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Russia Offers Up to $20 Billion to Help Shore Up Euro

December 15, 2011 by Leave a Comment

Speaking after meeting with E.U. leaders in Brussels, the Russian president, Dmitri A. Medvedev, said his country was “interested in the European Union’s preservation as a dynamic economic and political force” and would consider assistance via the I.M.F.

Though Russian leaders and officials faced some criticism for the conduct of recent elections, they arrived at the meeting in a strong position, knowing that Europe was seeking help from Moscow as well as courting other countries, like China and Brazil.

Mr. Medvedev’s economic aide, Arkady V. Dvorkovich, said Russia would be ready immediately to allow the I.M.F. to keep $10 billion from a commitment made in 2009 that, he said, was due to be reimbursed.

A possible second loan from Russia of up to $10 billion was dependent on clearer plans emerging for the financing of a firewall for still-vulnerable euro zone nations like Italy and Spain, Mr. Dvorkovich added.

“There has been a sort of strategic inversion in relations between Russia and the E.U.,” said Thomas Gomart of the Institute for International Relations in Paris. “In 1998 Russia defaulted and around 14 years later, Russia is in a position to finance Europe. Psychologically that is a very big change.”

Plans to leverage the resources of the euro zone bailout fund, the European Financial Stability Facility, are falling well short of the target of €1 trillion, or $1.3 trillion, set by E.U. leaders. The I.M.F is expected to help make up some of the shortfall, but the fund is still waiting to hear the details of how the euro zone will put together a new contribution of up to €200 billion to the I.M.F.

Another E.U. summit meeting on the crisis has now been tentatively scheduled for the end of January or beginning of February.

Meanwhile, worries are intensifying over the possible loss of France’s top credit rating and the effect this would have on the ability of the bailout fund to protect Italy and Spain in the event of further debt problems.

European officials insist that the plans to leverage the E.F.S.F would survive a French downgrade or even a downgrade of all the remaining triple-A-rated members of the euro zone.

But the tension showed in comments by the governor of the French central bank published Thursday, calling debt-rating companies “incomprehensible and irrational” and suggesting that Britain should be next in their sights.

“A downgrade doesn’t strike me as justified based on economic fundamentals,” Christian Noyer told Le Télégramme, a newspaper based in Brittany, according to Bloomberg News. “Or if it is, they should start by downgrading the U.K., which has a bigger deficit, as much debt, more inflation, weaker growth and where bank lending is collapsing.”

Russian officials believe that more detail is needed on the leverage plans to stabilize anxious financial markets. “What we would like to understand is what is the gap and how they are going to collect the whole amount,” Mr. Dvorkovich said. “What we need to do is make markets believe.”

Russia accepts that, with strong economic ties to Europe as an energy exporter and large holdings of euros, it would lose from a deepening economic crisis in its largest market.

The European Union sent €87 billion of exports to Russia in 2010 and imported €158 billion, mainly in natural resources. The summit meeting Thursday occurred ahead of an agreement, expected Friday, on Russia’s membership of the World Trade Organization, a move intended to expand trade opportunities.

“Forty-one percent of exchange reserves of Russia are in euros or euro-denominated securities,” Mr. Medvedev said, adding that, ultimately, “only Europe can help Europe.”

Mr. Medvedev and the Russian foreign minister, Sergey V. Lavrov, met Thursday with the president of the European Council, Herman Van Rompuy; the president of the European Commission, José Manuel Barroso; and the E.U. foreign policy chief, Catherine Ashton.

The two parties agreed on a plan of cooperation on issues, like security and biometric passports, intended as a step toward a visa-free regime for travelers.

Though Mr. Van Rompuy referred to worries about the fairness of recent elections to the Russian Duma, he avoided overly critical comments.

Less measured criticism from European Parliamentarians who called for a re-run of the Duma elections were dismissed on Twitter by Russia’s ambassador to NATO, Dmitri Rogozin. “In a few days they will be coming back to us as if nothing happened,” he said.

Article source: http://www.nytimes.com/2011/12/16/business/global/russia-offers-up-to-20-billion-to-help-shore-up-euro.html?partner=rss&emc=rss

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Once the Leading Airline, American Is Now Third

December 3, 2011 by Leave a Comment

Most airlines found a way back to profitability in the last few years by shedding costs through bankruptcy, reducing capacity and merging with one another. But American lost passengers to newly merged carriers like Delta Air Lines and United Airlines as well as low-cost competitors like Southwest Airlines. It retrenched around fewer hub airports. It struggled with older, jet fuel-guzzling planes and delayed renewing its fleet.

