December 3, 2023

Second-Quarter G.D.P. Revised Sharply Higher

Other economic data on Thursday showed the number of Americans filing new claims for jobless benefits fell last week, a potential sign of faster hiring in August.

U.S. gross domestic product grew at a 2.5 percent annual rate in the April-June period, according to revised estimates released by the Commerce Department. That was more than double the pace clocked in the prior three months.

The reports could boost confidence that the economy is turning a corner, shaking off the government austerity enacted earlier in the year when Washington hiked tax rates and slashed the federal budget.

“We are likely now moving past the peak of fiscal drag and, as we do, improving underlying private demand should support a pickup in GDP growth,” said Ted Wieseman, an economist at Morgan Stanley in New York.

The government had initially estimated that GDP expanded at a 1.7 percent rate in the second quarter. But recent data showed that exports climbed during the period at their fastest pace in more than two years.

Economists polled by Reuters had forecast the economy growing at a 2.2 percent pace.

Many economists expect the economy will accelerate further in the second half of the year as austerity measures begin to weigh less on national output.

That drag was evident in the second quarter, when spending contracted at all levels of government. Indeed, Thursday’s data showed the economic drag from spending cuts was greater in the second quarter than initially estimated.

Still, the data could make officials at the U.S. central bank more confident in their plan to begin reducing monthly bond purchases later this year.

“The upward revision today does help cement the decision to start tapering,” said Stuart Hoffman, an economist at PNC Financial in Pittsburgh.

Stock prices rose, as did yields on U.S. government debt, while the dollar strengthened against the euro.

The Fed’s program has reduced borrowing costs and helped spark a recovery in the nation’s housing market, which collapsed during the 2007-09 recession.

In the second quarter, investments in housing accounted for nearly a fifth of the economy’s growth during the period.

However, other reports have suggested that housing began to look more shaky toward the end of the quarter. Expectations that the Fed could trim its $85 billion in monthly bond purchases as early as September have driven mortgage rates sharply higher since May.

The bond-buying program is one of the United States’ last major economic stimulus programs, as government spending began to drag on GDP in late 2010.

In the second quarter, higher taxes appeared to hold consumers back. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, slowed to a 1.8 percent growth pace after rising at a 2.3 percent rate in the first quarter.

Corporate profits, however, unexpectedly climbed in the second quarter, posting their fastest after-tax gain since late 2011.

The report leaves the annual economic growth rate averaging 1.8 percent in the first half of the year, making it more plausible that GDP could expand this year as much as the Fed forecasts. Its forecasts in June were for economic growth of at least 2.3 percent in 2013.

Still, some of the strength in the second quarter could dull growth in the third quarter. Part of the upward revision was due to retailers restocking their shelves at a faster pace than originally estimated, so they may face less of a need to build inventories between July and September.

“Inventories might be more of a headwind to (third-quarter) growth than we had been anticipating,” said Daniel Silver, an economist at JPMorgan in New York.

A separate report from the Labor Department showed the number of Americans filing new claims for unemployment benefits slipped 6,000 last week to 331,000.

Claims have not strayed too far from the 330,000 level since mid-July, bolstering expectations of an acceleration in the pace of employment gains in August.

(Reporting by Jason Lange; Additional reporting by Lucia Mutikani in Washington and Richard Leong in New York; Editing by Paul Simao)

Article source:

Economic View: Wealth Taxes: A Future Battleground

The mathematical reality is that wealth is becoming more important, relative to income. In a new paper, “Capital Is Back: Wealth-Income Ratios in Rich Countries 1700-2010,” Professors Thomas Piketty and Gabriel Zucman of the Paris School of Economics have performed the heroic task of measuring wealth for eight leading economies: the United States, Canada, Britain, France, Italy, Germany, Japan and Australia.

Their estimates reveal some striking trends. For instance, wealth accumulation in these eight countries has risen relative to yearly production. Wealth-to-income ratios in these nations climbed from a range of 200 to 300 percent in 1970 to a range of 400 to 600 percent in 2010. Behind the changing ratios is some bad news, namely that slow productivity growth and slow population growth have depressed income growth, but also some good news — that relative peace and capital gains have preserved wealth.

Focusing on the wealth of economies lets us reframe our recent debates about government debt in useful ways. A look at the ratio of debt to gross national product, for example, can be scary, but the ratio of debt to wealth is far less forbidding. If, say, a nation’s debt-to-G.D.P. ratio is 100 percent — often considered a dangerous level — and national wealth is 10 times yearly national income, the debt-to-wealth ratio is thus 10 percent, which is comparable to owing $100,000 on a $1 million home. Not so scary.

