government bonds

DealBook: Deutsche Bank to Miss Profit Goal

October 4, 2011 by NewsMaker Leave a Comment

Alex Domanski/ReutersThe headquarters of Germany’s Deutsche Bank in Frankfurt.

FRANKFURT — Deutsche Bank, Germany’s biggest lender, joined a growing list of banks buffeted by the sovereign debt crisis on Tuesday, saying it would not meet its 2011 profit target owing to investor uncertainty and a loss from its Greek bond holdings.

The bank said in a statement that it would not be able to achieve its goal of a pretax profit of 10 billion euros ($13.2 billion) for 2011. The bank also said it would cut 500 investment banking jobs, most of them outside Germany.

“The intensifying European sovereign debt crisis led to sustained uncertainties among market participants in the third quarter and thus to significantly reduced volumes and revenues,” Deutsche Bank said in a statement.

Financing Drought for European Banks Heightens Fears

September 22, 2011 by NewsMaker Leave a Comment

On the contrary, debt issuance by banks has slowed to a trickle at the same time that short-term interbank lending is drying up. The financing drought raises questions about whether banks will have enough money to refinance their own long-term debt and still meet demand for business and consumer loans.

Less lending could further depress growth in Europe, which is already teetering on the edge of recession. “The euro zone economy has stalled and as the recent financial stresses feed into the real economy, it is likely to get worse still,” analysts at HSBC wrote in a note to clients Thursday, after the release of data showing that pessimism among manufacturers has reached levels not seen since the 2009 recession.

Banks’ fund-raising problems stem directly from the sovereign debt crisis, which is having an insidious effect in more ways than first meet the eye.

Not surprisingly, investors are wary of banks that could suffer losses if Greece defaults on its debt, as seems increasingly likely. But the crisis has also raised fundamental doubts about the underlying health of the European banking system, and whether governments would be able to step in to rescue their banks in the wake of another financial catastrophe.

“Banks certainly do not have enough capital in relation to their government bonds,” said Dorothea Schäfer, an expert in financial markets at the German Institute for Economic Research in Berlin. She has calculated that the 10 largest German banks would need to raise €127 billion, or $171 billion, to bring their capital reserves to 5 percent of gross assets — a level she considers barely adequate.

“That could substantially heighten trust, I would even say would bring it back,” Ms. Schäfer said. But raising that additional capital would be politically fraught, because it would probably require another taxpayer-financed bailout. Many of the banks that need capital most are already owned by government entities and, because they are not listed on stock markets, cannot sell new shares to increase their capital.

The banking industry is also fighting requirements that would require them to keep more ample reserves, which would cut into profits.

According to the standard used by regulators, banks are much better capitalized than they were in 2008. Banks in Europe had so-called core Tier 1 capital — the most durable form of reserves — equal to 10.6 percent of their assets at the end of June, according to calculations by analysts at Nomura. That compares with a previous low of 6.4 percent.

For that reason, some analysts say that the alarm about bank financing is overblown.

“I don’t think we’re overly concerned yet,” said Jon Peace, a banking analyst at Nomura. But he added, “Definitely we are watching the data week by week.”

He said that banks in Northern Europe, where government debt is less of a problem, are having an easier time raising money.

Ms. Schäfer argues, though, that current measures of capital reserves are “useless” because they do not capture the risk from holdings of government bonds, which the International Monetary Fund this week estimated at €300 billion for European banks.

Regulations still treat European government debt as if it were risk free, though it obviously is not. As a result, banks are not required to set aside extra capital to cushion against a government default. And holdings of government bonds are excluded from the calculation of capital ratios.

Sophisticated investors are well aware of these shortcomings, which helps explain the drastic drop in debt issuance recently. Since July, sales of bonds and other debt instruments has plummeted 85 percent compared with the period in 2010, according to Dealogic, a data provider in London.

“A lot of money has been lost,” said Kenneth Rogoff, a Harvard professor and former chief economist at the I.M.F., during an appearance in Frankfurt on Thursday. Greek default is inevitable, said Mr. Rogoff, author of a history of sovereign defaults. “Banks and governments may not have put it in their books,” he said of the losses, “but it’s gone.”

