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Backing Grows for European Bank Plan

May 7, 2013 by Leave a Comment

BRUSSELS — The European Union’s halting effort to create a more unified banking system, which many experts consider necessary for avoiding future financial crises, received fresh impetus on Tuesday.

Two top E.U. finance officials gave a push forward to efforts to overhaul governance of the region’s banks, easing concerns that the bloc is failing to move swiftly enough to avoid future crises that could sink the euro.

Speaking in Berlin, Germany’s finance minister, Wolfgang Schäuble, signaled support for moving ahead with efforts to create a so-called banking union. Germany, and Mr. Schäuble in particular had been widely viewed as standing in the way of progress, demanding a potentially complicated treaty change to proceed.

“Naturally, with the inertia that we have in Europe, we cannot wait for treaty changes to solve current problems,” Mr. Schäuble told an audience at the Free University in Berlin. “We have to make the best of it on the basis of the current treaties.”

German officials say there has no been a change in their stance, but proponents see a softening in tone that could signal a new openness.

Meanwhile on Tuesday in Brussels, the president of the euro zone’s group of finance ministers, Jeroen Dijsselbloem, said it would be “dangerous” to delay moving ahead with a banking union. He said some of the bloc’s biggest banks could reveal new vulnerabilities as their accounts come under scrutiny in the next few months as part of a new round of so-called stress-test audits expected to be conducted by the European Central Bank.

Last month at a finance minister’s meeting in Dublin, Mr. Schäuble conceded that a banking union could go forward under current E.U. law. But he still insisted then that treaty change would eventually be needed for a new single banking supervisor, under the aegis of the E.C.B., to work effectively. As the euro zone’s paymaster, Germany has considerable clout in the banking union debate.

On Tuesday, Mr. Schäuble still said there was a need for “institutional changes” in the medium term, requiring changes to the treaty. But he indicated that near-term problems required timely attention.

German leaders, however, remain cautious about any moves that could lead to further euro zone demands for money from their country. Chancellor Angela Merkel, up for re-election in September, has shown little inclination to test the patience of a bailout-weary electorate.

E.U. leaders agreed last year to create a banking union as a way of breaking the so-called doom loop. This is a vicious circle in which states go so deeply into debt to support failing banks that they require bailouts or risk leaving the euro zone. But that agreement in principle has been hard to put into practice.

The question of how to regulate banks under a banking union has been politically contentious as the European debt crisis rumbles on.

Bailing out banks has been one of the biggest factors in Europe’s financial crisis, and Mr. Dijsselbloem, president of the Eurogroup of finance ministers, said Tuesday that Europe continued to face “very dangerous” situation unless all its members started using the same rule book for restructuring or shutting down failing banks.

A standard process for winding down troubled banks would be a key component of a banking union.

The effect of huge bank debt on state finances almost forced Ireland and Cyprus to leave the euro zone before they received bailouts. And is now a major concern for Spain, which has received banking bailout money from the euro zone, and Slovenia, which is scrambling to avoid asking for a bailout.

German officials had warned that adding the politically fraught business of bank supervision to the E.C.B.’s responsibility for monetary policy would risk the bank’s independence.

Article source: http://www.nytimes.com/2013/05/08/business/global/08iht-euro08.html?partner=rss&emc=rss

Filed Under: Economy News Tagged With: , ,

Markets Expected Credit Ruling, but Risks Remain, Analysts Say

August 7, 2011 by Leave a Comment

“I think this is already baked in the cake,” said Garett Jones, an economist at the Mercatus Center at George Mason University, suggesting that investors and bond traders had already accounted for a downgrade. “It’s not a disaster. It’s just that we’re a little bit riskier, a little bit crazier than people thought a month or two ago.”

However, with the United States economy on such fragile footing and growth remaining elusive, and with Europe desperately trying to contain its debt crisis, anything that undermines already low confidence levels could create a ripple effect and further stall the recovery.

“It’s a very emotional and volatile environment,” said Kenneth S. Rogoff, a professor of economics at Harvard University and author, with Carmen M. Reinhart, of “This Time Is Different,” a history of financial crises. “An event like this can sometimes trigger a reaction far in excess of what you might expect.”

In practical terms, investors will first focus on what happens when global markets open Monday morning, particularly in trading of Treasuries. Standard Poor’s announced its downgrade after the markets had closed on Friday. Analysts said that since Moody’s and Fitch, the two other ratings agencies, have so far kept the United States at AAA, the S. P. downgrade left Treasuries near the top of a short list of assets attractive to investors anxious about Europe’s debt crisis.

“People are going to look for a safe place to hide,” said Ward McCarthy, the chief financial economist at Jefferies, a securities and investment banking firm. “And there aren’t many places. There’s gold and Treasuries.”

Although the debt downgrade itself is somewhat abstract, even those who don’t pay much attention to economic news will hear of it on cable news programs and late-night comedy shows. And S. P.’s judgment mainly reflects the anxieties many Americans are already feeling as a result of the nation’s debt troubles.

“For a household, the concern is, am I going to keep my job and what are my future tax burdens?” said Glenn Hubbard, the Columbia Business School dean who led the Council of Economic Advisers under President George W. Bush. “If Washington is having a very difficult time getting its fiscal house in order, as a household, I either expect radical spending cuts that will affect me or radical tax increases that are going to affect me,” Mr. Hubbard said. “It doesn’t mean I won’t buy bread, but it might mean putting off purchases” like washing machines, furniture or other large items.

The United States stock market will be a crucial barometer when Wall Street opens on Monday morning, and some analysts expect it could actually rally after the big losses last week — down 7.1 percent in just five days. “This may be one of those sell-the-rumor-and-buy-the-news relief rallies,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia.

