April 18, 2021

Contraction Shows Signs of Slowing for Greece

Gross domestic product shrank by 4.6 percent in the second quarter compared with the same three months a year earlier, the official Hellenic Statistical Authority said. That was an improvement from the first quarter of 2013, when the economy contracted 5.6 percent compared with a year earlier.

The economy has been shrinking since the third quarter of 2008, when the collapse of Lehman Brothers rocked the global financial system, drying up credit to Greek businesses and consumers, exposing years of errors in government record-keeping and driving the country to the brink of collapse.

The troika of international bodies that have been shoring up Greece’s finances and guiding its recovery — the International Monetary Fund, the European Central Bank and the European Commission — has approved more than 240 billion euros ($319 billion) in bailout loans since 2010, a sum larger than the country’s annual economic output. In July, Greece received a loan installment of 5.7 billion euros after Parliament agreed to further increases in taxes and cuts in the public payroll.

Ben May, an economist in London with Capital Economics, said the latest number was “encouraging, as it looks like the quarterly pace of decline is slowing.” An analysis of the second-quarter figure suggested that G.D.P. might have ticked up by about one-tenth of a percent from the first quarter, he said.

“The troika’s forecast for a 4.2 percent annual decline in 2013 looks achievable,” Mr. May said.

But it remains “plausible,” he said, that the Greek economy will continue shrinking into 2015. He forecast a 2 percent decline in G.D.P. for next year, followed by a 0.5 percent contraction in 2015.

Many economists argue that the austerity approach favored by the troika is itself part of the problem, pushing Greek unemployment to depression levels. The jobless rate reached a new peak of 27.6 percent in May, according to the statistical agency, with youth unemployment around 65 percent.

Austerity has in practice largely meant laying off civil servants and cutting social spending, because raising taxes generates little revenue in a collapsing economy. The policy is paying off in one respect: Christos Staikouras, the deputy finance minister, told reporters on Monday that the government had achieved a primary budget surplus of 2.6 billion euros, or 1.4 percent of G.D.P., in the first seven months of the year, significantly better than the expected primary deficit of 3.1 billion euros. A primary deficit or surplus excludes debt service and some other costs.

The International Monetary Fund said last month that Greece had made “important progress in rectifying precrisis imbalances” and that the economy was “rebalancing.” But the fund noted that the gains had come as a result of recession, which has suppressed imports, and not through “productivity-enhancing structural reform.”

Mr. May said that it was almost certain that some kind of government debt restructuring would be needed to achieve what the troika calls a sustainability target: a debt-to-G.D.P. ratio of 120 percent by 2020.

The Bundesbank, the German central bank, expects Greece to receive yet another bailout after German national elections on Sept. 22, according to a report Sunday in the newsmagazine Der Spiegel, which cited a central bank document.

According to the document, which Spiegel said had been prepared by the Bundesbank for the I.M.F. and the German Finance Ministry, the Bundesbank says that it was only “political pressures” that enabled Greece to obtain last month’s installment of financing, and that the bailout program remains “exceptionally” risky.

The German Finance Ministry dismissed the Spiegel report, saying it had no knowledge of the document Spiegel cited, Reuters said.

Article source: http://www.nytimes.com/2013/08/13/business/global/greek-economy-shrinks-for-20th-straight-quarter.html?partner=rss&emc=rss

Unemployment in Euro Zone Continues to Rise

The unemployment rate in the 17-nation currency union ticked up by one-tenth of a percentage point from February, when the previous record was set, Eurostat, the statistical agency of the European Union, reported from Luxembourg. A year earlier, euro zone joblessness stood at 11 percent.

A separate report Tuesday from Eurostat showed inflation dropping sharply in the euro zone, well below the European Central Bank’s target of 2 percent a year. The annualized rate of inflation for consumer prices was just 1.2 percent in April 2013, down from March, when inflation stood at 1.7 percent.

The reports, along with other recent data suggesting that the economy is healing more slowly than many had hoped, could prompt the European Central Bank to take action at its policy meeting on Thursday. The central bank could cut its key interest-rate target, already at a record low of 0.75 percent, by a quarter point, economists say, though the impact of such a move would probably be slight, because banks remain less than eager to lend.

