November 18, 2024

You are here: Home / Archives for solvency

Europe Looks to I.M.F. Again for Help in Euro Crisis

December 3, 2011 by Leave a Comment

The fund may be asked to assist further as leaders of the 17 European Union nations that use the euro meet to prepare for a summit meeting on Thursday and Friday. Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France are scheduled to hold talks in Paris on Monday, and, at the request of President Obama, Treasury Secretary Timothy F. Geithner is meeting with European leaders later in the week.

European Union leaders have already turned to the I.M.F. to assist smaller nations like Ireland, Greece and Portugal. In all three, the fund is providing about a third of the necessary loans and its expertise in guiding countries with solvency problems back to recovery. Last month, at the Group of 20 summit meeting in Cannes, the fund was also asked to monitor the economic, fiscal and structural reforms in huge and shaky Italy — not as a lender, at least not yet, but rather to lend its skills and credibility to the efforts of the new prime minister, Mario Monti, a technocrat.

The I.M.F. lacks the resources to create the much-discussed “firewall” to keep interest rates at sustainable levels for troubled euro zone economies. Italy and Spain together have total debts of more than $3.3 trillion, with Italy about to roll over $276 billion in debt over in the next six months and Spain about $150 billion. Just those two rollovers would wipe out the amount the fund has available to lend worldwide, about $400 billion.

European policy makers are looking to the fund to help ensure budgetary restraint while perhaps also serving as a vehicle for financing. The I.M.F. could raise or contribute its own money, or channel money from countries with surpluses, like China.

A senior Treasury official said that the I.M.F. might provide “additional, spare-tire capacity” by contributing some financing, but that Europe would primarily use its own resources to wrestle down interest rates and keep countries like Spain solvent.

“Europe is rich enough. It is not in net deficit, when you balance out all of the trade deficits and surpluses,” says Raghuram Rajan, a professor at the University of Chicago and former chief economist at the I.M.F. “What Europe needs right now is money that is willing to absorb losses — and the I.M.F. is not going to provide the money that absorbs losses.”

Analysts say that Europe will need to provide the bulk of that money itself: through the European Central Bank; the European bailout fund, called the European Financial Stability Facility; or transfers from fiscally sound countries like Germany.

Consideration of how to use I.M.F. resources and expertise started in earnest at the Cannes summit meeting in early November. Finance ministers were ordered to develop plans for “deploying a range of various options” for the fund to help bring down borrowing costs.

Some of the options appear to be more likely than others. One is a plan to have euro zone central banks lend money to the I.M.F. The fund could then provide lines of credit to countries struggling to finance their debts, and could participate in fiscal monitoring.

That plan is gaining support in Europe. “It is an easy solution because bilateral loans are coming from the central banks,” said Herman Van Rompuy, the European Union president, on Thursday, according to Bloomberg News. “They haven’t to ask for money from the taxpayer.”

A second plan under discussion would have the I.M.F. create new special drawing rights to grant to member countries. Countries hold the special drawing rights — an i.o.u. with a value based on a basket of major currencies — as reserves and can tap them in case of an emergency. The measure would be marginal and supplementary, given that the special drawing rights would be apportioned to members according to their contributions to the I.M.F. But by assuring investors that countries have the capacity to repay all loans, such additional special drawing rights could push down borrowing rates.

American agreement is necessary to increase I.M.F. funds, and in private conversations Treasury officials have ruled out that measure for now. Further, Mr. Obama is considered highly unlikely to ask Congress for extra money to bail out Europe, especially in an election year.

All the options under consideration are founded on the fund’s reputation for helping countries, albeit sometimes painfully, return to fiscal health and manage short-term liquidity crises.

The fund “brings money to the table,” says Edwin M. Truman, a former Treasury official and now at the Peter G. Peterson Institute for International Economics. “But it also brings credibility. The fund has been in the business of creating lending programs for decades. It has a reputation for being tough and unbiased.”

