March 29, 2024

News Analysis: In Europe, Debate Slowly Shifts to Speed of a Recovery

A year ago, many people seriously doubted whether the euro would still exist by now. On the threshold of 2013, the debate is more about how long it will take for the euro zone economy to recover and what must be changed to avoid future crises.

Europe still has plenty to worry about. Economic output is shrinking in 9 of the 17 members of the euro zone. European banks remain weak, and many have yet to confront their problems decisively.

Many businesses in Spain and Italy and other distressed countries cannot obtain credit, hampering a recovery.

What is more, with national elections coming up in Italy (February) and Germany (September), leaders there may be more focused on the narrow concerns of their voters, rather than the cause of European unity.

“At the moment the crisis seems to have calmed down somewhat,” Jens Weidmann, president of the Bundesbank, the German central bank, said in an interview with the Frankfurter Allgemeine newspaper published Sunday. “But the underlying causes have by no means been eliminated.”

But consider some of the doomsday scenarios that did not occur in 2012. Greece did not leave the euro zone or set off a Lehman-like financial Armageddon. Spanish and Italian bond yields, rather than succumbing to contagion from Greece, retreated from levels that had threatened their governments with bankruptcy. And nowhere did populist, anti-euro political parties gain the upper hand.

All of these things could still happen, of course. But the probability of catastrophe has fallen substantially because of a fundamental change in the way that European leaders are dealing with the crisis.

Under its president, Mario Draghi, the European Central Bank has promised to buy bonds of countries like Spain, if needed, to control their borrowing costs. That vow, which cooled the crisis fever of late summer, bought time for elected officials to begin creating the superstructure that the common currency needs to become more credible, including a permanent fund for rescuing stricken member countries and a unified system for overseeing banks.

“In 2012, the euro-area leaders finally got the diagnosis right,” said Jacob Funk Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington, “It wasn’t about Greek debt or Irish banks. It was about some very fundamental design flaws that needed to be fixed. That’s what markets were looking for.”

Even though European political leaders seem to argue endlessly, they have made enough progress to keep speculators at bay. Investors surveyed by UBS recently ranked the chances of a euro-zone breakup well behind the danger from the so-called fiscal cliff in the United States — the combination of spending cuts and tax increases scheduled to take effect next month — or a hard landing by the Chinese economy.

“There is more of a perception that nobody is better off if this thing breaks up,” said Richard Barwell, senior European economist at Royal Bank of Scotland.

As the year progresses, the question will be whether a fragile calm in Europe holds long enough for economic growth to resume, for banks to rebuild their balance sheets and for policy makers to make progress creating a more durable currency union.

Here are some of the main things to watch:

Economic performance The euro crisis, arguably, will be over the day that all of the stricken countries are generating economic growth. Ireland, one of the first countries to get into debt trouble back in 2008, might already have turned the corner. Its gross domestic product grew 0.2 percent in the third quarter from the level of a year earlier.

Spain, Italy and Portugal are still deep in recession, and Greece is in a de facto depression. But there are some signs of progress in one crucial measure: trade balances. All of the distressed countries have increased their exports this year and reduced their trade deficits. That is a sign their products have become more competitive on world markets.

Article source: http://www.nytimes.com/2012/12/31/business/global/in-europe-debate-slowly-shifts-to-speed-of-a-recovery.html?partner=rss&emc=rss

Moody’s Downgrades Top French Banks

Moody’s cut various ratings for Société Générale, BNP Paribas and Crédit Agricole by one notch, citing the problems each had had recently in raising funds on the open market.

The ratings agency said the banks could face further losses on their holdings of Greek and Italian government bonds should the crisis deepen.

Just a day earlier, Europe’s main banking regulator said that all French banks had passed a test designed to see whether financial institutions had enough capital to weather unexpected shocks.

And on Friday, Goldman Sachs upgraded its recommendation for holding shares of European banks to neutral from underweight. It said a decision Thursday by the European Central Bank to lend troubled banks dollars for longer periods under eased terms would help the banks weather the effects of the crisis and an economic downturn.

But the Moody’s assessment includes more dire assumptions about the future of the euro than the European Banking Authority used. Moody’s also repeated a warning that Greece and several other countries could default on their debts and exit the euro zone if politicians failed to find a solution to their problems.

If Société Générale, BNP Paribas and Crédit Agricole continue to have trouble getting funding, Moody’s said, the French government will probably step in to provide them with financial support, raising the specter of at least a partial nationalization of the biggest French banks.

The French government has a long history of stepping in to support its banks, considering them integral to the economy. French officials have said they are ready to backstop the banks if the markets force their hand, but they insist the banks are sound.

The downgrades came as European leaders took their latest step Friday to keep the euro monetary union from breaking apart. All 17 members of the euro zone agreed to sign a treaty that would require them to enforce stricter fiscal and financial discipline in future budgets.

The leaders also agreed to provide €200 billion, or $266 billion, to the International Monetary Fund and to make changes to Europe’s own bailout funds to help keep the crisis from engulfing Italy and Spain.