So American’s decision to file for bankruptcy this week highlighted both the industry’s remarkable transformation over the last decade and the distance now separating this airline from its peers. While other airlines have found ways to remain profitable even with elevated fuel prices and slowing passenger demand, American has been losing about $100 million each month. American was once the nation’s leading domestic and international carrier; now it is a distant third.

“American’s problems didn’t happen overnight but they have finally caught up with them,” said Robert Herbst, an independent analyst and retired airline pilot. “Their higher costs have forced them to cut unprofitable routes, which worsened their revenue problem. Bankruptcy was inevitable.”

The industry’s road to financial stability has been rocky and remains fragile. Employees, whose pensions and salaries were cut back, paid a heavy price. Dozens of airlines disappeared over the last decade, some through bankruptcies and others through mergers. The industry’s losses reached $60 billion in that period.

Thanks to reduced competition, the surviving airlines were able to raise ticket prices and increase revenue in all sorts of ways through a variety of fees for things like checked bags and booking an aisle seat.

American was the last of the so-called legacy carriers, created before the industry was deregulated in 1978, not to have filed for bankruptcy. If it manages to reduce its costs under court protection, analysts say it could become a candidate for a merger or a takeover. The most likely partner is US Airways, whose chief executive, Doug Parker, has long advocated the need for consolidation in the industry.

Ray Neidl, an analyst at the Maxim Group, said that US Airways would increase American’s network in the Southwest and in the Southeast, although it would not add much by way of international destinations. A merger with US Airways, Mr. Neidl said, “would also bring a very powerful and aggressive management team into play, which American would need to regain its proper place in the industry.”

But given American’s inability to reach a labor agreement with its pilots in the last three years, US Airways would pose another problem. It is still dealing with its own labor issues from its merger in 2005 with America West. Pilots from the two airlines have yet to agree to a common seniority list.

For now, American follows in the path set by Delta, United, and US Airways — which all went through bankruptcy court in recent years. Like these carriers, it hopes to be able to rewrite its labor contracts, shed obligations and debt and perhaps reduce the pension commitments it cannot afford. The details of American’s reorganization plan have not been made public yet.

US Airways filed for court protection twice before it was acquired by America West. Delta bought Northwest a year after both carriers emerged from bankruptcy. And United, which stayed under court protection the longest, from 2002 to 2006, bought Continental last year. Southwest, which never went through bankruptcy, completed its purchase of AirTran earlier this year.

“What probably saved the industry were the mergers,” Mr. Herbst said. “Most airlines would have gone bankrupt again without them.”

The airlines have also shown uncommon discipline in keeping their capacity in check since 2008. They have cut back on some flights and focused instead of filling as many seats as possible on their planes. Most are now flying packed planes most of the time.

Article source: http://feeds.nytimes.com/click.phdo?i=4e859cbeafc8fb120871036371eb2512

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European Finance Ministers Approve Billions in Loans for Greece

November 30, 2011 by Leave a Comment

Speaking after the meeting, Jean-Claude Juncker, who heads the euro zone finance ministers, said they had agreed to release their portion of an 8 billion-euro loan to Greece. The International Monetary Fund is expected to sign off on its share — roughly one third — early next month, making the loans available by the middle of December.

The ministers also agreed on rules to increase the firepower of their bailout fund, the European Financial Stability Facility, and will be able to offer insurance to those buying the bonds of nations like Spain and Italy. In these cases, insurance certificates — attached to make bonds more attractive — will themselves be tradable, said Klaus Regling, who heads the bailout fund. The fund will also seek investment from sovereign wealth funds and other non-European sources.

Though a goal of 1 trillion euros, or $1.3 trillion, was set for the expanded bailout fund, ministers acknowledged that this was now unlikely, and no figure was given at Tuesday night’s news conference.

Luc Frieden, Luxembourg’s finance minister, said the figure of 1 trillion euros “will be very difficult to reach, in view of the changed market circumstances.”

“I think the E.F.S.F. alone will not be able to solve all the problems,” Mr. Frieden said.

“We have to do so together with the I.M.F. and with the E.C.B., within the framework of its independence,” he said, referring to the European Central Bank.

The six hours of talks here highlighted the contrast between Europe’s tortuous decision-making and the breakneck speed with which financial markets have been pushing the currency zone toward a moment of truth.

