January 20, 2022

France’s Gloomy Economic Outlook Haunts Presidential Race

Radmila Zakovic, 59, went for benefits at the local unemployment office for herself and her two sons, both jobless. She had told them that if they finished school, they would find careers. “I feel like I’ve lied to my children,” she said.

As President Nicolas Sarkozy contemplates his race for re-election, with the first round of voting 100 days away, he is confronted with an economy reeling from the euro crisis and nearly zero growth. France has just lost its AAA credit rating and must cut government spending. The unemployment rate is 9.9 percent, a 12-year high, and rising.

The loss of the treasured AAA rating, while expected, was a blow to France’s status in Europe, making it seem less like a power than a problem. The downgrade makes it harder for France to pretend to be Germany’s equal in leading the European Union, which the Franco-German partnership has traditionally dominated. That, in turn, will make it harder for France, Italy and Spain to challenge the German recipe of austerity and to press harder for more liberal, pro-growth policies from the European Central Bank.

The downgrade was also a major political blow to Mr. Sarkozy and his prospects in the coming election. Polls show the main concerns of voters are clear: the size of the French debt, the cost of living, unemployment and general economic insecurity. Mr. Sarkozy’s rivals, fairly or not, leave little doubt where to place the blame.

“It is Sarkozy’s politics that have been downgraded, not France,” said François Hollande, the Socialist candidate who leads in the polls. Mr. Sarkozy’s presidency, with higher debt and higher unemployment, has been a disaster, Mr. Hollande said, but he has provided few details about his own plans.

It is hard to see how France can quickly extricate itself from its economic morass. It is Europe’s most centralized, state-dominated economy, and is deeply invested in its opposition to what the French call the Anglo-Saxon economies of Britain and the United States, whose laissez-faire approach they blame for the 2008 financial crisis.

Yet, like Europe’s lagging Mediterranean countries, though to a lesser extent, France is having trouble competing with the larger German economy, which is more flexible, less confrontational in its relations with employees and more solidly built on industry and exports.

While Mr. Sarkozy blames France’s woes on the 2008 global financial shock, the real problem, said Nicolas Baverez, an economist and historian, “is the unsustainable economic and social model of the last three decades.” France, like other European countries, benefited from cheap credit, leading to a society in which nearly two-thirds of the economic growth depended on consumption, partly financed by social transfers. Those, in turn, were financed by public debt that has ballooned to 86 percent of the gross domestic product in 2011 from 20 percent in 1980.

The main criticism of Mr. Sarkozy is that while he promised “a rupture” with the past to modernize France’s heavily state-dominated economy — liberalizing the tax system, eliminating the 35-hour workweek, reducing bureaucracy and improving purchasing power — he has accomplished little in the face of political and union opposition, save for an important delay in the retirement age. The Socialists, if they win, are unlikely to be much braver, altering the edges of tax and social policy, but not the core.

For Mr. Sarkozy and other European leaders, the euro crisis and the heavy sovereign debts that led to it have created a kind of political prison. Normally, faced with high unemployment and stagnant growth, leaders would spend to stimulate the economy, investing in infrastructure, education and job training. Instead, pressed by the markets and his own promises to limit deficits, Mr. Sarkozy has had to cut government spending and raise taxes in an election year.

But France’s efforts to repair its figures — as with the rest of the countries in the euro zone — are “too little, too late,” said François Heisbourg of the Foundation for Strategic Research in Paris.

Elvire Camus, Scott Sayare and Sophie Cohen contributed reporting.

Article source: http://www.nytimes.com/2012/01/16/world/europe/frances-gloomy-economic-outlook-haunts-presidential-race.html?partner=rss&emc=rss

France Loses AAA Credit Rating, S.&P. Says

The actions, which lowered the ratings of nine countries, were the strongest signal yet that Europe’s sovereign debt woes were far from over and would pose fresh political challenges for politicians, including President Nicolas Sarkozy of France, as they try to stabilize the problem on the Continent, now in its third year.

Another reminder of the continuing challenge came Friday from Greece, the original source of Europe’s debt troubles. A snag arose in talks between the new Greek government and its creditors —  banks and other private investors — in which Athens hopes the bond holders will agree to take losses as a way for Greece to avoid a default.

Together, the developments underscore that even as Europe’s debt turmoil enters its third year, no clear solutions are yet in sight — despite recent signs that financial market pressures might be easing as a result of a new lending program by the European Central Bank.

