May 26, 2017

Euro Zone Economy Grew 0.3% in 2nd Quarter, Ending Recession

PARIS — Europe broke out of recession in the second quarter of the year, official data showed Wednesday, amid stronger domestic demand in France and Germany, ending a six-quarter downturn that has sapped confidence and thrown millions of people out of work.

The gross domestic product of the 17-nation euro zone grew by 0.3 percent in the April-June period from the previous three months, when the economy contracted by 0.3 percent, according to a report from Eurostat, the statistical agency of the European Union. That was slightly better than the 0.2 percent growth economists had been expecting.

On an annualized basis, the euro zone grew by about 1.2 percent in the second quarter, short of the 1.7 percent second-quarter showing by the United States and 2.6 percent in Japan, but nonetheless a relief to the Continent, which has weathered an unemployment rate that has risen to 12.1 percent and a sovereign debt crisis that raised existential questions about the euro.

The economy of the European Union as a whole, which consists of 28 nations, also grew by 0.3 percent in the second quarter.

Germany grew by 0.7 percent, after stagnating in the first quarter. The gains were led by demand from households and government, the Federal Statistical Office reported from Wiesbaden, while exports and investment also rose. The news bolsters Chancellor Angela Merkel as her coalition government prepares for September elections.

France, which had declined for the two previous quarters, posted 0.5 percent quarterly growth, as household spending grew and companies increased exports of goods and services, though investment declined slightly. Pierre Moscovici, the French finance minister, noted that it was the best showing since the first quarter of 2011, before President François Hollande took office, and hailed the result as justifying the government’s economic policies.

The fact that households in Germany and France helped to drive the rebound “suggests that the recent period of relative calmness in the euro zone is encouraging core consumers to spend money and might raise hopes of a narrowing of the economic imbalances within the currency union,” Jonathan Loynes, an economist in London with Capital Economics, wrote in a research note.

Still, Mr. Loynes wrote, the weaker European economies, particularly those hurt by the sovereign debt crisis, “remain a very long way from the rates of expansion required to address their deep-seated problems of mass unemployment and cripplingly high debt.”

“The recession may be over,” he added, “but the debt crisis is decidedly not.”

Article source: http://www.nytimes.com/2013/08/15/business/global/euro-zone-economy-grew-0-3-in-2nd-quarter-ending-recession.html?partner=rss&emc=rss

Strategies: Dow Touches 15,000 but the Economy Lags

Yet in the financial markets, it’s a much happier world. An epic rally in stocks has been roaring ahead, with the Dow Jones industrial average on Friday briefly surpassing 15,000 for the first time.

Thanks to the intervention of the Federal Reserve, the bond market remains improbably strong, too. The benchmark 10-year Treasury rate fell as low as 1.612 percent last week, driving prices, which move in the opposite direction, to stratospheric levels. That helped Apple sell $17 billion of bonds at yields once reserved for the sovereign debt of only the safest governments.

In short, it’s been a giddy time to be an investor. But while the financial markets are soaring, the real economy appears to be mired in an endless slog. That discrepancy raises a troubling question: How long can financial portfolios continue to swell if wages, employment and corporate revenue remain constrained?

Unfortunately, there is no clear answer.

“The beauty of economics is that we are still arguing about the causes of the start and the end of the Great Depression,” said James W. Paulsen, the chief investment strategist at Wells Capital Management in Minneapolis. “We’ll be debating these questions for the rest of our lives.”

Economists and market strategists have plenty of opinions, however, and Mr. Paulsen, who takes a glass-half-full perspective on the current situation, is no exception.

He says the stock market rally can continue so long as the economy keeps growing at what he prefers to call a “modest” pace, rather than a disappointing one. Despite evidence to the contrary — most crucially, stubbornly high unemployment — he maintains that the recovery is actually quite good under the circumstances. And, he said, it’s robust enough for American corporations to churn out solid profits that will bolster stock returns.

That provides no comfort for people who are out of work or earning inadequate wages, he said, but it may reassure investors and be useful for public policy.

Why? Mr. Paulsen has been arguing for years that the annual rate of economic growth is likely to remain in the low single digits because of a long-term demographic shift: the aging of the American population. The working-age population has been expanding less rapidly, at an annualized rate of 1.1 percent from 1986 to 2012, down from 1.7 percent from 1960 to 1985.

