December 1, 2023

Europeans Report Progress on Bank Rescue Plan

After negotiating through the weekend in Brussels in search of a comprehensive solution to the Continent’s sovereign debt crisis, European leaders reported progress on the framework of a broad rescue package.

If, as the leaders have pledged, the final details are announced when the summit meeting wraps up on Wednesday, it could quell the worst fears of investors by taking the risk of a financial collapse off the table.

But if the talks break down, some investors said Wall Street might need to brace for a repeat of the turmoil that followed the Lehman Brothers’ downfall in 2008.

“If Wednesday comes and there’s no real progress, we’ll see a riot in the markets,” said Mark D. Luschini, the chief investment strategist at Janney Montgomery Scott. “We need at least some broad schematics.”

European officials appeared to reach an agreement on Sunday evening that the size of the bank recapitalization plan would be about 100 billion euros ($138 billion).

But more has yet to be decided. Officials still had no final answer on how they might increase the firepower of a separate euro zone rescue fund known as the European Financial Stability Facility. Nor had they reached agreement on how steep the write-offs would be that holders of Greek debt might be required to take.

Expectations among investors have been modest. Many said they were not necessarily expecting to see a detailed solution come out of the meeting, but hoped to see signs of significant progress.

“I think we will get something; it will probably be half-baked and it will probably give us two to three months of room to figure out the next steps,” said Jaime Valdivia, head of global emerging markets research and strategy at BlueCrest Capital. “If we get something mediocre out of the euro zone, markets can climb higher because the expectations have been so low.”

Even as European officials suggested that $138 billion would help the banks shore up their balance sheets, investors were still trying to assess the severity of the banks’ problems.

There are doubts that $138 billion will be enough to cushion the blow from big losses on Greek debt and that of other fiscally troubled European nations.

In July, banks and other institutional investors agreed to take losses of about 21 percent on Greek debt.

But as Greece’s economy has deteriorated, some policy makers are now suggesting that banks will need to take much bigger losses, perhaps as much as 60 percent.

Greater clarity about the extent of the problem could remove some of the fear hanging over the markets, many investors said.

“There are rumors flying all over the place on how big the recapitalization needs to be — from 100 billion to 400 billion euros,” said Christopher Orndorff, who helps oversee global fixed-income investments at Western Asset Management.

“I think the number that they come out with needs to be a credible number,” he added.

Milton Ezrati, a senior economist at Lord Abbett Company, said, “Even if they say the losses are going to be a larger number, at least people would know where the line is.”

Since the summer, the markets have swung wildly with each burst of news from the Continent. As reports emerged last week that European officials were nearing a deal on a rescue plan, the Standard Poor’s 500-stock index rose 1 percent.

Asian markets rose on Monday morning, but that was partly a result of a report showing that Japan’s exports had increased more than expected. The Nikkei 225 in Tokyo was up 1.5 percent, while the S. P./ASX 200 index was up 2 percent.

Even if the recapitalization plan is seen as credible, there is still the question of whether the banks will be able to raise money without disrupting the markets.

The plan under discussion calls for banks to turn to private investors before tapping government-backed funds.

A similar arrangement was used successfully in the United States after stress tests in 2009. There is concern that European banks may find it difficult to raise capital from private investors and instead start selling assets and spark a fire sale.

“The global economy could take another hit,” Mr. Valdivia said.

Julie Creswell and Graham Bowley contributed reporting.

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Obama Lauds Bailout at Visit to Chrysler Plant

In the center of auto country and straddling two political swing states, Mr. Obama visited a Chrysler plant here to hail the auto industry’s comeback two years after he approved a $60 billion conditional bailout for Chrysler and General Motors, and to receive the gratitude of hundreds of enthusiastic employees.

“Thanks for saving my job,” one young man told him at shift change. On the assembly line a woman spun around, to show the words “Thank you” on her T-shirt’s back.

Yet Mr. Obama left Washington that morning with a fresh reminder of just how many millions more people remained out of work — the news that the government’s monthly jobs report showed a slump in the growth of hiring in the private sector and an increase in the unemployment rate to 9.1 percent.

He never directly addressed the jobs report in a speech that mixed celebration for the auto industry’s revival and sober acknowledgment of lingering pain in the general economy. By contrast, last month when Mr. Obama also visited a factory, in Maryland, a far-better jobs report merited positive mention in his remarks. When Mr. Obama later made a stop at a hardware store, he ignored a reporter’s shouted question about the data.

In the third year of his presidency, Mr. Obama can claim credit for helping to bring the country back from the brink of financial collapse and out of the deepest recession since the Great Depression, but not for a full economic recovery.