Article source: http://feeds.nytimes.com/click.phdo?i=135a5250de09e1fd1500036f08114615

Filed Under: Economy News Tagged With: european banks, financial catastrophe, government bonds

S.&P. Downgrades Italy’s Credit Rating a Notch

September 20, 2011 by NewsMaker Leave a Comment

The ratings firm cut Italy’s long- and short-term sovereign credit ratings to “A/A-1” from “A+/A-1+.” The rating is still five steps above junk status.

The ratings agency has a negative outlook on Italy’s ratings and listed Italy’s political issues and heavy debt load as the main factors contributing to the downgrade. It anticipates that political differences will likely limit Italy’s ability to respond decisively to its debt crisis.

“What we view as the Italian government’s tentative policy response to recent market pressures suggests continuing future political uncertainty about the means of addressing Italy’s economic challenges,” SP managing director David T. Beers wrote in a research note outlining the credit rating downgrade.

Last week, Italy’s Parliament gave final approval to Premier Silvio Berlusconi’s government’s austerity measures, a combination of higher taxes, pension reform and spending cuts. The planned cuts and taxes sparked street protests in Rome similar to those in other European countries trying to come to grips with the economic crisis.

Berlusconi has said that the government’s austerity measures will shave more than 54 billion euros ($70 billion) off Italy’s deficit over three years.

The European Central Bank had demanded stiff austerity measures to calm markets roiled for weeks over doubts about how serious Italy is about coming to grips with its debt. Italy is the eurozone’s No. 3 economy and has a deficit to gross domestic product ratio of 120 percent, one of Europe’s highest.

The bank has spent billions over the last month buying up Italian government bonds in a bid to lower Italy’s borrowing costs and keep it from becoming the next eurozone nation to need an international bailout. The SP downgrade, however, could lead to higher borrowing costs for Italy because it implies that investors face greater risks when buying Italian debt.

SP said that weaker economic growth will likely limit the effectiveness of the government’s economic plan.

“We believe the reduced pace of Italy’s economic activity to date will make the government’s revised fiscal targets difficult to achieve,” SP said.

The firm projects that Italy’s real gross domestic product will grow at an annual average of 0.7 percent between this year and 2014, down from an earlier projection of 1.3 percent growth.

Italian officials have reportedly held talks with China’s sovereign wealth fund in an effort to persuade Beijing to buy Italy’s government bonds or invest in its companies. The nation’s financial crunch also has prompted Rome to consider selling stakes in major state-owned companies such as power utility Enel or oil and gas supplier Eni, according to news reports.

Article source: http://www.nytimes.com/aponline/2011/09/19/business/AP-US-Italy-Credit-Rating.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: government bonds, italian government, policy response

China Ties Aiding Europe to Its Own Trade Goals

September 15, 2011 by NewsMaker Leave a Comment

Premier Wen Jiabao on Wednesday offered to help Europe. But, in an unprecedented move for China, he linked the offer to a potentially onerous demand: that Europe renounce its main legal defense against low-priced Chinese exports.

Mr. Wen urged the European Union to classify China as a “market economy” instead of a “nonmarket economy.”

In international trade legalese, the new designation would make it almost impossible for Europe to impose tariffs on Chinese goods considered unfairly cheap.

His remarks, in a speech at a conference in Dalian in northeast China, were the clearest move by China to link its continuing investments in Europe to specific changes in European trade policies. The linkage is being made as Beijing is showing a new willingness to use its vast financial resources to extend its political influence far from China’s shores. On Monday China announced $1 billion in subsidized loans to Caribbean nations.

Mr. Wen’s comments Wednesday seemed to contain more pro quo than specifics about the quid. He was vague on whether China was prepared to increase its monthly lending to Europe by an amount that might ease the euro zone’s budget and banking difficulties. He also was not specific about whether China was interested in buying European government bonds or making investments like acquiring more European businesses.

“We have been concerned about the difficulties faced by the European economy for a long time, and we have repeated our willingness to extend a helping hand and increase our investment,” Mr. Wen said.

European stock markets were buoyed in part by his remarks.