Many banks in Europe have had trouble getting funding in recent months, and have had to turn to their national central banks and the E.C.B. instead.

Société Générale, BNP and Crédit Agricole had “materially” increased their borrowing from the French central bank in September, Moody’s said, adding that it was “unlikely that markets will return to normalcy soon.”

Standard Poor’s warned in the past week that it could cut the credit ratings of 15 countries in the euro zone — including France — by two notches, as the bill from the crisis grows and the European economy risks tipping into a recession.

If such a downgrade were to happen, all banks in those countries would have even more funding problems.

Société Générale and BNP recently cut the amount of Italian debt they hold. Each also recently took losses on their investments in Greek bonds.

But Société Générale and Crédit Agricole remain exposed to Greece through subsidiaries there that could pose fresh problems if Greece were to default or leave the euro, Moody’s said.

BNP is exposed to Italy further through a retail banking outlet.

To maintain a sizable capital cushion so as to absorb any fresh losses the crisis might inflict, each bank has announced plans to sell assets. But with investor appetite dampened by the crisis, Moody’s warned that the banks could have a hard time finding buyers.

Société Générale said it was “confident” it could reach its capital goals and “surprised” by the Moody’s decision to downgrade it.

Société Générale is one of a handful of European banks that have been the subject of rumors of financial difficulty. The bank has vigorously denied that, and last summer called on the French government to investigate what it said were attacks against it by short-sellers, or investors betting against its stock.

Article source: http://feeds.nytimes.com/click.phdo?i=6300ddc664f7efa566f3317bd7b765bf

E.C.B. Looks Poised for Action at Thursday Meeting

Mr. Trichet will hold the last press conference of his eight-year term Thursday in Berlin, amid speculation that the bank could cut its benchmark interest rate just three months after raising it.

Some analysts doubt that the E.C.B. will reverse course so quickly, but they are nearly unanimous in thinking that it will need to do something at its monetary policy meeting Thursday in response to deteriorating conditions in the euro zone economy and the banking system.

Recent events have highlighted the bank’s role as the only institution in the euro area with the flexibility and resources to respond quickly to a crisis that seems to grow more acute by the day.

Euro zone governments are struggling to approve a bailout fund in a politically charged process that has focused an improbable amount of international attention on parliamentary debates in Finland and Slovakia. Yet the fund, at a proposed €440 billion, or $585 billion, already appears inadequate for the growing scale of the crisis.

At the same time, fears about European banks seem to be coming true. It has been reported that Dexia, a French and Belgian institution, may break up because of its exposure to Greek debt.

“We are coping with the worst crisis since World War II,” Mr. Trichet said Tuesday during an appearance — his last as E.C.B. president — before the Economic and Monetary Affairs Committee of the European Parliament.

Analysts at Royal Bank of Scotland see a better-than-even chance that the E.C.B. will cut its benchmark rate to 1.25 percent from 1.5 percent Thursday, but they acknowledge that it is not an easy call.

The E.C.B.’s governing council, which includes the central bank chiefs of the 17 members of the euro zone, is divided and has been sending conflicting signals. Earlier this year, Mr. Trichet clearly flagged rate moves in advance.

“When I listen to what the governing council members have said in the last few days, there is no consensus,” said Michael Schubert, an economist in Frankfurt for Commerzbank.

One argument in favor of cutting rates Thursday is that Mr. Trichet will want to do a favor for his successor, Mario Draghi, governor of the Bank of Italy. Mr. Draghi, who will take office Nov. 1, will be under pressure to establish his credentials as an inflation fighter, and he risks undermining his credibility if he oversees a rate cut immediately upon assuming the presidency.

But inflation hard-liners like Jens Weidmann, president of the Bundesbank, are likely to argue vehemently against a rate cut even though evidence is building that Europe is going into a recession. Inflation in the euro area probably rose to an annual rate of 3 percent in September, according to official estimates, well above the E.C.B.’s target of about 2 percent.

The E.C.B. might seek a compromise and take less controversial steps to show it is not watching idly as the banking crisis becomes more acute. It could revive its purchase of secured debt issues by banks, for example, or extend low-interest lending to strapped institutions.

None of those moves will solve the debt crisis, though, nor would a large rate cut, for that matter. But the E.C.B. is very unlikely to take more radical steps, like printing money to buy huge quantities of government bonds, relieving the banks of damaged assets.

Mr. Trichet signaled Tuesday that political leaders should not expect the E.C.B. to rescue them. “We cannot substitute for governments,” he told the parliamentary panel, before going on to mention how much he is looking forward to retirement on the coast of Brittany.

Article source: http://www.nytimes.com/2011/10/05/business/global/ecb-looks-poised-for-action-at-thursday-meeting.html?partner=rss&emc=rss

World Banks Unite to Shore Up European System

The central banks, in a coordinated action intended to restore market confidence, agreed to pump United States dollars into the European banking system in the first such show of force in more than a year. Some banks have found it hard to borrow dollars as American lenders grew nervous about their financial condition.