Using the wealth numbers provided by Professors Piketty and Zucman, we can understand how Japan, despite a debt-to-G.D.P. ratio of more than 200 percent, can maintain low interest rates; Japan has a wealth-to-income ratio of about 600 percent. In essence, creditors think the Japanese political system will be able to drum up enough support for the requisite taxes, pulled out of national wealth if necessary, when the time comes.

But don’t relax too quickly, because fiscal problems remain very real for many countries. While virtually every government could pay off its debts by taxing wealth, such taxes are often politically unacceptable. In other words, fiscal problems are best regarded as problems of dysfunctional governance. In the recent elections in Italy, the incumbent government lost voter support partly because it addressed the nation’s revenue problems by levying a wealth tax on real estate; the policy remains contentious and may yet be repealed or limited.

And here is a related issue: If there is enough national wealth to pay off debts, it may be harder to arrange bailouts from outside.

In the European Union, countries like Germany may regard the union’s more troubled nations as shirking their fiscal duties, and that makes cooperation harder to achieve. Italy, for instance, is in a fiscal crisis, but it also has an especially high wealth-to-income ratio, at 650 percent, indicating that it could pay off its debt if more of that wealth were taxed. Germany, by contrast, has a much lower wealth-to-income ratio: 400 percent. And though the professors caution that the German data, in particular, may be incomplete, the figures do lend support or at least plausibility to the recent argument that Germany shouldn’t be viewed as the rich uncle of Europe.

Some forms of wealth taxation take hidden forms, such as financial repression. This occurs when a nation’s citizens are required to hold deposits in banks under unfavorable terms — meaning at low interest rates. The banks, in turn, may be required to buy government debt to help finance a budget deficit. For better or worse, this is likely part of a longer-run resolution of fiscal problems in the periphery of the euro zone.

In the United States, wealth taxes are currently limited to a few levies, such as property taxes and inheritance taxes. Capital gains taxes that aren’t indexed to inflation also serve as an implicit wealth tax, because they dig into the body of a person’s capital. Most likely those rates will rise. Like the bank robber Willie Sutton, revenue-hungry governments go “where the money is.”

The coming battles over wealth taxation may prove especially bitter and polarizing. Most wealth has already been subjected to income and other taxes, perhaps multiple times. It doesn’t seem fair to the holders of that wealth to suddenly pay additional taxes on assets that they thought were in the clear, and such taxes would signal that previous policy has failed.

Higher wealth in a nation means that there is more to take, and growing inequality means there are more problems that its government might seek to remedy. At the same time, however, this new economic configuration will mean greater political influence for the holders of that wealth, and that will make higher wealth taxes harder to achieve.

Historically, economists — including me — have generally favored taxes on consumption, on the grounds that they would do the least damage to long-term savings, investment and economic growth. Yet in some eyes, rising wealth will become a tempting target for short-term political gain. And note that while most Republicans currently oppose consumption taxes, they may dislike the relevant alternative, namely wealth taxes, even more.

Get ready to choose a side.

Tyler Cowen is a professor of economics at George Mason University.

Article source:

Regulator Says China’s Banking System Liquid Enough

SHANGHAI — China’s chief banking regulator has said liquidity in China’s banking system is sufficient, and he has pledged to control risks from local government debt, real estate and shadow banking.

Despite a cash squeeze that sent money-market interest rates soaring over the last two weeks, banks have more than enough reserves to meet settlement needs, Shang Fulin, chairman of the China Banking Regulatory Commission, said at a financial forum Saturday.

“Over the last few days, due to multiple factors, the problem of tight liquidity has appeared in the market. But over all, liquidity in our banking system really isn’t scarce,” Mr. Shang said in a speech to the Lujiazui Forum.

Mr. Shang said excess reserves in China’s banking system totaled 1.5 trillion renminbi, or about $244 billion, which he said was more than double the amount necessary for normal payment and settlement needs.

On the issue of banks’ asset quality and, in particular, banks’ exposure to local government debt and the real estate market, Mr. Shang acknowledged risks but said they were manageable.

“Recently, some international organizations and industry insiders have expressed worry about a slowdown in China’s economic growth, local government debt, the real estate market and related areas,” Mr. Shang said. “Currently everyone is fully aware of the risks. As long as we take proper risk control measures, these risks are controllable.”

On local debt, Mr. Shang pledged to closely monitor and control the growth in local borrowing and “alleviate hidden risks.”

Outstanding bank loans to local government financing vehicles totaled 9.59 trillion renminbi at the end of the first quarter, he added.

