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News Analysis: Greece Awaits Votes on Rescue Package in Euro Crisis

It’s not clear whether the global markets will give them that much time. Investors will be watching a series of crucial votes by European parliaments due this week on an earlier package aimed at preventing a default by Greece, Ireland and Portugal.

Sensing urgency from the markets and keenly aware of the potential consequences of a rejection of that plan by the German Parliament when it votes on Thursday, Chancellor Angela Merkel drew parallels on Sunday between the risk of a Greek default now and the broader chaos in the financial system that followed the collapse of Lehman Brothers in 2008. “We are doing it for ourselves,” she said in a radio interview on Sunday night aimed at persuading a skeptical German audience that setting aside hundreds of billions of euros to prop up shaky neighbors made sense. “Otherwise, the stability of the euro would be in danger.”

“We can only take steps that we can really control,” she said. If a Greek default started a fresh financial crisis, “then we politicians will be held responsible.”

All 17 member countries of the euro bloc must approve the strengthening of the rescue package, known as the European Financial Stability Facility, with votes set on Tuesday in Slovenia, Finland on Wednesday and Germany on Thursday. So far, only six countries have signed off, but European leaders say the process should be completed by mid-October.

Only after that do they seem likely to come up with a broader rescue package aimed at relieving the anxiety that has driven markets lower in recent weeks. The markets may not wait that long.

Indeed, for political leaders like Mrs. Merkel, the problem now is that investors have already concluded that the 440 billion euro bailout fund, the expansion of which is being voted on this week, might not be enough to stop the contagion from spreading. On Friday, the yield on two-year Greek notes rose to 69.7 percent, suggesting that investors considered a default all but inevitable.

When the initial expansion of the bailout fund was agreed to in July, worries centered on three smaller countries on the periphery of Europe — Greece, Ireland and Portugal. Since then, however, fears have multiplied about the ability of Spain and Italy, the third-largest economy in the euro zone, to keep borrowing heavily, creating doubts about pools of debt from countries that right now are considered “too big to bail.”

The worry is that a default by Athens would threaten these and other sovereign borrowers, as well as banks in France and Germany that hold tens of billions of euros in Greek debt. That, in turn, has helped push shares of American banks, which are intertwined with their European counterparts, sharply lower, dragging down the broader market.

“The next three weeks are absolutely critical, and they can still stabilize the markets, but I wouldn’t tell my clients to put money to work until we see it,” said Rebecca Patterson, chief market strategist at J.P. Morgan Asset Management. “As we stand right now, European policy makers have gotten well behind the curve. It’s not about the periphery anymore; it’s about the core, too.”

A fresh indicator of market confidence in European borrowers will come as Italy sells billions of euros in bonds this week, culminating on Thursday. Weak demand at an auction on Sept. 13 brough global worries about the safety of Italian debt, which stands at a whopping $2.3 trillion, making Italy one of the world’s largest borrowers.

What is more, Italy’s debt load equals 120 percent of the country’s gross domestic product. In Europe, only Greece is in worse shape, with debt totaling roughly 150 percent of G.D.P.

In addition, the Greek Parliament must vote this week on a recently proposed property tax increase that is seen as a test of whether the country will stick to past promises to tighten its belt.

Greece is also trying to show its austerity program is enough to qualify for an aid payment due in October.

Last week, anxiety about Europe led to the worst week for the Dow Jones industrial average since the onset of the financial crisis in 2008, and as was the case then, it seems events are moving faster than political leaders, further narrowing their options.

Besides the 6 percent drop on Wall Street last week, investors are concerned about the continuing rout in European stocks, especially bank shares, which stand at two-year lows. In another troubling echo of the events of 2008, traders abandoned former havens like gold, oil and other commodities, preferring the safety of United States Treasury securities or, better yet, cash.

In Asia on Monday, investors remained nervous. The Nikkei 225 index in Japan was down about 2 percent in the early afternoon, and the Hang Seng index in Hong Kong was down about 1.5 percent.

Meanwhile, deep divisions persist, not just among political leaders in different countries but among policy makers and the heads of Europe’s biggest banks.

Under a deal worked out in July, European banks agreed to take a 21 percent loss on their holdings of Greek debt as part of a restructuring that would give Greece more time to pay back what it owes, but now it appears political leaders in Germany and elsewhere want the banks to take a bigger hit.

Wolfgang Schäuble, Germany’s finance minister, suggested as much in a tough speech delivered to international bankers at the Institute for International Finance over the weekend. He argued that because of their bad lending decisions, bankers shared the blame for Greece’s predicament and should also share in the cost.

“Without a substantial contribution from financial institutions,” he said, “the legitimacy of our westernized capitalized systems will suffer.”

But Josef Ackermann, chief executive of Deutsche Bank and the chairman of the Institute for International Finance, quickly rejected any effort to renegotiate what had been agreed to in July. “It is not feasible to reopen the agreement,” he said.

Now, not only must the original July plan be approved, but policy makers must agree on how to augment it in the face of widening worries.

“The Europeans are trying to balance the process of approval in 17 parliaments and trying to get the most firepower” from the stability fund, said Robert B. Zoellick, president of the World Bank.

Just how to do that, including what can be purchased and how it might be leveraged, was “richly discussed,” Mr. Zoellick said at the annual meetings of the International Monetary Fund and the World Bank this weekend.

On both sides of the Atlantic, there is a feeling that policy makers have few arrows left in their quiver. A Federal Reserve announcement on Wednesday that it would buy $400 billion in long-term Treasury securities left the stock market unimpressed.

