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Merkel and Sarkozy Warn Greece on Debt

January 10, 2012 by Leave a Comment

The leaders of the European Union’s two largest countries met in the German capital to discuss their next steps in combating the sovereign-debt crisis that has destabilized the Continent and threatened the common currency. Even as Mrs. Merkel and Mr. Sarkozy promised quick action to stem the crisis, investors signaled the depth of their ongoing concern over the instability that has spread from Greece to the very heart of the euro zone by purchasing German debt at a negative real interest rate for the first time ever.

Speaking at a news conference after the two leaders met at the chancellery building here, Mr. Sarkozy acknowledged the uncertainty in the markets, saying, “The situation is very tense, very tense.”

There are increasing signs that Greece will fail to make the structural changes to its economy that its leaders have promised. Greek’s prime minister, Lucas Papademos, warned last week that without deeper spending cuts a disorderly default was a possibility, and could result in Greece leaving the euro.

With an eye toward Athens, Mr. Sarkozy said that “our Greek friends must live up to their commitments.” Mrs. Merkel said that if those commitments were not met by the Greek government “it will not be possible to pay out the next tranche” of the bailout money.

The holidays may have created a lull in the action but the New Year promised to be just as hectic as the old for European leaders and Mrs. Merkel in particular. The head of the International Monetary Fund, Christine Lagarde, arrives on Tuesday evening for talks with the German chancellor. Italy’s prime minister, Mario Monti, comes to Berlin on Wednesday.

Mrs. Merkel and Mr. Sarkozy are scheduled to travel to Rome on January 20th for negotiations with the Italian government ahead of the next European Union summit in Brussels on January 30.

“Everyone would like a grand design rather than a series of small steps going forward, some going backwards,” said André Sapir, an economist and senior fellow at Bruegel, a research group based in Brussels. “Sometimes there doesn’t seem to be a design at all, and that has been unnerving investors being asked to refinance debt both private and public.”

A drumbeat of bad economic news lately has led many economists to predict the imminent return to recession for many of the countries that use the euro. At the same time, European countries and financial institutions need to raise roughly $2.4 trillion in 2012.

Asked whether she feared that ratings agencies would downgrade additional European countries and in the process further spook markets, Mrs. Merkel replied coolly, “Fear does not motivate my political actions.”

The gap between countries with sound finances and those like Italy and Spain that are forced to pay high rates has widened to a chasm of five percentage points or more. Germany on Monday joined the likes of the Netherlands and Switzerland as perceived safe havens where customers of short-term debt are willing to lose money in return for shelter from upheaval and the possibility of even greater losses.

Mrs. Merkel called the plan to stabilize the euro “an ambitious but attainable goal.” She hit several familiar themes, stressing that there were no quick solutions to the euro crisis and that Greece was an exception when it came to debt writedowns, often known as a “haircut,” for private investors. “Our intention is that no country must withdraw from the euro area,” Mrs. Merkel said.

She and Mr. Sarkozy both voiced their determination to press ahead with a tax on financial transactions opposed by Britain, but they appeared to diverge on the timing. Mr. Sarkozy, facing a strong left-wing challenge in his struggle for re-election in May, suggested France could go it alone and challenge other states to follow suit.

French Prime Minister François Fillon said today in Paris that France may present a bill on such a tax in February, hoping that other countries follow. “Someone has to be the first to jump in the water,” Mr. Fillon said.

Mrs. Merkel expressed her support for Mr. Sarkozy’s goal of pressing ahead with a financial-transaction tax, saying that European Union finance ministers should make a formal proposal by March. Although an agreement between the 27 members of the union was preferable, one among the 17 countries that issue the euro was acceptable.

“If Sarkozy loses the election, which is entirely possible, the Socialists would certainly be a more difficult partner for Merkel,” said Frank Decker, a political scientist at the Institute for Political Sciences and Sociology at the University of Bonn. “As a result, she looks for ways that she can strengthen his position.”

Steven Erlanger in Paris contributed reporting

Article source: http://feeds.nytimes.com/click.phdo?i=03e894a586eece162b8f31e8c57c1b91

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New E.C.B. Official May Be Open to Bond-Buying

December 14, 2011 by Leave a Comment

Mr. Coeuré, 42, will take office in January, giving France a representative on the six-member board for the first time since Jean-Claude Trichet retired in October as E.C.B. president.