Amid the cash squeeze last month, the banking regulator repeated previous orders to banks to report all forms of local government debt exposure, including funds channeled through wealth management products.

The central bank, the People’s Bank of China, which had let short-term borrowing costs spike to record highs to drive home a message to banks that they could no longer count on cheap cash to fund riskier operations, said it would ensure policy supported a slowing economy.

He also highlighted the risks of wealth-management products, bank-issued securities that have exploded in recent years as households and companies have searched for higher-yielding alternatives to traditional deposits.

“In reality, wealth management products are investment products. Wealth management products are not the same as savings. Investors have to bear investment risk. When banks do these products, are they clearly explaining the risks to investors?” Mr. Shang said.

Analysts have said many who invest in wealth-management products believe their investments carry an implicit guarantee from state-backed banks, even if no legal guarantee exists.

Bank-issued wealth-management products totaled 8.2 trillion renminbi by the end of the first quarter, of which 70 percent were invested in the real economy.

On the real estate market, Mr. Shang downplayed the risk to the banking system, despite a three-year campaign by the central government to restrain housing prices. Real estate loans totaled more than 13 trillion renminbi by the end of April, of which mortgages comprised about 70 percent, he added.

“Chinese people are creditworthy. The nonperforming loan ratio on mortgages is extremely low, far below 1 percent,” Mr. Shang said.

Article source:

Latvia Steps Toward a Tarnished Prize, the Euro

FRANKFURT — The small Baltic nation of Latvia received official endorsement for membership in the euro currency union Wednesday, in a move that European leaders clearly hoped would demonstrate the endurance of the euro zone despite its dismal economic performance and damaged reputation.

“Latvia’s desire to adopt the euro is a sign of confidence in our common currency and further evidence that those who predicted the disintegration of the euro area were wrong,” Olli Rehn, the European Union’s commissioner for economic and monetary affairs, said in a statement.

Both the European Commission, the European Union’s main policy-making body, and the European Central Bank said that Latvia had met the requirements for membership, which include limits on inflation and government debt. Latvia also had to demonstrate that its laws on issues like central bank independence are in line with European Union standards.

Latvia’s application still requires review by the European Parliament and endorsement by European Union political leaders, a process that is likely to result in formal approval in July.

Latvia would join on Jan. 1, becoming the 18th European Union country to adopt the euro.

The country, with 2.2. million people and economic output last year worth about 20 billion euros, is often held up as a model for advocates of austerity because the country responded to a severe banking crisis in 2008 by slashing government spending.

Economic output plunged, unemployment soared and wages fell, but the Latvian economy gradually recovered. The country’s economy grew 1.2 percent in the first quarter of 2013 compared with the previous quarter, second only to neighboring Lithuania among European Union countries.

“Latvia’s experience shows that a country can successfully overcome macroeconomic imbalances, however severe, and emerge stronger,” Mr. Rehn said.

However, opinion polls indicate that most Latvians are reluctant to join the euro, even though they have a powerful political incentive to do so. Like Estonia, another Baltic nation, which was the most recent country to join the euro in 2011, Latvia is anxious to tie itself to Europe and distance itself from its former Russian masters.

The Latvian government did not hold a voter referendum on euro membership. In many ways, the country is already a de facto member. The country has kept its currency, the lat, closely tied to the euro. And Latvian bank loans are commonly denominated in euros.

In its report, the European Commission said it had concluded that Latvia “has achieved a high degree of sustainable economic convergence with the euro area.”

The European Central Bank was also generally positive about Latvia, but expressed some concerns about the country’s readiness.

About half the deposits in Latvian banks come from outside the country, primarily Russia. That raises the risk of a sudden exodus of money in the event of a crisis. Earlier this year, Cyprus, another tiny euro zone member, was forced to limit withdrawals to prevent a bank run by Russian depositors.

But Latvia is considered less vulnerable to a Russian deposit flight than Cyprus because most of the money is linked to genuine business ties. Cyprus was regarded as a place where Russians parked their money to avoid taxes or because of fears that Russian authorities might one day seize assets.

The European Central Bank also expressed some concern whether Latvia could continue to meet the inflation targets required of euro members. While inflation has been well below 2 percent lately, Latvia has experienced huge swings in prices during the last decade, the central bank said, ranging from deflation to annual inflation of more than 15 percent.

The governor of the Latvian central bank will automatically join the European Central Bank’s governing council and have a vote in decisions on interest rates and other monetary policy issues. It is unclear who that person will be, since the term of the current governor, Ilmars Rimsevics, expires at the end of this year.

