cope with Spain’s problems even as he agreed last week to step down early to take responsibility for Spain’s economic crisis.

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

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

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

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

Liz Alderman reported from Paris, and Matthew Saltmarsh from London. Jack Ewing contributed reporting from Frankfurt, and Rachel Donadio from Rome.

Article source: http://feeds.nytimes.com/click.phdo?i=65ef67aabf23c6e92cac4ba6661ff433

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In Greek Pact, Compromises and Intrigues

July 23, 2011 by Leave a Comment

The French president arranges a private summit meeting with the German chancellor. Europe’s top central banker resists calls to allow Greece to write off some debt, fearing it could undermine the euro. The Greeks cry out that their sovereignty is infringed.

And only when markets teeter toward panic is a deal finally reached in Brussels to stave off more attacks on the euro zone’s vulnerable southern countries and prevent, for the moment at least, a broader run on financial markets.

The dramatic elements in the latest round of messy European compromise are not in themselves new. The question is whether the deal reached Thursday for another Greek bailout, this time valued at $157 billion, and relief for Portugal and Ireland is a decisive step to calm Europe’s financial storm or simply postpones another reckoning for the weakest southern European economies and the euro itself.

The consensus emerging is that European leaders went farther than ever before, crossing even their own red lines to shelter their decade-old currency. But many also worry that the intensive bargaining necessary to make an agreement possible resulted in a weak accord, saving face for all the key parties.

Jean Pisani-Ferry, director of Bruegel, an economic research institution in Brussels, said Thursday’s meeting “clarifies the horizon and pushes it forward.” But relief was not the same as solutions, Mr. Pisani-Ferry said, adding that he thought the private sector had not made enough concessions for the long run. Greece is almost sure to need further debt restructuring, he said.

The deal involved delicate compromises from all parties, especially Chancellor Angela Merkel of Germany and the European Central Bank. Each gave something and could claim a prize as well. The Europeans eased the burden on Greece, gave a modest bill to the private financial institutions and empowered a European-wide fund to act more broadly to buy up bad debt. The moves seemed to appease the markets, for now.

Babis Papadimitriou, an analyst for the Kathimerini newspaper in Greece, warned that its government had not shown great skill at putting into effect measures it had approved, including the opening up of closed professions and the privatization of over $70 billion in state assets.

The issues are political as much as economic. European democracy is fraught with the complications of 27 member nations, 17 of which use the euro, plus European institutions with shifting responsibilities. It was all on display in this crisis — internal German politics, the qualms of the European Central Bank, the plight of the Greeks and market anxieties over Italy and Spain, which are too big to bail out.

The biggest sticking point in reaching a broader accord to relieve Greece of some of its crippling burden of debt is Germany, where Mrs. Merkel has steadfastly resisted using European resources — meaning the wealth of Germany and other relatively prosperous members of the union — to write down Greek debt. Past bailouts provided new loans to Greece to help it pay off old ones, but ultimately just added to the country’s overall debt load.

But as markets swooned again this past week, pressure mounted in Germany. Even members of her own party attacked her with a ferocity unseen during the slowly unfolding crisis, saying she was jeopardizing European unity. President Obama called Mrs. Merkel on Tuesday to remind her how fragile the world financial system had become and of Germany’s responsibility.

Jean-Claude Trichet, president of the European Central Bank, was also pressed to consider steps he had previously insisted were impossible. On Wednesday, he called the bank’s 23-member governing council together in the bank’s high-rise headquarters in Frankfurt to discuss allowing the first default by a country that uses the euro.

Though staunchly opposed to compelling private banks to share the costs on Greece, which would mean at least a partial default in the eyes of bond rating agencies, the members of the bank council recognized that Germany was determined that any new bailout involve some pain for the private sector. But the council would insist on several conditions. European countries must guarantee Greek bonds so they will remain eligible as collateral for central bank lending. The bloc must support Greek banks and step up assistance for Greece’s economy.