While proposals have been working their way through Europe’s convoluted procedures, risks have grown that the debt crisis will plunge Europe into a steep recession or lead to a fragmentation of the currency union.

On Tuesday, the borrowing costs of Italy, the euro zone’s third-largest economy after Germany and France, reached nearly 8 percent, a record since the inception of the common currency in 1999. After the discussions late Tuesday, Olli Rehn, European commissioner for economic and monetary affairs, said that because of the economic slowdown, there would have to be tougher measures if Italy was to reach its financial goals.

Mr. Juncker said the ministers would explore “further options” to leverage the bailout fund.

A month after European Union leaders announced a plan to resolve the crisis, most of those decisions have either been delayed or overtaken by events, said Nicolas Véron, a senior fellow at the Bruegel economic research institute in Brussels. Plans to increase the power of the bailout fund, were now “too little too late,” Mr. Véron said, adding that Europe’s policy errors were caused by a “systemic failure of our institutional framework.”

France and Germany said they planned to break the downward spiral by outlining a new push toward a fiscal union, with stricter rules against budget “sinners,” before a meeting of leaders next week in Brussels.

The details of how these ideas will be pushed through remain highly uncertain, but Mr. Juncker said that discussions on tightening the rules would include the possibility of changing the European Union’s governing treaty — a slow and cumbersome process.

Germany is determined to toughen the euro zone rules significantly before it contemplates any additional far-reaching changes to help shore up the currency. So far, Berlin has resisted both greater intervention by the European Central Bank, which might stoke inflation, as well as the short-term introduction of common euro zone bonds.

Some officials hope that agreement in principle on new fiscal rules can encourage the central bank to intervene more actively to help Italy and Spain without risking criticism from Berlin. In recent days, senior figures in Austria, Finland and the Netherlands have declined to rule out an enhanced role for the bank.

The latest discussions illustrate the time it takes to impose decisions in Europe. Plans to expand the bailout fund, and allow it more freedom, were agreed to in July, and a decision was made in October to leverage its power to around 1 trillion euros. The decision on whether to release an international loan of 8 billion euros to Greece was also made in October, but carrying that out was held up when the former Greek prime minister, George A. Papandreou, suggested holding a referendum on the bailout package. The idea was later scrapped, and Mr. Papandreou resigned.

The finance ministers agreed Tuesday to release that 8 billion-euro installment, said an official who requested anonymity because an announcement had not yet been made. The money, part of the initial 110 billion-euro bailout extended to Greece last year, also must be approved by the International Monetary Fund.

Bank recapitalization, the third pillar of the October meeting, was not a main area of discussion on Tuesday, but there are worries that this requirement may impose burdens on banks that make them less likely to lend.

Article source: http://feeds.nytimes.com/click.phdo?i=e2fb4e96eb311b604fa61e1a8de99323

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For European Union and the Euro, a Moment of Truth

November 13, 2011 by Leave a Comment

On Saturday, the crisis swept away its second leader, when Prime Minister Silvio Berlusconi resigned after 17 years of dominance in Italian politics to the jeers and cheers of crowds in Rome.

Both there and in Greece, jumbled parliaments came together with urgency to install more technocratic governments that are committed to delivering the difficult reforms and austerity measures demanded by the European Union, the European Central Bank and the International Monetary Fund.

Despite those drastic and tangible steps, though, there is a host of problems that could quickly overwhelm Europe’s progress.

Looming over all the discussions of reform and financing mechanisms is the slowdown in the Continent’s already anemic growth rate, to 0.5 percent in 2012, and even the threat of a double-dip recession, the European Commission said in a forecast for the euro zone last week.

That calls into doubt the adequacy of the euro zone’s latest attempt to placate the markets, the lagging effort to bolster the $605 billion European Financial Stability Facility to $1.4 trillion or to find other funding. The task will become that much harder in a recessionary environment, especially as France’s credibility with investors begins to decline.

“I think we’re in very dangerous territory, and the euro zone has to act soon,” said Simon Tilford, chief economist for the Center for European Reform in London. “There isn’t really a muddle-through option right now. And those who argue that it’s possible for the south and Italy to default or deflate into competitiveness are fanciful and flying in the face of evidence.”

The damage that can result, he said, is potentially severe “to their economies, debt burdens, social and political stability, democratic accountability, and their belief in their European allies and in the European Union itself.”