Historically, though, Latvia has stuck to the kind of conservative policies favored by Germany, Finland and other northern European countries. Government debt last year equaled about 41 percent of gross domestic product, well within limits set by treaty and much lower than Western European countries like France or Italy.

Still, recent experience with countries like Greece and Ireland has shown that nations can have trouble maintaining fiscal and economic discipline after they have joined the euro club.

“The temporary fulfillment of the numerical convergence criteria is, by itself, not a guarantee of smooth membership in the euro area,” the European Central Bank said in its report.

James Kanter reported from Brussels.

Article source:

Political Economy: Cyprus Goes After the Little Guy

Cyprus’s proposed deposit grab is a bad precedent. Money had to be found to prevent its financial system from collapsing. But imposing a 6.75 percent tax on insured deposits is a type of legalized robbery. Cyprus should instead impose a bigger tax of on uninsured deposits and not touch small savers.

Confiscating savers’ money will knock confidence in the banks. Trust in the government will also take a hit, since Nicosia had theoretically guaranteed all deposits to a level of €100,000, or about $130,000. Small savers should be encouraged, not penalized. Those who squirrel away their savings are the quiet heroes of the financial system, not those who drag it down by engaging in borrowing binges.

Nicosia has not technically broken its promise to guarantee small deposits. That is because it is not the banks that are failing to repay savers — something that would have set off the insurance program. Instead, it is the government itself grabbing a slice of deposits. The pill is also being sugared by giving savers shares in the banks as compensation. That said, the mechanism is still an effective breach of promise.

There is no denying that Cyprus needed a solution. The small Mediterranean island was on the brink. Its banking system — which had grown to eight times its gross domestic product on inflows of Russian money and aggressive expansion in Greece — was technically bust. Its exposure to the Greek economy, Greek government debt and Cyprus’s own burst property bubble had seen to that.

Nicosia’s euro zone partners made it clear that there was no time to waste. They had chosen to hold their finance ministers’ meeting Friday night, knowing that Cyprus already had a bank holiday scheduled Monday. The country’s president said the European Central Bank was threatening to cut off liquidity Tuesday if there was no deal. The banking system would have collapsed.

In total, Cyprus requires €17 billion — almost 100 percent of G.D.P. — to rescue its banks and deal with the government’s own bills. If Nicosia had borrowed all that cash on top of its existing debt, it would have been carrying an unsustainable burden. It would have been only a matter of time before the debt needed restructuring.

Cyprus’ euro zone partners and the International Monetary Fund rightly decided not to lend it so much money, limiting the bailout to €10 billion. This means Nicosia should end up with debt equal to a manageable 100 percent of G.D.P. in 2020.

The problem was where to find the extra €7 billion. Because Germany and other northern European countries were not prepared to give a handout, there were two options: force the government’s own bondholders to take a loss, or hit bank creditors.

The option of a haircut on government debt — as Greece imposed last year — was rejected. Many of the bonds are held by Cypriot banks, so a haircut — a loss on investment — would just have increased the size of the holes in their balance sheets, meaning they would have needed an even bigger bailout. The Cypriot government’s credit would have been destroyed for little benefit.

So, pretty much by default, the banks’ creditors had to be tapped. Ideally, bank bondholders would have taken the strain. But Cypriot banks have hardly any bonds. So there was not much money that could be grabbed there.

This, incidentally, rams home the importance of requiring all banks to have fat capital cushions, consisting either of equity or bonds that can be bailed in during a crisis. The sooner international regulators come up with a minimum standard for so-called “bail-in” debt, the better.

Given that Cypriot banks did not have such a cushion, the remaining option was to hit depositors, for €5.8 billion in total. There was even some rough justice in the policy. After all, as much as half of the country’s €68 billion in deposits is held by Russians and Ukrainians, and some of this money is thought to be black money laundered through Cyprus.

What is more, the country’s banks have been paying high interest rates in recent months — in some cases of as much as 7 percent on euro deposits. That is clearly danger money. Depositors should have known there were risks attached to such high rewards.

If the deposit tax had been confined to uninsured deposits, which are facing a 9.9 percent levy, such arguments would have merit. But the insured savers have also been hit with a 6.75 percent tax. It would be better to get the money entirely from the €38 billion of uninsured depositors. That would require raising the tax to about 15 percent. It is still not too late for Cyprus’s Parliament to change course.

The Cypriot government did not want to do this, because uninsured deposits are disproportionately foreign and it was feared that such a high tax would undermine its status as an offshore financial center. Even if there is domestic political logic in cushioning Russian mafia at the expense of Cypriot widows, such a policy is bad for the rest of the euro zone.

