January 20, 2022

Top E.U. Official Joins Chorus Warning of Greek Fallout

BRUSSELS — On the eve of a crucial summit of euro area leaders, a senior European Union official said Wednesday that failure to act decisively on Europe’s debt crisis could have global repercussions.

The warning from José Manuel Barroso, president of the European Commission, came as the French President Nicholas Sarkozy was heading to Berlin for a pre-summit meeting with the German Chancellor Angela Merkel.

“Nobody should be under any illusion: the situation is very serious,” Mr. Barroso said in Brussels. “It requires a response, otherwise the negative consequences will be felt in all corners of Europe and beyond.”

In recent days the crisis has taken on a new and potentially more dangerous dynamic, with a spike in borrowing costs for Italy and Spain, which are much bigger economies than the three that have already sought international bailouts, namely Greece, Ireland and Portugal.

The financial markets appear unnerved by the prospect that private investors will be asked to share the burden of a second Greek bailout — which the leaders will debate on Thursday — and that this will be classified as a default, amplifying the contagion.

As long ago as February 2010, European leaders promised to take determined and coordinated action to preserve their common currency, and Mr. Barroso challenged leaders to live up to their rhetoric.

The leaders “have said they will do what it takes to ensure the stability of the euro area,” Mr. Barroso said. “Well, now is the time to make good on that promise.”

Mr. Barroso outlined the broad shape of the deal that is expected to emerge from the meeting of 17 euro-zone leaders, including measures to ensure “the sustainability of Greek public finances.”

Though he did not go into detail, these plans are likely to include a reduction in the rate of interest and an increase in the maturity date of international loans.

In addition Mr. Barroso highlighted the “scope for more flexible action through the European Financial Stability Facility,” the bailout fund that is already lending to Ireland and Portugal and which some governments want to finance a buyback of Greek bonds.

Mr. Barroso also said the plan should identify the “feasibility and limits of private sector involvement” — again without any specifics.

This has been the biggest point of conflict in constructing a second Greek bailout because Germany, the Netherlands and Finland have been pressing for private investors to share a substantial part of the pain.

In recent days, a new idea for a bank levy has been floated as one solution which would not trigger a default and risk further contagion.

Mr. Barroso also called attention to the need to repair the banking sector and “ensure the provision of liquidity to our banking system.”

Germany was initially resistant to the idea of calling a meeting of leaders on Thursday, suggesting that it was only sensible if preparations were well enough advanced to reach agreement.

On Tuesday, Mrs. Merkel, has cautioned observers and financial markets not to expect anything spectacular.

But on Wednesday, her spokesman, Steffen Seibert, sounded more positive, saying the meeting Wednesday night with Mr. Sarkozy should help. “We are very confident that there will be a good and sensible solution,” he told reporters in Berlin.

The Greek Prime Minister George Papandreou said Europe’s leaders needed to demonstrate they can resolve the debt crisis to avoid a contagion enveloping Italy and Spain.

“It could be a make-or-break moment for where Europe is going,” Mr. Papandreou said during an interview Tuesday, Bloomberg News reported.

Article source: http://feeds.nytimes.com/click.phdo?i=23b8a6cb89e01a7a154dc360c8a8ce93

S.&P. Downgrades Japan’s Outlook to Negative

HONG KONG — Nearly seven weeks after a powerful earthquake and tsunami hit northeastern Japan, the Japanese economy is still struggling to return to normal, and the country faces reconstruction costs that could severely strain its already stretched public finances.

The latest warning about the country’s fiscal health came on Wednesday, when Standard Poor’s lowered its outlook on Japan to negative, saying that the massive costs of rebuilding the devastated areas — which it estimated as high as ¥50 trillion, or $612.6 billion — could lead to a lower credit rating unless the government steps up its efforts to keep high government debt levels from rising much further.

The ratings agency kept its long-term rating for the Japanese economy, which it had downgraded in January, unchanged at AA-. But its now negative outlook highlighted the huge uncertainty that overshadows the country’s recovery from the March 11 disaster.