In announcing the downgrades, Standard Poor’s said: “Today’s rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policy makers in recent weeks may be insufficient to fully address ongoing systemic stresses in the euro zone.”

A downgrade by a single ratings agency like Standard Poor’s could have an immediate, though not devastating, impact on the countries’ ability to borrow money. S. P. warned in December that the agency was reviewing the credit ratings of more than a dozen European Union countries because of the crisis. Germany and the Netherlands, which were on the original list, did not receive a downgrade.

European politicians had criticized S.P.’s downgrade plans as providing no meaningful new information to investors but simply stoking a sense of crisis. In fact, the prospect of rating downgrades has already been priced into the bond auctions that Italy, Spain and other countries have held recently.Even before the announcement by S.P., Finance Minister François Baroin of France confirmed the loss of France’s AAA grade to AA+, but he insisted the country was headed in the right direction and that no ratings agency would dictate the policies of France.

“It’s not good news,” Mr. Baroin said on France television earlier in the day, but it is “not a catastrophe.”

In addition to Italy (now BBB+) and Portugal (BB), two nations had their ratings cut by two notches — Spain (A) and Cyprus (BB+). Those lowered by one grade, along with France, were Austria (AA+), Malta (A–), Slovenia (A+) and Slovakia (A).

The ratings of the other countries in the review — Belgium (AA), Estonia (AA–), Finland (AAA), Ireland (BBB+) and Luxembourg (AAA) — were unchanged.

Of the 17 euro zone countries, only Greece, with the lowest rating of the group (CC), was not cited in the review.

Rumors of imminent downgrades trickled out all day Friday, the end of a week in which Prime Minister Mario Monti of Italy and Mr. Sarkozy warned that the crisis could deepen if steps were not taken to stoke growth. Both delivered their messages to Chancellor Angela Merkel in her offices in Berlin, prompting the German leader to admit for the first time that the harsh program of austerity she has been pushing on the euro zone was not a cure-all for the crisis.

S. P. issued its warning last month after all three leaders held an emergency European summit meeting aimed at establishing a consensus for better fiscal discipline in the euro monetary union.

But the bid to reassure the financial markets about the European Union’s resolve quickly fizzled, as investors fretted that the years-long efforts to strengthen the foundations of the euro currency club could be overwhelmed in the meantime by a looming recession in most of Europe.

Last summer, Standard Poor’s lowered the AAA rating of United States long-term debt by one notch, citing a threat to America’s finances from political gridlock in Washington.

Interest rates for Treasury debt in the United States have remained at remarkably low levels as investors continue to avoid other risk. But in general, a downgrade is likely to make it costlier for a country to pay down its debt, as investors demand that the government pay higher borrowing costs to compensate for the loss of its risk-free status.

In addition, the new European rescue fund, the European Financial Stability Facility, which is designed to prevent the contagion from spreading to large countries like Italy and Spain, would likely see its borrowing costs rise. France is one of its major financial backers, and if the country is downgraded, that could make the fund less effective in stemming the euro crisis.

Steven Erlanger contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=6d711d3dc7c297651054aee2266a936d

France Among Euro Nations Expected to Get Debt Downgrade

The actions would be the strongest signal yet that Europe’s sovereign debt woes were far from over and would pose fresh political challenges for politicians, including President Nicolas Sarkozy of France, as they try to stabilize the problems on the Continent, now in their third year.

A downgrade by a single ratings agency would have an immediate, though not devastating, impact on the countries. S.P. warned in December that the agency was reviewing 15 European Union countries for lower ratings because of the crisis. Germany and the Netherlands, which were on the original list, were not expected to receive a downgrade Friday, news agencies reported.

The rumors came at the end of a week in which Prime Minister Mario Monti of Italy and Mr. Sarkozy warned that the crisis could deepen if steps were not taken to stoke growth. Both delivered their messages to Chancellor Angela Merkel in her offices in Berlin, prompting the German leader to admit for the first time that the harsh program of austerity she has been pushing on the euro zone was not a cure-all for the crisis.

S. P. issued its warning last month after all three leaders held an emergency European summit meeting aimed at establishing a consensus for better fiscal discipline in the euro monetary union.

But the bid to reassure the financial markets about the European Union’s resolve quickly fizzled, as investors fretted that the years-long efforts to strengthen the foundations of the euro currency club could be overwhelmed in the meantime by a looming recession in most of Europe.