China, with an estimated $3.2 trillion in foreign reserves, is seen as potentially a global banker. But most of its lending has come in the form of buying nearly $2 trillion in United States Treasury bonds and other forms of American debt. China already buys billions of euros worth of European debt each month, but that level of lending has done little to ease the euro zone’s crisis.

So a vague promise of more “investment” in Europe, without specifying the amount or form, might not seem to European Union officials to justify granting China the new trade status Mr. Wen proposed.

The World Trade Organization has technical criteria for countries to decide when China has become a market economy, John Clancy, the European Union’s trade spokesman in Brussels, said Wednesday. China has made progress, but has not met the criteria, in European Union’s view.

“Since China dictates the speed with which market-oriented rules and laws are effectively enforced centrally and locally, the timing of the conclusion on its market economy status is largely in China’s hands,” Mr. Clancy wrote by e-mail.

The new market economy designation Mr. Wen seeks would let China avoid the steep import duties assessed on Chinese companies that sell goods in Europe for less than it costs to produce and market them — or what trade lawyers describe as the “normal value” of these goods.

Under the terms of China’s accession to the World Trade Organization in 2001, the country will automatically qualify as a market economy in 2016. But Mr. Wen on Wednesday exhorted European nations to “look courageously at China’s relationship from a strategic point of view” on the issue of market economy status. “If European Union nations can demonstrate their sincerity several years earlier,” he said, “it would reflect our friendship.”

China once before, in 2003, asked the European Union to grant it market economy status. That request was denied.

By classifying China as a nonmarket economy, the European Union allows its antidumping investigators to compare the price Chinese exporters to Europe charge with the price of goods from other low-cost countries. Antidumping duties, which can exceed 100 percent, are assessed if Chinese prices are lower.

But if China were labeled a market economy, antidumping investigators would have to compare the export prices Chinese companies charge with the prices they charge for the same goods in China. Virtually all prices in China are very low in terms of other currencies, partly because of China’s extensive intervention in currency markets to keep its currency, the renminbi, weak.

China’s critics also suggest that close links between many companies and the Beijing government make it impossible to assess the extent to which Beijing helps companies keep prices low at home, through subsidies, preferential loans or policies like free or discounted land for factories. So it would become extremely difficult to win an antidumping case if China were labeled a market economy.

Article source: http://feeds.nytimes.com/click.phdo?i=4460e42feb0cc0055f3f63715df9eb37

Filed Under: Business News Tagged With: government bonds, pro quo, unprecedented move

Moody’s Cuts SocGen and CreditAgricole, BNPP Still on Review

September 14, 2011 by NewsMaker Leave a Comment

The ratings agency said it was extending its review of BNP Paribas (BNPP), but any downgrade was unlikely to be by more than one notch.

Moody’s had put the banks under review for possible downgrade on June 15, citing their exposure to Greece’s debt crisis.

Moody’s at the time had cited French banks’ exposure to Greece’s debt-stricken economy as the reason behind the review. Outside commentators had said the ratings were ripe for a downgrade because of rising borrowing costs in the face of sovereign debt turmoil.

The agency said that during the review, Moody’s concerns about the structural challenges to banks’ funding and liquidity profiles increased, in light of worsening of refinancing conditions.

Moody’s cut SocGen’s debt and deposit ratings by one notch to Aa3 from Aa2. The outlook on the long-term debt ratings was negative. Moody’s anticipated that the impact of its review on the Bank Financial Strength Rating (BFSR) would be limited to a one-notch downgrade.

For Credit Agricole, Moody’s downgraded its BFSR by one notch to C from C+, and cut its long-term debt and deposit ratings by one notch to Aa2 from Aa1.

However, Moody’s said it believed SocGen has a level of capital that can absorb potential losses it is likely to incur on its Greek government bonds and to remain capitalized at a level consistent with its BFSR even if the creditworthiness of Irish and Portuguese government bonds were to deteriorate further.

Moody’s said that BNPP had a sufficient level of profitability and capital that it can absorb potential losses it is likely to incur over time on its Greek, Portuguese and Irish exposures.