Nearly 26,000 people are missing or have died, tens of thousands of buildings were flattened and hundreds of thousands of cars destroyed. The flow of components and spare parts needed by manufacturers was thrown into disarray, and damage to the Fukushima Daiichi nuclear power station severely disrupted power supplies in key parts of the country.

Expected power shortfalls during the hot summer months could set back businesses in many parts of the country for months to come, analysts say.

Statements from Sharp, the electronics manufacturer, and All Nippon Airways, one of the country’s biggest airlines, on Wednesday shed light on the pain and uncertainties felt by many Japanese companies.

“It is extremely difficult at this time to reasonably estimate the impact of the earthquake on our financial results, which will be broad across our entire business activities from production to sales,” Sharp said in a statement. ANA said a sharp fall in air traffic after the quake had cost it ¥19 billion in revenue.

Earlier this week, Canon lowered its annual profit and sales forecasts, while Toyota has said it will take months until production at its plants can return to pre-quake levels.

Consumer spending, meanwhile, also has been badly hurt by the disaster. The Japanese government reported Wednesday that retail sales in March slumped 8.5 percent from the same period a year earlier, the biggest drop in 13 years, and a larger fall than analysts had expected.

A large rebound in consumption “looks unlikely in the near future,” Masamichi Adachi, an economist at JPMorgan Chase in Tokyo, commented in a research note. “The concern on the development at the Fukushima Daiichi nuclear plant is expected to persist for while, and consumers appear to be reluctant to spend.”

All of this has bludgeoned an economy that was already burdened by feeble growth, deflation, an aging population and high government debt levels before the earthquake struck on March 11.

Standard Poor’s estimated Wednesday that Japan’s reconstruction costs could be in the range of ¥20 trillion and ¥50 trillion.

The extent of environmental contamination in northeastern Japan remains unknown, and although supply chains are expected to normalize, some manufacturers could decide to move a greater share of production offshore

In addition, the massive disruption to manufacturers’ supply chains could undermine the dominant positions that many companies have in their sectors, said Takahira Ogawa, ratings analyst at Standard Poor’s, in a conference call.

Although the disasters are unlikely to hurt the economy’s long-term growth potential, that potential is in any case muted. Growth in the medium term is unlikely to rise much above an annual rate of 1 percent, S.P. said.

The ratings agency forecast that net general government debt could reach 145 percent of gross domestic product in the business year that ends in March 2014 — up from its previous projection of 137 percent.

The vast majority of Japanese government debt is held by domestic investors, and despite its other problems, Japan continues to run a current account surplus. Analysts say that this means any debt rating downgrade would be unlikely to badly undermine the Japanese debt markets or sharply raise government borrowing costs.

Indeed, Japanese government bond yields were little changed after the ratings agency’s move, while the Nikkei 225 stock index ended the day 1.4 percent higher.

Still, government officials on Wednesday rushed to reassure investors about the state of Japan’s public finances.

“The government at present is doing its utmost for disaster relief and reconstruction. It is important to pursue fiscal reform at the same time,” Finance Minister Yoshihiko Noda said, according to Reuters. “Fiscal reform is something we cannot avoid.”

However, Japan’s options for stimulating the economy without raising more debt in the long run are limited.

The central bank cannot lower interest rates, which are already near zero, meaning that the support measures it has announced in the wake of the earthquake have focused on facilitating lending and pouring liquidity into the financial markets. Economists say that at the Bank of Japan’s policy meeting on Thursday the central bank may further beef up a program to purchase government and corporate bonds.

Parliament, meanwhile, is expected to pass a supplementary budget of ¥4 trillion. Debate on a much larger secondary budget covering full-scale rebuilding has started, said Mr. Adachi, the JPMorgan economist, but there is as yet little clarity about how big this will be and how it will be financed.