In addition to France, S. P. last month named Germany, the Netherlands, Austria, Finland and Luxembourg as countries that could lose their AAA rating. Last summer, Standard Poor’s lowered the AAA rating of United States long-term debt by one notch, citing a threat to America’s finances from political gridlock in Washington.

A downgrade would make it costlier for each country to pay down its debt, as investors demand that the government pay higher borrowing costs to compensate for the loss of its risk-free status.

In addition, the new European rescue fund, the European Financial Stability Facility, which is designed to prevent the contagion from spreading to large countries like Italy and Spain, would likely see its borrowing costs rise. France is one of its major financial backers, and if the country is downgraded, that could make the fund less effective in stemming the euro crisis.

Steven Erlanger contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=2480446208534edf2ea916a9b7be90a3

Stocks in Asia Drop on Eurozone Worries

BANGKOK (AP) — Asian stocks dropped Monday, ignoring signs of job improvement in the U.S., as traders continued to fret about Europe’s unfolding sovereign debt drama.

Benchmark oil fell to $101 per barrel while the dollar strengthened against the euro but fell against the yen.

South Korea’s Kospi fell 1.1 percent to 1,822.42 while Hong Kong’s Hang Seng index was 0.9 percent lower at 18,422.23. Benchmarks in Singapore, Taiwan, India and Indonesia also were lower. In Japan, financial markets were closed for a public holiday.

Bucking the negative trend were mainland Chinese shares, which rose amid promises by Beijing to channel more bank lending to struggling entrepreneurs while keeping inflation and surging housing costs in check. The Shanghai Composite Index jumped 1.4 percent to 2,194.57. The smaller Shenzhen Composite Index added 1.8 percent to 832.81.

China tightened lending and investment curbs last year to cool its overheated economy but has reversed course in recent months following a slump in global demand that has hurt exporters and led to job losses.

Other positive economic news came out of the U.S., where the unemployment rate fell to 8.5 percent in December, the lowest level in nearly three years.

But signs of strength in the U.S. job market were not enough to offset worries about Europe’s debt. On Friday, Italy’s borrowing costs spiked to dangerously high levels. The country is now paying over 7 percent to borrow for 10 years, a sign that investors are concerned the country could default on its debts. Greece, Portugal and Ireland were forced to seek a bailout after their borrowing rates rose above 7 percent.

German Chancellor Angela Merkel and French President Nicolas Sarkozy are to meet later Monday in Berlin to discuss the eurozone debt crisis. But markets no longer react to such powwows, having witnessed Europe pledge time and again to stem the crisis — only to see it worsen.

“We are very much in a situation now where the market is not inclined to react positively to statements of intent,” said Ric Spooner, chief market analyst at CMC Markets in Sydney.

“Concrete, locked-in, agreed-to steps must be taken, and those steps have to be sufficient to provide a mechanism for halting the contagion risk and for putting in place a mechanism for a reasonable growth scenario,” Spooner said.

Bank stocks fell on concerns that the debt crisis will spread through the financial industry. Hong Kong-listed Agricultural Bank of China fell 0.6 percent and Commonwealth Bank of Australia shed 0.2 percent. China Construction Bank lost 0.2 percent.

Heavy industrial shares also fell. Korean steelmaking giant POSCO lost 2.5 percent while India’s Tata Steel Ltd. lost 1.9 percent.

Zijin Mining Group, China’s biggest gold miner, lost 3.8 percent following a drop in gold prices.

The euro continued its slide against the dollar. On Monday, it fell to $1.2694 from $1.2724 late Friday in New York. The dollar fell to 76.92 yen from 77.02 yen.

In energy trading, benchmark crude for February delivery fell 45 cents to $101.11 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell 25 cents to settle at $101.56 in New York on Friday.

Article source: http://feeds.nytimes.com/click.phdo?i=08b94c20c94b74849c888c73d5ede0a3

Celebration Succumbs to Concern for Euro Zone

In European trading and on Wall Street, shares fell sharply after Moody’s Investors Service and the Fitch Ratings warned that European efforts to protect the common currency had not resolved the immediate dangers of a significant economic downturn and troubles in the banking system.

