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Italy and France Are Risks to Euro Zone, Report Says

April 10, 2013 by Leave a Comment

In Spain and Slovenia, structural economic imbalances are “excessive,” according to a report covering 13 European Union countries prepared by the commission’s directorate for economic and monetary affairs.

“Decisive policy action by member states and at E.U. level is helping to rebalance the European economy,” Olli Rehn, the commissioner for economic and monetary affairs, said in a statement before a press conference Wednesday.

But “it will take some time yet to complete the unwinding of the imbalances that were able to grow unchecked in the decade up to the crisis, and which continue to take a toll on our economies,” Mr. Rehn said.

In Spain, very high levels of debt, both domestically and externally, continue to pose serious risks for growth and financial stability, the report said.

In Slovenia there are substantial risks for financial sector stability stemming from high corporate indebtedness that is linked to and has an effect on public finances, according to the report.

The report on so-called macroeconomic imbalances said Italy and France, among others, others were suffering a decreased ability to withstand economic shocks.

In Italy, real gross domestic product has declined by 7 percent since the onset of financial and debt crises in mid-2008.

Italy’s unit labor costs are increasing compared to its peers, which translates into a loss of productivity, while its specialized companies are increasingly unable to compete with those in countries like China, and the banking sector remains burdened by non-performing loans, the report said.

“The potential economic and financial spillovers to the rest of the euro area remain sizeable, should financial market turmoil related to the Italian sovereign debt intensify again,” the report said.

France successfully avoided a recession in 2010-2011, but its trade balance had been decreasing since 1997 and its external debt rose sharply in 2011.

“Should these trends continue, they would increasingly push down France’s medium-term growth prospects,” the report said.

In France, as in Italy, unit labor costs have increased, putting pressure on the profitability of companies and hurting innovation, according to the report.

“The reduced number of exporting firms, their relatively small size, as well as factors relating to the business environment are also impediments for export performance,” the report said.

The commission heaped blame for France’s weak prospects on the structure of the labor market, where costs continue to rise and it is too difficult to reallocate workers to more productive areas of the economy.

“The profit margin of French companies is the lowest in the euro area,” the report noted.

The cost of servicing France’s “high and increasing public debt” is depriving the economy of public spending and will require higher taxes, according to the report.

Overall, the French debt “represents a vulnerability not only for the country itself but for the euro area as a whole,” the report warned.

Article source: http://www.nytimes.com/2013/04/11/business/global/italy-and-france-are-risks-to-euro-zone-report-says.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Euro Watch: European Commission Offers Grim Prediction for Economy

February 22, 2013 by Leave a Comment

BRUSSELS — A top European Union official warned Friday that worse-than-expected growth last year and weak prospects for 2013 will lead countries like France to miss deficit-reduction targets designed to ensure the stability of the euro.

“The ongoing rebalancing of the European economy is continuing to weigh on growth in the short term,” Olli Rehn, the European commissioner for economic and monetary affairs, said, according to a prepared statement ahead of a news conference.

But Mr. Rehn insisted that Europe’s belt-tightening policies were working and would lay the groundwork for a recovery.

“We must stay the course of reform and avoid any loss of momentum, which could undermine the turnaround in confidence that is underway, delaying the needed upswing in growth and job creation,” he said in the statement.

Mr. Rehn was presenting a so-called winter economic forecast that has taken on greater significance as his department at the European Commission, the Union’s administrative arm, gains greater responsibility for overseeing government budgets. In the coming months, Mr. Rehn must decide whether to recommend punishing countries for missing their targets, possibly leading to large fines, or to offer them leniency.

In a report, the commission forecast growth across the 27-nation European Union of just 0.1 percent in 2013 and a contraction of 0.3 percent in the 17-nation euro area over the same period. That downbeat assessment came a day after data showed a slump in business activity in the euro area worsened unexpectedly this month, especially in France.

Mr. Rehn said the economy should expand in 2014, with growth reaching 1.6 percent across the Union and 1.4 percent in the euro area.

One of the biggest test cases for Mr. Rehn will be France, the second largest economy in the euro area.

