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While Merkel and Sarkozy Talk, Traders Act

January 9, 2012 by Leave a Comment

Even as the leaders promised quick action to stem the crisis, investors signaled the depth of their concern when they bought German debt at a negative interest rate for the first time ever.

Germany joined the Netherlands and Switzerland on Monday as perceived havens where customers of short-term debt are willing to lose money in return for shelter from upheaval and from the possibility of even greater losses. In an auction of six-month bills, investors agreed to take less money back half a year from now, or a negative yield for German debt.

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

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

The holidays may have created a lull, 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, was to arrive Tuesday evening for talks, and the Italian prime minister, Mario Monti, comes to Berlin on Wednesday.

Mrs. Merkel hit several familiar themes in her remarks Monday, emphasizing that there were no quick solutions to the euro crisis and that Greece was an exception when it came to debt write-downs, often known as a haircut, for private investors.

“Our intention is that no country must withdraw from the euro area,” Mrs. Merkel said. She called the plan to stabilize the euro “an ambitious but attainable goal.”

Economic data continue to point to economic stagnation in Europe, including predictions of a 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 €1.9 trillion, or $2.4 trillion, in 2012.

Mr. Sarkozy has been Mrs. Merkel’s most important partner in the efforts to stem the crisis, but he is likely to be distracted by his re-election bid. The first round of the presidential election comes in April.

Mrs. Merkel expressed her support for Mr. Sarkozy’s goal of pressing ahead with a tax on financial transactions, 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 between the 17 countries in the euro currency zone was acceptable.

Article source: http://feeds.nytimes.com/click.phdo?i=58253de4ac43a988288aaf94256d21fb

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Eyeing 2012 Race, White House Presses Europe on Debt

December 8, 2011 by Leave a Comment

Publicly, Obama administration officials talk only about the economic consequences of a potential debt conflagration in Europe. Privately, though, they are well aware that Europe’s success in dealing with the troubles — and the administration’s success in persuading them to do so — is arguably the single most important factor that will determine Mr. Obama’s re-election chances.

The American economy has shown signs of life recently, with talk of a double-dip recession fading and job growth picking up. The change has raised the prospect that the economy may not be quite the political weight around Mr. Obama’s neck in 2012 that his advisers had feared — unless Europe goes downhill. Mr. Obama’s aides realize that there is no easy way to plan a re-election strategy for one potential body blow: an implosion of the European currency. Such an event, experts say, would undoubtedly send the American unemployment rate higher and possibly induce another recession. Other than lobbying from the sidelines, Mr. Obama and his administration have little control over the situation.

“It’s certainly true that Europe is the gorilla in the room when people look at how the economy could affect the election,” one senior Obama adviser said, speaking on grounds of anonymity because he was not authorized to speak publicly. Added Edwin M. Truman, former adviser to Mr. Geithner: “If the euro comes apart in a messy way — and it’s hard to imagine it will come apart in a nonmessy way — it would make the fall of 2008 look like a clambake.”

And so it is, Mr. Truman and others said, that Mrs. Merkel and Mr. Sarkozy could have far more to say about who will be the next president of the United States than anyone thought.

For Mr. Obama, the change of fortune is stark. This is a president whose election was greeted in Europe with rapture; as a candidate, he visited both Mrs. Merkel and Mr. Sarkozy in the summer of 2008, where he received welcomes more fitting to World War II heroes — including a speech at the Brandenburg Gate in Berlin and an arrival ceremony at the Élysée Palace in Paris. France would be “delighted” with Mr. Obama’s election, Mr. Sarkozy gushed at the time.

Now, incongruously, it is Mrs. Merkel and Mr. Sarkozy who could play a part in whether Mr. Obama wins re-election. The president himself has called Europe the “wild card” in the domestic economic recovery and his aides have privately expressed frustration at what they view as a passive response from European leaders to the debt crisis. Obama administration officials say that leaning on European leaders to get their house in order, as the president has been doing, is in best interest of the United States, and not something that Mr. Obama is doing for his own political benefit.

Mr. Geithner is in Europe this week in advance of the latest European summit meeting on Thursday that is meant to, yet again, try to deal with the debt issue. In a hurried, five-city, three-day tour, meeting with heads of state, Europe’s central banker and high-ranking economic officials, Mr. Geithner has quietly dispensed advice on the sovereign-debt crisis while pressing for decisive action for the good of the global economy.