“It gets worse before it gets better,” said Adam Parker, Morgan Stanley’s chief United States equity strategist. “If you’re banking on a policy to bail you out, you will be disappointed.”

Landon Thomas Jr. and Jack Ewing contributed reporting.

Article source: http://www.nytimes.com/2011/09/26/business/global/greece-awaits-votes-on-rescue-package-in-euro-crisis.html?partner=rss&emc=rss

German Leaders Reiterate Opposition to Euro Bonds as a Way to Ease Crisis

Mrs. Merkel told ZDF television in an interview broadcast Sunday that the so-called euro bonds would be an option only in the distant future.

“It will not be possible to solve the current crisis with euro bonds,” she said. She added that “politicians can’t and won’t simply run after the markets.”

“The markets want to force us to do certain things,” she added. “That we won’t do. Politicians have to make sure that we’re unassailable, that we can make policy for the people.”

The German finance minister, Wolfgang Schäuble, echoed Mrs. Merkel’s comments, saying that common debt would make it easier for governments to avoid pursuing responsible fiscal policies. In any case, he told the newspaper Welt am Sonntag, it would take too long for countries in the euro zone to amend the treaty on monetary union, which would probably be required to allow the issuance of such bonds.

“We have to solve the crisis within the existing treaty,” Mr. Schäuble said.

The statements by the German leaders are in tune with public opinion in Germany as well as in other countries, like the Netherlands. The Dutch finance minister, Jan Kees de Jager, told the magazine Der Spiegel in an interview published Sunday that Mrs. Merkel should remain firm in her opposition to euro bonds.

That is not what investors want to hear, however.

Stocks around the world plunged last week amid widespread concern that political leaders were unwilling to take bold steps to address the European sovereign debt crisis, at the same time that indicators were pointing to sharply slower growth in Europe and the United States. The benchmark Stoxx Europe 600 index dropped 6 percent last week, with banks suffering some of the biggest drops.

Any further drop in investor confidence could also put pressure on the European Central Bank, which has been intervening in bond markets to hold down yields on Italian and Spanish debt and keep borrowing costs for those countries from reaching dangerous levels.

So far the central bank’s bond market intervention, which began two weeks ago, has kept Italian and Spanish yields below 5 percent, Frank Engels, an analyst at Barclays Capital in Frankfurt, wrote in a note. In October, the European Financial Stability Facility, the bailout fund, will be able to buy government bonds. But that may not be enough to keep yields within bounds, he said.

Mr. Schäuble told Die Welt that he did not think it would be necessary to increase the size of the bailout fund. Such comments may come as a particular disappointment to investors because Mr. Schäuble is regarded as one of the most pro-European members of the German cabinet, and among the most willing to agree to national sacrifice in the interest of saving the common currency.

But Mr. de Jager, the Dutch finance minister, said he would be willing to increase the size of the bailout fund.

Since the beginning of the debt crisis, Mrs. Merkel has resisted being swayed by bond investors; she waited until pressure became intense before agreeing to aid for Greece and other measures that were unpopular with German voters.

She also said she saw “nothing that points to a recession in Germany.” She acknowledged that political leaders needed to regain the confidence of financial markets but said the best way to do that would be to reduce debt.

Mrs. Merkel expressed opposition to euro bonds after a meeting in Paris last week with the French president, Nicolas Sarkozy, during which they pledged to improve economic coordination among euro members.

In the interview with Die Welt, Mr. Schäuble said he personally would be willing to cede some control over fiscal policy to a European finance minister, as Jean-Claude Trichet, the president of the European Central Bank, has proposed. But Mr. Schäuble added, “We can only go as fast and as far as we can convince citizens and their representatives in Parliament.”

Separately, Der Spiegel reported that the German Finance Ministry had calculated that euro bonds would cost Germany an additional 2.5 billion euros, or $3.6 billion, in interest payments in the first year of issuance, and as much as 10 times that sum each year after a decade. Germany’s borrowing costs are typically among the lowest in the world, but could rise if the nation’s reputation for fiscal prudence was diluted by closer association with countries like Italy.

A Finance Ministry spokesman said he could not confirm the Spiegel report, which the magazine said was based on estimates by unidentified ministry experts.

Opposition to euro bonds is strong within German political circles and among the country’s conservative economics establishment because of the perception that the country would wind up subsidizing its neighbors.

But some economists argue that euro bonds would be cheaper even for Germany, because the volume of the bond market would rival that of United States Treasury securities and promote the euro as a reserve currency. That would increase demand for the bonds and lower interest rates.

There is some support for euro bonds in Germany. Leaders of the opposition Social Democrats and Green Party have spoken in favor of common European debt. In addition, the Frankfurter Allgemeine newspaper quoted several members of Mrs. Merkel’s governing coalition in Parliament on Sunday as saying that Germany should not rule out euro bonds forever.

While rejecting the bonds, Mr. Schäuble said that Germany would defend the euro “under all circumstances” and that the government categorically rejected suggestions that Greece should leave the euro zone, as some economists have proposed.

If Greece dropped out, he said, Europe would suffer “a dramatic loss of trust and influence.”

Article source: http://www.nytimes.com/2011/08/22/business/german-leaders-reiterate-opposition-to-euro-bonds.html?partner=rss&emc=rss

News Analysis: Greece Awaits Votes on Rescue Package in Euro Crisis

German Leaders Reiterate Opposition to Euro Bonds as a Way to Ease Crisis

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