“Stabilizing the peripheral euro zone countries will take at least until the end of 2013,” Ralph Solveen, an economist with Commerzbank in Frankfurt, said. As a result, he said, unemployment would probably keep rising “until next spring.”

For the 27-nation European Union, the March jobless rate was unchanged, at 10.9 percent. Eurostat estimated that 26.5 million men and women were now unemployed in Europe, including 5.7 million young people.

Both the euro zone and European Union jobless figures are the highest Eurostat has reported since it began keeping the data in 1995 in the days before the euro. In comparison, the unemployment rate in the United States was 7.6 percent in March.

Six years after Wall Street’s bad bets on the United States housing market began to sink the global financial system, the European economy remains trapped in torpor with little relief in sight. Governments have tightened the screws on public finances to meet deficit targets, and companies remain extremely reticent about hiring. The euro zone’s gross domestic product is widely expected to decline for a second consecutive year in 2013.

Manufacturers are largely dependent on demand from outside Europe for growth. Carmakers, which employ about two million people in Europe, anticipate sales in the European Union this year to fall back to levels last seen in the early 1990s. In that dismal landscape, PSA Peugeot Citroën, the French automaker that ranks No. 2 in Europe behind Volkswagen, said Monday that its unions had agreed to a plan to close a plant near Paris and to reduce its French work force by more than 11,000.

While a decline in energy prices helped to push the inflation rate lower, Jennifer McKeown, an economist in London with Capital Economics, argued that the jobless problem was probably itself part of the reason for the downward pressure on prices. She said in a note that it would be “a disappointment” if the E.C.B. failed to ease rates and “announce further unconventional policies to boost bank lending.”

Two nations are staggering under depression-level jobless rates: Greece, where the European sovereign debt crisis began, had a rate of 27.2 percent in January, the latest month for which data are available; Spain had unemployment of 26.7 percent in March. Portugal was next at 17.5 percent. Germany, which has the largest economy in the European Union, was at just 5.4 percent, with only Austria, at 4.7 percent, lower. Britain’s rate stood at 7.8 percent, while France’s was at 11 percent.

Mr. Solveen forecasted that the euro zone economy would shrink by 0.2 percent this year, but he pointed to progress in some countries, including Italy and Spain, in addressing problems that he said would eventually help turn things around. Still, Spain’s “catastrophic” unemployment rate is a reminder that its burst housing bubble is still sapping the economy.

“The correction there has to go on,” he said, “because there is still a huge number of unsold homes.”

Mr. Solveen said that Germany had reduced its dependence on its euro zone neighbors, and the key to its economic growth was now tied to the global economy.

Article source: http://www.nytimes.com/2013/05/01/business/global/european-unemployment-sets-another-record.html?partner=rss&emc=rss

U.S. Blacklists an Iranian and Businesses Over Violation of Sanctions

The Treasury Department, which administers the government’s Iran sanctions, said the executive, Babak Morteza Zanjani, had conspired with First Islamic Investment Bank of Malaysia and what the department called an international network of front companies stretching halfway around the world “for moving billions of dollars on behalf of the Iranian regime.”

The announcement, coming just a few days after diplomatic talks with Iran over the nuclear issue adjourned with no sign of progress, was the second high-profile Treasury action against accused violators of the Iranian sanctions in less than a month.

On March 14, the Treasury blacklisted a Greek shipping tycoon, Dimitris Cambis, over what it called his scheme to acquire a fleet of oil tankers on Iran’s behalf and disguise their ownership to ship Iranian oil.

“As international sanctions have become increasingly stifling, Iran has resorted to criminal money-laundering techniques, moving its oil and money under false names and pretenses,” said David S. Cohen, the Treasury’s undersecretary who oversees the sanctions effort.

In a statement, Mr. Cohen said the action announced on Thursday reflected what he called the government’s commitment to “exposing and thwarting Iran’s attempts to evade international sanctions and abuse the global financial system.”

The Treasury action also applied to a Swiss-based Iranian oil trading company, Naftiran Intertrade, which the Treasury said was owned by the National Iranian Oil Company, which has already been blacklisted.