At the center of it all sits Germany, leading the bloc of Northern European countries, which also includes the Netherlands and Finland, steadfastly maintaining that austerity and fiscal rectitude on the part of the debtors, no matter how painful, represent the only path to resolving the crisis. Any proposals to share the burden with the heavily indebted countries by collectivizing European debt — even though they may have contributed to the prosperity of the northern countries by consuming their exports — are rejected out of hand, largely for fear of a political backlash.

When Germany’s council of independent economic advisers proposed to Chancellor Angela Merkel last week a way to share European debt to protect Italy and Spain, she dismissed the idea as impossible without changes to European Union treaties. She has also opposed any expansion in the European Central Bank’s role in buying up the bonds of the indebted countries, which could hold down interest rates on their debts, let alone allowing the bank to guarantee Italian debt.

But critics say there is no time for the treaty changes Mrs. Merkel is talking about; those could take years to put in place.

“The crisis must be solved right now, and it simply will not wait for these instruments to fix it,” said Bernhard Rapkay, chairman of Germany’s Social Democrats in the European Parliament.

The vulnerability of Italy — the third-largest economy in the euro zone and the fourth-largest debtor nation in the world — brought the crisis into the core of the euro zone. For all the speculation over weaker countries eventually choosing to leave the euro, there is really no euro without Italy, certainly not a euro that can be considered a common European currency.

And if borrowing becomes so expensive for Italy that it is priced out of the markets, which seemed a real possibility last week, there is no so-called wall of money big enough to bail it out or to guarantee its $2.6 trillion debt.

“We’ve entered a make-or-break scenario,” said Thomas Klau, a German who heads the Paris office of the European Council on Foreign Relations. “The present situation with Italy now is sustainable for days, perhaps weeks, but not months. This new chapter either writes the endgame of the euro zone, or it precedes a much bigger leap into political and economic integration than all those made so far.”

With each bout of uncertainty, speculative attacks come closer to the core of the European Union. Greece teeters, Italy wobbles and France begins to tremble. The precariousness of the situation was on full view Thursday when a leading ratings agency, Standard Poor’s, mistakenly suggested on its Web site that it had downgraded France’s prized AAA rating, prompting a sell-off in French government bonds.

Article source: http://www.nytimes.com/2011/11/13/world/europe/for-european-union-and-the-euro-a-moment-of-truth.html?partner=rss&emc=rss

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S.E.C. Rule Lifts Lid on Hedge Funds

October 26, 2011 by Leave a Comment

WASHINGTON — Large hedge funds, the secretive private investment outfits that use extensive borrowing to magnify the returns of their portfolio bets, will be required to report detailed information on their holdings to federal regulators under a new rule adopted by the Securities and Exchange Commission on Wednesday.

The purpose of the quarterly disclosure is to give regulators the ability to monitor the risks that the funds pose to the overall financial system, something that officials at the Federal Reserve, the Treasury Department and the S.E.C. did not have during the financial crisis.

The data will not be public, however. It will be visible only to the regulators, including the Financial Stability Oversight Council, which was created by the Dodd-Frank regulatory law to oversee risks to financial institutions and markets.

For now, even the details of what the S.E.C. approved on Wednesday will be confidential. Because the new rules are a joint release with the Commodity Futures Trading Commission, the S.E.C. won’t make public the actual form that it approved in a public meeting until after the C.F.T.C. approves it.

The commodity commission is expected to vote “within the next week,” the S.E.C. said. One S.E.C. official said that might be as soon as Wednesday.

The data collection “follows the lessons learned during the financial crisis — lessons about the importance of monitoring and reducing the possibility that a sudden shock or failure of a financial institution will cascade through the entire financial system.” Mary L. Schapiro, the chairwoman of the S.E.C., said.

The commission, which currently has four sitting members, voted unanimously to approve the new rule.

Managers of funds with more than $1.5 billion in assets will be required to disclose aggregated information on how much the fund has invested in various asset classes, where investments are concentrated geographically, and how active the fund is in trading its portfolio.

In addition, large funds must disclose how leveraged their investments are — that is, the degree to which the size of the investments are enhanced using borrowed money — and how liquid, or quickly sold and converted into cash, they are.

Large funds will be required to report the information quarterly, within 60 days of the end of the quarter. They are not required to report “position information,” or details on individual investment holdings, however.