On Friday, the commission said low growth meant the French budget deficit was expected to be 3.7 percent of gross domestic product, down from an estimated 4.6 percent in 2012, but well above the government’s official target of 3 percent. The commission also warned that the deficit could rise again to 3.9 percent in 2014.

Jean-Marc Ayrault, the French prime minister, warned earlier this week that his government would need to seek leniency from the commission because the 3 percent target was still out of reach.

The commission said the French economy stagnated last year and that G.D.P. was projected to increase only by 0.1 percent in 2013. It attributed the stagnation on declining spending by households linked to rising unemployment — which was expected to reach 10.7 percent in 2013, from an estimated 10.3 percent in 2012, and 11 percent in 2014, according to the report — and to a drop in confidence among entrepreneurs.

In the case of Spain, the commission said tax increases and a slashing of year-end bonuses for public sector workers were responsible for a significant decline in the budget deficit, although that figure excluded the effects of spending to rescue the banking sector.

The commission estimated that the Spanish deficit would fall to 6.7 percent this year, down from 10.2 percent in 2012. But it warned that the deficit could rise again to 7.2 percent in 2014.

The European Union has vowed to show a new determination to enforce discipline after the failure to do so over the last decade was a factor in several debt crises that began with Greece and threatened to undermine the euro.

A “six pack” of rules approved in 2011 tightened E.U. scrutiny of national budgets and economic policies and introduced swift penalties for profligate states. Under rules agreed to this week, dubbed the “two pack,” the European Commission would gain new powers to request a redraft of euro states’ budget plans — although that would only apply as of the budget review procedure in 2014.

Europe’s insistence on austerity has been criticized by some economists who see it as creating a self-perpetuating cycle. As government spending is cut to meet deficit targets, they argue, overall demand is diminished, weakening tax revenue and further straining finances — even as the denominator of the deficit-to-G.D.P. equation shrinks.

Carsten Brzeski, a senior economist with ING in Belgium, said that Mr. Rehn was likely to be caught in coming months in a familiar bind between showing toughness and avoiding a political battle with a major member state like France over the wisdom of forcing more budget tightening in a downturn.

“The way forward will be a walk on a tightrope,” Mr. Brzeksi said. Mr. Rehn will need to weigh “strict application of the rules to regain credibility or softer, and for some smarter, application not to overburden the battered economies with additional austerity.”

David Jolly contributed reporting from Paris.

Article source: http://www.nytimes.com/2013/02/23/business/global/daily-euro-zone-watch.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Sharp Words From European Minister for Countries in North

January 10, 2013 by Leave a Comment

BRUSSELS — Jean-Claude Juncker, the departing leader of the group of ministers who oversee the euro currency, sharply criticized northern Europeans on Thursday for demanding austerity budgets from their southern neighbors.

But in the same speech he seemed to endorse as his successor an official from the Netherlands, one of countries that has made the toughest demands for fiscal rigor in the euro zone.

Mr. Juncker, himself a northern European and prime minister of Luxembourg, told members of the European Parliament’s influential Economic and Monetary Affairs Committee that northerners had falsely painted themselves as more economically virtuous than southerners. “I’m totally against this distinction,” he said.

Mr. Juncker warned that some members of his own country’s Parliament had become fed up with “the German diktat,” and he said countries making painful economic adjustments should be rewarded for their efforts.

“We have been arrogant” toward countries like Greece, he said.

Still, Mr. Juncker said his successor as head of the Eurogroup of ministers would speak one of the languages of the Benelux, a grouping that includes Belgium, the Netherlands and Luxembourg. Mr. Juncker’s comments were characteristically cryptic, but appeared to lend weight to the chances of the front-runner for the job, Jeroen Dijsselbloem, the Dutch finance minister.

The president of the Eurogroup plays a coordinating role among finance ministers when they make critical decisions like giving political approval for bailouts or pressuring governments to shore up their finances to preserve the stability of the euro. Mr. Juncker has held the post since 2005; although his term expired last summer, he indicated he would stay on for a limited time until a successor was named.