The American sanctions freeze the assets of blacklisted individuals and companies and prohibit American dealings with them. Foreign companies that do business with any names on the blacklist run the risk of American penalties as well.

A senior Treasury official, speaking on the condition that he not be identified by name, said it was a sign of Iran’s desperation that it had been forced into a money-laundering relationship with Mr. Zanjani that had been relatively easy to trace.

“These are Rube Goldberg-type networks, in efforts to try to get access to revenues, and not being able to do so in a way that escapes our attention,” the official said.

Mr. Zanjani, who is the chairman of more than 60 companies known collectively as the Sorinet Group, based in the United Arab Emirates, did not immediately respond to e-mail requests for comment.

But it is not the first time that he has been accused of violating Western sanctions on Iran, an accusation he has denied.

Last December, the European Union identified him as a “key facilitator of Iranian oil deals” and forbade European Union companies or individuals from doing Iran-related business with him. Mr. Zanjani said at the time that he had done nothing wrong. “This is a mistake,” he was quoted by Reuters as saying.

The United States and the European Union have been using increasingly onerous economic sanctions against Iran as part of their effort to force the country to make concessions in the protracted dispute over its enrichment of uranium, which it has continued in violation of United Nations Security Council resolutions requesting a halt to the enrichment.

The West has accused Iran of seeking the capacity to build nuclear weapons, an accusation that the Iranians have denied.

The sanctions have basically banished Iran from the global banking system, caused a severe devaluation in its currency and sharply reduced its ability to sell oil, the country’s most important export.

Iranian leaders have called the sanctions useless bullying that will only harden their resolve to prevail.

At the same time, the lack of diplomatic progress to resolve the dispute has increased sentiment among Iran’s critics for even tougher economic sanctions, including a trade embargo, and has resurrected warnings from the Obama administration that “all options are on the table” — a reference to possible military action if Iran is thought to be close to the ability to make a weapon.

President Obama said last month that his administration believed it would take “over a year or so” for Iran to achieve that ability, and sanctions advocates said the Treasury’s focus on starving Iran financially appeared to be part of that calculus.

“The Obama administration is committed to targeting the oil-related payments that are essential to Iran’s ability to replenish its dwindling foreign exchange reserves,” said Mark Dubowitz, the executive director of the Foundation for Defense of Democracies, a Washington-based advocacy group that has pushed for stronger sanctions.

Mr. Dubowitz said, “The administration is in a race to intensify the pressure, and try to reach a diplomatic deal, before Iranian nuclear physics wins.”

Article source: http://www.nytimes.com/2013/04/12/world/us-blacklists-an-iranian-and-businesses-over-violation-of-sanctions.html?partner=rss&emc=rss

DealBook: HSBC to Pay $1.92 Billion Fine to Settle Charges Over Laundering

HSBC's headquarters in London.Facundo Arrizabalaga/European Pressphoto AgencyHSBC’s headquarters in London.

4:37 a.m. | Updated

State and federal authorities decided against indicting HSBC in a money-laundering case over concerns that criminal charges could jeopardize one of the world’s largest banks and ultimately destabilize the global financial system.

Instead, HSBC announced on Tuesday that it had agreed to a record $1.92 billion settlement with authorities. The bank, which is based in Britain, faces accusations that it transferred billions of dollars for nations like Iran and enabled Mexican drug cartels to move money illegally through its American subsidiaries.

HSBC said it had “reached agreement with United States authorities in relation to investigations regarding inadequate compliance with anti-money laundering and sanctions laws.” The bank is also expected to reach a settlement on Tuesday with Britain’s Financial Services Authority, according to a person with direct knowledge of the matter.

“We accept responsibility for our past mistakes,’’ HSBC’s chief executive, Stuart T. Gulliver, said in the statement. “We are committed to protecting the integrity of the global financial system. To this end, we will continue to work closely with governments and regulators around the world.”

While the settlement with HSBC is a major victory for the government, the case raises questions about whether certain financial institutions, having grown so large and interconnected, are too big to indict. Four years after the failure of Lehman Brothers nearly toppled the financial system, regulators are still wary that a single institution could undermine the recovery of the industry and the economy.