During testimony before a committee of the European Parliament on Monday, Mr. Coeuré said that it might be necessary for the E.C.B. to step up its purchases of sovereign bonds in order to maintain the bank’s control over interest rates.

That was not a declaration in favor of wholesale bond purchases by the E.C.B., which a large group of economists advocate as the only way to hold down borrowing costs and save the euro. But the statement suggested that Mr. Coeuré may be more flexible on the issue than Jürgen Stark, a German who is leaving the executive board at the end of the year because of his discomfort with E.C.B. bond market intervention.

Jörg Asmussen, a high-ranking official in the Finance Ministry, will replace Mr. Stark and is seen as less of a hard liner. However, Mr. Asmussen is also close to Jens Weidmann, the president of the German Bundesbank who has been an implacable opponent of stepping up E.C.B. bond purchases.

Mr. Weidmann repeated his opposition to more bond buying Wednesday in a speech in Berlin. “One idea should be dispensed with once and for all, namely the idea of using the printing press to create emergency funds,” he said. “That would endanger the most important foundation of a stable currency: the independence of a central bank focused on price stability.”

Mr. Coeuré replaces Lorenzo Bini Smaghi, an Italian who resigned to make way for a French representative. Members of the executive board are supposed to represent the interests of the euro area and not a particular country. But there is an unwritten rule that the largest countries in the euro area should each have a seat on the executive board.

After Mario Draghi took over as president of the E.C.B. at the beginning of November, Italy was seen as over-represented on the board.

Mr. Coeuré, deputy director-general of the French Treasury, belongs to the inner circle of officials who manage the country’s debt and finances and has also been a key figure behind the scenes at meetings of the Group of 20 countries.

Official interest rates and other key policy decisions are set by the E.C.B. governing council, which consists of the executive board plus heads of the central banks of the 17 euro nations. But the members of the executive board play a particularly influential role, managing E.C.B. operations and proposing policy initiatives.

The E.C.B. governing council has not yet decided what portfolios Mr. Coeuré and Mr. Asmussen will assume when they join the executive board. Mr. Stark has been the E.C.B.’s de facto chief economist, a position both Mr. Coeuré and Mr. Asmussen are likely to covet.

The European Parliament approved Mr. Coeuré by a wide margin.

Liz Alderman contributed reporting from Paris

Article source: http://www.nytimes.com/2011/12/15/business/global/new-ecb-official-may-be-open-to-bond-buying.html?partner=rss&emc=rss

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S.&P. Cuts Belgium’s Rating to AA

November 26, 2011 by Leave a Comment

PARIS — Standard Poor’s lowered its rating on Belgium’s sovereign debt on Friday, the latest in a string of downgrades issued this week on European countries and banks that have been hit by the European debt crisis.

The downgrade, to AA from AA-plus, came just days after ratings agencies also signaled that France’s triple-A credit rating could eventually be at risk as the crisis spreads to the euro zone’s largest countries.

Belgium has been without an elected government for the last 19 months, and the government recently agreed to split a multibillion-euro bill with France for the bailout of Dexia, a French-Belgian bank that last month became the first European bank to be partly nationalized in the euro crisis.

S. P. said it was concerned about the ability of Belgian authorities to respond to potential economic pressures from inside and outside the country. A caretaker government has tried to improve the nation’s finances, but the lack of solid leadership may make it harder for Belgium to undertake deeper fiscal and structural reforms, the agency said.

“The announcement by Standard Poor’s reinforces further the necessity to finalize the 2012 budget in a very brief period,” Didier Reynders, Belgium’s finance minister, said in a statement.

The leader of Belgium’s French-speaking socialist party, Elio Di Rupo, tendered his resignation to King Albert II of Belgium on Monday after talks for a 2012 budget ground to a halt.

The government may also have to put up more money to support its financial sector as Belgium’s banks find it more difficult to obtain credit in the open market, S. P. said. In particular, Belgium may find itself facing a taxpayer bill for Dexia of about 90 billion euros, or around 24.5 percent of the nation’s gross domestic product, at the end of 2011, S. P. said.

On Thursday, agencies lowered the ratings of Portugal and Hungary to junk.

Article source: http://feeds.nytimes.com/click.phdo?i=abde5d37e2a8fa5444613de22edf2510

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Off the Charts: Bond Brush Fires Spreading in Europe

August 13, 2011 by 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.

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