At a news conference Thursday, Mr. Juncker said a decision on his successor should be made on, or shortly after, Jan. 21, because that would be the last meeting of the Eurogroup at which he would serve as president.

Although the president of the Eurogroup is supposed to be elected by ministers, as a practical matter is decided by consensus among governments, opening the way for political horse-trading.

Mr. Dijsselbloem’s candidacy gained strength in recent weeks partly because he comes from a country that still holds a triple-A debt rating, making him a natural ally of Germany. But his candidacy is more problematic for the French, the other major power in the euro area.

The government led by President François Hollande has emphasized giving the most vulnerable members of the euro area the leeway to make painful economic adjustments. By contrast, the Netherlands, along with Germany and Finland, has pressed indebted nations like Greece and Portugal to tighten their belts, despite the recessionary effect on their economies.

One factor that could help the French swing in support of Mr. Dijsselbloem, a member of the Dutch Labor Party, is that he, like Mr. Hollande, is a socialist.

Meanwhile, for the soon-to-be created single banking supervisory agency for the euro zone, Mr. Juncker suggested Thursday that a Frenchwoman could be offered a senior role. And although Mr. Juncker again did not offer names, there are reports in the French news media that Danièle Nouy, an official at the Banque de France, could be offered such a role, partly to assuage French concerns.

Mr. Dijsselbloem, 46, won the finance portfolio, his first Netherlands cabinet post, late last year, and he has little experience at the top levels of government or in European affairs. But he did take office in time to participate in a round of marathon meetings by finance ministers to strike agreements on resuming aid to Greece and the creation of the single banking supervisor.

“I suppose he is suitable as he wouldn’t be finance minister,” said Sophie in ‘t Veld, a Dutch member of the European Parliament for the Democrats 66, a liberal and pro-European political party.

“But how is he going to navigate between the deeply euro-skeptic electorate and a deeply euro-skeptic Parliament that will expect him to be a troublemaker in Europe and, on the other hand, show compromise and consensus as the head of the Eurogroup?” she asked.

Mr. Dijsselbloem told the Dutch daily newspaper De Volkskrant at the end of December that he regarded “strengthening European cooperation inevitable and good for the Netherlands.” But he also cautioned that, “when it comes to Greece, for example, everyone looks to the Netherlands and we have to take the floor” and that, “from us, from Germany and Finland, it’s expected that we exhibit some strictness.”

That, though, is an approach that Mr. Juncker on Thursday cautioned his successor against taking. For countries like Greece and Portugal facing brutal austerity, he said, there should be rewards for meeting targets and “not only a big stick.”

Mr. Juncker also called for euro area countries to adopt a legal minimum wage so as not “to lose the support of the working classes.”

And in a marked contrast to the stance of some Dutch politicians, Mr. Juncker suggested that countries like Spain and Ireland should have some scope for using European bailout funds to bail out their banks directly. Otherwise, said Mr. Juncker, the purpose of the bailout fund “would lose a large part of its sense.”

For his part, Mr. Juncker said at the news conference that he would concentrate on winning another term as the prime minister of Luxembourg and use that perch to continue to play a role in European affairs.

“You will hear from me,” he said.

Article source: http://www.nytimes.com/2013/01/11/business/global/sharp-words-from-eu-minister-for-countries-in-north.html?partner=rss&emc=rss

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Wall Street Rebounds in Early Trading

September 26, 2011 by Leave a Comment

Shortly after trading started in New York, the Standard Poor’s 500-stock index rose 0.8 percent, while the Dow Jones industrial average climbed 1.1 percent. The Nasdaq composite index added 0.2 percent.

The benchmark Euro Stoxx 50 index rallied 2.1 percent in afternoon trading, rebounding from an early loss. The DAX climbed 2.2 percent in Frankfurt.

News reports from a conference at the International Monetary Fund in Washington over the weekend suggested that the German and French authorities have begun a major strategy to prevent the crisis escalating, culminating in a possible announcement at the next Group of 20 leaders’ summit meeting set for Nov. 4 in Cannes, France.

