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European Central Bank Moves to Avoid Loss on Greek Bonds

January 25, 2012 by Leave a Comment

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: http://www.nytimes.com/2012/01/25/business/global/eu-officials-continue-to-press-for-a-quick-deal-on-greek-debt.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

German Bank Chief Sticks to Hard Line on Euro Support

December 2, 2011 by Leave a Comment

FRANKFURT — The president of Germany’s powerful central bank reiterated his opposition to huge bond purchases Friday, potentially deflating hopes that the European Central Bank is preparing to intervene more forcefully in financial markets.

The comments by Jens Weidmann, president of the Bundesbank, muddied expectations that central bankers and government leaders were moving toward a broad agreement on how to finally tame the sovereign debt crisis, which threatens a global credit crunch.

“I don’t believe that the euro would be stabilized over the long term by ignoring constitutions and treaties,” Mr. Weidmann said during an interview. “The central bank is forbidden from redistributing debt obligations in massive amounts among the euro zone countries.”

Optimism about a solution to the debt crisis rose Thursday after Mario Draghi, the president of the E.C.B., made comments that were widely interpreted as opening the door to a European version of quantitative easing — huge purchases of government bonds to stimulate bank lending and growth. Signs of a grand bargain to save the euro, along with a drop in U.S. unemployment, helped push up major stock indexes in Asia, Europe and the United States on Friday.

A growing number of economists and policy makers argue that the crisis has become so large that only an overwhelming display of E.C.B. firepower will preserve the euro and avoid a global economic calamity. Even a relatively orderly breakup of the euro zone would be worse than the bankruptcy of Lehman Brothers in 2008, with European output plunging 12 percent over two years, according to a report this week by the Dutch bank ING.

Mr. Draghi had suggested Thursday that the E.C.B. would be willing to move more aggressively if European leaders took decisive steps to impose greater spending discipline on members and address the underlying structural flaws of the euro zone. Several key leaders have indicated they would be willing to deliver just such changes when they hold a summit meeting on Dec. 9.

Chancellor Angela Merkel of Germany, for example, called Friday for a “union of stability” able to enforce controls on individual European economies. “Where we today have agreements, we need in the future to have legally binding regulations,” she told the German parliament.

Mr. Weidmann has only one vote on the E.C.B.’s 23-member governing council, but it would be very difficult for Mr. Draghi to execute huge bond purchases — effectively printing money — without the support of Germany. Members of the E.C.B. governing council are extremely conscious of the need to maintain the consent and trust of euro-area citizens.

Mr. Weidmann’s views are widely shared in Germany and influential among political leaders, including Mrs. Merkel. Mr. Weidmann, 43, served as her economic adviser before becoming Bundesbank president in May.

“There is a clear message coming through that sets Germany against any form of debt monetization,” said Mark Cliffe, chief economist at ING Group in Amsterdam.

Mr. Weidmann declined Friday to comment directly on Mr. Draghi’s remarks a day earlier. But he said he did not believe his opinions were far apart from those of the E.C.B. president.

“Financing nations by printing money is absolutely incompatible with a monetary policy that guarantees price stability,” Mr. Weidmann said. By law, the European Central Bank is supposed to make price stability its top priority.

The E.C.B. did not respond to Mr. Weidmann’s comments. But Mr. Draghi made no effort Friday to correct or amend his remarks from Thursday, as he might be expected to if he thought he had been misunderstood.

In a speech to European Parliament members on Thursday, Mr. Draghi called for a “new fiscal compact” among euro nations, and suggested that if one materialized the E.C.B. might be willing to take additional steps.

The central bank has other tools at its disposal that would not meet opposition from the Bundesbank. For example, when the E.C.B. meets next Thursday, it is expected to broaden its support to euro-area banks by offering them unlimited, low-interest loans for as long as three years. So far the maximum lending period has been 13 months.