But the threat of criminal prosecution acts as a powerful deterrent. If authorities signal such actions are remote for big banks, the threat could lose its sting.

Behind the scenes, authorities debated for months the advantages and perils of a criminal indictment against HSBC.

Some prosecutors at the Justice Department’s criminal division and the Manhattan district attorney’s office wanted the bank to plead guilty to violations of the federal Bank Secrecy Act, according to the officials with direct knowledge of the matter, who spoke on the condition of anonymity. The law requires financial institutions to report any cash transaction of $10,000 or more and to bring any dubious activity to the attention of regulators.

Given the extent of the evidence against HSBC, some prosecutors saw the charge as a healthy compromise between a settlement and a harsher money-laundering indictment. While the charge would most likely tarnish the bank’s reputation, some officials argued that it would not set off a series of devastating consequences.

A money-laundering indictment, or a guilty plea over such charges, would essentially be a death sentence for the bank. Such actions could cut off the bank from certain investors like pension funds and ultimately cost it its charter to operate in the United States, officials said.

Despite the Justice Department’s proposed compromise, Treasury Department officials and bank regulators at the Federal Reserve and the Office of the Comptroller of the Currency pointed to potential issues with the aggressive stance, according to the officials briefed on the matter. When approached by the Justice Department for their thoughts, the regulators cautioned about the effect on the broader economy.

“The Justice Department asked Treasury for our view about the potential implications of prosecuting a large financial institution,” David S. Cohen, the Treasury’s under secretary for terrorism and financial intelligence, said in a statement. “We did not believe we were in a position to offer any meaningful assessment. The decision of how the Justice Department exercises its prosecutorial discretion is solely theirs and Treasury had no role.”

Still, some prosecutors proposed that Attorney General Eric H. Holder Jr. meet with Treasury Secretary Timothy F. Geithner, people briefed on the matter said. The meeting never took place.

After months of discussions, prosecutors decided against a criminal indictment, but only after securing record penalties and wide-ranging sanctions.

The HSBC deal includes a deferred prosecution agreement with the Manhattan district attorney’s office and the Justice Department. The deferred prosecution agreement, a notch below a criminal indictment, requires the bank to forfeit more than $1.2 billion and pay about $700 million in fines, according to the officials briefed on the matter. The case, officials say, will claim violations of the Bank Secrecy Act and Trading with the Enemy Act.

As part of the deal, one of the officials briefed on the matter said, HSBC must also strengthen its internal controls and stay out of trouble for the next five years. If the bank again runs afoul of the federal rules, the Justice Department can resume its case and file a criminal indictment. An independent auditor will also monitor the bank’s progress to strengthen its internal controls, and will make regular assessments on the firm’s progress.

Shares in the British bank fell less than 1 percent in morning trading in London on Tuesday.

The HSBC case is part of a sweeping investigation into the movement of tainted money through the American financial system. In 2010, Lanny A. Breuer, the head of the Justice Department’s criminal division, created a money-laundering task force that has collected more than $2 billion in fines from banks, a number that is set to double with the HSBC case.

The inquiry — led by the Justice Department, the Treasury and the Manhattan prosecutors — has ensnared six foreign banks in recent years, including Credit Suisse and Barclays. In June, ING Bank reached a $619 million settlement to resolve claims that it had transferred billions of dollars in the United States for countries like Cuba and Iran that are under United States sanctions.

On Monday, federal and state authorities also won a $327 million settlement from Standard Chartered, a British bank. The bank, which in September agreed to a larger settlement with New York’s top banking regulator, admitted processing thousands of transactions for Iranian and Sudanese clients through its American subsidiaries. To avoid having Iranian transactions detected by Treasury Department computer filters, Standard Chartered deliberately removed names and other identifying information, according to the authorities.

“You can’t do it. It’s against the law, and today Standard Chartered is being held to account,” Mr. Breuer said in an interview.