The plan was said to include bank recapitalizations similar to the United States Treasury Department’s Troubled Asset Relief Program, which started injecting capital into banks in 2008. News reports also suggested that the European Central Bank could lend extra funds to the European Financial Stability Fund, the main bailout mechanism in Europe.

There was no official comment, although Wolfgang Schäuble, Germany’s finance minister, said during the weekend that policy makers could make the financial stability fund more “efficient.” And he raised the prospect of bringing in a permanent financial support mechanism before 2013, the current target date.

Olli Rehn, the European Union’s monetary affairs commissioner, said that there was “increasing political will” among European leaders for a new effort to soothe investors.

Jim Reid and Colin Tan, Deutsche Bank analysts, said in a research note Monday: “The hope in Europe is that things are getting potentially so bad that the chances of seeing something much more substantial from the authorities over the next few weeks have surely increased.”

“If not,” the note continued, “then we will really have to think about a financial disaster in the Continent.”

Also supporting stocks in Europe on Monday, a European Central Bank governing council member, Ewald Nowotny, was quoted Monday by the news agency Market News International as saying that an interest rate cut by the bank could not be excluded.

Separately, a report showed that German business confidence in September had fallen less than economists had forecast. The Ifo Institute in Munich said its business climate index dropped for a third straight month to 107.5 points from 108.7 in August. Economists had forecast a decline to 106.5 points, according to Bloomberg News.

In the Asia-Pacific region, stocks declined, compounding the sharp falls they had suffered during the previous week.

In Japan, the Nikkei 225 index dropped 2.2 percent, ending at 8,374.13 points. The index has fallen nearly 500 points since Sept. 16 and is now at its lowest close since April 2009.

The Kospi in South Korea ended down 2.6 percent and the Taiex in Taiwan declined 2.4 percent on Monday. The Hang Seng was 1.5 percent lower.

The markets have for months been shrugging off the fact that most Asian economies — with the notable exception of Japan — are still poised to grow solidly, especially when compared to those of the United States and Europe, and have little direct exposure to the sovereign debt woes of Greece and other euro zone nations.

Many foreign investors have instead stayed on the sidelines or pulled funds into assets deemed safer, like Treasury bonds from the United States and currencies like the Swiss franc and Japanese yen.

But investor jitters have hit gold, which usually is considered a haven in times of uncertainty, and the precious metal fell to around $1,560 an ounce on Monday.

In London, the euro was higher against the dollar on Monday, trading at $1.3508.

Matthew Saltmarsh reported from London. Bettina Wassener contributed reporting from Hong Kong.

Article source: http://feeds.nytimes.com/click.phdo?i=13daf7f5743a52256077259190395e02

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News Analysis: In Crisis, Reminders of Disputes in Euro’s Founding

August 18, 2011 by Leave a Comment

EUROPE has never found it easy to define itself, and now it is having more trouble than ever doing so.

When the rules for the euro currency were first drafted 15 years ago, the leaders of France and Germany had to compromise even to agree on the name for the proposal: Berlin wanted a “stability pact,” emphasizing Germanic fiscal discipline, while Paris insisted on adding “growth” to the title to make it more palatable to French voters.

In Paris on Tuesday, the two countries again sought to bury their differences, proposing deeper integration for the single currency in the throes of a ferocious debt crisis.

If carried out, those plans could solidify an economic inner core within a two-tier European Union. But with domestic politics pushing in different directions, and much of the detail left deliberately vague, many proponents of a united Europe remain to be convinced.

“Too little, too uncertain, too late — that has been the regular response of E.U. leaders to the euro zone debt crisis,” argued Sharon Bowles, chairwoman of the Economic and Monetary Affairs Committee of the European Parliament. “The Sarkozy-Merkel proposals of Tuesday broadly fall, once again, into this category.”

Simon Tilford, chief economist at the Center for European Reform in London, called it “a positive step that this debate is taking place in Germany and that there is an acceptance that pooling fiscal authority is a necessary precondition of a lasting conclusion of the crisis.”

“But there is a risk,” he added pointedly, “that in order to sell this to domestic opinion, Germany will extract concessions that will render the whole thing unworkable.”