Some prominent Europeans have bridled at what they consider the unsought American intervention. On Wednesday, Valéry Giscard d’Estaing, the former French president, told Reuters: “Geithner’s visit is inopportune. He should not be meddling in European affairs.” Cognizant, no doubt, of such sensitivities, Mr. Geithner has tried to chart a careful course in Europe this week, meeting behind the scenes, careful never to push or prescribe publicly, and so far taking only two questions from the news media. So far, European leaders have largely declined to yield to pressure from Obama administration officials who are advocating the same aggressive way that the United States responded to its own banking crisis in the fall of 2008 and through early 2009.

Frustrated Obama officials have been urging their European counterparts to move as much money as possible to prop up the debt of countries like Greece, Italy, Portugal and Spain. “Ultimately, Europe will need to find a path that allows for stronger growth, but right now, the most important thing Europe can do for the global recovery is to manage this crisis successfully,” Michael Froman, the deputy national security adviser for international economic affairs, said in an interview.

Administration officials say that besides the potential for drying up demand in Europe for American goods and the looming potential of a European bank failure’s setting off another financial debacle, the European crisis could stymie growth not only in Europe, but also in emerging markets.

Anxiety over what could happen across the Atlantic, coupled with earlier undue optimism about the domestic economic recovery, has the White House nervous about trumpeting even modest good economic news for fear of a later downturn.

Democratic campaign strategists concede that a collapse of the euro would transform the political dynamic even as some see the president’s standing improving, enhancing the prospects of other Democratic candidates.

“It is absolutely an important assumption that if the economy really tanks, really tanks, as the result of strong headwinds coming from Europe, it would be a more challenging environment,” said Representative Steve Israel of New York, the chairman of the Democratic Congressional Campaign Committee.

While political analysts say Mr. Obama, as the incumbent, would bear the brunt of the political fallout of another economic crisis, some Republicans are fretting as well. At a Washington dinner party two weeks ago, David Smick, a Republican financial consultant, approached Karl Rove, the Republican strategist, with a provocative question. “What if I told you that given what’s happening in Europe, that whoever is president in 2013 might not see his party elected for another 30 years,” Mr. Smick told Mr. Rove, according to guests who were present. Mr. Rove, one guest said, “just listened.”

In an interview, Mr. Smick said that the European crisis, in his view, could eventually make another huge government bailout like the controversial bank rescue program of late 2008 and 2009 necessary. But most political analysts say that could be political suicide for the country’s leaders. On Wednesday afternoon, Mr. Obama was on the phone with Mrs. Merkel again. “As usual,” the White House said in a statement afterward, “the president expressed his appreciation for the efforts the chancellor and other European leaders are making to resolve the crisis.”

Helene Cooper reported from Washington, and Annie Lowery from Paris.

Article source: http://www.nytimes.com/2011/12/08/world/europe/eyeing-2012-race-white-house-presses-europe-on-debt.html?partner=rss&emc=rss

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Calling Bankers’ Bluff, Merkel Got Europe a Debt Plan

October 28, 2011 by Leave a Comment

It was approaching 2 a.m. Thursday, not long before the Asian markets would open, and the two leaders were desperately trying to nail down the last component of a complex deal to save the euro: forcing the banks to pay a greater share of Greece’s effective default.

For hours, negotiators had been trying to persuade the banks to accede to a “voluntary” 50 percent loss in the face value of their Greek bond holdings. The banks, which had already agreed to a 21 percent write-down, had dug in their heels.

They knew how badly the European leaders needed a deal, and how much financial experts feared a disorderly, involuntary default. That could set off a “credit event,” throwing world financial markets into turmoil, much as the collapse of Lehman Brothers did in the fall of 2008.

But Mrs. Merkel called the bankers’ bluff, said officials present at the discussions. Accept the 50 percent write-down, she told the bankers, or bear the consequences of default. In effect, she was willing to risk a credit event, and to place the blame for any fallout on them.

The European success sent the markets soaring and laid out the path to a more comprehensive solution to the euro crisis, though the plan faces hurdles.

It includes an order to weak banks to raise more capital to protect against bad loans, and an effort — still very vague — to increase the firepower of the $625 billion bailout fund, the European Financial Stability Facility, to better protect large and vulnerable economies like Spain and Italy.

But the very process of achieving those steps underscored the many problems that lie ahead for the euro zone. While the rescue package has been hailed as an important step, it was achieved only under enormous pressure from the financial markets and with a steely, last-minute stand by Mrs. Merkel.

Foremost among those problems is Italy, which is too big to bail out, owing a total of $2.7 trillion, or 120 percent of its gross domestic product. While Italy runs a relatively small budget deficit, Prime Minister Silvio Berlusconi’s government seems paralyzed, vowing structural changes to produce growth and to further shrink public spending, but it is so far too weak and divided to deliver on most of its promises.