BNPP on Wednesday announced a plan to sell 70 billion euros ($95.7 billion) of risk-weighted assets to help ease mounting investor fears about French bank leverage and funding, two days after smaller rival Societe Generale unveiled a similar plan.

France’s lenders — two of which own local banks in Greece — have the highest overall bank exposure to Greece, according to the Bank for International Settlements. They have begun to take writedowns on their Greek sovereign debt holdings as part of a new rescue package but some say not aggressively enough.

Greece vowed on Saturday to stay the course of austerity and avoid bankruptcy as anger at the country’s failure to meet fiscal targets under its EU/IMF bailout reached boiling point.

(Reporting by Wayne Cole; Editing by Ed Davies)

Article source: http://www.nytimes.com/reuters/2011/09/14/business/business-us-frenchbanks-moodys.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: bnp paribas, government bonds, sovereign debt

World Markets Open Higher After U.S. Rally

September 13, 2011 by NewsMaker Leave a Comment

SHANGHAI (AP) — Asian markets were mostly higher Tuesday as investors took heart from a late rally on Wall Street, but China shares fell on speculation over possible fresh measures to counter inflation.

Benchmark oil rose to near $89 a barrel while the dollar slipped against the yen and the euro.

Japan’s benchmark Nikkei 225 index gained 0.5 percent to 8,577.45 by midday. Suzuki Motor Corp. jumped 3.3 percent, a day after the company announced it was ending its alliance with Volkswagen AG.

Australia’s SP/ASX200 index was up 0.7 percent to 4,152.2, with resource-related companies leading the gains. Global miners Rio Tinto climbed 1 percent and BHP Billiton rose 2.5 percent.

Benchmarks in New Zealand, Singapore and Indonesia also rose. Taiwan and Malaysia were lower.

Unconfirmed reports that China is considering investing in government bonds of Italy — another potential debt domino in the eurozone — provided a glimmer of hope, helping along a late technical rebound on Wall Street.

There was no immediate response from China’s government investment arm to the reports, which cited Italian government officials.

Mainland Chinese investors were preoccupied with domestic concerns over further monetary tightening to counter inflation, which is hovering near three-year highs.

The benchmark Shanghai Composite Index down 1.4 percent to 2,462.10. The smaller Shenzhen Component Index was 2 percent lower at 1,094.03.

“Apart from worries over Europe, a rumor that the government will issue 20 billion yuan ($3.1 billion) in bills to tighten liquidity is weighing on the market,” said Peng Yunliang, an analyst based in Shanghai.

Shares in economic in non-ferrous metals, home appliances and engineering companies weakened.

Guangdong Orient Zirconic Ind Sci Tech lost 5.3 percent while Jinduicheng Molybdenum Co. shed 4 percent. Appliance maker Qingdao Haier Co. slipped 2.1 percent.

Markets in Hong Kong and South Korea were closed for public holidays.

The Dow Jones Industrial index ended Monday up nearly 69 points after a late afternoon rally pushed the stock market higher. The Dow closed at 11,061.12, with all of the gains coming in the last 10 minutes of trading.

The SP 500 index rose 0.7 percent to close at 1,162.27. The tech-heavy Nasdaq composite index rose 1.1 percent to 2,495.09.

Markets in Europe and Asia plunged Monday as investors worried that Greece could be edging closer to default.

Greece is being kept solvent by a euro110 billion ($150 billion) international rescue loan package, while an agreement in July to double the bailout size has yet to be implemented. The cash lifeline, without which the country would go broke in a few weeks, is conditional on Athens meeting its ambitious savings targets.

The euro rose to $1.3685 from $1.3666 in New York late Monday. Earlier that day, the European common currency hit $1.3495, a seven-month low. The euro started the month around $1.43. The euro also hit a 10-year low against the Japanese yen.

The dollar dipped to 77.01 yen from 77.25 yen.

Benchmark oil for October delivery was up 79 cents to $88.98 in electronic trading on the New York Mercantile Exchange. Crude fell 52 cents to end at $112.25 on Monday.

In London, Brent crude for October delivery was up 62 cents at $110.81 on the ICE Futures exchange.