This is just the latest phase of a debate that has ebbed and flowed over decades of European integration. Indeed, when the rule book for introducing the euro — which came to be known as the Stability and Growth Pact — was being drafted, it was completed only after a fractious summit meeting in Dublin Castle in Ireland in 1996.

The patched-together pact, put in place in advance of the introduction of the single currency in 1999, was criticized by many economists from the start. By 2002, with France complaining about the need for more flexibility to promote growth during downturns, Romano Prodi, then the president of the European Commission, described it as “stupid.”

France put together a coalition, ultimately supported by Germany, that prevented the imposition of sanctions on countries that violated the rule limiting annual budget deficits to 3 percent of a nation’s gross domestic product. France and Germany themselves were among those breaching the limits.

The debt crisis has now brought the debate back to its starting point.

Under the emerging set of proposals being pushed by Germany and France, strict new rules would enforce discipline, including fines for sinning countries, which might also lose certain subsidies. The idea of a European finance ministry has been put forward. Debt brakes would be written into constitutions or national law.

Euro zone leaders would have regular summit meetings presided over by a president who, according to talk within the corridors of power, may also lead meetings of the 17 finance ministers.

That is good news for the top contender, Herman Van Rompuy, the former Belgian prime minister who is president of the European Council, which represents the 27 governments in the European Union, and who has maneuvered skillfully for a greater role in coordinating economic policy.

A new bailout mechanism would grow into a sort of European version of the International Monetary Fund, with a bigger staff and powers to buy bonds on the secondary market. And despite the current opposition of Chancellor Angela Merkel of Germany, common euro bonds — which would put the collective strength and collateral of all the euro area countries behind sovereign debt — could eventually become a reality.

As usual with these deals, however, consensus is elusive.

Germany most wanted the debt brakes and strict surveillance of other euro zone governments, with tough punishment for violators. Under pressure from domestic voters horrified at having to bail out a Greek government that lied about its economic data, Mrs. Merkel needs to persuade Germans that the debt crisis won’t rear its ugly head again. The message at home is that the euro zone economy will be recreated in Germany’s image.

France, meanwhile, insisted on new structures to forge integration, led by the 17 prime ministers and presidents, and pressed hard on issues like harmonizing corporate tax rates.

With an election looming, Nicolas Sarkozy, the French president, wants to cast himself in his home country as the savior of the single currency and the driving force behind European integration. Mr. Sarkozy appropriated the notion of strict fiscal discipline to outflank his socialist opposition by making it a centerpiece of the new plans.

The next few months will determine whether this hastily drawn agreement intended to satisfy multiple constituencies will actually upgrade the euro zone’s creaking, often chaotic, structures into something workable in an era of unforgiving markets.

None of this will be easy. It will fall to Mr. Van Rompuy to produce a coherent set of proposals.

Europe still hasn’t resolved the fundamental question it skirted back in 1996 at Dublin Castle: Is the euro more in need of Germanic fiscal stability or the growth and stimulus policies that France traditionally champions?

“It is not going to help the euro zone,” said Mr. Tilford of the Center for European Reform, if “they enforce unworkable positions on the rest of the euro zone.”

He added, “The markets are concerned about debt levels — but also about growth.”

Article source: http://www.nytimes.com/2011/08/18/business/global/debt-crisis-brings-focus-back-to-early-euro-pact.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Greece and Its Lenders Agree on Austerity Plan

June 24, 2011 by Leave a Comment

Last week, the European Union, European Central Bank and International Monetary Fund, known as the troika, unexpectedly withheld the next installment of $17 billion in emergency aid to Greece over concerns that its blistering program of austerity measures might be falling short of its goals.

That set off a week of market turmoil and political uncertainty in Greece that was calmed on Tuesday after Mr. Papandreou obtained a parliamentary vote of confidence on a new cabinet. Markets recovered from an early swoon on Thursday after reports that Greece and the troika had reached a deal, which includes an additional $5.4 billion in tax increases and spending cuts.

In a news conference in Athens, the new finance minister, Evangelos Venizelos, said that some of the new revenue would come from changes in income tax rules, a $430 annual charge to the thousands of self-employed Greek workers and an increase in the tax on heating oil.