Italian news outlets reported on Thursday that a number of lawmakers from Mr. Berlusconi’s coalition had signed a letter asking him to stand down to allow for the creation of a government that could pass the measures that would tranquilize jittery financial markets.

Market skepticism about Italy has led to high interest rates on its bonds, which if unchecked could rip huge holes into its budget and possibly provoke a full-blown credit crisis. With Mr. Berlusconi hanging on by a thread, and his coalition partner, Umberto Bossi of the Northern League, working to block fundamental change, Italy remains a major vulnerability in restoring market confidence to the euro.

European leaders Thursday welcomed new promises made by Mr. Berlusconi, including a weak pledge to increase the age for pensions to 67 from 65 by the year 2026, but said sternly that carrying them out was the key.

Along with the European Central Bank, they have demanded such changes in return for buying up Italian bonds at cheaper than market rates and helping to create the bailout fund, and now to expand it to about $1.4 trillion, because at $625 billion it is far too small to protect Italy or Spain, and nearly half of that is already committed.

But the leaders were vague about how to enlarge the fund, and reluctant to put up more of their own nations’ capital. They said they hoped to create another special fund open to investment by China, Russia and Japan — which all expressed a willingness to help in principle — as well as by other wealthy nations with surplus cash. But how such a fund would work, and what guarantees it would provide to investors, remain to be determined next month, European officials said. Until the details are clear, there is likely to be little investment.

Also left unclear are the details of how to leverage the existing fund, by guaranteeing a percentage of potential losses by bondholders. While Mr. Sarkozy said the aim was to leverage the fund up to $1.4 trillion, there was no agreement on the specific percentage the fund would guarantee. More should become clear by the time of the Group of 20 summit meeting on Nov. 3 and 4 in Cannes, France.

Liz Alderman contributed reporting from Paris, and Elisabetta Povoledo from Rome.

Article source: http://www.nytimes.com/2011/10/28/world/europe/europe-in-accord-on-basics-of-plan-to-save-the-euro.html?partner=rss&emc=rss

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Merkel Implores German Lawmakers to Back Euro Rescue Measures

October 26, 2011 by Leave a Comment

“The world is looking at Germany, whether we are strong enough to accept responsibility for the biggest crisis since World War II,” Mrs. Merkel said in an address to the Bundestag, the German Parliament, in Berlin. “It would be irresponsible not to assume the risk.”

Mrs. Merkel also called for a revision of the European treaty to strengthen the union’s ability to police fiscal discipline among members. She argued for stronger regulation of banks, and swift action to get institutions to build up their capital reserves. She implied that investors will have to accept a 50 percent reduction in the value of Greek bonds. And Mrs. Merkel said that Europe should be ready to accept advice and financial aid from the International Monetary Fund.

“Many questions require not only a national and European solution, but also an international solution,” Mrs. Merkel said. She praised Christine Lagarde, managing director of the I.M.F., for her role in the crisis.

With expectations low ahead of a summit of European leaders in Brussels on Wednesday evening, Mrs. Merkel’s speech was a more forceful defense of the euro ideal than has been typical of her in the past. It suggests that leaders could agree to measures to contain the European debt crisis that are broader and more comprehensive than markets and commentators have been expecting.

Mrs. Merkel cautioned that the summit would not produce a “big bang,” and that “this issue will occupy us for years.”

In contrast to the piecemeal approach that has marked European policy so far, she touched on all the main issues of the crisis and called for ambitious measures to ensure stability in the future. For example, she said, the European treaty should be revised so that the union could impose changes on countries that are losing economic competitiveness. Greece’s dysfunctional economy is at the root of its problems.

Mrs. Merkel has often seemed a reluctant European, unwilling to risk domestic political capital on unpopular measures to prop up Greece and save the euro. But she adopted loftier rhetoric Wednesday, reminding members of Parliament of the work that an earlier political generation had done to unite Europe after a century of bloodshed.

“Nobody should believe that another half century of peace and prosperity is a given,” she said. “If the euro fails, then Europe fails. We have a historic duty.”

Mrs. Merkel has been under pressure from other leaders, including President Barack Obama, to be more decisive in response to the crisis, which has become a grave threat to the global economy. Earlier this month, former Chancellor Helmut Schmidt, during an event in Frankfurt at which both spoke, delivered her a lecture on postwar European history and the toil involved in creating a unified continent.

Frank-Walter Steinmeier, leader of the opposition Social Democrats in the Bundestag, complained that Mrs. Merkel’s conversion to European advocate had taken too long. Taking the floor after the chancellor, he said, “I would have liked to hear these phrases a year ago.”