Contributing reporting were Landon Thomas Jr. in London, Jack Ewing in Frankfurt, Stephen Castle in Brussels, Rachel Donadio in Rome, Judy Dempsey in Berlin and Niki Kitsantonis in Athens.

Article source: http://feeds.nytimes.com/click.phdo?i=7d6708b2b9cda23f818ac67566f951b0

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Dow Retreats on U.S. Debt Uncertainty

July 22, 2011 by Leave a Comment

Stocks on Wall Street were mixed on Friday as investors sorted through news of the deal reached by European leaders on Greece’s debt and scenarios for global growth as corporate results trickled out.

United States investors were also warily watching the deficit-reduction talks in Washington, where President Obama and the Republican House speaker, John A. Boehner, were trying to shape a deal and avoid a government default in less than two weeks.

In afternoon trading the Dow Jones industrial average was down 40.57 points, or 0.32 percent, to 12,683.84. The broader Standard Poor’s 500-stock index was a point ahead, at 1,345.01 points, and the Nasdaq composite was up 25.00 points, or 0.88 percent, to 2,859.43.

It was a muted start to the last day of the trading week in which the markets have weathered heightened uncertainty over the euro zone debt crisis and the talks in Washington.

Financial markets in Europe on Friday continued to give a positive reception to a deal reached in Brussels on Thursday by European leaders that gave Greece more time to deal with its mountain of debt. Bank stocks in particular benefited, and Greek, Irish and Spanish bonds continued to rally.

In the United States, the Dow was on track to end the week higher, even though it was down for the day. That was partly because the Dow shot up more than 152 points on Thursday on news of the Brussels deal, propelling it to its highest close in more than two months. As of Thursday, the Dow was up 2.5 percent so far this month and 1.9 percent this week.

Quarterly corporate earnings in some bellwether stocks were released on Friday.

Caterpillar, which reported that second-quarter revenue was up 37 percent, said earnings per share were $1.72, slightly below expectations of $1.75, analysts noted. It also reported softening demand in China.

Caterpillar was trading about 5 percent lower.

“It’s basically cause and effect,” said Lawrence Creatura, portfolio manager at Federated Investors.

Timothy Hoyle, vice president of research at Haverford Investments, said the results “disappointed the market.” But he added: “I think the market might be overreacting.”

Another major industrial company, General Electric, reported results that slightly surpassed Wall Street’s expectations in both profits and sales. G.E. stock rose a slight 0.16 percent.

The industrial sector as a whole was down more than 1 percent. Telecommunications were 1.25 percent lower and financial stocks declined by 0.56 percent.

Prices rose as the yields on benchmark 10-year Treasury bonds fell to 2.98 percent, in what one analyst said was a predictable bout of behavior at the end of the week, before the market is closed for two days.

“Remember that today is Friday, and recently Friday tends to see more short-covering and safe-haven buying than the other days of the week,” said Kevin H. Giddis, the executive managing director and president for fixed-income capital markets at Morgan Keegan Company, in a research note. “Debt deals in Europe, debt deals in the U.S., debt deals at home,” he said. “The potential ‘rise and fall’ of these is causing investors to take a more conservative approach on the last day of the week before what might or might not happen over the weekend.”

In Europe, the package of measures approved by euro zone leaders includes a reduction in interest rates for the two other bailed-out countries as well — Ireland and Portugal.

The Euro Stoxx 50 index of blue chips opened strongly but gave up some of its gains and ended the day up 0.3 percent. Greek 10-year yields dropped below 16 percent for the first time since June 8, sinking 137 basis points to 15.12 percent, according to Bloomberg News. Irish 10-year yields tumbled 52 basis points to 11.83 percent. Spanish 10-year bond yields fell eight basis points to 5.65 percent while yields on Italian debt of the same maturity declined eight basis points to 5.27 percent.