A Socialist Party veteran known for his ability to rally his troops, Mr. Venizelos also dashed any talk of tax cuts — which the center-right opposition had favored. He said the government’s immediate aim was to push the measures through Parliament and secure the release of a new round of emergency financing.

Amid heated debate in Brussels on Thursday, Olli Rehn, the European commissioner for economic and monetary affairs, said that the European Union was prepared to give Greece some stimulus spending — something numerous economists have suggested would help Greece emerge from its “debt trap,” in which it is unable to return to growth while slashing state spending.

But “the first thing is that Greece must help itself so that the other Europeans can help Greece,” Mr. Rehn added. “That’s the bottom line.”

Mr. Venizelos said the Greek government’s key goals were to “regain our credibility, to lay the foundations for more effective negotiations aimed at tackling our fiscal problems and reducing our debt.”

But he added that it was “most crucial” for Parliament next week to pass the bill on the new austerity measures — which will include the sale of about $70 billion in state assets — and a second bill on the fast-track implementation of the previous austerity measures. The two votes are expected next week.

Mr. Venizelos said the recovery program for Greece was based on three “pillars:” completion of the privatization program, the participation of private banks and a new loan from the country’s foreign creditors. He added that next week Parliament would begin debating a “radical overhaul of the tax system.”

Mr. Venizelos said the government was “encouraging” Greek banks to participate in efforts to prop up the beleaguered economy, and he stressed that the program was voluntary. Ratings agencies have made clear that they would regard any forced rollovers of Greece’s debt as a default.

“We most be totally honest with the Greek people,” Mr. Venizelos said. “We must begin now with the implementation of the measures, as we can’t keep asking for more sacrifices. The point is now to keep our heads above water.”

Stephen Castle contributed reporting from Brussels.

Article source: http://www.nytimes.com/2011/06/24/business/global/24greece.html?partner=rss&emc=rss

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Debt Talks Continue, Minus a Key Figure

May 17, 2011 by Leave a Comment

Still, the absence of Dominique Strauss-Kahn, the managing director of the International Monetary Fund, cast a long shadow over the meeting, depriving ministers of the advice of a powerful and experienced European with a pivotal role on the global financial stage.

A former French economy minister, Mr. Strauss-Kahn was a member of the political generation that created the euro. He also had the respect of the euro zone’s most senior politicians and officials.

“He’s a good friend of mine,” said Jean-Claude Juncker of Luxembourg who is chairman of the euro zone finance ministers. “I didn’t like the pictures I saw on the TV this morning,” Mr. Juncker said at a news conference. “It was deeply sad and traumatic. But Mr. Strauss-Kahn is in the hands of the American justice. It’s not up to us to comment on this, but it makes me deeply, deeply sad.”

European officials insisted that it was business as usual without Mr. Strauss-Kahn, who was being replaced in Brussels by Nemat Shafik, a deputy managing director at the I.M.F.

At Monday’s meeting in Brussels, ministers nominated Mario Draghi of Italy as the next president of the European Central Bank, making his endorsement by European Union leaders a formality.

As also expected, they unanimously agreed to grant aid worth a total of 78 billion euros ($110 billion) to Portugal under a three-year program jointly administered by the European Union and the I.M.F.

Under the deal, the Portuguese authorities would encourage private investors “to maintain their overall exposures on a voluntary basis.” Although it was unclear how that encouragement would be offered, one possibility would be special guarantees to those who agreed to retain Portuguese bonds.

Olli Rehn, the European commissioner for economic and monetary affairs, said that the interest rate charged on loans to Portugal would be “above 5.5 percent but clearly below 6 percent.”

But the most difficult discussions came over Greece, which was urged to speed up its promised 50 billion euro privatization program before a second rescue. Ministers discussed putting Greece’s privatization project in the hands of an external agency.

While Mr. Juncker ruled out the possibility of restructuring Greek debt, he said that he “would not exclude in a definite way a kind of reprofiling,” or a voluntary easing of loan terms. The idea, however, was rejected by France’s economy minister, Christine Lagarde.