But Mr. Steinmeier said the Social Democrats would support expansion of the bailout fund, the European Financial Stability Facility, and other measures, because it is important to show that the euro project has broad support. Mrs. Merkel did not give details of how the clout of the €440 billion, or $612 billion, fund would be expanded, and said that Germany’s contribution will not increase.

Mrs. Merkel also expressed sympathy for anti-Wall Street protesters in New York as well as similar actions in Frankfurt and Berlin, saying she understood how ordinary people have suffered from the financial crisis.

She took a hard line with the banking industry, saying banks must increase their capital reserves to reduce risk, accept stricter regulation, and be subject to a tax on financial transactions.

Investors must also accept a deeper cut in the value of their Greek bonds, she said. Greece’s debt must be brought down to 120 percent of gross domestic product, she said, a figure that implies a 50 percent reduction in the value of Greek bonds.

Mrs. Merkel took a more forgiving line toward the Greek people, who have been stereotyped as lazy spendthrifts by the German tabloid press. In addition, a strong faction among German economists has pushed for Greece to quit the euro area.

“We want Greece to quickly get back on its feet again,” Mrs. Merkel said.

Article source: http://www.nytimes.com/2011/10/27/business/global/merkel-implores-german-lawmakers-to-back-euro-rescue-measures.html?partner=rss&emc=rss

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U.S. Pressures Europe to Act With Force on Debt Crisis

September 23, 2011 by Leave a Comment

In phone calls and meetings over the last week, President Obama urged Mrs. Merkel and President Nicolas Sarkozy of France to take coordinated measures to prevent Greece’s debt woes from spreading to its neighbors. The American pressure will be on display again Friday and this weekend at a gathering of the world’s finance ministers in Washington.

Yet administration officials played down the likelihood of concerted action emerging from these meetings of the International Monetary Fund and the World Bank. At best, they said, the ministers might lay the groundwork for a bolder response in November, when leaders of the Group of 20 industrialized nations meet in Cannes, France.

The lack of global action comes even amid the growing recognition that Europe’s debt crisis is now perhaps the largest shadow hanging over the global economy. Although trade with Europe represents only a small share of the American economy, Europe’s problems have repeatedly rattled Wall Street over the last year and a half, eroding confidence and exacerbating fears of businesses and consumers.

“The biggest single risk to the United States today is that the European situation will spiral out of control,” said Edwin M. Truman, a former Treasury official who is now at the Peterson Institute for International Economics. “Europe is not going to save the U.S. economy, but it could be the straw that breaks it.”

Kenneth Rogoff, a Harvard economist who has written about the history of financial crises, puts Europe’s effect on the United States in blunt political terms. “The downside scenario is awful,” he said, “and if it happens before the U.S. election, it would turn a toss-up election into one in which the president is a huge underdog.

“The administration’s hope is that the Europeans will kick the can down the road far enough that it gets past the election,” said Mr. Rogoff, who has advised Mr. Obama and Republicans.

The administration has trained much of its attention on the figure who may have the greatest ability to influence the outcome in Europe: the German chancellor. Since he took office Mr. Obama has met or spoken with Mrs. Merkel 28 times  — a pace befitting someone who may have as much influence on his fortunes as his rivals in Washington.

In their most recent call, on Monday, Mr. Obama implored Mrs. Merkel to throw more financial firepower at the crisis. The conversation delved into technical details, as well as the risk of financial contagion, a senior administration official said.

Mrs. Merkel faces daunting political obstacles — which Mr. Obama fully recognizes, this official said — in persuading the German public to spend hundreds of billions of euros to bail out Greece and potentially other Mediterranean countries.

While the United States is offering lessons drawn from its own crisis in 2008, Treasury Secretary Timothy F. Geithner and other officials are treading carefully to avoid antagonizing Europeans who complain the United States has no business lecturing them. When Mr. Geithner attended a meeting of European finance ministers last week in Wroclaw, Poland, a handful of officials from smaller countries took shots at him afterward, but American officials said the meeting was more productive behind closed doors.

The administration’s lobbying effort takes two main forms. One is to press the argument, supported by many economists, that Germany benefits enormously from preserving the euro in its current form rather than abandoning it or standing by as it unravels.

By combining its Deutschmark with the currencies of poorer countries, like Greece, Germany has been able to have a cheaper currency than it would on its own and to export far more than it otherwise might. And exports, which account for a larger share of the German economy than the American economy, have been the main engine of Germany’s recovery.

Article source: http://www.nytimes.com/2011/09/24/business/us-pressures-europe-to-act-with-force-on-debt-crisis.html?partner=rss&emc=rss

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