Nevertheless, the filings will provide an extensive peek inside funds whose trading activity can move financial markets, and whose risk-taking enables the funds both to book outsized returns and to suffer large losses.

Hedge funds with $150 million to $1.5 billion in assets will be subject to less extensive disclosures, as will private equity funds.

The new form has “substantial modifications” from the proposal that the S.E.C. released in February. That form drew broad complaints from hedge fund managers and at least one member of Congress, who said in comments filed with the commission that the requirements posed an unnecessary regulatory burden on investment managers.

They also expressed concern about whether the regulators will be able to keep the proprietary information confidential. Hedge funds closely guard their trading information and investment strategies.

If approved as expected by the C.F.T.C., the new rules will go into effect in mid- to late-2012, depending on a fund’s size.

Hedge funds will be required to provide some information to the public under new rules adopted by regulators in June.

Those regulations required limited disclosures, however, detailing only general information about a fund’s size, its largest investors and the fund’s “gatekeepers,” including its auditors, the brokerage firms that help to execute its trades and the marketers that service the fund.

This article has been revised to reflect the following correction:

Correction: October 26, 2011

An earlier version of this article stated incorrectly when large hedge funds would be required to report information on their holdings. The information is due quarterly, not annually, and within 60 days of the end of the quarter, not 120 days of the end of a fiscal year.

Article source: http://feeds.nytimes.com/click.phdo?i=6a2eaf14ee916092cf4dc1edaa89eb08

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Austria Approves Euro Bailout Fund

September 30, 2011 by Leave a Comment

Despite sustained heckling from far-right legislators that compelled Parliamentary leaders to call a temporary recess, the bailout was approved in the small Alpine country by a healthy 117 to 53 margin. The vote meant that Austria agreed to raise its share of the bailout to 21.6 billion euros, or roughly $29.4 billion, from 12.2 billion euros.

The decision in Vienna left just three countries out of the 17 members of the currency zone that had yet to approve the measure, which expands not only the size but the powers of the bailout fund. With Malta and the Netherlands set to vote next week, pressure mounted on Slovakia, viewed by many as the last holdout.

One day after Germany’s Bundestag passed the same measure with a wide majority, Chancellor Angela Merkel was in Warsaw where she met with Slovakia’s prime minister, Iveta Radicova, on the sidelines of a European Union summit. Ms. Radicova told reporters that she expected Parliament to ratify the fund no later than October 14, Reuters reported.

But the Slovak government’s majority in Parliament rests on four parties with divergent views, and many Slovaks feel that asking poorer Central Europeans to pay for the mistakes of the richer Greeks is unfair. One of the junior parties in Ms. Radicova’s coalition, the Freedom and Solidarity Party, known by its Slovak initials SaS, opposes the bailout, but in recent days has signaled some willingness to compromise.

With Germany’s weight behind the fund, known as the European Financial Stability Facility, political commentators say it is only a matter of time before Slovakia bows under the pressure and approves its own version of the bill.

The need to ratify the July agreement to expand the facility is all the more important in light of the fact that markets have already indicated that even a 440 billion euro fund, or roughly $600 billion, was nowhere close to enough money to fend off speculative attacks against heavily indebted countries, especially if larger countries like Spain and Italy are forced to turn to it for assistance.

Even as national parliaments have moved ahead with ratifying the agreement, Greece’s prime minister, George Papandreou, has pressed his case that his country will live up to its commitments to its European partners. Mr. Papandreou visited France’s president, Nicolas Sarkozy, in Paris on Friday.

Greece’s ability to stick to the difficult program of budget austerity has been viewed as crucial if it is to continue receiving aid. Mr. Papandreou also visited Berlin to meet with Mrs. Merkel Tuesday night.

But the euro crisis will never be resolved if debtor countries cannot take credible steps to reduce their national debts, said Norbert Irsch, chief economist at KfW Group in Frankfurt.

But he dismissed calls for Greece to leave the euro. The suggestion that Greece should leave the euro zone, he said, “does not sufficiently take into account the fact that the country would be plunged into an even more serious and long-lasting crisis.”

As the debate in Austria indicated, feelings run high on the subject of bailing out neighbors. Members of the far-right Alliance for Austria’s Future unfurled a banner on the floor of the chamber demanding a referendum.

Peter Filzmaier, a professor of political science at the Danube University Krems, said that the far-right parties saw the rescue fund more as an opportunity to score political points than a chance to alter the outcome of the vote.