The euro rose against a number of currencies including the Swiss franc and the pound, but fell slightly against the dollar, to $1.4370. Analysts said a report showing German business confidence declined by more than forecast in July was holding back stronger gains.

Article source: http://feeds.nytimes.com/click.phdo?i=45fe20e5ba1d364f3026df858765efed

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Europeans Accept New Greek Bailout

June 24, 2011 by Leave a Comment

“We have agreed that there will be a new program for Greece,” Angela Merkel, the chancellor of Germany, told reporters at the end of a two-day meeting in Brussels. “This is an important decision that says once again we will do everything to stabilize the euro over all.”

The comments came a day after Greece agreed with international creditors to more austerity measures as part of revised plans for 2011-15 aimed at plugging a gap in its future financing.

If the Greek Parliament approves this proposal next week, the European Union and the International Monetary Fund will release a 12 billion euro ($17 billion) tranche of emergency aid, and then put together a second rescue.

The shape and size of the new bailout could become clear at a meeting on July 3 of euro zone finance ministers in Brussels.

All this comes a little more than a year after the government in Athens won a package of loans worth 110 billion euros.

“Greece is supported,” President Nicolas Sarkozy of France said at a news conference. “Europeans trust the Greek authorities and Parliament in their endeavors to implement the bold measures that have been decided.”

After discussions with the Greek prime minister, George Papandreou, European leaders expressed confidence that Greece’s Parliament would approve the austerity package, which has already prompted large protests in Athens.

Changes to the plan, negotiated with European and I.M.F. officials Thursday, are certain to make it even less popular among Greek citizens.

The new austerity program will now include a one-time levy on personal income ranging from 1 to 5 percent, depending on income.

Meanwhile, the tax-free threshold on income will be lowered to 8,000 euros a year from 12,000 euros, with the lowest rate set at 10 percent — but with exemptions for people up to 30 years old, pensioners older than 65 and the disabled. There will also be an annual levy of 300 euros on the self-employed.

On Thursday, at a meeting of center-right parties in Brussels, the Greek opposition leader, Antonis Samaras, refused to bow to pressure to change course and support the new plan during next week’s vote. During the discussion, Mr. Samaras was warned that Europe was engaged in a war for its economic stability, according to one official who spoke on the condition of anonymity.

Reflecting the disappointment of European leaders at Mr. Samaras’s stance, Mrs. Merkel said that “it would be better to have the widest support.”

She also insisted that any new program for Greece should be monitored closely. “One needs to do a reality check on whether the assumptions are proved right,” she said.

Nonetheless, in a statement issued late Thursday, European Union leaders accepted the need for a “new program jointly supported by its euro area partners and the I.M.F.”

That could amount to as much as 120 billion euros, though no figures have been identified yet because euro zone countries are negotiating with private investors to determine their level of voluntary contributions.

After the meeting, Mr. Papandreou conceded that his country was on a “difficult path” but one that was “much better than the alternative path of defaulting.”

“I believe that this is something which is understood by the majority in the Greek Parliament,” Mr. Papandreou said, adding that he was sure that the 12 billion euros in emergency aid would be released next month.

At the summit meeting, an obstacle to the new rescue was removed when the leaders agreed that nations that do not use the euro would not be obliged to contribute through a fund that they finance along with countries that use the single currency.

Britain objected to taking part, arguing that it had not participated in last year’s Greek package and had no plans to join the single currency.

“For Britain, we weren’t involved in this bailout and we should not be involved, as a noneuro country, in anything that might happen subsequently,” David Cameron, Britain’s prime minister, said at a news conference. Some practical difficulties remain, including an insistence from Finland that any new loans to Greece should be guaranteed by collateral.

James Kanter contributed reporting.

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European Leaders Propose a Sweeter Deal for Greece

June 22, 2011 by Leave a Comment

At a meeting of European leaders on Thursday and Friday, Mr. Barroso is expected to propose to make it easier for the debt-laden country to use the money, the equivalent of $1.4 billion, to encourage economic growth.