Mr. Strauss-Kahn’s arrest was not discussed formally at the meeting, but the implications of the case dominated debate in the corridors.

Most diplomats expected him to leave the I.M.F. soon to run for president of France in elections next year. But now, he may depart under a cloud, which increased concerns over the cozy arrangement that had allowed for a European to lead the I.M.F.

Even with Mr. Strauss-Kahn at the helm, Europeans felt a hardening of attitudes at the I.M.F., where concerns have grown in North America about Europe’s internal policy divisions over the debt crisis.

Meanwhile, some in the developing world are concerned about the amount of effort the I.M.F., which has traditionally devoted resources to their problems, is having to expend on Europe, said a European Union diplomat who was not authorized to speak publicly.

Chancellor Angela Merkel of Germany defended Europe’s claim to keep the top job at the I.M.F. for now, saying it made sense given its role in tackling the euro zone crisis, Reuters reported from Berlin. However, she said it was not yet time to discuss a successor.

“Generally, we know that in the medium term developing countries certainly have a claim both to the post of I.M.F. chief as well as World Bank chief,” Mrs. Merkel said. “I believe, however, that in the current phase, there are good reasons for Europe to have good candidates ready.”

That view was echoed in Brussels by Didier Reynders, the Belgian finance minister. “It would be preferable if we continued to hold these posts in the future,” he said.

As a former French government minister, Mr. Strauss-Kahn has been a strong presence and is someone who feels at home in the complex world of European Union policy making.

A Frenchman who speaks English and German, he was well placed to play at Europe’s top table. He was scheduled to meet Mrs. Merkel on Sunday before his arrest.

Technical work was continuing with officials from the I.M.F., the European Central Bank and the European Commission ahead of a likely new package of aid next month. The I.M.F. is providing about a third of the original 110 billion euro loan package for Greece.

But European officials are finding it increasingly difficult to quash speculation that Greek debt will have to be restructured.

“Of course we discuss all kinds of topics, including restructuring,” said Jan Kees de Jager, finance minister of the Netherlands, as he arrived at the meeting Monday. “But in public, we are very reluctant about discussing and debating restructuring.”

On Sunday, Wolfgang Schäuble, the finance minister of Germany, suggested that extending the maturities of Greek bonds could be a way to help ease the country’s debt crisis if private investors participated..

The I.M.F is believed to be more positive toward a restructuring of Greek debt than the European Central Bank and particular European governments, prompting some speculation that Mr. Strauss-Kahn’s absence might affect policy.

However, Daniel Gros, director of the Center for European Policy Studies, said that the effect was most likely to be felt over the longer term.

“They have pretty much made up their minds that nothing on restructuring happens before 2013,” he said. “If they want to keep their promise then the voice of the I.M.F. might be relevant next year. And maybe the next I.M.F. managing director will be clearer in saying you in Europe got us into this and we want to get our money back.”

In the meantime, Mr. Gros said, the message from leading governments was that the euro zone would do what was necessary, though the details of another aid package for Athens, and what Greece could offer in return, were not yet clear.

Article source: http://www.nytimes.com/2011/05/17/business/global/17euro.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

E.U. Looks to Ease Terms for Greece and Ireland

May 9, 2011 by Leave a Comment

The European Union is looking to lower interest rates on bailout loans to Greece and Ireland and is working on a second rescue for Athens in a chaotic effort to prevent a disorderly debt restructuring. The efforts were in motion as Standard Poor’s lowered its rating on Greece’s debt even further.

The executive European Commission said Monday that it hoped to see a decision within weeks on reducing the rate charged to Ireland to make Dublin’s debt more sustainable.

“The commission is clearly in favor of a rate cut,” said a spokesman for Olli Rehn, the European Union’s economic and monetary affairs commissioner. “The commission is against debt restructuring.”

The new Irish government’s bid for lower interest payments has so far been blocked by Germany and France, which want Dublin to drop its veto on harmonizing the corporate tax base in Europe in exchange or raise its own low corporate tax rate.

In Germany, a senior lawmaker in Chancellor Angela Merkel’s conservative party said a further cut in the rate on emergency loans to Greece, already reduced by one percentage point in March, would be justified if it carried out further reforms to reduce its debt risk.