By taking a “gradualist” approach to forging a true fiscal union among the 17 euro zone members, politicians were imposing additional economic and financial costs on the region, Fitch warned. “It means the crisis will continue at varying levels of intensity throughout 2012 and probably beyond, until the region is able to sustain broad economic recovery,” the agency said.

Moody’s said it was putting the sovereign ratings of European Union countries on review for a possible downgrade in the coming months. Standard Poor’s issued a similar warning last week, saying it could lower the sterling credit ratings of Germany and France and cut other countries’ credit scores as Europe headed into a probable recession next year.

On Monday, President Nicolas Sarkozy of France acknowledged that a loss of the nation’s triple-A rating could come soon, but said it would not pose an “insurmountable” difficulty. Mr. Sarkozy has made it a priority of his coming presidential campaign to keep the country’s top credit rating, and repeated a pledge to reduce the nation’s debt and deficit without cutting wages and pensions.

Mr. Sarkozy’s rival, the Socialist candidate François Hollande, said Monday that he would try to renegotiate the terms of the Europewide deal struck Friday if he were elected president in May, saying the pact would stifle growth.

With markets and rating agencies expressing mild disappointment with the deal, the spotlight returned to the European Central Bank, the only institution with overall responsibility for maintaining the health and integrity of the euro.

Amid last week’s political theater, the E.C.B. took a crucial step to help prevent the biggest European banks from succumbing to an increasingly volatile economic and market environment by agreeing to provide banks with unlimited funds for up to three years.

“That reduces the possibility of a Lehman moment quite substantially,” Jacob Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington, said during a conference call on the crisis. “It says to every bank in the euro area that even if you’re shut out of the market, we are the lender of last resort and provide you with necessary funding.”

While that may ease the pressure on the financial system, any further downgrade in the credit rating of European governments could raise the fever of the crisis by making it more expensive for the weakest countries to service their debts. It could also make it more difficult for banks in Italy, Spain and even France to get credit from other banks, causing a potential pullback in lending to consumers and businesses at a time when economic growth is already being squeezed.

In the lightning-fast world of financial markets, the efforts by Mr. Sarkozy, Chancellor Angela Merkel of Germany and other euro zone leaders appear to be moving too slowly to satisfy the demands of investors.

While the summit meeting in Brussels on Thursday and Friday marked a major step toward greater fiscal union among the core countries, the architecture will take months, even years, to construct.

In the meantime, the decision to embrace significant new spending cuts and tax increases across much of Europe at a time of economic weakness is expected to undermine growth in the immediate future, analysts said.

Carl B. Weinberg, the chief economist at High Frequency Economics, said some European banks that were already selling assets to keep enough money on hand were also curbing lending.

“We are now moving off the charts in terms of normal procedures, and moving into a grim time for European banks,” Mr. Weinberg said. “This is not a good time to be thinking of European bank shares because a contraction of credit has already begun and will get worse.”

Indeed, despite the political will to bring the euro zone under more centralized management, ratings agencies, banks and businesses are increasingly considering the possibility that countries could default, or leave the currency union.

Many governments and investors are hoping the E.C.B. will ride to the rescue by buying the bonds of troubled governments in Italy and Spain, in a bid to keep their borrowing costs from rising to levels that forced Greece, Ireland and Portugal to take international bailouts.

But Germany has opposed that move as being outside the bank’s mandate, and the E.C.B. president, Mario Draghi, made clear last week that the bank remained loath to take such steps.

Article source: http://www.nytimes.com/2011/12/13/business/global/moodys-warns-of-possible-downgrade-to-some-euro-zone-economies.html?partner=rss&emc=rss

Cameron, Speaking to Parliament, Defends Actions at Europe Summit

“I responded in good faith,” Mr. Cameron said in the televised speech, explaining his actions last week. “We were simply asking for a level playing field.”

Reiterating his reasons for the veto decision, Mr. Cameron said he could not agree to the changes to European Union treaties because they would have threatened the competitive future of London’s financial services industry, a critical part of Britain’s economy. He also said he had done nothing to compromise Britain’s membership in the European Union itself.

“Britain remains a full member of the E.U. and the events of the last week do nothing to change that,” said Mr. Cameron, who leads the Conservative Party. “Our membership of the E.U. is vital to our national interest. We are a trading nation and we need the single market for trade, investment and jobs.”