Article source: http://www.nytimes.com/aponline/2011/09/12/world/asia/AP-World-Markets.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: bhp billiton, government bonds, home appliances

European Debt Concerns Rear Up Again

September 3, 2011 by NewsMaker Leave a Comment

LONDON — Concerns about the euro zone’s ability to cohesively respond to its debt crisis resurfaced Friday after talks between Greece and its foreign creditors were interrupted and the head of the European Central Bank warned Italy to stick to its austerity program.

Yields on 10-year Italian bonds rose almost a tenth of a percentage point, to 5.21 percent — well above the 5 percent level that policy makers consider the top desirable rate. The yield on Spain’s 10-year securities climbed slightly to 5.06 percent, despite passage in the lower house of the Spanish Parliament on Friday of an amendment that will enshrine stricter budgetary discipline in the Constitution.

Europe’s central bank began the extraordinary step of buying Italian and Spanish debt on Aug. 8 to help calm markets after 10-year rates spiked to around the 6 percent level.

David Schnautz, interest rate strategist at Commerzbank in London, said many investors had chosen to use the central bank’s recent bond-buying program to offload those bonds, and that was causing yields to drift up now.

“There’s still no genuine investor demand for Spanish and Italian government bonds,” he said.

In the debt talks in Athens, European and International Monetary Fund officials withdrew early as they apparently disagreed over the country’s deficit figures and how to make up for a growing budget shortfall.

The mission had been sent to determine whether Greece would meet the conditions for the next tranche of emergency loans, expected this month.

Representatives of the European Commission, the European Central Bank and the I.M.F. said in a statement that “good progress” had been made, but that they wanted to allow time for the Greek government to complete technical work on the 2012 budget and reforms.

The delegates, who had been scheduled to leave next week, said they would return to Athens by mid-September, “when we expect the Greek authorities to have completed the technical work, to continue discussions on policies needed to complete the review.”

An initial loan package, agreed to last year, has since been supplemented by a second bailout deal that was reached in Brussels in July, but now hangs in the balance amid demands by some euro zone countries for guarantees from Greece in the form of collateral. Without that fresh aid, Greece could default on its obligations.

The Greek finance minister, Evangelos Venizelos, denied that there was a rift with the auditors over the country’s ability to meet deficit reduction targets set by the foreign creditors.

The minister told reporters at a news conference that talks were continuing with auditors in “a very friendly and constructive climate,” and that he expected the team back on Sept. 14 for a second phase once the Greek government had finished a draft of the national budget for 2012.

Greek officials had not previously suggested that there would be a break in negotiations with the inspectors, whose earlier audits had lasted two weeks.

One issue that dominated talks, which concluded early Friday, was a deeper-than-expected recession in Greece that would necessitate “some additional elaboration to ensure there is no divergence” from deficit reduction targets, Mr. Venizelos said.

A European official, speaking on condition of anonymity because the talks were confidential, said that without additional information, there was a risk that some euro zone countries might not agree to releasing the round of aid.

Mr. Venizelos also said that Greece’s economy was expected to contract by “up to 5 percent” but would not give a figure for the Greek budget deficit, broadly expected to overshoot a deficit target of 7.6 percent for 2011 by up to one percentage point.

Analysts said the government’s procrastination in adopting tough measures — like a crackdown on tax evasion and an ambitious privatization scheme — could cost the country dearly.

Moses Sidiropoulos, economics professor at Aristotle University in Thessaloniki, told the private television channel Skai that Greece’s future in the euro zone was at stake.

“If immediate action isn’t taken, even one thing, an example to the foreign creditors that we are serious, I fear Greece will soon be featured in textbooks as a paradox of economic management,” he said.

Greek two-year note yields climbed Friday as much as 358 basis points to reach a euro-era record 46.51 percent, according to Bloomberg News.

Matthew Saltmarsh reported from London and Niki Kitsantonis from Athens. Raphael Minder contributed reporting from Madrid.

Article source: http://www.nytimes.com/2011/09/03/business/global/european-debt-concerns-rear-up-again.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: creditors, government bonds, tranche

Off the Charts: Bond Brush Fires Spreading in Europe

August 13, 2011 by NewsMaker Leave a Comment

The European Central Bank this week began to buy Spanish and Italian government bonds, and yields on such bonds immediately fell by more than a percentage point. But market pressure shifted immediately to France.