HSBC’s actions stand out among the foreign banks caught up in the investigation, according to several law enforcement officials with knowledge of the inquiry. Unlike those of institutions that have previously settled, HSBC’s activities are said to have gone beyond claims that the bank flouted United States sanctions to transfer money on behalf of nations like Iran. Prosecutors also found that the bank had facilitated money laundering by Mexican drug cartels and had moved tainted money for Saudi banks tied to terrorist groups.

HSBC was thrust into the spotlight in July after a Congressional committee outlined how the bank, between 2001 and 2010, “exposed the U.S. financial system to money laundering and terrorist financing risks.” The Permanent Subcommittee on Investigations held a subsequent hearing at which the bank’s compliance chief resigned amid mounting concerns that senior bank officials were complicit in the illegal activity. For example, an HSBC executive at one point argued that the bank should continue working with the Saudi Al Rajhi bank, which has supported Al Qaeda, according to the Congressional report.

Despite repeated urgings from federal officials to strengthen protections in its vast Mexican business, HSBC instead viewed the country from 2000 to 2009 as low-risk for money laundering, the Senate report found. Even after HSBC’s Mexican operation transferred more than $7 billion to the United States — a volume that law enforcement officials said had to be “illegal drug proceeds” — lax controls remained.

HSBC has since moved to bolster its safeguards. The bank doubled its spending on compliance functions and revamped its oversight, according to a spokesman. In January, HSBC hired Stuart A. Levey as chief legal officer to come up with stricter internal standards to thwart the illegal flow of cash. Mr. Levey was formerly an under secretary at the Treasury Department who focused on terrorism and financial intelligence.

On Monday, the bank said it was promoting Robert W. Werner, who oversaw the group at the Treasury Department that enforces sanctions, to run a specially created division focused on anti-money laundering efforts.

Regulators have also vowed to improve. The Congressional hearings exposed weaknesses at the Office of the Comptroller of the Currency, the national bank regulator. In 2010, the regulator found that HSBC had severe deficiencies in its anti-money laundering controls, including $60 trillion in transactions and 17,000 accounts flagged as potentially suspicious, activities that were not reviewed. Despite the findings, the regulator did not fine the bank.

During the hearings this summer, lawmakers assailed the regulator. At one point, Senator Tom Coburn, Republican of Oklahoma, called the comptroller “a lap dog, not a watchdog.”

Article source: http://dealbook.nytimes.com/2012/12/10/hsbc-said-to-near-1-9-billion-settlement-over-money-laundering/?partner=rss&emc=rss

DealBook: Fed Wants U.S. Banks to Adhere to Stiffer International Rules

The Federal Reserve proposed on Thursday that the country’s banks adopt a broad package of international regulations aimed at making the global financial system more resilient to shocks.

The proposal, drafted by a group of central banks and national bank regulators, would require banks to hold sturdier buffers against losses. The Basel Committee on Banking Supervision devised the rules, known as Basel III, after the 2008 financial crisis revealed the frailty of global banks.

“It is a faithful implementation of the global agreement,” said Stefan Walter, a principal at Ernst Young, and a former secretary-general of the Basel committee. “This is a major step forward.”

The proposal focuses on capital, which banks must hold to protect themselves against potential losses. The critical requirement compares Tier 1 common capital with a measure of a bank’s assets. Thursday’s proposal would require Tier 1 common capital that amounted to 7 percent of assets by the end of 2018, when the phase-in period for the regulations would end. The Fed’s proposed rules will be open to public comment for 90 days.

Many of the requirements have been known for months, and the banks are already fortifying their balance sheets in preparation. For instance, Citigroup, which was severely undercapitalized when it entered the financial crisis, said it had an estimated Basel III ratio of 7.2 percent at the end of March. JPMorgan Chase, under scrutiny because of a multibillion-dollar loss in a derivatives trade, has not publicly disclosed its current estimated Basel III ratio.

The largest global banks are likely to be required to have capital levels higher than 7 percent. Regulators are expected to demand that the largest banks hold extra capital to reflect the risk their size presents to the financial system. Such banks might be need as much as 2.5 percentage points of additional capital, bringing the total to 9.5 percent.