Michael Meister, finance policy spokesman of Ms. Merkel’s Christian Democrats, told German radio he opposed any idea that Athens should restructure its debt or that it should consider leaving the euro zone.

But a German Finance Ministry spokesman, Martin Kotthaus, said at a news conference: “There is no discussion at the moment about extending the payment schedule or lowering the interest rates for Greece.”

On Monday, Standard Poor’s lowered its rating on Greece’s debt to B from BB-, dragging it further into junk territory over concerns that a debt restructuring is increasingly likely.

“In our view, there is increased risk that Greece will take steps to restructure the terms of its commercial debt, including its previously issued government bonds,” the agency said in a statement, warning that more downgrades could come.

It said its projections suggest that principal reductions of 50 percent or more could be needed to restore Greece’s debt burden to a sustainable level.

Greece, whose fiscal slippages set off Europe’s debt crisis, is rated junk by all three major rating agencies.

The calls within the European Union for lower interest rates for Greece and Ireland came after a select group of top euro zone policy makers held not-so-secret talks in Luxembourg on Friday evening on how to stem the currency bloc’s deepening sovereign debt crisis.

The cost of insuring Greek, Irish and Portuguese debt against default rose further on Monday as market jitters intensified over the risk that Greece may have to restructure its debt, forcing investors to take losses.

European shares fell amid signs the three euro zone states in intensive care are staging a bidding war for easier terms by pointing to concessions made to each other.

The jitters also followed a report by the German magazine Der Spiegel alleging that Greece was considering leaving the euro zone, which drew indignant denials from Athens and E.U. ministers.

A German government spokesman said Ms. Merkel would meet the European Commission president, José Manuel Barroso, head of the E.U.’s executive arm, and the European Council president, Herman van Rompuy, who chairs the bloc’s regular summit meetings, on Wednesday to review the situation.

A Greek exit from the euro has never been under discussion and is not now, he said at a news conference.

Euro zone and E.U. finance ministers are due to meet next week to approve Portugal’s aid program amid lingering uncertainty over whether Finland, which has a caretaker government and has not yet begun negotiations for a new coalition, will be in a position to give the required agreement.

Pressure is mounting for those meetings to deliver decisions on Ireland and Greece as well.

Responding to anger in some countries that were not invited to Friday’s talks, a German Finance Ministry spokesman insisted there was no attempt to create a two-class euro zone.

The Greek finance minister, George Papaconstantinou, who attended the Luxembourg meeting, said investors did not believe that his country could return to capital markets next year as envisaged in its E.U./I.M.F. plan, so it might need alternative financing.

Jean-Claude Juncker, chairman of the Eurogroup of finance ministers of the 17-nation euro area, said after Friday’s talks that there was a consensus that Athens would require a second rescue.

“We think that Greece does need a further adjustment program,” he said after meeting with ministers from Germany, France, Italy, Spain, Mr. Rehn of the European Union and the European Central Bank president, Jean-Claude Trichet.

He gave no details, but a euro zone source said one idea under consideration was for the European Financial Stability Facility rescue fund to buy Greek bonds in the primary market upon issuance next year, in return for a new form of collateral.

Greece, which has a debt mountain of nearly 150 percent of gross domestic product, is supposed to raise 27 billion euros in the market in 2012, according to the existing rescue plan.

Market analysts are convinced Athens will have to reduce its debt substantially by a mixture of rescheduling maturities, lower interest rates and possibly convincing private investors to take voluntary losses to avoid a disorderly default.

Some also believe Ireland will be unable to repay its debt, set to reach 120 percent of gross domestic product, and will face mounting political pressure to make bank bondholders share the cost.

A senior Irish minister said on Sunday that Dublin was watching to see what concessions it can win on its E.U./I.M.F. bailout if Greece is given a new deal to resolve its crisis.

Energy Minister Pat Rabbitte said he hoped Ireland would win a 1 percentage point cut in the rate it is paying on some 40 billion euros of loans from the E.U. at the meeting of the organization’s finance ministers.

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