For France, the rise in yields must have come as a shock. At the end of last week, Standard Poor’s had gone out of its way to declare that the country deserved a Triple-A rating, and this was at the same time it was taking that rating away from the United States.

As soon as the French bond yields began to rise, rumors appeared that major French banks might be in trouble because of their holdings of government, or sovereign, debt. The banks insisted they were fine.

The accompanying charts show the trend in yield spreads between 10-year government bonds issued by Germany, by far the largest and strongest country in the euro zone, and the four other largest countries that share the common currency.

The most recent round of market worry appeared to begin on July 22, as Europe agreed on terms for the latest loans to Greece. That agreement was aimed at persuading banks that owned Greek bonds to share in the pain, and the yield spreads on Spanish and Italian bonds promptly began to rise, as speculators sold bonds issued by those countries.

At an emergency meeting on Sunday, the European Central Bank governing board reached agreement to allow purchases of bonds from those two countries. When those purchases began on Monday, yield spreads relative to Germany declined from the peaks of the previous week. But it appears that some of the speculation shifted, and France came up as a possible target, and its spread began to widen. The S. P. report on the United States had called attention to the fact that France’s debt, as a percentage of gross domestic product, was larger than that of the United States.

The difference between French and German yields on 10-year bonds rose to almost a full percentage point. That is not close to the spreads between German bonds and those of Italy or Spain, but it is the largest spread for France since the euro was established in 1999.

But the Netherlands, whose bonds had traded at wider spreads than France’s during the financial crisis in 2008 and 2009, appeared to be unaffected by speculation this week.

The first set of charts shows the changes in spreads since July 22, while the second set of charts shows the long-term trend beginning in 1994.

During the mid-1990s, anticipation of the establishment of the euro led spreads to collapse. Previously, countries like Italy had often had to pay substantially more to borrow, a fact that reflected fears of currency devaluation. With a common currency, and no provision for a country to ever leave the euro, it appeared that there was no reason for yields to be very different.

But when the financial crisis struck, bond investors began to differentiate more between countries, a trend that accelerated when first Greece and then Ireland and Portugal had to seek European help. The latest Greek deal provided that bondholders would be asked to take some losses, a fact that emphasized the risk of default to investors in other countries’ bonds.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Article source: http://feeds.nytimes.com/click.phdo?i=8b42219470dd4e7777f63e4761d2099c

Filed Under: Business News Tagged With: brush fires, government bonds, largest countries

DealBook: In U.S. Stress Tests, a Tool to Gauge Contagion in Europe

August 11, 2011 by NewsMaker Leave a Comment

Tiziana Fabi/Agence France-Presse — Getty ImagesPrime Minister Silvio Berlusconi of Italy, left, with his finance minister, Giulio Tremonti. American banks hold sizable amounts of Italian debt.

In early 2010, top officials at the Federal Reserve began to wonder: how would United States banks hold up through the European debt crisis? Investors were fleeing Greece and Ireland, and starting to get nervous about Portugal and Spain, spreading contagion.

The conclusion from the stress tests that resulted was heartening to supervisors at the regulator, according to a person who was directly involved in the exercise: American banks didn’t have too much exposure to Portugal and Spain, so the contagion would not be a problem.

Unless it hit Italy.

“At the time, the results made us a bit relieved; our focus was on Ireland and Greece,” said this person, who spoke on the condition of anonymity because the Fed has a policy of not discussing supervisory actions. “But if Italy goes, God help us all.”

American banks not only had a small exposure to Italian government bonds, but also a larger one to Italian banks and companies. If the European debt crisis spread to Italy, it could cause another global financial catastrophe. Only this time, global regulators might have fewer weapons to combat it. The Fed declined to comment on its analysis.

And that is why last week was so terrifying, scarier than either the stock market drop or the Standard Poor’s downgrade of the United States credit rating: debtholders had abandoned Spain and Italy.