Despite the stricter requirements, the Federal Reserve would allow many banks to pay out their capital in the form of dividends and share buybacks. A Federal Reserve official said that recent bank stress tests took into account whether the banks could still meet minimum, interim Basel III requirements after paying out capital. The banks will have more than six years to fully comply with the new rules, with the phase-in period starting next year.

The Basel III standards have plenty of critics. Some bankers say they are overly burdensome, arguing that even a slow introduction could crimp lending.

Under Basel III, banks would have to hold more capital against certain types of mortgages, which could deter banks from making home loans. A Federal Reserve official responded that the Basel III rules were intended to give banks incentives to write sound mortgages, not hamper lending.

Some analysts say they think the rules are too weak and could lead to dangerous unintended consequences.

Through a practice known as risk-weighting, Basel III allows banks to hold less capital against assets that the rule makers assume are less risky, like government bonds. The European sovereign debt crisis shows the potential danger of this approach.

“When you give something a low risk-weight, that’s where the risk tends to build,” said Anat R. Admati, professor of finance and economics at Stanford University.

Article source: http://dealbook.nytimes.com/2012/06/07/the-fed-proposes-stronger-buffers-for-banks/?partner=rss&emc=rss

News Analysis: In Euro Zone, Banking Fear Feeds on Itself

As Europe struggles to contain its government debt crisis, the greatest fear is that one of the Continent’s major banks may fail, setting off a financial panic like the one sparked by Lehman’s bankruptcy in September 2008.

European policy makers, determined to avoid such a catastrophe, are prepared to use hundreds of billions of euros of bailout money to prevent any major bank from failing.

But questions continue to mount about the ability of Europe’s banks to ride out the crisis, as some are having a harder time securing loans needed for daily operations.

American financial institutions, seeking to inoculate themselves from the growing risks, are increasingly wary of making new short-term loans in some cases and are pulling back from doing business with their European counterparts — moves that could exacerbate the funding problems of European banks.

Similar withdrawals, on a much larger scale, forced Lehman into bankruptcy, as banks, hedge funds and others took steps to shield their own interests even though it helped set in motion the broader market crisis.

Turmoil in Europe could quickly spread across the Atlantic because of the intertwined nature of the global financial system. In ad-dition, it could further damage the already struggling economies elsewhere.

“This crisis has the potential to be a lot worse than Lehman Brothers,” said George Soros, the hedge fund investor, citing the lack of an authoritative pan-European body to handle a banking crisis of this severity. “That is why the problem is so serious. You need a crisis to create the political will for Europe to create such an authority, but there is still no understanding as to what the authority will do.”

The growing nervousness was reflected in financial markets Tuesday, with stocks in the United States and Europe falling 1 percent and European bank stocks falling 5 percent or more after steep drops in recent weeks.

European bank shares are now at their lowest point since March 2009, when the global banking system was still shaky following Lehman’s collapse.

Investors also continued to seek the safety of United States Treasury bonds, as yields on two-year bonds briefly touched 1.90 percent, the lowest ever, before closing at 1.98 percent.

Adding to the anxiety, several immediate challenges face European officials as they try to calm markets worried about the debt crisis spreading.

In the coming weeks, the 17 countries of the euro currency zone each could agree to a July deal brokered to bail out Greece again and possibly the region’s ailing banks. Along with getting unanimity, more immediate obstacles could trip up the agreement.

On Wednesday, Germany’s top court is to rule on whether it is  legal for that country’s leaders to make such an agreement. On Thursday, officials in Finland are to express their conditions for approving the deal, and other countries may follow with their own demands to ensure their loans will be paid back. 

Though they have not succeeded in calming the markets, European leaders have taken a series of steps to avert a Lehman-like failure. New credit lines have been opened by the European Central Bank for institutions that need funds, while the proposed Greek bailout would provide loans to countries that need to recapitalize their banks. In addition, the central bank has been buying up bonds from Italy and Spain, among other countries, to keep interest rates from spiking. Many of these have been bought from European banks, effectively allowing them to shed troubled assets for cash.