But with the 26 other members of the European Union either agreeing to the proposed plan outright or saying they would put the matter before their Parliaments, Mr. Cameron has come in for harsh domestic criticism. Nick Clegg, the leader of the Liberal Democrats, the junior coalition partner in Mr. Cameron’s government, told the BBC on Sunday that Britain was left in danger of being “isolated and marginalized” in Europe. Mr. Clegg added that if he had been in charge, “of course things would have been different.”

Mr. Clegg, who normally sits next to Mr. Cameron on the front bench of the parliamentary chamber, was conspicuously absent during Mr. Cameron’s remarks on Monday.

In an unusually blunt acknowledgment of the divide between Britain and the rest of Europe, President Nicolas Sarkozy of France said in a newspaper interview published on Monday that, while he and Chancellor Angela Merkel of Germany had done “everything in order that the English should be part of the agreement” at the Brussels summit, the reality was that “henceforth there are clearly two Europes — one seeking greater solidarity and regulation, and the other attached to the exclusive logic of the single market.”

“You have to understand this is the birth of a different Europe — the Europe of the euro zone, in which the watchwords will be the convergence of economies, budget rules and fiscal policy, a Europe where we are going to work together on reforms enabling all our countries to be more competitive without renouncing our social model,” he told the newspaper Le Monde.

But Mr. Sarkozy also referred to a broader relationship with Britain, despite the ever closer ties between Paris and Berlin in addressing the crisis in the euro zone, of which Britain is not a member.

“Does the importance of the understanding with Germany mean that there is nothing to be done with London? No,” he said. “We intervened in Libya with the United Kingdom and the prime minister, David Cameron, was courageous. With London we share an attachment to nuclear energy and a strong cooperation in defense.”

He also rejected an interviewer’s suggestion that Britain should leave the European Union’s single market — a vast trade zone stretching from Ireland to Scandinavia, the Balkans and the Mediterranean. “We need Great Britain,” Mr. Sarkozy said.

The developments in Brussels brought less ambiguous criticism from Britain’s opposition Labour Party.

“This is the first veto in history not to stop something,” David Miliband, a former Labour foreign secretary, told the BBC on Monday. “The plans are going right ahead. It was a phantom veto against a phantom threat.”

“David Cameron didn’t actually stop anything, because the other 26 are going on and the provisions of the treaty would not have weakened our rights and freedoms one iota,” Mr. Miliband said.

The Labour opposition was intent on echoing those complaints in Parliament, seeking to dent the enthusiasm of the dominant Conservatives and to highlight divisions within the governing coalition.

Many euroskeptic Conservatives, who want Britain to renegotiate its relationship with the European Union, were hailing the outcome of the Brussels summit as a victory. But several officials suggested that both the Conservatives and the more pro-European Liberal Democrats wanted to avoid a widening of the rift between them.

Article source: http://www.nytimes.com/2011/12/13/world/europe/david-cameron-to-address-british-parliament-over-europe-treaty.html?partner=rss&emc=rss

Markets End Lower Ahead of European Summit

Stocks fell sharply on Wall Street on Thursday after the European Central Bank appeared to dampen expectations for an expanded bond-buying program and as leaders gathered for a summmit meeting in Brussels aimed at resolving the sovereign debt crisis in Europe.

The E.C.B cut its benchmark interest rate for the second month in a row and expanded the emergency funding it provides to cash-starved banks.

But Mario Draghi, president of the central bank, indicated in a news conference that he was cautious about future bond purchases. Yields on Italian and Spanish bonds rose sharply after his remarks and stocks declined in Europe and then on Wall Street.

Analysts said that investors appeared to be disappointed by M. Draghi’s remarks, in which he said he was “surprised” his recent comments were seen as a sign that the E.C.B. would buy more bonds if political leaders delivered tougher rules on budgetary discipline.

Anthony Valeri, an investment strategist in fixed income at LPL Financial, said that Mr. Draghi was “keeping his powder dry for when he really needs it.”

“It puts more pressure on the summit to deliver something tangible,” said Mr. Valeri.

While markets traded lower for most of the day, the decline accelerated at the end of the session. At 4 p.m., the Dow Jones industrial average was down 1.6 percent after a 0.4 percent rise on Wednesday. The Standard Poor’s 500-stock index slipped 2.1 percent, and the Nasdaq composite index was down 2 percent. Financial stocks fell the most, down nearly 4 percent.

European stocks closed even lower, with the Euro Stoxx 50 down 2.4 percent.

