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Europe Looks for Hope in Bank Test Results

July 15, 2011 by Leave a Comment

Europe’s festering debt crisis may well be approaching its own post-Lehman Brothers moment, when fear of the unthinkable finally prompted British and American governments to take radical action and force most of their capital-thin banks to accept government money — whether they liked it or not.

But to the frustration of many, Europe seems far removed from such a drastic move.

Instead, the euro zone’s top banking supervisor will announce on Friday the results of its latest examination into the health of its financial institutions. It is an exercise that an increasingly desperate European Union hopes will quell investor fears that the region’s banks have become too impaired by holdings that may be seriously overvalued to provide the loans needed to stimulate economic growth.

While European finance ministers pledged this week that they would have a backstop plan for vulnerable banks, in practice that task will be left to national banking regulators, who have varying levels of resources and political will.

The banks’ stress test results come at a time of cresting market anxiety, spurred in particular by worries of a strike by domestic buyers for Italian government bonds. On Thursday, the yields on two-year Italian bonds — an accurate gauge of short-term market sentiment — were at 4 percent, higher than Spain’s and double what they were a year ago. (For Greece, two-year money is available at a rate around 30 percent.)

And the overnight Euribor rate — what banks in Europe charge each other for short-term loans — more than doubled over the last week, to 1.47 percent from 0.6 percent, as banks within the euro zone have become more reluctant to lend to each other.

That is still well below the high of around 4 percent reached after the Lehman collapse. But bankers say the increased jitters in Italy are leading investment banks to demand higher amounts of collateral and cash to back up their loans to Italian counterparties.

The stress test is the third in three years but only the second in which results are being made public. It is being overseen by the European Banking Authority, based in London, which has scoured the balance sheets and capital levels of 91 banks, focusing on the exposure banks have to the dubious sovereign debt of Greece, Portugal and Ireland.

The survey last year was widely condemned after Irish banks failed just months after receiving passing grades. Regulators have tried to strike a different tone this year.

“There will be a certain number of banks that will not pass and others that barely do so,” said Michel Barnier, the European Union commissioner for internal markets. That fact, he said, “will be strong evidence that these tests are credible.”

The new tests will require a reserve benchmark of 5 percent core Tier 1 capital and that the banks be able to handle a 0.5 percent economic contraction in the euro zone in 2011, a 15 percent drop in European stock markets and potential trading losses on sovereign debt.

Since the last stress tests a year ago, the banks have raised 67 billion euros ($94.2 billion) in new capital, according to Morgan Stanley, a relative pittance given that European banks have on their books 1.1 trillion euros in government debt from Greece, Ireland, Portugal and Spain.

For some large and systemically important banks, the margin for error is thin indeed.

At the French bank Crédit Agricole, Greek holdings are about equal to its equity. (Société Générale and BNP Paribas also have significant Greek bond exposures but benefit from larger capital buffers). And for the Royal Bank of Scotland, which is majority owned by the British government, the same is the case for the Irish loans on its books.

Landon Thomas Jr. reported from London and Jack Ewing from Frankfurt. Floyd Norris contributed reporting from New York.

Article source: http://feeds.nytimes.com/click.phdo?i=590687b13e786039bfc6ceec1823f241

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Europe Faces Tough Road on Effort to Ease Greek Debt

July 5, 2011 by Leave a Comment

Representatives of European governments and banks, continuing talks that have been under way for several weeks, expressed optimism that they could find ways that bond holders could voluntarily contribute to reducing Greece’s debt.

But S. P., responding to a French proposal to have banks give Athens more time to repay loans as they come due, seemed to leave little room for maneuver. The proposal would amount to a default, S.P. said, because creditors would have to wait longer to be repaid and the value of Greek bonds would effectively be reduced.

“Ratings agencies are saying, ‘We don’t think it’s voluntary; it’s just a way to hide a default’ — which it is,” said Daniel Gros, director of the Center for European Policy Studies in Brussels.

European leaders are trapped between domestic political demands for banks to share the cost of a Greek bailout, and the dire consequences of a default. These would include the collapse of Greek banks, probably followed by the collapse of the Greek economy and Greece’s exit from the euro zone.

A crisis in Greece could quickly spread to European banks, particularly in France and Germany, which own government bonds or have lent money to Greek individuals and businesses. Ratings of French banks have already suffered because of their vulnerability to the Greek economy. And once the precedent of a euro zone default had been set, investors would likely abandon the debts of other struggling members, including Portugal and Spain. More worryingly, a tower of credit default swaps — a form of debt insurance typically sold by investment banks — has been built on the debts of those countries, and the cost of paying up in a default would be huge.