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At one point on Friday, Italian bonds were trading at more than 400 basis points higher than Germany’s, a signal of panic. Italy has a huge debt load. If investors began to focus on that, it wasn’t clear what might stop the run.

The European Central Bank intervened this week, buying Spanish and Italian government bonds. On Monday, the panic eased in Europe, with Italian and Spanish interest rates falling. The French and Germans announced that the European Financial Stability Facility (clearly named by Dr. Seuss) would be able to buy those government bonds when it was up and running in late September.

By Wednesday, the fears were back, as French banks got hit especially hard. The problem is that Europe has tried repeatedly to fence off the problem, only to have it escape again to wreak havoc. Greece and Ireland have each been through several rounds of failed bailouts and extensions. If they are bankrupt, and not simply victims of investor panic, then someone, somewhere will have to take losses. And if Spain and Italy start to go down, those losses threaten the global economy.

European banks are on the front lines, vulnerable because they are more thinly capitalized than their American counterparts. Europe has conducted stress tests, just as the Fed has, but they haven’t instilled confidence, in part because they didn’t subject most sovereign debt holdings to any loss estimates.

The tests did require vast disclosures, however, so that investors and analysts could delve into the numbers and conduct their own analyses.

If European banks go down, what will happen to American banks? Investors and analysts seem unconcerned. American banks disclose some of their exposure to specific countries, but the information isn’t up to date and the figures depend on opaque estimates of how well hedged the banks are. Analysts differ on the amounts at risk.

According to a note from the research firm CLSA on July 13, Citigroup had $12.7 billion in Italian holdings, much of it government-related, while JPMorgan Chase had $12.2 billion. According to a note from Bernstein Research, JPMorgan had “less than $20 billion” in exposure to Portugal, Ireland, Italy, Greece and Spain combined. But that was going in the wrong direction, up from “less than $15 billion” at the end of 2010, when one might expect the banks to be paring exposure.

These aren’t large numbers, less than 1 percent of these gigantic banks’ balance sheets. And banks wouldn’t take 100 percent losses on their investments in the event of a default.

Unfortunately, we simply don’t know whether the analysts are right. Neither the Fed nor the Securities and Exchange Commission has forced United States banks to make as detailed disclosures as the European stress tests did of its banks. So it’s a matter of having to trust the banks and the regulators.

Which brings us back to the exercise the Fed undertook last year. Two Fed officials ordered up the analysis: Daniel K. Tarullo, the board member who oversees matters of bank supervision, and Patrick Parkinson, the head of banking supervision, who is reported to have undergone a conversion from a Alan Greenspan antiregulation acolyte to a believer in strong oversight. Clinton D. Lively, a number-cruncher who recently left the New York Fed, was one of the officials who played a major role.

Disturbingly, before the financial crisis of 2008, the Fed, which is the most important bank regulator and is charged with keeping the banking system safe and sound, couldn’t really do this kind of analysis, according to former Fed officials. It might have asked banks for the data on their exposures to specific countries, but it couldn’t play out a chain of events very easily. What if the central bank wanted to know what would happen to United States banks if the euro fell 20 percent in a short period? The Fed didn’t have the tools.

Now it does, thanks in part to the efforts of Mr. Lively and others. The assessment came with its own pitfalls. At time the Fed was gathering the data, a rumor started in markets that the Fed was worried about two Spanish banks. Some European banking supervisors became nervous about the Fed’s efforts and voiced those concerns.

Unfortunately, the biggest problem is whether the data truly reflects all the risks. That continues to be a matter of intense debate within the central bank. Given the complexity of the trading arrangements within the global financial system, it’s far from clear that the banks have a handle on their own exposures. As we learned in 2008, hedges that seemed solid on Monday disappear on Tuesday.

Nevertheless, it’s good to know that the Fed isn’t flying blind.

Jesse Eisinger is a reporter for ProPublica, an independent, nonprofit newsroom that produces investigative journalism in the public interest. Email: jesse@propublica.org. Follow him on Twitter (@Eisingerj).

Article source: http://dealbook.nytimes.com/2011/08/10/in-u-s-stress-tests-a-tool-to-gauge-contagion-in-europe/?partner=rss&emc=rss

Filed Under: Global Business Tagged With: financial catastrophe, government bonds, tiziana

Euro Zone Rescue Effect Appears to Peter Out

July 26, 2011 by NewsMaker Leave a Comment

Officials in Brussels agreed last week to bolster the European Financial Stability Facility and to provide Greece with new financing on more favorable terms. Those terms would also be available to the other euro zone members that have received bailouts, Portugal and Ireland.

But as investors examine the details of the package, too many questions remain unresolved, Martin van Vliet, an economist at ING Bank in Amsterdam, said.

The bailout package “was a huge leap for European politicians,” he said. “But it was a small step for the market.”

The Euro Stoxx 50 index, a barometer of blue chips in the 17 countries that share the euro, had been on a winning streak since July 18, when it fell to a 2011 low. But on Tuesday it slipped 0.11 percent.

A rally in the government bonds of “peripheral” euro zone members, including Spain and Italy, the two countries that European and International Monetary Fund officials are determined to protect, also petered out, with yields ticking back to around the 6 percent level at which they stood before the deal.

In perhaps the best barometer of investor enthusiasm, both Italy and Spain held debt auctions Tuesday, with somewhat disappointing results.

Spain sold €2.9 billion, or $4.2 billion, of three- and six-month bills, paying more and meeting with weaker demand than at a similar auction in June, the central bank said. The three-month debt was priced to yield 1.899 percent, while the six-month debt moved at 2.519 percent.

The Italian Treasury sold €7.5 billion of six-month bills that were priced to yield 2.269 percent, a much higher level than the 1.988 percent yield that resulted from a similar auction last month. It also auctioned €1.5 billion of two-year zero-coupon bonds priced to yield 4.038 percent.

Mr. van Vliet noted that Greece remained hobbled by its borrowings and said that there was also a risk that the government in Athens would be unable to keep its promises to reduce expenditure and raise revenue.

“I think there’s probably another Greek bailout to come,” he said.

But the bigger problem, he said, was with the E.F.S.F. itself. While officials agreed to make the bailout fund more flexible and enhanced its role, they did not increase its size, and as a result it may prove unequal to the task ahead if countries beyond Greece, Portugal and Ireland run seriously afoul of the market.

“I’m not certain they could help Spain,” he said, “not to mention Italy, if either of those had trouble.”

Christine Lagarde, the I.M.F. chief, said Tuesday in New York that “the agreement shows that European leaders believe in the euro zone.” But, she added, according to prepared remarks, “turbulence could easily resurface. For this reason, it is essential that the summit’s commitments should be implemented quickly.”

The euro itself has been doing relatively well, at least against the dollar, ticking up to $1.4509 on Tuesday, from $1.4425 before the deal was announced Thursday. But that may not be the best indicator, as the U.S. currency is under pressure owing to a political battle over raising the debt ceiling in Washington.

In one bright spot, the number of banks lining up for cheap European Central Bank loans dropped by one-third Tuesday, a possible sign that the deal last week had helped restore a measure of confidence and made it easier for weaker institutions to borrow in open markets.

Total demand for E.C.B. cash remained high, however, indicating that a significant number of institutions still faced doubts about their creditworthiness. In E.C.B. data released Tuesday, 193 banks took out one-week loans at 1.5 percent interest; 291 banks did so last week. The banks borrowed €164 billion, down from €197 billion last week but still well above normal levels.

The E.C.B.’s weekly lending operation is considered a measure of the health of the European banking system, reflecting banks’ willingness to lend to each other. Many banks in Greece, Portugal, Ireland and some other countries have been frozen out of money markets because of fears that they are vulnerable to their home countries’ debt woes.

Mr. van Vliet said he was ultimately optimistic about the euro zone’s prospects.

“At least the politicians have signaled their willingness to do whatever is necessary to address it in the future,” he said. “But it’s not necessarily going to happen at the speed everyone hoped. It’s going to be a slow-motion process.”

Jack Ewing reported from Frankfurt.

Article source: http://www.nytimes.com/2011/07/27/business/global/euro-zone-rescue-effect-appears-to-peter-out.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: euro stoxx 50 index, financial stability, government bonds