At their two-day summit meeting, European leaders are expected to consider proposals for tougher fiscal rules from the German chancellor, Angela Merkel, and President Nicolas Sarkozy of France. The leaders were gathered for a dinner on Thursday before the main part of their agenda on Friday.

José Manuel Barroso, the president of the European Commission, sought to instill confidence that a solution would be found, saying early Thursday: “I believe this is possible,” according to The Associated Press.

“My appeal — my strong appeal — to all the heads of state and government is to show this commitment to our common currency,” Mr. Barroso said. “I think this is indispensable, and leadership is about making possible what is indispensable.”

Mr. Barroso was in Marseille along with Mr. Sarkozy and Mrs. Merkel for a meeting of the European People’s Party, the conservative bloc in the European Parliament, before their departure for Brussels.

Laura LaRosa, the director of fixed income for Glenmede, said that United States Treasury prices rebounded as investors’ appetite returned for assets seen as safer. On 10-year Treasuries, the yield, which moves opposite to the price, was at 1.969percent, down 6 basis points.

“I think what you are going to see tomorrow is going to be another day where there is a tremendous amount of anticipation,” she said.

Tim Courtney, chief investment officer of Burns Advisory Group, said that with the euro zone debt crisis a concern for investors for some time, expectations for a solution were already low and priced in to the markets.

Late Wednesday, Standard Poor’s said that it was putting the credit ratings of the entire 27-nation European Union on watch for a possible cut from its top AAA rating, citing “concerns about the potential impact on these member states of what we view as deepening political, financial, and monetary problems within the euro zone.”

The action, of mainly technical interest since the bloc itself does not issue debt on a large scale, came after the agency on Monday put 15 of the 17 euro member nations on watch for downgrade, meaning all of the euro zone countries face ratings cuts — and potentially higher borrowing costs — if the crisis meetings fail.

“A bit of pressure is not unwelcome,” Jean-Claude Juncker, the Luxembourg prime minister who acts as head of the Eurogroup, said on French radio regarding the S.P. action, according to Reuters. Still, he said, “the pressure would have existed even if there hadn’t been these warnings from the agencies.”

In its second monetary easing in just five weeks, the European Central Bank cut its main overnight rate by a quarter of a percentage point, to 1 percent. The Bank of England’s Monetary Policy Committee, which also met Thursday, left the main British overnight rate unchanged at 0.5 percent.

Stocks in Europe closed lower across the board. The FTSE 100 index in London lost 1.1 percent, the CAC 40 index in Paris was down 2.5 percent and the DAX in Frankfurt was 2 percent lower.

The euro rose after the central bank lowered its interest rate, but then slumped. It was trading at $1.3363 from $1.3412 late Wednesday in New York.

Yields on Italian and Spanish bonds rose sharply after Mr. Draghi’s remarks. At the end of the session, the yield on 10-year Italian bonds climbed 47 basis points to 6.429 percent, and the Spanish yields advanced 39 basis points to 5.75 percent.

German 10-year bonds yields were 2.01 percent, down 9 basis points. A basis point is one-hundredth of a percent.

Asian shares declined. The Tokyo benchmark Nikkei 225 stock average fell 0.7 percent. The Sydney market index S.P./ASX 200 fell 0.3 percent. InHong Kong, the Hang Seng index fell 0.7 percent and in Shanghai the composite index fell 0.1 percent.

Article source: http://www.nytimes.com/2011/12/09/business/global/daily-stock-market-activity.html?partner=rss&emc=rss

Euro Zone Deal Optimism Lifts Stocks

The positive mood looked set to add to the glow from last week’s American jobs data. The Standard Poor’s 500-stock index rose more than 1 percent at the opening of trading on Wall Street, and increases in European market indexes ranged from 0.8 percent to almost 3 percent.

“The U.S. economy has been resilient to market turmoil of recent months but remains vulnerable to a deterioration in Europe,” Julia Coronado, BNP Paribas North America chief economist, said in a note.

Market sentiment was given an early boost after Italy unveiled a 30-billion-euro package of austerity steps, and the Irish government too said it would do something similar in a new budget to be announced later in the day.

The positive mood drove Italian bond yields further below the worrying 7 percent level at which they are seen as unsustainable and the cost of insuring Italian debt against default also fell.

The poor state of the euro zone’s economy, however, was underlined by business surveys suggesting there will be a steep economic contraction in the current quarter.