Longer loans would help banks that have had trouble raising funds on the open market by issuing their own bonds. That is a typical way that banks collect money to lend to customers, but bond issuance has plummeted because investors have become uneasy about the health of euro-area institutions. Two- or three-year E.C.B. loans would also help banks that have longer-term obligations that must be continually refinanced.

The E.C.B. demands collateral in return for the loans, but it accepts securities that have lost value on the open market, including bonds from Greece. Defenders of the bank argue that its liberal collateral policy amounts to a form of quantitative easing, because it allows institutions to convert devalued paper into cash that can be lent to customers.

In a sign of the squeeze facing banks, institutions borrowed €8.6 billion from the E.C.B.’s overnight lending facility Thursday, up from €4.6 billion on Wednesday. Banks must pay a punitive 2 percent interest rate to borrow E.C.B. funds overnight, and only do so when the need is urgent. The E.C.B. closely guards information about the identity of the banks.

The E.C.B. still has room to reduce interest rates as well. Many analysts expect the bank to cut the benchmark rate to 1 percent from 1.25 percent at its meeting on Thursday, and it could conceivably go lower in coming months. But Mr. Cliffe of ING said that it would be difficult to solve the debt crisis without huge bond purchases, in order to keep borrowing costs for Italy from becoming ruinous. “They need to do something to improve the liquidity of government bond markets and give Italy a chance to avoid insolvency,” he said.

As he has before, Mr. Weidmann said that the solution to the crisis lay with governments, who must win back the trust of bond investors by addressing the shortcomings in the design of the euro zone. Countries, he said, must be willing to cede some control over their spending policy by, for example, by agreeing to automatic tax increases if their budget deficits rise above limits agreed to by treaty.

If political leaders announce a credible plan this coming week, he said, “calm could quickly return to markets.”

Nicholas Kulish contributed reporting from Berlin

Article source: http://feeds.nytimes.com/click.phdo?i=73743a58732f36b9cc9feef22b7ab1d0

Filed Under: Economy News Tagged With: , ,

Britain Worries About Its Status in Europe

November 2, 2011 by Leave a Comment

The broad market sell-off Tuesday on news from Greece only makes that outcome more uncertain.

Before this latest jolt to the euro zone, the British prime minister, David Cameron, was already in a delicate dance, trying to defend his relevance in the European Union while trying to sidestep politicians and policy makers in London who would just as soon pull out of the bloc altogether.

Notably, Mr. Cameron, as prime minister of one of the 10 member states that do not use the euro, was not invited to dine with government leaders of euro nations in Brussels last week. And he was excluded from the talks on how to save the single currency. Those were significant snubs.

But Britain’s concerns go far beyond dinners missed and meetings not attended. There is a growing fear in London that a closer fiscal union among the 17 countries that share the euro, if such a consolidation is an eventual outcome of the crisis, would curb Britain’s influence on decisions that could affect the British economy.

The outline of a rescue plan that the euro zone leaders agreed to last week would result in “more meetings alone,” Mr. Cameron said Friday during a trip to Australia. The 17 nations that share the euro, he said, could possibly create a united voting bloc against the other 10 members of the European Union.

“It is very important that the institutions of the 27 are properly looked after and that the commission does its job as the guardian of the 27,” Mr. Cameron said. The “crisis means that greater fiscal integration in the euro zone is inevitable, but this must not be at the expense of Britain’s national interest.”

In some ways, analysts say, Britain has more at stake in the crisis than the other nine members that do not share the euro. Britain, after all, is home to Europe’s largest financial center, a crucial part of its domestic economy.

At the same time, the British economy is tightly linked with the Continent. As a bloc, the euro zone nations, led by France, Germany and Italy, are by far Britain’s largest trading partners.

“The fear is that a strong caucus of euro zone members would say, ‘Here’s what we want and we’ll push it through,’ ” said Iain Begg, a professor at the London School of Economics.