“Greece has the potential to access a significant amount of E.U. money,” Mr. Barroso said in Brussels, adding that the money should be concentrated where it can create jobs. The idea, he said, was to “front-load and accelerate them, so that Greece gets the benefit now.”

Fitch Ratings said Tuesday that it would consider even a voluntary rollover of Greece’s sovereign debt as a default, which would lead it to cut the country’s credit rating. And Timothy F. Geithner, the United States Treasury secretary, criticized Europe for failing to speak with one voice on the Greek crisis.

Speaking in Washington, Mr. Geithner called on Europe to “speak with a clearer, more unified voice on the strategy” for Greece, according to Bloomberg News. “I think it’s very hard for people to invest in Europe, within Europe and outside Europe, to understand what the strategy is when you have so many people talking.”

Mr. Geithner said he told leaders of the Group of 7 industrialized countries last weekend that the European Union had “a very substantial financial arsenal” at its disposal and that it needed to ensure that they were “available to be deployed to do the kind of things they need to do to make this process work.”

“That means make it available so banks can be recapitalized where they need capital, to make sure there is a funding available to the banking system,” he said. He added that there was “no reason why Europe cannot manage these problems.”

European leaders have been desperately trying to prevent a Greek default, which would hurt global markets and could fatally undermine the euro monetary union. Some analysts have said it could have an effect on credit and debt markets comparable to the one that followed the collapse of Lehman Brothers in 2008.

The warning by Fitch kept pressure on Prime Minister George A. Papandreou of Greece and his newly shuffled government, which survived a vote of confidence early Wednesday. It also kept the heat on European policy makers as they worked on a second bailout for the country.

Parliament will be asked to endorse further spending cuts, which are a condition of receiving a fresh disbursement of 12 billion euros, or $17.1 billion, from last year’s 110-billion-euro bailout from the European Union and the International Monetary Fund.

“The assumption must be that if these two critical votes are passed, the short-term pressure on Greece will ease,” said Adam Cole, head of foreign exchange strategy at RBC Capital Markets in London.

The Barroso plan is intended to help tackle one of the main obstacles facing the Greek economy, which risks a downward economic spiral of low growth that depresses government tax revenue.

A large pot of money has been allocated to Greece for job creation projects, but of a total of 20 billion euros for 2007-13, only about a quarter has been disbursed. One of the obstacles is that most of the grants require matching money from the country receiving aid, something that Greece is now unable to afford. Changing that rule, however, would be time-consuming, so officials think that accelerating payments would be a quicker way of helping the Greek economy.

Mr. Barroso also reinforced calls for Greek politicians to endorse the austerity measures. “My message today is that if Athens acts, Europe will deliver,” he said. “If anyone thinks that without the program agreed with the E.U. and the I.M.F. we can still get by somehow, there’s an alternative program, that’s not true. There is no alternative. The E.U. and the I.M.F. won’t support any other program.”

Euro zone finance ministers have said that a second Greek bailout would include a contribution by private holders of government bonds. Ministers have asked that the contribution be voluntary but “substantial,” but its nature remains uncertain.

That uncertainty has raised concerns at ratings agencies. Andrew Colquhoun, a senior director for Asia-Pacific sovereign ratings at Fitch, said at a conference Tuesday in Singapore that Fitch would regard a debt exchange or voluntary debt rollover “as a default event and would lead to the assignment of a default rating to Greece.”

But Cristina Torrella, a senior director in Fitch’s financial institutions group, said in a statement that a restructuring or rollover of Greek government debt “would not automatically trigger a default by the major Greek banks.”

“The precise rating actions on the banks will depend on the full terms of the sovereign event and the extent to which this considers maintaining solvency and, vitally, liquidity in the Greek banking system,” Ms. Torrella said.

Article source: http://www.nytimes.com/2011/06/22/business/global/22euro.html?partner=rss&emc=rss

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