While the problems in smaller countries like Greece and Ireland are not new, in recent weeks the concerns have spread to banking giants in countries like Germany and France that are crucial to the functioning of the global financial system and are closely linked with their American counterparts. What is more, worries have surfaced about the outlook for Italy, whose debt dwarfs that of other smaller troubled borrowers like Greece.

Article source: http://www.nytimes.com/2011/09/07/business/global/in-euro-zone-banking-fear-feeds-on-itself.html?partner=rss&emc=rss

Strategies: Whatever Happened to ‘Risk Free’?

How bad has it been? Despite brief rallies, the Standard Poor’s 500-stock index has fallen more than 13 percent from its May peak. For four consecutive days, the index moved up or down by at least 4 percent, the first time that’s happened.

In a steadily rising market, investing may be a pleasant pastime, like knitting or chess or antique-collecting. Lately, it’s been a blood sport. William Butler Yeats captured the feeling nicely:

Things fall apart; the center cannot hold;

Mere anarchy is loosed upon the world.

There are prosaic explanations for the gyrations that have been unmooring the financial markets. Start with the unseemly squabbling over the debt ceiling in the United States, and the inability of politicians in Washington to come to grips with the nation’s growing debt load.

Then there’s the parallel debt crisis in Europe, which has exposed fissures in the European Union and vulnerability among its major banks. Behind all of that is a sagging global economy — highlighted, in the United States, by a moribund housing market and painfully high unemployment.

While these issues aren’t new, the accretion of them all is like “adding grains of sand to a mound on the beach,” said Mohamed El-Erian, the chief executive of Pimco, the world’s biggest bond manager. “For a while, you add sand and nothing much happens,” he said. “Then with just a few extra grains, the structure starts to shift.”

There has been one significant change in the structure of markets recently, he said. It was partly symbolic, but still disturbing: the Standard Poor’s downgrading of the sovereign debt of the United States. Why is this so important?

It’s because AAA United States Treasury bonds have been the linchpin of the global financial system, and the center of myriad calculations in business, portfolio construction and capital markets.

In this context, Mr. El-Erian said, the downgrade represents a wide perception of instability in the world’s financial structure. “We lived in a world in which ‘risk free’ and United States Treasuries were interchangeable terms,” he said, “a world in which it was assumed that the United States would safeguard its pristine AAA rating, and protect the dollar, the world’s reserve currency.” Now, for many around the planet, the world’s core seems much less solid.

Aswath Damodaran, a finance professor at New York University, says the true rate for a “risk-free investment,” which had been assumed to be the 10-year Treasury yield, now needs to be “approximated,” a procedure heretofore required for emerging markets. “The distinction between developed and emerging markets has blurred,” he said, “and will require a fundamental rethinking.”

Eugene F. Fama, a finance professor at the University of Chicago, said S. P.’s move was “a nonevent in itself, because it merely reflected a view that was already well understood by the markets.” But, he added, it reflected “a great deal of pessimism out there, a great deal of uncertainty” over whether Western governments would resolve their fiscal dilemmas. “Capitalism itself is under duress,” he said.

Mr. Fama, a leading theoretician of efficient markets, said the current volatility “is exactly what you’d expect when efficient markets are confronted by massive uncertainty.”

Not that the Treasuries have been supplanted by another putative risk-free security. In the current crisis, Treasuries have been very much in demand. Their prices have soared, and yields, which move in the opposite direction, have plummeted. Thanks in part to a Federal Reserve pledge last week to keep rates low until at least 2013, the 10-year note fell on Friday to 2.25 percent.

Scott Minerd, the chief investment officer at Guggenheim Partners, predicted correctly in May that the 10-year Treasury yield would dip below 2.5 percent over the summer as the economy weakened and investors sought a haven from greater distress in Europe. Now, he says, long-term government bond yields are likely to remain very low for several years, and the Fed is likely to ease monetary conditions further.

There is more risk in the global financial system, he says, but for canny investors, it has created a “phenomenally good time to buy.” He sees bargains in stocks as well as in municipal bonds. Over the long haul, he said, he’s also bullish on gold, but added that “its recent parabolic rise will lead to a correction, so this isn’t the time to buy it.”