Thursday’s action, coming almost exactly three years after the collapse of the investment bank Lehman Brothers, lifted global stock markets, sharply increasing the value of shares in banks heavily exposed to debt from Greece and the other struggling members of the euro zone. The euro, which had been falling in recent days, rebounded.

The central bank action came as European finance ministers and other policy makers were gathering in Wroclaw, Poland, for meetings on Friday and Saturday. The United States Treasury secretary, Timothy F. Geithner, who was scheduled to attend, was expected to urge European officials to act more aggressively to contain the sovereign debt crisis, which has already begun to undercut growth in Europe.

While the move will relieve some pressure on troubled banks, it does not address the underlying problems that made it difficult for the banks to borrow dollars on their own.

The central banks seemed determined to demonstrate that they would not hesitate to deploy their combined weight to keep the crisis from leading to a collapse of the euro zone.

“They are getting together and acting together,” Christine Lagarde, the president of the International Monetary Fund, said in Washington on Thursday. “To me, that is the most important message.”

But Ms. Lagarde also warned that policy makers had not done enough and suggested more action was needed. “We have entered into a dangerous phase of the crisis,” she said. There is still a path to recovery, she said, but it is “a narrow one.”

Jean-Claude Trichet, the president of the European Central Bank, called the move “a clear illustration of our very close cooperation at the global level.” Noting that the collapse of Lehman three years ago could have provoked a depression, Mr. Trichet said, “We still have a long way to go to move beyond this crisis.”

The European Central Bank said it would allow banks to borrow dollars for up to three months, instead of just for one week as before, giving them breathing room for the rest of the year. The E.C.B. said it was acting in cooperation with the Federal Reserve of the United States, the Bank of England, the Bank of Japan and the Swiss National Bank.

In recent days some European banks have faced difficulties in borrowing dollars, whether from other banks or from money market funds in the United States. There was fear that if they could not borrow dollars, they would be forced to cut off loans to American companies or sell dollar-denominated assets, perhaps forcing prices down in already unsteady markets.

The move was possible under deals between the central banks that were already in existence, and the Fed saw no need to make an announcement on Thursday.

While there now is more certainty that banks will have access to funds, deeper issues remain unresolved, including whether they have enough capital to withstand a possible default by Greece on its government debt.

An official forecast warned Thursday that growth in Europe would come “to a virtual standstill” toward the end of the year. It predicted, though, that Europe would just barely avoid a double-dip recession.

The euro system, established in 1999, created a common currency for 11 countries, a number that has grown to more than 20. But it did not unify national finances. Over time, inflation and a failure to reform labor markets left most countries in the group uncompetitive with Germany but unable to regain competitiveness through devaluation.

That is a problem that some say Europe has yet to deal with.

“The lesson of 2008 and earlier crises is that the later you act, the more you have to do, and the more painful it becomes,” said Robert Zoellick, the president of the World Bank, in a speech Wednesday. “It is not responsible for the euro zone to pledge fealty to a monetary union without facing up to either a fiscal union that would make monetary union workable or accepting the consequences for uncompetitive, debt-burdened members.”

Analysts said they expected Mr. Geithner to press European ministers in Wroclaw to increase the resources available to their bailout fund for the euro zone countries. But even the expansion of the fund to 440 billion euros ($611 billion), agreed to in July, has yet to be ratified. There is some worry that countries guaranteeing the bailout fund might themselves face doubts about their own credit.

“Part of the problem for policy makers is that they are still waiting for last big initiative to get off the ground,” said Peter Westaway, chief European economist in London for Nomura. “We’re all kind of on hold until then.”

Angela Merkel, the German chancellor, said Thursday during a visit to the Frankfurt Motor Show that her nation has “a duty and responsibility to make its contribution to securing the euro’s future.” But she added, stabilizing the euro area “won’t happen overnight or with any one-time thunderbolt.”

United States money market funds and other institutions have cut European banks’ access to about $700 million in short-term loans over the last year, according to research by JPMorgan Chase and CreditSights.

European banks have only rarely used an existing one-week dollar credit line offered by the E.C.B. On Thursday, two banks borrowed $575 million from the facility. The E.C.B. does not disclose the identity of the borrowers. The two banks were the first to tap the dollar credit line since August.

By making dollars available for a longer three-month period, the central banks are providing reassurance that ailing banks will not be dependent on the more fragile one-week funding. The E.C.B. will offer the dollars in three operations, starting on Oct. 14 and again in November and December. The other central banks will follow similar schedules. The Fed will not offer loans directly, but will provide dollars to the E.C.B. by way of a swap agreement. The borrowing banks must supply collateral in the form of bonds or other securities.

David Leonhardt contributed reporting.

Article source: http://www.nytimes.com/2011/09/16/business/global/borrowing-costs-stubbornly-high-at-spanish-auction.html?partner=rss&emc=rss