Some watchers wonder why the I.M.F. should be involved in aiding such rich countries at all.

“This is a European problem, and there is no strong rationale for I.M.F. lending,” said Simon Johnson, a former I.M.F. chief economist who also contributes to a New York Times blog, Economix. “Europe has lots of money and no balance of payments problem. The euro is a reserve currency. The Germans can do a lot themselves, and the Germans and the E.C.B. can do everything the I.M.F. can do.”

“There’s no justification under the I.M.F.’s articles for the I.M.F. to get involved in Italy,” said Andrew Hilton, director of the Center for the Study of Financial Innovation, in London, and a longtime fund watcher. He added that less-wealthy fund members, like Brazil, Argentina, Russia and India, would have legitimate complaints about bailing out more wealthy countries.

Still, further I.M.F. involvement seems very likely. In recent days, euro zone leaders have indicated support for a bolstered I.M.F. role in resolving the sovereign-debt crisis.

Luc Frieden, Luxembourg’s finance minister, said the European bailout fund and the central bank did not have the capacity to ease the crisis alone. “We have to do so together with the I.M.F. and with the E.C.B., within the framework of its independence,” he told reporters at a meeting of euro zone finance ministers.

Annie Lowrey reported from Washington, and Steven Erlanger from Paris.

Article source: http://feeds.nytimes.com/click.phdo?i=fb1ba8fc8da83dce1bd1bce00b7d0b4a

Filed Under: Economy News Tagged With: , ,

News Analysis: Europe Seems to Agree on Recapitalizing Banks — but How?

October 7, 2011 by Leave a Comment

That seems to be the view European leaders are finally coming around to, but whether the politicians can make it happen in a convincing manner is another question — especially given that Germany and France are already divided.

Analysts are skeptical that even the richest countries will be able to agree on guidelines for a broad, coordinated effort, one impressive enough to remove all doubts about solvency in the event of a default by Greece or another sovereign debtor.

In the first signs of a split, 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,” Chancellor Angela Merkel said Friday.

But the sums required to armor banks against losses on government bonds — up to €300 billion, or about $400 billion, by some estimates — could jeopardize France’s top-notch credit rating. That would be a big political setback for Mr. Sarkozy before the elections next May.

These kinds of arguments are just what economists fear. A parochial approach will lead countries to try to seek advantage for their own institutions, as has often been the pattern in the past, critics say. In addition, most large European banks have extensive operations and therefore require pan-European oversight, they argue.

“You need to have a European approach, which is tremendously difficult politically,” said Nicolas Véron, a senior fellow at Bruegel, a research organization in Brussels. “If it doesn’t happen, I am not very optimistic about the ability of European authorities to keep the crisis under control.”

Indeed, when Fitch Ratings cut Spain’s credit rating Friday by two levels, to AA- from AA+, it cited the “intensification” of the debt crisis along with slower growth and shaky regional finances, Bloomberg News reported. Fitch cited similar reasons for also downgrading Italy one level to A+, while maintaining Portugal at BBB-, saying it would complete a review of that ranking in the fourth quarter.

Meanwhile, grave problems at the French-Belgian bank Dexia, which is on the verge of its second taxpayer-financed bailout in three years, have dashed any illusions about the health of European banks. It was only in July that Dexia breezed through an official stress test that was supposed to expose the vulnerable banks.

It has become obvious that restoring the soundness of European banks is fundamental to resolving the debt crisis, and removing a serious threat to the global economy. Christine Lagarde, managing director of the International Monetary Fund, has been urging a wholesale recapitalization for several months. In the United States, President Barack Obama warned Thursday that “the problems Europe is having right now could have a very real effect on our economy.”

But no one has provided even rough details of how to compel banks to raise money on open markets if they can, and to provide government funds if they can’t.

“Our experience is that if no one is talking about the details of something, it is because they do not exist,” Carl Weinberg, chief economist of High Frequency Economics, wrote in a note to clients Friday. “Let us just agree that there is no plan.”

Mrs. Merkel and Mr. Sarkozy are expected to discuss the issue when they meet in Berlin on Sunday, along with their finance ministers. The European Commission, the bloc’s executive, expects to produce its proposal for a coordinated recapitalization within a week.

Even if Dexia proves to be an isolated case, it is clear that investor confidence in the solvency of European banks is at a low ebb. European banks are reluctant to lend to each other, and U.S. lenders are reluctant to lend to European institutions. Banks have been unable to sell bonds to raise money.

Article source: http://www.nytimes.com/2011/10/08/business/global/europe-seems-to-agree-on-recapitalizing-banks-but-how.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Austerity in Italy May Not End Its Jobs-for-Votes System

September 15, 2011 by Leave a Comment

The auxiliaries, who earn a respectable 800 euros a month, or $1,100, to work 20 hours a week, are among about 64 Comitini residents employed by the town, the product of an entrenched jobs-for-votes system pervasive in Italian politics at all levels.

“Jobs like these have kept this city alive,” said Caterina Valenti, 41, an auxiliary in a neat blue uniform as she sat recently with two colleagues, all on duty, drinking coffee in the town’s bar on a hot afternoon. “You see, here we are at the bar, we support the economy this way.”

But what may be saving Comitini’s economy is precisely what is strangling Italy’s and other ailing economies throughout Europe. Public spending has driven up the public debt to 120 percent of gross domestic product, the highest percentage in the euro zone after Greece’s. In recent weeks, concerns about Italy’s solvency and the shaky finances of other deeply indebted European nations have sapped market confidence and spread fears about the stability of the euro itself.

On Wednesday, Italy’s lower house of Parliament gave final passage to a $74 billion austerity package aimed at eliminating Italy’s budget deficit by 2013. But analysts doubt that the measures — primarily tax increases but also cuts in aid to local governments, a higher retirement age for women in the private sector and a change in Italy’s labor law to make it easier for companies to hire and fire — will achieve the advertised savings.

Many of the cuts in financing for local governments may yet be bargained away in annual budget negotiations to be held this year, and nowhere in the legislation are there any measures to reduce the salaries or the number of public sector employees, more than 80 percent of whom have lifetime tenure. But they would lose some retirement benefits, and a hiring freeze is already in place.

Financial markets have remained edgy, with yields on Italian bonds rising to a record high of 5.7 percent at auction this week, before rallying a bit after the government passed a confidence vote on the austerity measures. Investors remain unconvinced, though, fearing a possible downgrading of Italy’s credit rating, which could further drag down the euro, and there is already talk of the government introducing additional austerity measures.

“I have great doubts about whether they’re sufficient,” Stefano Micossi, an economist and the director of Assonime, an Italian business research group, said of the austerity package. “The mechanisms that led to such spending haven’t changed.”

The sticking point, he added, was the public sector. “The big problem is the public administration,” he said. “It’s inefficient and corrupt. But corruption is born in politics and politicians don’t want to change.”

Italy is contending with a public debt, built up under a succession of Christian Democratic governments, that helped the country emerge from dire poverty after World War II to become Europe’s third-largest industrial economy.

Especially in the poorer Italian south, the Christian Democrats put millions of people on the state payroll in a jobs-for-votes system that many say has persisted under Prime Minister Silvio Berlusconi. The quid pro quo worked so long as the economy was expanding, but now is seen as one of the major threats to Italy’s solvency.

In 2009, the most recent year for which data is available, an estimated 3.5 million Italians were on the state payroll out of a work force of 23 million, according to the Ministry for the Public Administration and Innovation. On Mr. Berlusconi’s watch, government expenditures — including the cost of public administration and defense — rose to more than $1 trillion in 2010 from $753 billion in 2000.

Gaia Pianigiani contributed reporting from Rome.

Article source: http://www.nytimes.com/2011/09/15/world/europe/italy-austerity-plan.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,