There probably will not be any immediate contagion to other crisis countries from Cyprus. After all, banking systems in Greece, Spain, Portugal and Ireland have recently been recapitalized. Meanwhile, the combination of Cyprus’s relatively huge banking sector and the fact that it is perhaps small enough to experiment with make it a special case.

Even so, citizens in the rest of the euro zone now know that if push comes to shove, their insured deposits could be grabbed too.

Hugo Dixon is editor at large of Reuters News.

Article source:

Bundesbank President Says France Needs to Control Its Deficit

FRANKFURT — The head of the German central bank said Monday that France should not give up trying to bring its government deficit below 3 percent of gross domestic product, adding to the criticism being heaped on President François Hollande of France from abroad.

Jens Weidmann, president of the Bundesbank, cloaked his rebuke in the language of French-German solidarity and was considerably more diplomatic than Maurice M. Taylor Jr., the head of the American tire maker Titan International, who sparked a furor last week when he told the French industry minister that French workers were lazy.

Still, Mr. Weidmann was the latest prominent person to lecture the increasingly defensive French on how they should manage their economy.

Speaking in Paris at the École des Hautes Études Commerciales, a leading business school, Mr. Weidmann noted that unemployment in France was above 10 percent while France’s share of world exports had declined by 25 percent since the euro made its debut. Total government debt “has reached a level that could potentially hurt growth,” Mr. Weidmann said.

France would undermine confidence in its prospects if it delayed efforts to control deficit spending, he said.

“Putting consolidation off would just shift the problem into the future,” Mr. Weidmann said, according to an advanced text of his remarks. “It would buy time but in so doing also worsen matters today as there is the risk that trust in public finances would erode even more.”

The tone of Mr. Weidmann’s speech was polite and even included a joke at Germany’s expense. (“How many Germans do you need to change a light bulb? One: he holds the light bulb, and the rest of Europe revolves around him.”)

Mr. Weidmann invoked the durable, if sometimes contentious, relationship between France and Germany, which has always been crucial to the functioning of the European Union. “Only together can France and Germany solve the current crisis,” he said.

But he said that the largest countries in the European monetary union had a responsibility to set an example for other members. “It is in my view particularly important for the heavyweights in E.M.U. to give clear signals,” he said.

France’s government budget deficit will be 3.7 percent of gross domestic product this year, while Germany will have a slight surplus, the European Commission forecast last week. When European countries formed a common currency, they agreed to keep their deficits below 3 percent of G.D.P., though the target has often been breached.

Mr. Weidmann acknowledged that budget austerity might hurt growth but said countries had no choice. “It is important that governments adhere to the consolidation plans they announced,” he said. “This will inspire confidence, which is an important prerequisite for the economy to grow.”

He rejected suggestions by Christine Lagarde, president of the International Monetary Fund and the former economics minister of France, that Germany should somehow become less competitive to give other countries a chance.

“The deficit countries must act,” Mr. Weidmann said. “They must address their structural weaknesses. They must become more competitive, and they must increase their exports.”

Article source:

The Next Crisis for German Banks — Shipping

FRANKFURT — For all the talk about Germany’s financial exposure to Greece, it turns out that some German banks have a problem of more titanic proportions — their vulnerability to the global shipping trade.

Germany’s 10 largest banks have €98 billion, or $128 billion, in outstanding credit or other risks related to the global shipping industry, according to Moody’s Investors Service. That is more than double the value of their holdings of government debt from Greece, Ireland, Italy, Portugal and Spain. And it is more than any other country’s financial exposure to the shipping industry, which is in the fifth year of a recession.

Moreover, German banks bear a generous share of the blame for spawning that recession. By helping to finance and market funds used to build and purchase ships, a popular tax shelter, the banks helped create a glut in large container ships that has led to a collapse in cargo hauling prices worldwide.

Germans grumble chronically about having to pay for Greece’s bad debts, and German policy makers style themselves as guardians of fiscal prudence. But the shipping-related crisis, and the threat it poses to the German economy from billions of euros in bad loans and losses at shipping-related companies, is a reminder that German banks and political leaders also have plenty to answer for.

Shipping’s recession has been overshadowed by the euro zone debt crisis, but it has many of the same causes. They include complex financial products that turned sour, market-distorting government incentives and a gigantic underestimation of risk.