If the American economy doesn’t lurch into recession, and if corporate earnings stay strong, then stocks are far better priced than government bonds, said Tad Rivelle, chief investment officer for fixed income at TCW. For a while last week, the 10-year Treasury yield dropped below the dividend yield on the S. P. 500, a rare occurrence, according to Birinyi Associates, a research firm. It also happened in the 2008-9 financial crisis, presaging the stock market bottom of March 2009.

While there will be opportunities for astute investors, Mr. El-Erian says that in addition to a “new normal” of slow economic growth and high unemployment, we must now also grapple with a weakening of the financial system’s core. “We will be living in a more volatile world,” he said.

Article source: http://www.nytimes.com/2011/08/14/your-money/when-a-risk-free-investment-suddenly-is-not.html?partner=rss&emc=rss

Relief and Dismay Greet Budget Deal Worldwide

Political leaders, economists and other financial analysts outside the United States expressed relief at a likely debt deal, but the big takeaway for many was that a minority in Congress could threaten the global financial system. The realization prompted some foreign observers to question the integrity not only of Treasury bills but even of American democracy.

“People are surprised to how close we came to a train wreck,” said Pankaj Ghemawat, a professor at IESE Business School in Barcelona who is author of a newly published book on globalization. “It doesn’t inspire confidence in what else might be coming down the tracks.”

Asian markets rallied on reports that President Barack Obama and congressional leaders had reached a budget deal, though it still required approval by lawmakers. But in Europe, major indexes ended the day lower, reflecting drops in U.S. stocks and anxiety that the budget agreement is an ugly compromise that will undercut the American economy. Weak manufacturing data also hurt stocks.

“The ideological rigidity that has gained ground in both parties, and the hardening of party lines, has never before existed in this form,” the conservative Frankfurter Allgemeine newspaper in Germany said on Monday in a front-page commentary on U.S. politics. “Not without reason, the functionality of the political system has been called into question.”

One lesson for foreign investors was that no government’s debt, not even once-sacred U.S. bonds, is any longer immune to risk. That was a particularly unsettling message in Europe, which already has a massive debt problem of its own.

Generations of economists and investors have been taught that U.S. bonds were the closest thing to a bulletproof investment, an assumption that has been shaken. In the days leading up to the agreement in Washington, there was even fear of a renewed financial calamity if America defaulted.

“It is important that the U.S. continues to be the global gold standard with regard to creditworthiness and the validity of its debt,” Mark Schneider, chief executive of the German health care company Fresenius, said Monday in an e-mail. That, he said, is “simply one of the cornerstones of global finance today.”

Benchmark stock indexes in Japan, Hong Kong and South Korea rose Monday as the deal was announced by Mr. Obama, while the dollar gained against the yen, which was good news for Japan. The U.S. debt troubles undermined the dollar’s value in currency markets in recent weeks — a worrying trend for Japanese exporters, as a stronger yen makes Japanese goods more expensive for shoppers overseas.

Expressing a general sense of guarded optimism about the debt deal, Yukio Edano, the Japanese chief cabinet secretary, said, “We welcome the deal, which we hope will lead to market stability.”

His sentiments were echoed by leaders in Europe.

“We strongly welcome that there has been an agreement,” a German government spokesman, Christoph Steegmans, said in Berlin, Bloomberg reported.

But there was also dismay that the deal did not seem to address the U.S. government’s underlying fiscal problems.

“The U.S. saved from default by a fragile, modest and temporary accord,” read a headline in the French newspaper Le Monde on Monday.

On the contrary, there was fear that the agreement might set the stage for further disruptive spending battles in years to come. “The Republicans have tasted blood,” said Mr. Ghemawat, a U.S. citizen who previously taught for two decades at Harvard University. “It makes them even more inclined to play tough the next time around.”

Another concern was that the deal, as outlined by Mr. Obama, might not be enough to stave off a downgrade from one or more of the major ratings agencies. The debt-ceiling debate “has made people realize just how much there is left to do on the fiscal front,” said David Carbon, an economist at DBS Bank in Singapore.

Article source: http://www.nytimes.com/2011/08/02/world/europe/02iht-global02.html?partner=rss&emc=rss