The stock market, though, does not have the safe haven protection of Treasuries, and is more a gauge of the broader economic outlook. With up to 70 percent of the economy driven by consumer buying, anything that could cause a further downshift in confidence is worrying.

“People may not know the exact details of what’s going on, but when they hear that the U.S. is close to default, even though it may be for all practical purposes a short default, they get scared,” said Raghuram G. Rajan, professor of economics at the University of Chicago. “If people think the full faith and credit of the U.S. isn’t what it was thought to be, they think that something has changed. It does erode confidence a little bit.”

For those worried that the downgrade could cause mutual funds, banks or money market funds to withdraw from Treasuries, there was little evidence of that over the weekend. The downgrade of long-term Treasuries does not affect the short-term federal debt widely held by money market mutual funds.

Mr. Rajan said that downgrade of debt in a smaller emerging economy would most likely immediately bring jumps in interest rates that would affect companies, home buyers and car purchases. But the strength of Treasuries, which tend to determine mortgage rates, would keep rates low for now, he said.

Louise Story contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=b46e93cbe1e91bcadece1f0e0975bd62

Filed Under: Business News Tagged With: , ,

Derivatives Cloud the Possible Fallout From a Greek Default

June 23, 2011 by Leave a Comment

No one seems to be sure, in large part because the world of derivatives is so murky. But the possibility that some company out there may have insured billions of dollars of European debt has added a new tension to the sovereign default debate.

In years past, when financial crises in Argentina and Russia left those countries unable to make good on their government debts, they simply defaulted. But this time around, swaps and other sorts of contracts have become so common and so intertwined in the financial markets that there are fears among regulators and financial players about how a Greek default would play out among derivatives holders.

The looming uncertainties are whether these contracts — which insure against possibilities like a Greek default — are concentrated in the hands of a few companies, and if these companies will be able to pay out billions of dollars to cover losses during a default. If there were a single company standing behind many of these contracts, that company would be akin to the American International Group of the euro crisis. The American insurer needed a $182 billion federal bailout during the financial crisis because it had insured the performance of mortgage bonds through derivatives and could not pay on all of them.

Even regulators seem unsure of whether a Greek default would reveal such concentrated risk in the hands of just a few companies. Spokeswomen for the central banks of both Europe and the United States would not say whether their researchers had studied holdings of such contracts among nonbank entities like insurance companies and hedge funds.

Asked about derivatives tied to Europe at a Wednesday press conference, Ben S. Bernanke, the chairman of the Federal Reserve, said that the direct exposure is small but that “a disorderly default in one of those countries would no doubt roil financial markets globally. It would have a big impact on credit spreads, on stock prices and so on. And so in that respect I think the effects in the United States would be quite significant.”

Derivatives traders and analysts are debating just how much money is involved in these contracts and what sort of threat they pose to markets in Europe and the United States. On the one hand, just over $5 billion is tied up in credit-default swap contracts that will pay out if Greece defaults, according to Markit, a financial data firm based in London. That is less than 1 percent the size of Greece’s economy, but that is a conservative calculation that counts protections banks have in place offsetting their positions, and is called the net exposure.

The less conservative figure, the gross exposure, is $78.7 billion for Greece, according to Markit. And there are many other types of contracts, like about $44 billion in other guarantees tied to Greece, according to the Bank of International Settlements. The gross exposure of the five most financially pressed European Union countries — Portugal, Italy, Ireland, Greece and Spain — is about $616 billion. And the broader figure on all derivatives from those countries is unknown.

The pervasiveness of these opaque contracts has complicated negotiations for European officials, and it underscores calls for more transparency in the derivatives market.

The uncertainty, financial analysts say, has led European officials to push for a “voluntary” Greek bond financing solution that may sidestep a default, rather than the forced deals of other eras. “There’s not any clarity here because people don’t know,” said Christopher Whalen, editor of The Institutional Risk Analyst. “This is why the Europeans came up with this ridiculous deal, because they don’t know what’s out there. They are afraid of a default. The industry is still refusing to provide the disclosure needed to understand this. They’re holding us hostage. The Street doesn’t want you to see what they’ve written.”

Regulators are aware of this problem. Financial reform packages on both sides of the Atlantic mandated many changes to the derivatives market, and regulators around the globe are drafting new rules for these contracts that are meant to add transparency as well as security. But they are far from finished and could take years to put into effect.

Darrell Duffie, a professor who has studied derivatives at the Graduate School of Business at Stanford University, said that he was concerned that regulators may not have adequately studied what contagion might occur among swaps holders, in the case of a Greek default.

Regulators, he said, “have access to everything they need to have. Whether they’ve collected all the information and analyzed it is different question. I worry because many of those leaders have said there’s no way we’re going to let Greece default. Does that mean they haven’t had conversations about what happens if Greece defaults? Is their commitment so severe that they haven’t had real discussions about it in the backrooms?”

Regulators aren’t saying much. When asked what data the Federal Reserve had collected on American financial companies and their swaps tied to European debt, Barbara Hagenbaugh, a spokeswoman, referred to a speech made by Mr. Bernanke in May in which he did not mention derivatives tied to Greece. At the Wednesday press conference, Mr. Bernanke said that commonly cited data on derivatives do not take into account the offsetting positions banks have on their Greek exposures. And with those positions, he said, even if there is a Greek default, “the effects are very small.”

At the European Central Bank, Eszter Miltenyi, a spokeswoman, said: “This is much too sensitive I think for us to have a conversation on this.”

On Wall Street, traders are debating whether the industry’s process for unwinding credit-default swaps would run smoothly if Greece defaulted. The process is tightly controlled by a small group of bankers who meet in an industry group called the International Swaps and Derivatives Association.

Article source: http://www.nytimes.com/2011/06/23/business/global/23swaps.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,