“The container ship market is completely overbuilt,” said Thomas Mattheis, a partner at TPW Todt, an accounting firm in Hamburg that advises clients in the industry. He blamed banks that granted easy credit, cargo companies that ordered too many vessels and investors eager for the tax-free profits that were part of the allure, thanks to German law.

“When you look back you can say they all had a share,” Mr. Mattheis said.

HSH Nordbank in Hamburg, the world’s largest provider of maritime finance, is expected to raise its estimate of potential losses from shipping on Wednesday when it reports quarterly earnings. The bank, owned by local governments and savings banks, has already warned that in coming years it will need to avail itself of €1.3 billion in guarantees offered by Hamburg and the state of Schleswig-Holstein, putting a further strain on taxpayers.

“I have to admit that grave mistakes were made in the years before 2009,” Constantin von Oesterreich, chief executive of HSH, said in an interview published by The Hamburger Abendblatt on Saturday. In October, Mr. von Oesterreich became the bank’s third new chief executive since 2008.

Other German banks that were particularly active in ship finance, including Commerzbank in Frankfurt and NordLB in Hanover, which both rank in the top five globally in that market, have said they have made adequate provisions for losses and will not need any government aid.

Commerzbank, which is partly owned by the German government after a bailout, shut down a unit specializing in ship financing this year and is winding down its holdings. The bank warned in its most recent quarterly report that it would be at least another year before it could sell units that were set up to finance construction of cargo ships with names including “Marseille” and “Palermo.” While larger, relatively new cargo ships sell for tens of millions of dollars, older, smaller ships often fetch only a few million — not much more than the value of the scrap metal.

Exposure to shipping is one reason Moody’s affirmed its negative outlook for German banks last month. In a report, the ratings agency warned that the global shipping industry “faces weakened demand amid sluggish global economic growth and evolving structural overcapacity.” It said money that the 10 largest German banks had lent to the shipping industry equaled 60 percent of their capital, the funds held in reserve for potential losses.

Article source:

European Central Bank Moves to Avoid Loss on Greek Bonds

LONDON — European leaders have begun discussions with the European Central Bank on several options that might keep it from having to take a loss on its 55 billion-euro portfolio of Greek bonds.

For months, the proposed debt restructuring deal between Greece and its private sector creditors had excluded the central bank from taking a loss on its Greek bond holdings while banks and hedge funds would have losses of 50 percent or more.

Among the measures being discussed Tuesday, according to officials involved in the negotiations, is one in which the central bank would exchange Greek bonds that it currently owns for a different form of Greek government debt that would not be eligible for a loss.

The talks remain fluid and could break down at any moment, said the officials, who were not authorized to speak publicly.

Also on Tuesday, European Union officials pressed political leaders to turn their attention to promoting growth, amid signs that a recovery will take longer than anticipated.

José Manuel Barroso, the president of the European Commission, urged government leaders to investigate “concrete measures to stimulate growth and employment.”

The leaders are set to meet next week in Brussels,

At the close of a two-day meeting of finance ministers in Brussels on Tuesday afternoon, other officials kept up the pressure for a quick deal on refinancing Greek private debt.

Olli Rehn, the European Union’s commissioner for economic and monetary affairs, suggested that time was running out on an agreement between creditors and the government in Athens aimed at lowering Greece’s debt burden to a sustainable level.

A representative for the central bank declined to comment specifically on the negotiations, saying that they were a matter for the private sector and that the central bank was not involved.

The deal could address what has long been one of the more vexing questions in reaching a broad agreement on reducing Greece’s mountain of debt: how to prevent the central bank, the largest holder of Greek bonds, from having to participate in a debt restructuring along with private sector investors.

Private sector investors, including large European banks and hedge funds, have complained bitterly — and in some cases threatened legal action — over the central bank’s insistence that its 55 billion euros in Greek bonds were exempt from the loss that the private sector is facing, which some have estimated at 60 cents on the euro.

The central bank bought the bulk of its Greek bonds in 2010 in a failed attempt to stabilize Greece’s collapsing bond market, paying discounted prices of about 70 to 75 cents on the euro. As part of the current talks, the central bank might exchange its current bonds for a different form of Greek debt at a cost similar to that of the distressed bonds.

In that way, the bank would, in theory, not have to take a loss and Greece would get the benefit of that discount, which could reduce its debt burden. Analysts argue that such a step would be seen positively by the markets.

“It’s a smart idea and it makes Greece’s debt more sustainable,” said Miranda Xafa, an expert on the Greek economy at EF Consulting in Athens.

The latest twist in Greece’s restructuring talks comes in the wake of a lingering impasse between private sector creditors and Greece’s financial backers, Germany and the International Monetary Fund over how much of a loss banks should take.