Despite this, retail sales data for October were better than expected.

Shares in financial institutions led the gains in Europe with the main euro zone banking index now up 23 percent from its lows in late November.

CRUCIAL WEEK LOOMS

The week ahead features a series of high profile meeting among European leaders seen as crucial to the future of the 17-nation euro zone.

French President Nicolas Sarkozy and German Chancellor Angela Merkel met in Paris ahead of a key European Union summit later in the week to iron out their differences on how to centralise control of euro zone budgets to resolve the region’s debt crisis.

The two leaders are expected to outline joint proposals for more coercive budget discipline in the euro zone, which they want all 27 EU leaders to approve at Friday’s summit.

An agreement could pave the way for an accelerated implementation of the euro zone’s rescue scheme to help ensure debt-ridden countries have a vehicle to tap for funds while encouraging bondholders to buy euro zone bonds.

On Tuesday, U.S. Treasury Secretary Timothy Geithner kicks off a visit to the region in Germany, where he will meet European Central Bank President Mario Draghi and government officials.

In a further sign Europe is making progress, four sources told Reuters that Germany is prepared to soften language in the euro zone’s permanent bailout mechanism compelling bondholders to accept losses in exchange for much stricter budget rules.

VOLATILITY EASES

World stocks as measured by MSCI were up about 1.2 percent. Earlier Japan‘s Nikkei closed up 0.6 percent.

The euro, which gained 0.8 percent last week, was up slightly at $1.344. The currency stood about 1.4 percent above its seven-week low of $1.3213 hit late last month.

“The market wants to see some kind of concrete agreement before investors are prepared to liquidate short positions,” said Niels Christensen, currency strategist at Nordea in Copenhagen.

“I see the euro trading sideways for now. We may need to see negative news that there won’t be any fresh agreement for it to test last week’s lows.”

On fixed income markets, Italian government bond yields fell across the curve on Monday, and the price of insuring against a default was also lower after the country’s austerity measures.

Short-dated Italian bond yields were down more than 80 basis points and 10-year yields were 49 basis points lower at 6.25 percent, well below the 7 percent level that triggered such concern in November.

(Additional reporting by Jessica Mortimer and Hideyuki Sano. Editing by Jeremy Gaunt.)

Article source: http://feeds.nytimes.com/click.phdo?i=fd21f5c7040dc0784905e294b3aac379

World Stocks Up as Crucial Euro Zone Week Kicks Off

Sentiment was also lifted by Italy’s unveiling of austerity steps, and expectations Ireland will do the same in a new budget to be announced later in the day.

European stocks were higher with the FTSEurofirst 300 gaining half a percent, building on last week’s biggest weekly gain since late 2008.

“I’m sure this week will be volatile. There will be moments of disappointment and moments of optimism,” said Katsunori Kitakura, chief dealer at Chuo Mitsui Trust Bank.

The week ahead features a series of high profile meeting among European leaders seen as crucial to the future of the 17-nation euro zone.

On Monday, French President Nicolas Sarkozy and German Chancellor Angela Merkel meet to outline joint proposals for more coercive budget discipline in the euro zone, which they want all 27 EU leaders to approve at Friday’s summit.

The focus at the summit will be squarely on new rules to tighten fiscal integration.

An agreement could pave the way for an accelerated implementation of the euro zone’s rescue scheme to help ensure debt-ridden countries have a vehicle to tap for funds while encouraging bondholders to buy euro zone bonds.

On Tuesday, U.S. Treasury Secretary Timothy Geithner kicks off a visit to the region in Germany, where he will meet European Central Bank President Mario Draghi and government officials.

In a further sign Europe is making progress, four sources have told Reuters Germany is prepared to soften language in the euro zone’s permanent bailout mechanism compelling bondholders to accept losses in exchange for much stricter budget rules.

Italy, one of the most severely debt-stricken euro zone countries which has faced soaring borrowing costs, unveiled a 30-billion-euro ($40.3 billion) package of austerity measures on Sunday, raising taxes and increasing the pension age.

VOLATILITY

World stocks as measured by MSCI were up 0.2 percent. Earlier Japan’s Nikkei closed up 0.6 percent.

The euro, which gained 0.8 percent last week, was flat at around $1.343. The currency stood about 1.4 percent above its seven-week low of $1.3213 hit late last month.

“The market wants to see some kind of concrete agreement before investors are prepared to liquidate short positions,” said Niels Christensen, currency strategist at Nordea in Copenhagen.

“I see the euro trading sideways for now. We may need to see negative news that there won’t be any fresh agreement for it to test last week’s lows”.

On fixed income markets, Italian government bond yields fell across the curve on Monday, and the price of insuring against a default was also lower after the country’s austerity measures.

Short-dated Italian bond yields were down as much as 40 basis points and 10-year yields were 26 basis points lower at 6.49 percent, well below the 7 percent level that many consider unsustainable.

(Additional reporting by Jessica Mortimer)

Corrects direction of German bonds in first paragraph.

Article source: http://www.nytimes.com/reuters/2011/12/05/business/business-us-markets-global.html?partner=rss&emc=rss

Leaders Struggle for Deal to Keep Euro Intact

The emerging solution is being negotiated under great pressure from the markets, the banks, the voters and the Obama administration, which wants an end to the uncertainty about the euro that is dragging down the global economy.

In the process, European leaders will begin to change the fundamental structure of the union, creating a form of centralized oversight of national budgets, with sanctions for the profligate, to reassure investors that this kind of sovereign-debt crisis is finally being managed and should not happen again.

The immediate focus of worry is on Italy and Spain, which have been buffeted by market speculation even as they move to fix their economies. That process took an important step on Sunday, as Italy’s cabinet agreed to a package of austerity measures to put the country in line for aid that would improve its financial stability.

The new euro package, as European and American officials describe it, is being negotiated along four main lines. It combines new promises of fiscal discipline that will be embedded in amendments to European treaties; a leveraging of the current bailout fund, the European Financial Stability Facility, to perhaps two or even three times its current balance; a tranche of money from the International Monetary Fund to augment the bailout fund; and quiet political cover for the European Central Bank to keep buying Italian and Spanish bonds aggressively in the interim, to ensure that those two countries — the third- and fourth-largest economies in the euro zone — are not driven into default by ruinous interest rates on their debt.

But important disagreements persist, and the two primary leaders of the euro zone, Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France, will meet on Monday in Paris to try to hammer out a joint proposal for the summit meeting. That meeting, which begins Thursday evening, is considered a last chance this year to set the euro right, even as some investors and analysts are beginning to predict its collapse.

“The survival of the euro zone is in play,” one senior European official said. “So far it’s been too little, too late.”

After consecutive, expensive failures to stabilize the markets and protect the euro, the broad plan emerging this week may have a better chance at succeeding, analysts say, in part because it weaves together measures that deal with the various issues of the euro, particularly the provision of a central authority that can monitor and override national budget decisions if they break the rules.

Still, even if all the parts are agreed upon in the meetings, which are bound to be fraught, the fundamental imbalances in the euro zone between north and south and between surplus countries and debtor ones will not go away. The euro will still be a single currency for 17 disparate nations in the European Union.

One dividing line is that the Germans, along with the Dutch and the Finns, remain adamantly opposed to what some consider the simplest solution: allowing the European Central Bank to become the euro zone’s lender of last resort and to buy sovereign bonds on the primary market, in unlimited amounts. Mrs. Merkel is also dead-set for now against collective debt instruments, like “eurobonds,” that would put taxpayers, particularly German ones, on the hook for the debt of others, which her government regards as illegal.

So Mr. Sarkozy and other European leaders are working on a less elegant and more phased way to create a pool of bailout money that is large enough to convince the markets there is little chance of a default on Italian and Spanish bonds, which should drive down rates to sustainable levels, European and American officials say.

Mrs. Merkel says it is time to get the euro’s fundamentals right. She is insisting on treaty changes to promote more fiscal discipline, including a limit on budget deficits, with outside supervision and surveillance of national budgets before they become dangerous, and clear sanctions for countries that fail to adhere to the firmer rules. Berlin wants the new standards backed up by the European Court of Justice or perhaps the European Commission, with the power to reject budgets that break the rules and return them for revision.

She would like the treaty changes to be accepted by all 27 members of the European Union, but failing that, she said she would accept treaty changes within the euro zone, with other countries who want to join in the future, like Poland, free to commit to the tougher rules now. Many countries, and not only Britain, are opposed to institutionalizing a two- or even three-tier European Union, fearing that their interests will be sacrificed and their voices diminished.

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