The jobs report is just one of several recent indicators of continued weakness that underscore how improbable it is that the economic picture will be much better — if it gets better at all — before voters make up their minds next year. And this summer Mr. Obama faces a big test of whether he can reach agreement with Congressional Republicans to significantly reduce a mounting federal debt — a challenge with implications for the economy, as another Wall Street rating firm warned this week, as well as for Mr. Obama’s re-election prospects.

“Now, I don’t want to pretend like everything is solved,” Mr. Obama told about 350 Chrysler workers, as he shifted from praising the success of the bailout. “We’ve still got a long way to go not just in this industry, but in our economy.” He compared the economy to a person who had been hit by a truck — “It’s taking a while to mend.”

Mr. Obama acknowledged that as happy as the workers were to have their jobs assembling the Jeep Wrangler, “there’s nobody here who doesn’t know someone who is looking for work and hasn’t found something yet.” (“Right!” a man yelled.)

“Headwinds” keep buffeting the recovery, Mr. Obama said — lately in the form of high gas prices, economic disruptions from Japan’s post-earthquake devastation and instability in the Middle East. And he warned of more ups and downs ahead.

“There are always going to be bumps on the road to recovery,” Mr. Obama said. “We’re going to pass through some rough terrain that even a Wrangler would have a hard time with.” (“No!” another loyal worker shouted.)

More than perhaps any of Mr. Obama’s presidential trips to date, this one had the feel of a campaign swing.

The president’s factory visit was sandwiched between his stops at Rudy’s Hot Dog, a landmark diner, and at Fred’s Pro Hardware Store near the Chrysler plant, which Mr. Obama visited to illustrate that the bailout had helped not just auto companies but also parts suppliers and the small businesses in the communities around the manufacturing plants.

Just like a candidate, he stood coatless and in rolled shirtsleeves at a plant gate during shift change, greeting the departing employees one by one. And more than usual, he went out of his way to greet people, lingering at the airport’s fence when he arrived and crossing the street from the hardware store to glad-hand the gathered locals, one of whom held aloft a hastily scribbled sign that said “Keep Working 4 the Working Class.”

Taking credit for the controversial decision to rescue the auto companies has become a staple of Mr. Obama’s stump speeches and is likely to remain so through his re-election campaign, especially given the importance of the industry to the swing states of Ohio and Michigan, as well as to Wisconsin and Indiana; Missouri, another major auto-manufacturing state, increasingly leans Republican and Mr. Obama narrowly lost it in 2008.

“In a weak economy it’s all the more important for Obama to have examples like the auto industry where he can point to his willingness to do what he thought was right for jobs even when it was politically controversial to do it,” said Geoffrey Garin, a Democratic pollster.

But David Winston, a Republican strategist and an adviser to the House speaker, John A. Boehner, a Republican who represents an Ohio district far south of Toledo, said taking credit for segments of the economy would not help if the overall economy remains weak. “It’s the macro-situation that matters in terms of how people are going to ultimately view his success or lack thereof with the economy,” Mr. Winston said. To the extent Mr. Obama boasts selectively, “that tends to reinforce the idea, ‘Maybe he’s disconnected.’ ”

Obama advisers, however, see the auto rescue as a valuable talking point beyond the affected states.

“The auto companies tell a story about the president’s economic leadership, the tough decision he made and how that’s reaped great results for people all across this country,” said Dan Pfeiffer, the White House communications director. “If the overwhelming number of Republicans had had their way two years ago, G.M. and Chrysler would be gone and so would a million jobs in communities all across this country.”

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Head of Japanese Utility Steps Down After Nuclear Crisis

At a news conference in Tokyo, the outgoing president, Masataka Shimizu, also said that the company had decided to decommission the four most heavily damaged of the plant’s six reactors and to cancel plans to add two more.

But his choice of an insider to succeed him could prompt further criticism of the troubled utility in the wake of the crisis at the Fukushima Daiichi plant, which was ravaged in the March 11 earthquake and tsunami and continues to release radiation.

Mr. Shimizu, 66, will step down and be replaced by Toshio Nishizawa, 60, a senior executive at the company, Tokyo Electric said.

“I take responsibility for this accident, which has undermined trust in nuclear safety and brought much grief and fear to society,” Mr. Shimizu said. “Whatever happens, there must be change,” he said.

The crisis has raised serious questions over cozy ties between Japan’s nuclear industry and the regulators charged with overseeing safety at the country’s 55 nuclear reactors. It has also prompted a rethinking of Japan’s energy policy, which had sought to raise the country’s dependence on nuclear energy to one-half of its electricity needs, from the current one-third.