Germany and the I.M.F. have held firm that the new bonds should carry an interest rate, or coupon, of below 3.5 percent to ease Greece’s debt burden, while the banks have fought back, saying that the subsequent loss would be too much and that the deal could no longer be deemed a voluntary one.

At a news conference in Zurich on Tuesday, Charles Dallara of the Institute of International Finance, the bank lobby representing the private sector, said that all parties in the talks must honor their commitments in the talks.

Two weeks ago, the creditors told European officials that the private sector would accept a large haircut if the European Central Bank would join in, according to bankers involved in the talks. European officials declined the offer, they said.

Now, the pressure is building on Europe to find a solution before Greece must pay 14.4 billion euros to bond holders in March or default.

The two-day meeting in Brussels ended with some progress on shoring up the euro zone. Finance ministers took further steps toward establishing a permanent bailout fund, the European Stability Mechanism, as the I.M.F. has urged. That fund could be operating by July.

Leaders still are tussling over whether the fund should have 750 billion euros to 1 trillion euros ($971 billion to $1.3 trillion) at its disposal. Mr. Schäuble has suggested that 500 billion euros is sufficient.

Landon Thomas Jr. reported from London, and James Kanter from Brussels. Jack Ewing contributed reporting from Frankfurt.

Article source:

In Auctions, Reassurance For Europe

And while the central bank left its benchmark interest rate unchanged at 1 percent Thursday, the bank’s president, Mario Draghi, indicated he was prepared to take further steps to ease credit, if necessary.

The Italian Treasury found brisk demand Thursday in selling 8.5 billion euros ($10.9 billion) of 12-month bills at an interest rate of 2.735 percent. It was the lowest interest rate Italy has been able to sell one-year debt at since an auction in June — and less than half the 5.952 percent Italy had to offer at the last sale, in early December.

In Madrid, the Spanish Treasury said Thursday it sold a total of 10 billion euros ($12.8 billion) of bonds — twice the amount it had set as a target — with yields down from previous auctions. For example, $4.3 billion in three-year notes were sold at a yield of 3.384 percent, compared with 5.187 percent in December for three-year notes.

Both Spain and Italy have been under intense pressure from investors because of their public finances, with recently installed governments scrambling to push through additional austerity packages to rein in deficits and debt levels.

Both countries’ longer-term debt yields, which reflect higher risk and uncertainty, remain relatively high. Another bellwether of the crisis comes Friday, when Italy tries to auction more than $9 billion in longer-term debt. The question remains whether enough investors will bid on that debt and feel confident enough in Italy’s fiscal health to justify declining yields.

The interest rate on Italy’s 10-year debt has dipped to 6.6 percent from 7.1 percent earlier this week, though it is still unsustainably higher than the 4 percent to 5 percent it traded at for much of the last two years.

But Thursday’s solid auctions were the latest sign that shorter-term government debt has become more attractive to commercial banks and other investors since the central bank last month began a program of offering low-interest three-year loans to commercial banks in the euro currency region.

While a large portion of that money has been used simply to pay off other lenders, it has clearly eased pressures on the banks and helped free up cheap money the banks can use to purchase sovereign debt.

“We do think this decision has prevented a credit contraction that would have been much more serious,” Mr. Draghi said Thursday.

He said the central bank would continue to support commercial banks in the euro zone and predicted that the bank’s next refinancing operation, in February, would attract even more lenders.

The central bank, based in Frankfurt, left its benchmark interest rate unchanged Thursday, after having cut rates by a quarter point twice since Mr. Draghi became its president at the beginning of November. The rate cuts have been meant to help slow an economic downturn in the 17 countries in the European Union that use the euro. Mr. Draghi said the bank was pausing in its rate cutting amid what it called “tentative” signs of increased economic stability. But he indicated the central bank was prepared to take further steps, if necessary.

Analysts took Mr. Draghi’s comments as a clear sign that the central bank stands ready to reduce its benchmark interest rate below the already historic low of 1 percent to counter a recession.

“He kept the door open,” said Jacques Cailloux, the chief European economist for Royal Bank of Scotland. “He made a very clear statement that the E.C.B. stands ready to act.”

Earlier Thursday, in London, the Bank of England kept its benchmark interest rate at a record low of 0.5 percent as the British government’s tough fiscal measures and the crisis in the euro zone exacerbated economic problems.

The Bank of England also voted to continue with its existing bond purchasing program of £275 billion ($422 billion). Many economists expect the British central bank to expand the asset-buying program at its next meeting in February in a bid to pump more capital into the economy.