As a result, officials predicted, European governments may have little choice but to abandon or modify the voluntary plan and fill the gap with more money from taxpayer coffers.

A senior figure in the Greek finance ministry, who spoke on condition of anonymity because he was not authorized to speak publicly, said on Monday that it was folly to think that the ratings agencies would view a debt exchange as purely voluntary and not representing a selective default.

“Now the official sector will need to find another 30 billion,” this person said, referring to the 30 billion euros ($43.6 billion) that European political leaders hoped to get from the private sector. That sum was never realistic in the first place, he said.

But he predicted that leaders would not turn their backs on Greece. “Europe has too much riding on this,” the official said. “Greece has done 80 percent of what it is supposed to have done. If Europe were to let Greece go that would be the end of euro zone solidarity.”

Europe is seeking to avoid a default at all cost because it could also initiate payment of credit-default swaps, with unpredictable results. There is little public information on which financial institutions have sold credit-default swaps and might have to absorb losses if Greece defaulted, but it is likely that American banks and insurance companies have taken on the largest share.

The shock to the global economy might compare to the collapse of Lehman Brothers in 2008, the European Central Bank has warned.

Mr. Gros said that calls for investors to roll over maturing Greek debt voluntarily could even backfire, by invoking memories of similar stopgap measures that preceded Argentina’s disorderly default in 2001.

Despite the discouraging assessment Monday from Standard Poor’s, European governments continued work on a contingency plan that they predicted would satisfy the ratings agencies and prevent Greece’s problems from provoking a wider crisis.

There was somewhat less urgency to the talks after euro zone finance ministers agreed over the weekend to provide Athens with financing of 8.7 billion euros ($12.7 billion) from the 110 billion euro bailout agreed to last year, to help the Greek government function through the summer. The new aid eliminates the prospect of a near-term default.

But the finance ministers put off the question of how to provide a second bailout, expected to total as much as 90 billion euros, to keep the country operating through 2014, when it is hoped that Greece will be able to return to the credit markets.

Negotiators are trying to put together a plan that would offer private investors good enough terms to encourage them to take part voluntarily while, at the same time, convincing angry voters in nations like Germany and the Netherlands that financial institutions are sacrificing, too.

Jack Ewing reported from Frankfurt and  Landon Thomas Jr. from Athens. Reporting was contributed by Stephen Castle in Brussels and David Jolly and Liz Alderman in Paris.

Article source: http://feeds.nytimes.com/click.phdo?i=87b169eda71a09a2ba195a359b197995

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Bond Yields Rise in Europe Despite French Assurances

June 28, 2011 by Leave a Comment

 Even German government bonds fell, and yields rose. Investors calculated that if the French proposal to roll over existing debt into new loans came to pass, somebody was going to pay for it. That would be the richer countries at the center of the euro currency zone, namely Germany and France.

 Normally, the bank plan announced by President Nicolas Sarkozy for French banks to extend the maturity of a large part of the Greek government debt they own by 30 years would have lifted bond prices in Greece and around Europe. It should have fueled optimism that Greece could escape its debt crisis and that other nations might soon find a similar way out of their own financial problems.

 But the vote in Greece on Wednesday and Thursday seemed to loom larger in investors’ minds as some doubts rose that the Greek government would pass new austerity measures. Yields on government bonds in Greece and other highly indebted nations like Ireland, Portugal and even Spain and Italy rose despite the announcement that the rollover plan was being considered.  

 Traders said investors feared that there was still some nervousness that the vote on 28 billion euros in spending cuts and tax increases could fail in Greece’s Parliament if the Socialist government cannot muster its majority. If the austerity measures failed in Parliament, it would stall a new 12 billion euros in aid due for Greece from the European Union and the International Monetary Fund, plunge Europe into a deeper crisis — and make any deal to roll over Greek debt held by French banks moot.

 In addition, traders and economists said there were still unanswered questions about the French proposal and they questioned whether it would form a template for the rollover of other countries’ debt, even whether it could in fact be agreed upon.

 “We have heard so much on this that it needs to be agreed to be taken seriously,” said Laurent Bilke , a strategist at Nomura Securities in London. “At the best it is a proposal from the French banks and the French government.”

 The plan foresees some of the banks’ debt holdings being invested in a guaranteed fund — but Mr. Bilke said it was still unclear who would guarantee the fund. In addition, he said, it was still also unclear when debt would become eligible for the rollover.