But some economists argue that such concerns are overblown, saying Britain’s voice would continue to be an important one in European decision making. Fanning any fears to the contrary, they say, mainly serves the ambitions of the British politicians and policy makers who would prefer that Britain leave the union.

It further stoked Britain’s anti-European Union contingent when word emerged that Mr. Cameron had been chided by President Nicolas Sarkozy of France at the Brussels meetings for trying to get too involved.

“You’ve lost a good opportunity to shut up,” Mr. Sarkozy told Mr. Cameron according to an exchange leaked by British officials and not denied by France. “We’re sick of you criticizing us and telling us what to do. You say you hate the euro, and now you want to interfere in our meetings.”

Mr. Cameron, who wants Britain to remain in the European Union but under better terms, faced a rebellion in his own Conservative Party last week. Several members ignored his orders and voted in favor of calling a referendum on Britain’s membership. The referendum plan was eventually rejected in Parliament, but Mr. Cameron was criticized by some of his own party members for not pushing Britain’s interests enough in Brussels.

Mr. Cameron also faces pressure from his coalition partner, the Liberal Democrats, which favor the union. Nick Clegg, the Liberal Democrat who is deputy prime minister, warned that any attempt by Britain to leave the union would be “economic suicide” and that Britain’s interests are best served by a “united and liberal Europe.”

“Euro skeptics tend to gaze longingly across the Atlantic, but the Americans are interested in us, in large part, because of our sway with our neighbors,” Mr. Clegg wrote in an article in the British Sunday newspaper The Observer last week. “We stand tall in Washington because we stand tall in Brussels, Paris and Berlin.”

The president of the European Council, Herman Van Rompuy, said in the run-up to the meetings in Brussels last week that he was fully aware of the concerns and “all the sensitivities of the relationship between the 27 and the 17 member states, so my intention is to have this exchange of views if possible each time before the euro summit meetings.”

Much of the British anxiety focuses on the City, London’s financial center and a hub for Europe’s hedge funds, derivatives trading and other investment banking activities. About 70 percent of global euro bond trading takes place in London, also a global center for foreign exchange transactions and derivatives trading.

“In London, E.U. legislation is increasingly seen as a threat to the City,” said Philip Whyte, a senior research fellow at the Center for European Reform in London. But the Continent does not always hold London traders in high regard.

Some euro zone members have started to push for a tax on financial transactions across the European Union to limit speculation and raise additional money, an idea Britain strongly opposes — unless it were a worldwide mandate — for fear of hurting London’s competitiveness in global finance. The tax proposal is to be presented to European finance ministers on Nov. 8.

Wolfgang Schäuble, Germany’s finance minister, has said that even if Britain blocked the agreement on such a tax in the full union, the euro zone should press ahead on its own. Mr. Schäuble said he was aware of Britain’s opposition “but it would be wrong to say it is hopeless before we have even discussed it.”

Article source: http://www.nytimes.com/2011/11/02/business/global/euro-crisis-holds-both-hopes-and-fears-for-britain.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

DealBook: Banks in Europe Face Huge Losses From Greece

October 5, 2011 by Leave a Comment

Yves Herman/ReutersShares of Dexia, the large French-Belgian bank, collapsed in recent days. Banking woes prompted a broad market sell-off in Europe on Tuesday.

Europe’s biggest banks may finally be forced to own up to their losses.

While bank executives and government leaders have been reluctant to acknowledge that the hundreds of billions of euros of Greek debt held by financial institutions is worth far less than its face value, they are slowly accepting the grim reality, as investors, clients and lenders grow increasingly wary.

On Tuesday, Deutsche Bank said it would not meet its profit goals for the year, citing investor uncertainty and losses on Greek bond holdings. Government officials are debating dismantling Dexia, the large French-Belgian bank, and warehousing its troubled assets in a bad bank.

The latest woes prompted a broad market sell-off in Europe, hitting banks in France and Germany particularly hard. Wall Street, dragged down early by the problems on the Continent, lifted at the close, after reports that European financial officials were considering ways to shore up the industry.