Some economists expect the central bank to move as early as next month for a rate cut. But others predict that the governing council will hold off until March, when a fresh growth forecast for the euro zone is to be issued.

Reporting was contributed by Julia Werdigier from London, David Jolly from Paris and Raphael Minder from Madrid.

Article source:

Italy’s Long-Term Borrowing Costs Decline

Despite a dramatic drop in short-term borrowing costs on Wednesday, the continuing high yields on the benchmark 10-year bonds — just shy of the psychologically important 7 percent rate — pointed to continuing challenges ahead.

Italy, the euro zone’s third-largest economy, must refinance almost 200 billion euros in government debt by April, and if borrowing rates remain high, the country could face a solvency crisis that could threaten the stability of the euro.

At the Thursday sale, the 10-year bond was priced to yield 6.98 percent, down from a euro-era record high of 7.56 at the previous sale in late November. The Italian Treasury also sold bonds due in 2014 to yield 5.62 percent, down from 7.89 percent.

The total of 7 billion euros, or $9 billion, sold Thursday in thin holiday markets was less than the target of 8.5 billion euros.

An auction of 9 billion euros in short-term Treasury bills on Wednesday saw rates fall by half from previous levels. But the sale Thursday was seen as a more significant as a signal of market sentiment about the longer term outlook of Italy’s struggling economy.

Analysts had said that much of the buying on Wednesday came from European banks that had just loaded up on cheap, three-year loans from the European Central Bank, and were looking for easy profit.

Significantly, the 10-year benchmark rate remained close to the 7 percent rate, which economists regard as untenable in the long term.

The auction followed the announcement that Italian business confidence fell to its lowest in two years in December amid imposition of a tough austerity program by the country’s new technocratic government.

The national statistics institute Istat said the manufacturing-sentiment index dropped to 92.5, from a revised 94 in November.

Last week, Mr. Monti won final approval of a $40 billion spending package that includes tax increases and a pension change aimed at eliminating Italy’s budget deficit by 2013. But with Italians starting to feel the pain and dissent growing in Parliament, he must act swiftly to stimulate Italy’s economy, which is already in recession and is expected by some forecasters to shrink in 2012. He was expected to outline new measures at a news conference later Thursday in Rome.

In many ways, the fluctuations in Italy’s borrowing rate only compound the country’s political complexities. Analysts say Mr. Monti’s government needs a certain amount of market pressure to help push through politically unpopular structural changes in the economy that the parties nominally backing him in Parliament are not eager to carry out.

Yet if the market pressure becomes too high and the borrowing rates remain too onerous, Italy risks a default.

“A part of the political class thinks that if the market pressure lets up, we can also lessen the sting of cleaning up the economy, to do weaker economic measures,” Massimo Giannini, the business editor and deputy editor of the center-left daily La Repubblica, said. “But by now I think there’s a broad awareness, at least on the part of the government, that we have to do these measures regardless of the euro and regardless of the commitment we made with Europe.”

In August, Italy agreed to eliminate its budget deficit by 2013 and enact structural changes to its pension system and labor markets in exchange for purchases of Italian government debt by the European Central Bank.

The People of Liberty, the largest party supporting Mr. Monti’s government in Parliament, believes that its former leader, Silvio Berlusconi, was swept out of office by market forces, not traditional democratic processes, and in recent weeks has attempted to gain political ground by capturing Italian discontent at the austerity measures.

“There’s no clear link between the decisions taken by the government and the markets,” Angelino Alfano, the leader of the People of Liberty and Mr. Berlusconi’s political heir, told a group of reporters last week. Calling on Europe to take broader action, he asked: “No matter how illuminated the choices are of the Italian government, can they change the course of the euro crisis or the destiny of Europe?”

In recent weeks, Mr. Monti, too, has been calling on Europe — which is to say Germany, the euro zone’s biggest and strongest economy — to help provide more institutional support for the euro.

Germany has adamantly opposed what it sees as rewarding the bad behavior of southern rim countries like Italy, Greece, Spain and Portugal, which amassed high public debts and where tax evasion is rampant. But it has also been vehemently opposed to changes that many economists and the Obama administration say are necessary to ensure the stability of the euro, such as allowing the European Central Bank to become a lender of last resort like the Federal Reserve in the United States.

The troubled backdrop to Italy’s economic challenge is neighboring Greece, where nearly two years of austerity measures — tax increases and wage cuts — demanded by the country’s foreign lenders have pushed the country into a deep recession and led to deep cuts in basic services like health care.

Harvey Morris reported from London.

Article source: