September 23, 2021

Greece and Lenders Near Deal on New Austerity Measures

ATHENS — After a week of tense negotiations, Greece and its foreign lenders were close to a deal on Monday on a new round of austerity measures that must be taken by the country to unlock further crucial rescue aid, with a politically contentious streamlining of the nation’s civil service looking likely.

Greece’s international creditors – the European Commission, European Central Bank and International Monetary Fund – said Monday that they had concluded their latest review of the country’s economic program and reached an agreement that was expected to be approved by euro zone finance ministers meeting in Brussels later in the day.

The lenders, known collectively as the troika, cited “important progress,” referring specifically to an overhaul of the tax system and a recapitalization of Greek banks that is “nearly complete.” But they noted that policy implementation was “behind in some areas.”

It remained unclear early Monday whether the finance ministers would approve the next batch of rescue aid of 8.1 billion euros, or $10.5 billion. Both the Greek finance minister, Yannis Stournaras, and the I.M.F.’s chief envoy to Athens, Poul Thomsen, said late on Sunday that progress had been made and that there was hope for a final deal before Monday’s ministers’ meeting.

The head of the euro zone finance ministers’ group, Jeroen Dijsselbloem of the Netherlands, told reporters in Brussels on Monday that the next loan to Greece might be disbursed in installments. “Whether that is necessary and helpful we will see on the basis of what the troika will present to us,” he said.

The negotiations had faltered last week on Greek pledges for cuts to civil service, a sensitive measure that nearly brought down the government last month after Prime Minister Antonis Samaras unilaterally shut down the state broadcaster, ERT. The move, which put some 2,700 employees out of work, prompted the junior partner in the three-way coalition of political parties to quit.

After much horse-trading, Greece and its creditors agreed on a procedure to put 12,500 civil servants into a so-called mobility program, where staff would receive a reduced wage for several months before being moved to another public sector post or dismissed, according to a government official who asked not to be named because of the confidential nature of the talks. Athens has also pledged to lay off a total of 15,000 civil servants by the end of next year.

Reports that thousands of employees of the capital’s municipal police force would be included in the plan prompted local workers to walk off the job on Monday. On Sunday night, the mayor of Athens, Giorgos Kaminis, was slightly injured after being assaulted by protesting workers while leaving a meeting on the cutbacks with visiting mayors from other Greek cities.

Although the negotiations on the civil service overhaul attracted the most media attention and speculation, the talks between government and troika officials focused on a range of issues. These included a budget gap of around 2 billion euros for 2013 and 2014, which officials have reportedly found ways to plug, chiefly through the control of spending in the health sector. Government officials said they would submit to Parliament a “multi-bill” with all the agreed-to changes as soon as the euro zone finance ministers approve them.

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Economix Blog: Sarkozy and Merkel’s Delicate Dance

President Nicolas Sarkozy of France greeting Chancellor Angela Merkel of Germany in Paris on Monday.Ian Langsdon/European Pressphoto AgencyPresident Nicolas Sarkozy of France greeting Chancellor Angela Merkel of Germany on Monday.

For weeks, attitudes toward Europe’s debt crisis have gone through a recurring cycle: markets flail, spurring leaders to gather and confer; grim-faced, they issue statements of guarded optimism and determination. Rinse. Repeat.

Below is a look back at statements from President Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany over the last two months:

Oct. 7: As Germany and France try to forge a comprehensive response to Europe’s debt crisis, the two nations clash on a fundamental question. France wants to draw on the European bailout fund, the European Financial Stability Facility, to rebuild bank capital. German leaders think national governments should take the lead.


“Only if a country can’t do it on its own should the E.F.S.F. be used,” Mrs. Merkel said.

Oct. 9: Mrs. Merkel and Mr. Sarkozy met in Berlin, and said they reached a general agreement on a plan.


“It’s not the moment to go into details of all questions,” said Mr. Sarkozy.


“We are determined to do everything necessary to ensure the recapitalization of Europe’s banks,” Mrs. Merkel said.

Oct. 19: Mr. Sarkozy and Mrs. Merkel met in Frankfurt, ahead of a European summit meeting, but emphasized that a comprehensive deal was not imminent.


In a speech, Mrs. Merkel noted that the meeting would be just “one point” in “a long journey.”


“In Germany, the coalition is divided on this issue. It is not just Angela Merkel who we need to convince,” Mr. Sarkozy told French lawmakers.

Oct. 23: As concerns over high debt spread to Italy, Mr. Sarkozy and Mrs. Merkel met with the leaders of the European Union in Brussels. Tensions ran high, but little new progress was made.


Mr. Sarkozy reacted sharply to criticism from Prime Minister David Cameron of Britain, which does not use the euro. “You say you hate the euro, and now you want to interfere in our meetings,” Mr. Sarkozy said.


Mrs. Merkel reiterated her call for a comprehensive solution. “Trust will not be achieved alone through a high firewall,” she said. “Trust will not happen from a new package for Greece. Trust will only happen when everyone does their homework.”

Oct. 27: In negotiations lasting into the early morning hours, Mrs. Merkel and Mr. Sarkozy secured an agreement from banks holding Greek debt to accept a 50 percent loss on its face value.


“If there was no accord yesterday, it’s not just Europe that would face catastrophe, but the whole world,” Mr. Sarkozy said.


Mrs. Merkel said, “I believe we were able to live up to expectations, that we did the right thing for the euro zone, and this brings us one step farther along the road to a good and sensible solution.”

Nov. 10: Fears of contagion continued to grow, as Italy’s cost of borrowing continues to rise rapidly.


Mr. Sarkozy suggested that a two-tiered model for Europe was likely in the future. “There are 27 of us,” Mr. Sarkozy told French students in Strasbourg. “Clearly, down the line, we will have to include the Balkans. There will be 32, 33, 34 of us. No one thinks that federalism, total integration, will be possible with 33, 34 or 35 states,” he said.


Mrs. Merkel renewed her call for fiscal discipline and central oversight of euro member states. “It is time for a breakthrough to a new Europe,” she said. “A community that says, regardless of what happens in the rest of the world, that it can never again change its ground rules, that community simply can’t survive.”

Nov. 18: Bond yields spiked in France and Spain, raising fears that the debt crisis could freeze credit markets throughout Europe.


Mrs. Merkel’s government again said it would oppose the creation of euro zone bonds or an expanded role for the European Central Bank. “I’m convinced that none of these approaches, if applied right now, would bring about a solution of this crisis,” Bloomberg News quoted Mrs. Merkel as saying in a speech.

Nov. 24: Meeting in Strasbourg, France, with Mr. Sarkozy and Prime Minister Mario Monti of Italy, Mrs. Merkel once again rejected calls for joint euro zone bonds or more activity by the E.C.B.


“I am trying to understand Germany’s red lines,” Mr. Sarkozy said.


“Nothing has changed in my position,” said Mrs. Merkel.

Dec. 1: In an address to French citizens, Mr. Sarkozy warned that Europe could be “swept away” by the euro crisis if it does not change.


“If Europe does not change quickly enough, global history will be written without Europe,” he said. “Europe needs more solidarity and that means more discipline.”

Dec. 2: In a speech to Germany’s Parliament, Mrs. Merkel called for changing European treaties to address the underlying causes of the debt crisis.


“The future of the euro is inseparable from European unity,” she said. “The journey before us is long and will be anything but easy. But I am convinced that we are on the right path. It is the right path to take to reach our common goal: a strong Germany in a strong European Union that will benefit the people in Germany, in Europe.”

Dec. 5: Meeting in Paris, the two leaders issued a joint call for Europe’s governing treaties to be amended to bring the 17 countries of the euro zone into greater fiscal harmony.


““We want to make sure that the imbalances that led to the situation in the euro zone today cannot happen again,” Mr. Sarkozy said.


“We are absolutely determined to keep the euro as a stable currency and as an important contributor to European stability,” Ms. Merkel said.

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European Banks Face Deadline to Raise Capital Levels

With European leaders under pressure to produce a major package of measures to tackle the debt crisis within weeks, banking supervisors are preparing a proposal that will place substantial new demands on European banks.

Europe’s leaders were given a boost Thursday when Slovakia’s Parliament reversed course and ratified a plan to bolster the euro zone’s rescue fund, becoming the 17th and final country to do so.

But, when European leaders meet in Brussels on Oct. 23, they will confront a series of complex decisions, including how much to increase the contribution of private investors to a Greek bailout. One leading banker confirmed Thursday that those discussions were already under way.

On Wednesday, the president of the European Commission, José Manuel Barroso, called for a comprehensive program of banking recapitalization and, the day before, the French foreign minister, Alain Juppé, said that French banks would be asked to build up capital buffers equivalent to 9 percent of their assets.

The European Banking Authority, which coordinates the work of supervisors in Europe, is reviewing the results of stress tests conducted in July.

Unlike that exercise, the new review takes into account the current market value of Greek and other sovereign debt, according to European officials who spoke on condition of anonymity because the tests are confidential.

In this case, the examination assumes relatively normal conditions rather than distressed ones as would obtain during a big drop in economic growth. But rapid recapitalization is likely to be required.

“A three- to six-month deadline is being considered,” one E.U. official said, adding that no decision had been made. One option is a two-stage process under which banks would be required to move up their recapitalization proposals, perhaps within three months, and then complete them three months later.

Struggling banks would be asked to raise capital themselves and then seek aid from their governments before European funds would be made available.

New, higher, capital buffers would be temporary to help restore confidence — and to insulate the sector against continued turbulence, the official said.

But calls for higher capital requirements have received a cool reception from the banking community, with some executives suggesting that financial institutions would rather sell assets than raise more capital.

The chief executive of Deutsche Bank, Josef Ackermann, said that he doubted requiring lenders to raise their capital levels would resolve the sovereign debt crisis.

“The injection of capital would not address the actual problem,” Mr. Ackermann said, according to a Bloomberg News report citing a speech given at a conference in Berlin. “It is not the capital funding of banks that is the problem, but rather the fact that government bonds have lost their status as risk-free assets.”

European officials anticipated that the banks would be opposed to the measure, the European official said. “They may use different arguments, but I assume the message will change once they know the detail.”

The European Banking Authority, which is likely to put forward proposals before the Oct. 23 meeting of European leaders, has declined to comment on speculation that it will recommend a 9 percent capital buffer.

“In our role as a European agency we are there to give technical advice to the European institutions,” said Romain Sadet, a spokesman for the agency.

Meanwhile, talks are under way on revising a July 21 agreement on a second bailout for Greece, which called for write-downs, or haircuts, of 21 percent for banks and other creditors, amid speculation that bank write-downs of 50 percent to 60 percent are being promoted by some governments.

“I led the negotiations at the summit in Brussels and will be there again next week because there are efforts to reopen it,” said Mr. Ackermann, who also is chairman of the global bank lobbying group, the Institute of International Finance. “That would mean an increase from the 21 percent we voluntarily said we’d do as investors, and it wasn’t easy at all to convince the investors to take that loss.”

European officials sought to limit the scope of negotiations. Because market conditions have changed since July 21, when the agreement was struck, the private sector may have to increase its contributions to stick to the “spirit” of the agreement, the official said.

Another crucial issue to be confronted by European leaders this month is whether to increase the firepower of the euro zone’s €440 billion, or $606 billion, bailout fund by leveraging it as advocated by the United States.

European officials say they believe a model under which the fund would insure against losses on purchases of bonds in struggling countries is the most likely option. The European Central Bank opposes another plan that would have it buy the bonds with the fund insuring it against losses.

On Thursday, one E.U. official said there was a preference for avoiding highly complex programs that used some of the financial engineering blamed for causing the crisis in 2008, in favor of a “plain vanilla” version.

For Slovakia, the successful passage of the rescue fund was just the beginning of a new political drama after Prime Minister Iveta Radicova lost a vote of confidence Tuesday, cutting her term as prime minister in half and setting the stage for new elections in March 2012.

The opposition Smer party already held the most seats in Parliament and was leading in opinion polls. The party’s leader, Robert Fico, a leftist former prime minister, hopes that voters will be ready to return him to power.

Nicholas Kulish contributed reporting from Berlin.

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DealBook Column: I.M.F. Chief’s Change of Tune on Bank Capital

Christine Lagarde, the managing director of the International Monetary Fund, spoke in London last week.Simon Dawson/Bloomberg NewsChristine Lagarde, the managing director of the International Monetary Fund, spoke in London last week.

Over the weekend, Christine Lagarde, the managing director of the International Monetary Fund, was desperately trying to back-pedal. A report had surfaced citing an internal I.M.F. document estimating that Europe’s banks were woefully short of capital — by a whopping $273.2 billion.

“Misreporting,” Ms. Lagarde insisted, before awkwardly describing the number as “tentative.” Then she went even further, saying that the number “is not a stress test that the I.M.F. conducts nor is it the global capital need for European banking institutions.” She added, “We are currently in discussions with our European partners to assess the global methodology until we reach a tentative draft. It will be published before the end of September.”

While Ms. Lagarde acted as if she was surprised by the number — and tried to play it down — she shouldn’t be. And in truth, she wasn’t.

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Changing her tune seems to be a theme for Ms. Lagarde, which may explain her feigned sense of shock.

Ms. Lagarde sounded alarm bells last month about what she called the need for an “urgent recapitalization” of European banks, and was roundly criticized for it.

“Developments this summer have indicated we are in a dangerous new phase,” she said then. Her refreshingly honest remarks had been so honest — apparently, too honest — that some bankers blamed her for further undermining confidence in European banks.

Yes, Ms. Lagarde had broken the secret code of silence among Europe’s top bankers — a silence she herself had kept for far too long when she was a politician.

Just this summer, before being appointed to her post at the I.M.F. in the wake of Dominique Strauss-Kahn’s scandal-forced exit, Ms. Lagarde was trying to will the world into believing that the French banks, the ones she oversaw as France’s Minister of Economic Affairs, Finances and Industry, and the ones which are now in the headlines every day — BNP Paribas and Société Générale, among them — were sound.

Shares of those banks fell as much as 12 percent on Monday amid worries that Moody’s is about to downgrade them because of their exposure to the mounds of distressed Greek debt that they own.

In an interview even before the results of this summer’s stress tests of European banks, she told The Economist: “As far as my banks are concerned, the French banks, I am very confident about the results; and No. 2 and probably more importantly, from what I have seen of the criteria, and the kind of tests that are applied to the 91 banks in Europe, it’s a very tough standard that is applied. And I’m saying that because I have seen here and there some, you know, allegations, little hints, and, and, various comments, analysts saying ‘Oooh, not so sure about the tests.’ Well, let’s go down to the details, the tests are really, really hard.”

Remember: only eight European banks failed the test (none of them French), and the test did not — and this was truly surprising — measure the banks’ ability to manage through a Greek default. Unlike Ms. Lagarde, who gave up her efforts to soft-pedal the condition of her country’s banks once she stepped into her role at the I.M.F., Europe’s central bankers continue to defend the fictional stress test.

Even as late as last week, they somehow argued that “individual disclosures of sovereign exposures were an essential component of the exercise and a great enhancement in terms of transparency” despite disbelief in the markets.

An I.M.F. spokesman declined to comment on behalf of Ms. Lagarde.

We often blame United States politicians and regulators for not owning up to our economic problems until it is too late. But the Europeans have tried to keep up the fiction of their economic strength for much longer. That, despite the popularity of banker condemnation, was clearly the result of horrible policy decisions that have created a structural dilemma throughout the European Union.

While the United States was injecting capital in banks, guaranteeing debt and trying to increase capital requirements, European regulators were fighting behind the scenes to keep capital requirements low. Instead, European regulators, including Ms. Lagarde, jumped on the banker compensation bandwagon, which might have won her political points, but appears now to have also kept the public eye off the bigger issue: Europe’s banks were woefully undercapitalized and every regulator knew it.

I remember officials from the Federal Reserve and the Obama administration complaining privately more than a year ago, which we and other news organizations reported, that Europe’s regulators were preventing them from instituting higher capital requirements because the European banks could not afford them.

Back in February, Timothy Geithner, the Treasury secretary, said it aloud: “Europe is more willing to run a system with lower capital requirements than the U.S.”

Simon Johnson, a professor at the M.I.T. Sloan School of Management, wrote on his blog in May, in an impassioned piece against Ms. Lagarde’s nomination at the I.M.F., that “France worked long and hard to prevent increases in bank capital during the recently concluded Basel III negotiations. Bank capital is a buffer against losses; as long as this remains as low as the French government wants, there is no safe way for any euro zone country to restructure its debts. Low bank capital creates serious systemic financial risk for Europe and the world.” (Mr. Johnson also contributes to the Economix blog of The New York Times.)

Europe’s economic problems won’t be solved until the banks — and their regulators — accept that they need more capital and a solution is reached about the structure of the European Union. (It probably has to happen in that order.) The question, of course, is now that Ms. Lagarde has broken her code of silence, can she persuade the rest of her European counterparts to come clean too?

AN UPDATE: Two weeks ago, I wrote a somewhat controversial column raising questions about the lack of public charitable giving by Steven P. Jobs, the co-founder of Apple, including his decision in 1997 to close Apple’s philanthropic programs upon his return to the company. Last Thursday, Apple’s newly installed chief executive, Tim Cook, announced to the company’s employees that Apple would start a charitable giving program.

Mr. Cook said Apple would match all employee donations to nonprofit organizations up to $10,000 per employee in the United States. He said that he hoped to expand the program in the future to include Apple’s employees in other countries.

Correction: A previous version of this article misstated Ms. Lagarde’s title. She is managing director of the I.M.F., not its president.

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A.I.G. Posts Big Loss in Continuing Operations

A.I.G.’s Chartis unit also had $864 million in catastrophe losses related to the March 11 earthquake in Japan. The company, one of the top foreign insurers in Japan, had warned of substantial quake charges.

Shares of A.I.G., which have lost more than 30 percent of their value since late January, fell nearly 1.6 percent in after-hours trading, to $30.30. Earlier they had fallen 85 cents, or nearly 2.7 percent, to close at $30.79.

The loss from continuing operations was $1.18 billion, or $1.41 a share, compared with a profit of $2.09 billion, or $2.16 a share, in the period a year ago.

A.I.G., in a statement, focused on the net income figure attributable to A.I.G., which it said was $269 million, down from $1.8 billion in the year-earlier period.

The Fed charge totaled $3.3 billion and was related to the recapitalization deal that closed in January. That arrangement paid off the Fed and left the Treasury with a 92 percent stake in the company.

The Treasury is expected to start selling down that position this month. The price is unclear. A.I.G.’s shares have fallen since the recapitalization closed, and they are near the government’s $28.72 break-even point.

On an operating basis, A.I.G. said its Chartis property and casualty business increased net written premiums nearly 20 percent in the quarter, representing a pickup in its United States operations and the consolidation of Fuji Fire and Marine in Japan.

A.I.G.’s domestic life insurer, SunAmerica, reported flat operating income, though its crucial annuity business continued to rebound after difficulties during the financial crisis, when the company took a $182 billion bailout.

During the quarter, A.I.G. closed the sale of AIG Star and AIG Edison businesses to Prudential Financial. The proceeds led to a $1.65 billion profit from discontinued operations in the period.

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