As Europe’s debt crisis continues to fester, financial firms exposed to troubled sovereign debt face a brutal fallout.

Weaker banks are moving closer to the embrace of their governments. Shares of Dexia — which held more than 21 billion euros of Greek, Italian, Spanish and Portuguese bonds at the end of last year — collapsed in recent days. The situation led the Belgian and French governments, three years after originally bailing out Dexia, to guarantee the bank’s future financing needs.

For stronger banks like Deutsche Bank, the biggest in Germany, the pressure is building to cut costs and raise capital. On Tuesday, Deutsche said that it could no longer meet its 2011 profit target of 10 billion euros, or $13.3 billion. The bank said it would take a loss of 250 million euros on its Greek debt and cut 500 investment banking jobs, most of them outside Germany.

By the numbers, a write-down on Greek debt should be affordable. Some banks have already marked down their holdings to market prices. But several of the biggest holders, including Dexia, Société Générale, BNP Paribas and two German-owned state banks, have resisted admitting that their Greek bonds are worth, at best, 50 percent of their face value. Dexia has 3.4 billion euros on its books while Deutsche Bank holds 1.1 billion euros.

European policy makers are fearful of pushing Greece into default. Regulators want to wait until they can erect a firewall around Italian and Spanish debt and protect the European banks holding the bonds on their balance sheets at near or face value.

“Once you take a write-down on Greek debt for Dexia, this has systemic implications for the French and German banks,” said Karel Lannoo, the chief executive of the Center for European Policy Studies in Brussels. Dexia may be one of the worst-off banks, he said, but “the issue is the same for all banks — it will be the taxpayer that pays for this.”

European policy makers remain deeply divided on how to deal with the shaky banks.

The French government supports an exchange between Greece and bankers, which was negotiated in July as part of a second bailout for Athens.

But Germany has increasingly pushed for the banks to contribute a larger share of Greece’s growing bailout bill. Officials at the German finance ministry argue that the most efficient way to do this is for banks to take a 50 percent loss on their Greek bonds.

Since the private sector deal was forged in July, the prices of Greek bonds in secondary markets have plunged to about 36 percent of face value, from 75 percent. That has put additional pressure on European policy makers to change the terms of the deal. On Monday, Jean-Claude Juncker, the prime minister of Luxembourg, who leads a permanent working group of euro zone finance ministers, cited the changing market conditions and added that Europe was discussing “technical revisions” to the exchange.

Analysts point out that the cost of this private sector initiative has increased significantly. As originally planned, Greece was supposed to borrow 35 billion euros to buy the AAA bonds needed to back the new securities created for the debt swap.

But the global rally in high-quality debt has made the bonds pricier. People involved in the deal now say that Greece may need to borrow an extra 12 billion euros.

While the question remains whether taxpayers or financial firms will make up the difference, European authorities may be moving closer to a coordinated effort on the banks.

Olli Rehn, the European commissioner for economic affairs, told The Financial Times on Tuesday that banks’ capital positions “must be reinforced to provide additional safety margins and thus reduce uncertainty.” He said there was “a sense of urgency,” acknowledging that officials were discussing measures to bolster the banks.

Mr. Rehn’s reported comments appear to be at odds with those of his colleague, Michel Barnier, the European commissioner responsible for financial services. On Tuesday, after a meeting of European Union finance ministers in Luxembourg, Mr. Barnier said that although bank recapitalization was proceeding, there was no need for new measures.

A growing number of economists, and some voices within the International Monetary Fund, argue that banks need to formally acknowledge their losses to restore their credibility.

“It is difficult to see how Greece gets out of this without a write-down of its debt,” said a senior I.M.F. official who refused to be identified because he was not authorized to speak publicly on the sensitive issue.

Stephen Castle contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=e071b29ed9abfd7aa34c3f607f722fe9

Filed Under: Business News Tagged With: , ,