“It was a very emotional debate,” said Mr. Filzmaier. “Austria has an extremely large number of people disinterested in the E.U., and when you’re talking about large sums of money and you don’t understand what is going on you get scared.”

The German press declared Thursday’s vote a victory for Mrs. Merkel, while asking how far she could push her intransigent coalition for further steps to rescue the common currency. Germany’s upper house, the Bundesrat, where delegations from the country’s states must approve legislation, signed off on Thursday’s vote in the Bundestag or lower house. But Bavaria’s state premier, Horst Seehofer, said Friday that his state would not support “additional increases or greater risks” beyond the existing guarantees.

Mrs. Merkel has faced criticism of her leadership almost from the beginning of the debt crisis, from the right and the left, domestically and from other foreign leaders, including President Obama. She has been attacked in particular for being slow and reactive in dealing with market turmoil and speculative attacks on fellow members of the euro zone.

The muddling through approach is criticized by academics, who find that it “does not fit into the worlds of models and textbooks,” said Mr. Irsch from KfW, but the German government and the European Central Bank “have acted in a pragmatic way and, in my opinion, also in a fitting manner.”

Article source: http://www.nytimes.com/2011/10/01/world/europe/austria-approves-euro-bailout-fund.html?partner=rss&emc=rss

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Equities Steady After Rise, Euro Holds Gains

September 30, 2011 by Leave a Comment

As the curtains come down on the September quarter, the worst for equities since the final quarter of 2008, investors are nursing their losses across all asset classes with traders eager to take profits to spruce up battered portfolios.

In early Asian trade, stocks in Japan and Australia edged higher while Seoul was broadly unchanged.

MSCI’s broadest index of Asia Pacific shares outside Japan was flat after rising for three consecutive days. For the month, it is down around 13 percent, its biggest monthly drop since October 2008.

Even a rare batch of strong economic data from the U.S. failed to cheer sentiment in Asia with traders focussing on China’s September PMI data to gauge how the world’s export powerhouse is holding up in the face of a slowing global economy.

Key indices in the U.S. closed between 0.8 to 1.3 percent higher with U.S. stock futures in Asia holding on to overnight gains.

In currencies, the euro hovered above a eight-month low versus the dollar after German Chancellor Angela Merkel’s coalition party voted on Thursday to enhance the European Financial Stability Facility’s powers.

Having worked through to $1.3679 at one stage, the single currency settled back at $1.3585 with investors worried about the many problems ahead for the euro zone.

“There is still a lot of uncertainty… Economic growth in Europe and the U.S. is not that good and that will put pressure on the euro and give a bid to the dollar,” said Joseph Capurso, strategist at Commonwealth Bank of Australia.

Worried investors gave the thumbs up to safe-haven bets like gold and Treasuries with the former extending gains slightly to hold $1,622 per ounce.

U.S. crude futures rose more than $1 to as high as $83.17 a barrel in electronic trade on Friday, extending Thursday’s gains.

(Additional reporting by Cecile Lefort in Sydney; Editing by Daniel Magnowski)

Article source: http://feeds.nytimes.com/click.phdo?i=eea3f7c0f5e57474369b016d492a3abf

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German Leaders Reiterate Opposition to Euro Bonds

August 21, 2011 by Leave a Comment

FRANKFURT — German leaders on Sunday reiterated their opposition to issuing bonds backed by all euro zone countries, with Chancellor Angela Merkel saying that so-called euro bonds would be an option only in the distant future, while her finance minister said that common debt would make it easier for governments to avoid pursuing responsible fiscal policies.

“It will not be possible to solve the current crisis with euro bonds,” Mrs. Merkel told ZDF television.

The German finance minister, Wolfgang Schäuble, said it would take too long for countries in the euro zone to amend the treaty on monetary union, which would probably be required to allow the bonds. “We have to solve the crisis within the existing treaty,” he told the newspaper Welt am Sonntag.

Mr. Schäuble also spoke out against euro bonds during an appearance Sunday in Berlin, Reuters reported, saying that the threat of higher interest rates was necessary to impose budgetary discipline on the nations using the euro currency.

With nervous financial markets likely to face another turbulent week, the comments by Mrs. Merkel and Mr. Schäuble could reinforce perceptions that European leaders remain reluctant to act more forcefully to address the sovereign debt crisis. If so, the European Central Bank could find it more difficult to hold down yields on Italian and Spanish debt, and keep borrowing costs for those countries from reaching dangerous levels.

France and Germany have made it clear that they do not see euro bonds as the solution to rising borrowing costs for countries like Spain and Italy, Frank Engels, an analyst at Barclays Capital in Frankfurt, said in a note.

So far the central bank’s bond market intervention, which began two weeks ago, has kept Italian and Spanish yields below 5 percent, Mr. Engels wrote. In October, the European Financial Stability Facility, the European Union’s bailout fund, will be able to buy government bonds. But that may not be enough to keep yields within bounds, he said.

“Are these backstop facilities sustainable? We have our doubts, as the E.C.B.’s stamina is probably limited and the E.F.S.F.’s balance sheet is capped,” Mr. Engels wrote.

Mr. Schäuble told Die Welt that he did not think it would be necessary to increase the size of the bailout fund. Such comments may come as a particular disappointment to investors because Mr. Schäuble is regarded as one of the most pro-European members of the German cabinet, and among the most willing to agree to national sacrifice in the interest of saving the common currency.

He said that he personally would be willing to cede some control over fiscal policy to a European finance minister, as Jean-Claude Trichet, the president of the European Central Bank, has proposed. But Mr. Schäuble added, “We can only go as fast and as far as we can convince citizens and their representatives in Parliament.”

Separately, Der Spiegel magazine reported that the German finance ministry had calculated that euro bonds would cost Germany an additional 2.5 billion euros or $3.6 billion in interest payments in the first year of issuance, and as much as 10 times that sum each year after a decade. Germany’s borrowing costs are typically among the lowest in the world, but could rise if the nation’s reputation for fiscal prudence was diluted by closer association with countries like Italy.

A finance ministry spokesman said he could not confirm the Spiegel report, which the magazine said was based on estimates by unidentified ministry experts.

Opposition to euro bonds is strong within German political circles and among the country’s conservative economics establishment because of the perception that the country would wind up subsidizing its neighbors.

However, some economists argue that euro bonds would be cheaper even for Germany, because the volume of the bond market would rival the market for United States Treasuries and promote the euro as a reserve currency. That would increase demand for the bonds and lower interest rates.

There is some support for euro bonds in Germany. Leaders of the opposition Social Democrats and Green Party have spoken in favor of common European debt. In addition, the Frankfurt Allgemeine newspaper on Sunday quoted several members of Mrs. Merkel’s governing coalition in Parliament as saying that Germany should not rule out euro bonds forever.

While rejecting the bonds, Mr. Schäuble said that Germany would defend the euro “under all circumstances” and that the government categorically rejected suggestions that Greece should leave the euro zone, as some economists have proposed.

If Greece dropped out, he said, Europe would suffer “a dramatic loss of trust and influence.”

Article source: http://www.nytimes.com/2011/08/22/business/german-leaders-reiterate-opposition-to-euro-bonds.html?partner=rss&emc=rss

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E.U. Monetary Official Blames Poor Communication for Market Jitters

August 5, 2011 by Leave a Comment

BRUSSELS — The European Union’s top finance official said Friday that a failure by leaders to adequately explain how a second bailout for Greece and other reforms would work was partly to blame for the recent market turmoil.

Olli Rehn, the economics and monetary affairs commissioner, also suggested that more determined efforts were needed to make good on an agreement last month to expand the main bailout mechanism for the euro zone. And he promised to issue a report soon on the feasibility using so-called euro bonds as another way of shoring up beleaguered European economies.

Speaking at a news conference, Mr. Rehn suggested that E.U. leaders had failed to explain adequately the “comprehensive, detailed and technically complex” agreement on Greece reached at a summit in Brussels last month.

“There were expectations in financial markets that all elements could be implemented immediately,” he said. “While these expectations were clearly unrealistic, markets have nevertheless been disappointed.”

“All of us who are in responsible positions in Europe will have to do much better in order to ensure verbal discipline and rigor,” he said.

European officials were “working night and day to put flesh on the bones” of the July 21 agreement, he said. “Once investors understand that all this work is underway behind the scenes, they will be reassured,” he said.

“It is not as if the fundamentals of the Italian or Spanish economies have changed overnight,” he said, referring to widening spreads on Spanish and Italian bonds in recent days.

Mr. Rehn also urged member countries and national parliaments to give a final green light to expanding the lending capacity and scope of the European Financial Stability Facility, or E.F.S.F., the region’s rescue fund.