Meanwhile, the downgraded outlook for Japan again spotlighted the huge debt levels at many of the world’s developed economies. Government debt in Japan, the United States and several European countries — notably Greece, Portugal, Spain and Ireland — have soared in recent years, intensifying the pressure on policy makers to introduce painful fiscal reforms.

Last week, S.P. issued a similar warning to the United States, saying that the country’s AAA rating was under threat because of budget deficits and the lack of clarity about how the government intends to reduce the debt burden.

Article source: http://www.nytimes.com/2011/04/28/business/global/28yen.html?partner=rss&emc=rss

Bailout for Portugal Will Put Politicians in a Vise

LISBON — To secure a bailout worth about €80 billion, Portugal may have to agree to international creditors’ demands that it impose tougher austerity measures than those its own lawmakers rejected less than a month ago.

This paradoxical situation is fueling divisions in Lisbon before a June 5 general election that was itself called because of a parliamentary standoff over how to clean up the public finances. In fact, Portuguese politicians may be more concerned about not getting blamed by voters for seeking outside help than about negotiating favorable terms for that rescue, valued at $116 billion.

“For the first time in three generations, the Portuguese are being forced to accept that they may find themselves worse off than their parents, and that is a huge shock for which nobody wants to take the blame,” said Miguel Morgado, a political science professor at the Catholic University of Portugal.

But officials from the European Union, the International Monetary Fund and the European Central Bank — expected to arrive Tuesday in Lisbon — will want to ensure that bailout conditions remain binding whatever the outcome of the June 5 vote. With that in mind, Olli Rehn, the European commissioner in charge of economic and monetary affairs, said last week that “a cross-party agreement” needed to be negotiated by mid-May, led by the caretaker Socialist government of Prime Minister José Sócrates but also involving opposition parties.

So far, the Portuguese response has been discordant.

Fernando Teixeira dos Santos, Portugal’s finance minister, said that “it is not for the government to negotiate with the opposition.”

Pedro Passos Coelho, the head of the main opposition Social Democratic Party, who will challenge Mr. Sócrates in June and is leading in opinion polls, backed the government’s call for a rescue, but called for any bailout package to be “minimal.”

International creditors will also be met in Lisbon with deep suspicion that a bailout, while necessary to meet Portugal’s immediate refinancing obligations, might not guarantee longer-term financial security. That fear has been fueled by the examples of Greece and Ireland, whose financing situation remains precarious even after securing last year €110 billion and €85 billion, respectively, in assistance.

“The chances of Greece not having to restructure its debt are not much higher than a year ago and that is something that our negotiators must keep in mind when discussing what interest rates are appropriate,” said António Nogueira Leite, a senior economic adviser to the Social Democratic Party.

While Portugal will be negotiating its rescue from a position of weakness, its European partners should also realize that “if the burden is not shared fairly in this third bailout, there is a genuine risk that resentment will poison the whole European project,” said Rui Ramos, a political analyst and professor of political history at the University of Lisbon.

“Germany and others must recognize that the problems of Southern European countries like Portugal are also due to excessive lending by their own banks,” he added.

When Portugal last called upon international assistance, in 1983, it was able to couple I.M.F. aid with a currency devaluation that resulted in an export-led recovery. That is no longer an option since the country adopted the euro.

In fact, the bailout negotiations come as Portugal faces another recession, with its central bank forecasting that the economy will contract 1.3 percent this year. Its public debt is expected to rise to almost 100 percent of gross domestic product this year from 60 percent five years ago.

Furthermore, Portugal recently revised its 2010 budget deficit — to 8.6 percent of G.D.P., rather than 7.3 percent — under stricter guidelines from Brussels about accounting at state-owned companies.

Some economists say they worry that Portugal’s difficulties will be harder to address than those of Greece or Ireland, where specific errors precipitated the crisis. Greece admitted to misstating public accounts while the Irish government guaranteed the debts of the country’s banks, which took huge write-downs on real estate loans.

Article source: http://www.nytimes.com/2011/04/11/business/global/11iht-bailout11.html?partner=rss&emc=rss