Another question hanging over the plan, analysts said, was whether the proposal would not be considered a default by rating agencies.

 Italian and Spanish bond yields recovered somewhat later in the trading session as some optimism returned that the austerity measures would pass in Greece. The yield on Italian debt, in particular, has come under pressure after Moody’s Investor Services last week placed more than a dozen Italian banks on review for downgrade because of the Italian government debt they hold.

 German government bond yields rose, traders said, on the growing realization that if the debt rollover took place it would still involve some kind of debt easing for Greece — and somebody would have to pay for that.

“Even if you are constantly pushing it out into the future, at some stage there has to be a fiscal transfer,” said Steven Major, global head of fixed income research at HSCB in London. 

Article source: http://www.nytimes.com/2011/06/28/business/global/28debt.html?partner=rss&emc=rss

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Chinese Prime Minister’s Visit to Europe Shows Concern Over Euro

June 25, 2011 by Leave a Comment

BERLIN — Before Prime Minister Wen Jiabao of China began a four-day official tour on Friday of Hungary, Britain and Germany, his trip had received little coverage by the Chinese media.

One reason for the weak interest is that China’s consuming interest in the United States as a superpower has historically taken precedence over its ties with Europe, despite the fact that China does more trade with the European Union than with the United States.

Over 12 percent of Chinese imports come from the European Union, compared with 7.3 percent from the United States, according to Eurostat, the Union’s statistical information service. The Union imports nearly a fifth of Chinese goods, compared with the United States’ 18 percent. And last year, trade between the Union and China amounted to €363.2 billion, or $515.4 billion, while that between the United States and China amounted to €292 billion.

But this importance of Europe as a trading partner is not lost on the Chinese leadership, particularly because China is increasingly concerned about the euro crisis.

“The E.U. is China’s most important trading partner; therefore China has an interest in supporting the stability of the euro,” said Thomas Paulsen, a China expert at the independent Körber Foundation in Berlin. “To support the euro, China has invested substantially in government bonds of E.U. member states, such as Greece, Ireland, Portugal and Spain.”

When Mr. Wen recently visited France, Portugal and Spain, he offered to help European economies overcome their debt-driven crises by investing in euro-denominated assets. He had made the same offer to Greece, which he visited last year.

Of China’s $3 trillion or more in foreign exchange reserves, bankers estimate that a quarter is invested in euro-denominated assets.

In Hungary, much of the focus will be on strengthening China’s foothold in Eastern Europe. Over the years, Chinese companies backed by state-owned Chinese banks have been investing, buying real estate and winning government construction contracts, according to the Hungarian Economy Ministry.

Trade and investment opportunities will dominate Mr. Wen’s talks during the weekend with Prime Minister David Cameron of Britain.

And in Germany, China’s most important trading partner in Europe but also its competitor as the world’s leading export-driven economy, Mr. Wen will lead a delegation of 10 ministers and dozens of business executives.

Last week, the Chinese central bank showed its concern for the euro as it urged European governments to contain debt levels.

Hong Lei, a Foreign Ministry spokesman, said this week that China held euro-denominated debt to promote cooperation with the Union and to help euro zone countries overcome the current crisis. “China is willing to continue cooperation with the countries concerned, to help European countries to achieve steady economic growth,” he added.

The burgeoning trade between the Union and China, and China’s eagerness to buy debt, however, has not led the Union, or the individual member states, to develop a long-term political strategy for dealing with China, analysts say.

“Here is China, an emerging superpower. On every global issue, the role of China is critical,” said Eberhard Sandschneider, Asia expert at the German Council on Foreign Relations.

“But the E.U. has no long-term strategy toward China,” Mr. Sandschneider said. “It has 27 different policies,” a reference to the 27 member states of the Union.

Feng Zhongping, the director of the Center of European Studies at the China Institutes of Contemporary International Relations, said during a recent seminar organized by the European Council on Foreign Relations that the E.U. member states had their own interests. Even though Europe was important to China, Europe has no common foreign policy strategy.

Yet other analysts say that China does want Europe to have a common foreign policy, not just for China but for strategic reasons.

“China does not want a bipolar world dominated by China and the U.S.” Mr. Paulsen said. “It supports a multipolar world, which would give China more flexibility. China would like to see Europe as one pole in this multipolar world.”

Article source: http://feeds.nytimes.com/click.phdo?i=baae2722f09dffee4e3795f9d91bc77b

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