The Japanese government has also been saddled with the task of aiding Tokyo Electric as it starts to pay out what is expected to be trillions of yen in compensation claims even as it continues desperate efforts to stabilize the Fukushima plant.

The Japanese government has announced a plan that could tap public money to save Tokyo Electric from financial collapse and also help it compensate victims of the disaster. But the plan would require the company to eventually repay in full all the money owed to victims of the accident. The company had hoped that payouts might be capped.

Speaking in a grave monotone, Mr. Shimizu said that Tokyo Electric had booked a net loss of 1.25 trillion yen, or $15.3 billion, for the fiscal year that ended in March, hit by the punishing costs of bringing the Fukushima Daiichi plant under control.

The company booked a special loss of 426 billion yen for costs associated with cooling down the reactors at Fukushima Daiichi, he said, and another 207 billion yen for shutting down the four most heavily damaged reactors.

But its losses so far do not include the compensation claims related to the accident. Tens of thousands of people have been forced to relocate from the area around the power plant, while nearby farmers and fishermen have seen their livelihoods threatened.

Tokyo Electric said it would sell off at least 600 billion yen in assets — including real estate and a stake in one of Japan’s largest telecommunications companies — to help meet compensation payments. The company’s board of directors promised to take no pay, and other executives will return 40 percent to 60 percent of their paychecks.

The company also said it would not pay dividends for the current fiscal year. Still, it was impossible to forecast earnings for the year, the company said.

Moody’s Japan has warned that it could downgrade its debt rating for Tokyo Electric to junk bond status.

Speaking after Tokyo Electric’s announcement, Yukio Edano, the top government spokesman, called for the company to step up efforts to squeeze out funds for compensation payments.

“This is just the start. There must be more scrutiny and more effort,” Mr. Edano said.

During the crisis at the Fukushima Daiichi plant, it became clear that Mr. Shimizu would have to go as the nuclear complex was exposed as woefully unprotected against tsunami risks.

Tokyo Electric has also come under intense criticism for its handling of the accident. Revelations this month that three of the plant’s reactors may have suffered meltdowns in the early days of the crisis has added to the furor.

Mr. Shimizu had been particularly criticized for largely disappearing from the public eye just as the crisis worsened. He checked himself into a hospital for a week after the disaster, and has rarely appeared at news conferences since.

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Japan Offers Help to Pay Plant Victims

The move would save the plant’s operator, Tokyo Electric Power, from financial collapse. But the plan would require the company to repay in full all payments due to victims of the accident. The company had hoped that payouts might be capped.

About 200,000 residents as well as factories, farmers and fishermen in the area, are expected to file compensation claims totaling billions of dollars.

“We must makes sure that the compensation is adequate, but we must also keep the financial burden on the public to a minimum,” Finance Minister Yoshihiko Noda told reporters.

Executives at Tokyo Electric Power and government officials have been wrangling for weeks over who should pay for the accident at Fukushima. The government, in particular, has wanted to prevent the company from raising electricity rates to pay for compensation claims, in effect passing on the accident’s costs to its customers.

But Prime Minister Naoto Kan also said this week that the state, which has long promoted nuclear energy, should assume some responsibility. The plan needs to be approved by the nation’s divided parliament to go into effect.

The plan calls for the government to issue special-purpose bonds to help finance a plan that would pay out compensation, according to a statement issued by the Trade Ministry. Other utilities in Japan would be required to contribute to the fund, which would also act as an insurance body to cover any future nuclear accidents, the statement said.

Tokyo Electric Power, known as Tepco, would be required to pay back the fund over time. But the fund would ensure that the utility is able to make sufficient investments to provide electricity for the Japanese capital and surrounding regions, where it holds a near monopoly.

At the same time, Tepco would be required to make aggressive cost cuts, like selling real estate and other assets, the ministry statement said.

The company said this week that eight top executives, including its president, Masataka Shimizu, would indefinitely receive no pay, and other directors would have their salaries slashed by 60 percent. The utility has pledged to sell 500 billion yen ($6.17 billion) worth of assets.

A supervisory body would effectively take control of all major management decisions, and make sure that profits, excluding vital investment in infrastructure, be set aside for victims, the Nikkei newspaper reported. The plan asks that Tepco make no dividend payments to shareholders until compensation payments are complete, the Nikkei said.

Still, by rescuing the company from what could have been crippling claims, the plan provides a degree of protection to holders of Tepco shares and bonds, circumventing chaos in financial markets. The company’s shares have lost three-quarters of their value since the crisis began.

Tepco raised about 2 trillion yen from financial institutions in March, but much of that will go toward decommissioning the damaged reactors.

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