He would not enter “into the numbers game“ or guess at the future capitalization of the fund, but said the technical and political details should be completed by early September.

Mr. Rehn also said the commission’s report on common bonds guaranteed by some or all euro zone members would examine whether such bonds “could contribute to fiscal discipline and increase liquidity in the bond markets in Europe so that the countries enjoying highest credit rating standards would not see their borrowing costs” rise, Mr. Rehn said.

But the idea of euro bonds has met with deep skepticism in Germany, and Mr. Rehn signaled some caution.

“Let’s not jump the gun nor rush to conclusions in that regard,” he said.

Article source: http://www.nytimes.com/2011/08/06/business/global/eu-monetary-official-blames-poor-communication-for-market-jitters.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

European Central Bank Buys Bonds to Reassure the Markets, to Little Avail

August 5, 2011 by Leave a Comment

The show of force initially bolstered Italian and Spanish bonds. But the move appeared to backfire as stock markets in Europe and the United States fell sharply after Jean-Claude Trichet, the central bank’s president, warned of dangers ahead, while the modest scale of the bank’s bond-buying apparently fell short of what investors considered adequate.

Compounding the tension, a top European official said that a deal reached two weeks ago to ease the debt crisis was not working and urged leaders to consider bolstering the region’s existing bailout fund.

European leaders decided last month to authorize the European Financial Stability Facility — the European Union’s bailout fund — to buy bonds in open markets, relieving the central bank of that responsibility. But it will take months before the rescue fund is able to start making purchases. In addition, European leaders did not increase the size of the fund, leaving questions about whether it would be up to the task if a country as big as Italy or Spain needed help.

The European Commission president, José Manuel Barroso, has been pushing euro zone leaders to do more. In a letter released Thursday, he called for a “rapid reassessment of all elements” related to the stability fund, so that it was “equipped with the means for dealing with contagious risk.”

He also criticized European politicians for “the undisciplined communication and the complexity and incompleteness” of the package agreed to at the summit meeting on July 21.

“Markets remain to be convinced that we are taking the appropriate steps to resolve the crisis,” he wrote. “Whatever the factors behind the lack of success, it is clear that we are no longer managing a crisis just in the euro area periphery.”

As part of its response to the crisis, the central bank also moved to prop up weaker banks that may be having trouble raising cash, expanding its lending to euro zone institutions at the benchmark interest rate. The central bank left that rate unchanged at 1.5 percent, while the Bank of England left its benchmark rate at a record low of 0.5 percent.

Mr. Trichet declined to say what bonds the bank was buying or how much. He said the bank acted in response to “renewed tensions in some financial markets in the euro area.” It was the first such intervention since March.

Traders said the central bank had bought Irish and Portuguese government debt during the day. But the bank did not buy bonds of Italy and Spain, two countries with huge bond markets and now seen as most vulnerable in the region.

The move to buy Portuguese and Irish debt made little sense, given that they are insulated by their official bailouts and no longer have to raise money on the market, said Michael Leister, a fixed-income analyst at WestLB in Düsseldorf, Germany.

Mr. Trichet, however, had “opened the door to acting on behalf of Spain and Italy,” he added. The yield on 10-year Italian debt rose 11 basis points, to 6.19 percent. Yields on 10-year Spanish bonds rose three basis points, to 6.28 percent. Earlier, Spain sold 3.3 billion euros, or $4.7 billion, of bonds due in 2014 with demand more than twice the level of supply. But the average yield rose to 4.813 percent from 4.037 percent at a comparable auction in June.

“Over all, sentiment hasn’t changed yet,” Mr. Leister said after the central bank had acted. “Everyone’s afraid that the debt spiral will become a self-fulfilling prophecy. And the E.C.B. is the only institution with the firepower to stop the situation in the short term.”

The central bank first began buying bonds in the open market in May 2010 but tapered off the interventions earlier this year, a move investors may have interpreted as a lack of resolve. Michael T. Darda, chief economist at MKM Partners in Stamford, Conn., warned Thursday that half-hearted forays into the bond market “will fail, just like they did last year.”

“In each case, the debt crisis got worse instead of better,” he wrote in a note.

Jack Ewing reported from Frankfurt and Matthew Saltmarsh from London. Julia Werdigier contributed reporting from London and Rachel Donadio from Rome.

Article source: http://feeds.nytimes.com/click.phdo?i=c948eca5010fa388e3871223e7455649

Filed Under: Business News Tagged With: , ,
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