Mr. Paulsen favors liberalizing immigration rules, which would reverse this trend and spur more robust growth, he said. Until that happens, he said, “it’s possible that 4 percent annual growth is all we are going to get, and we should be happy with it.”

In the first quarter of this year, the annualized G.D.P. growth rate was only 2.5 percent, he points out, but it would have been 4 percent if the effects of government budget cuts had been excluded. Government austerity is a drag on the economy now, he said, but is likely to become less severe at some point, when a longer-term solution replaces the draconian budget sequestration.

Whatever the reason for less-than-stellar economic growth, American companies have been reaping handsome profits. And corporate America’s ability to preserve its profit margins has been a linchpin of the market rally, said David J. Kostin, the chief United States equity strategist at Goldman Sachs.

An important metric, recurring profit margin, has plateaued near 9 percent, according to his calculations, and as long as it continues at that level, it should be enough to propel the market upward. Last week was the heart of earnings season for American companies. More than 80 percent of the companies in the S. P. 500 have reported results for the first quarter and, by and large, they fared well, he said.

“The stock market is trading at fair value today, and I think it can continue to climb higher in line with earnings growth,” he said.

Goldman projects that the American economy will grow at a rate of 2 percent this year, he said. In the quarter, sales reported so far at S. P. 500 companies — which include revenue from faster-growing markets like China’s — were virtually flat, according to Thomson Reuters I/B/E/S. But profits grew 5.7 percent. “We aren’t seeing an extraordinary level of economic growth,” he said, “so companies need to take other measures to enhance profits.”

ONE thing that companies are doing is “being very careful about costs and about hiring,” he said, which helps explain the anemic labor market. And by borrowing at low rates, businesses can use the money for productive purposes or to engage in financial engineering.

They can buy back shares — thus increasing earnings per share — or increase dividends or both, which is what Apple plans to do with its borrowed billions. (Apple is keeping a cash hoard of more than $100 billion overseas, at least partly to avoid incurring a tax liability in the United States.)

Low interest rates will be with us a good while longer, Fed policy makers reiterated last week. They said they’d keep rates low as long as inflation was subdued and unemployment stayed high. In fact, they suggested that they might even add stimulus — increasing their $85 billion a month in bond purchases — if economic conditions worsen.

“For the stock market the Federal Reserve is the big wild card,” said Ed Clissold, United States market strategist at Ned Davis Research in Venice, Fla. “As long as the Fed and the other central banks keep pumping liquidity into the economy, our base case is that the cyclical bull market in stocks can continue.”

But Mr. Clissold said the lack of meaningful sales growth for S. P. 500 companies concerned him. Weak sales could presage a drop in profit margins, he said. And if profit margins decline sharply — by about 10 percent or so — history suggests that it’s time to say goodbye to the bull market. And that’s the least of it.

A sharp drop in sales and profit margins might also be an early indicator of an outright recession. That would bring untold pain to many people, not just stock investors.

For now, though, while he is scrutinizing the numbers closely, they appear to be benign.

It may not be a great economy, but the financial markets are partying on.

Article source: http://www.nytimes.com/2013/05/05/your-money/dow-touches-15000-but-the-economy-lags.html?partner=rss&emc=rss

Resistance in Cyprus Grows to Europe’s Bailout Plan

President Nicos Anastasiades was trying to compel policy makers in Brussels to soften demands for a tax to be assessed on Cypriot bank deposits, saying European Union leaders used “blackmail” to get him to agree to those conditions early Saturday in order to receive a bailout package worth 10 billion euros, or $13 billion.

Cyprus, whose banking system is verging on collapse, is now the fifth nation in the 17-member euro union to seek financial assistance since the crisis broke out three years ago.

As anger in this country swelled against the measure, Mr. Anastasiades delayed an emergency vote parliamentary vote on the bailout plan until Tuesday, the second step in as many days. Faced with a lack of support from lawmakers, the vote could be delayed until as late as Friday.

The government also said it would keep Cypriot banks shuttered until at least Wednesday, beyond a bank holiday that was supposed to end Monday, a move aimed at staving off a possible bank run.

Cyprus’s banking association issued a statement calling on people to remain “calm,” saying it was ready to implement whatever measures were needed to protect the stability of the banking sector. The association said it would instruct banks to load automated teller machines with cash while banks remained closed.

Financial markets stuttered on the news, with Asian stocks suffering the most, closing down about 2 percent. European market indexes were off about 1 percent by the end of the session, and Wall Street shares were less than 0.2 percent lower in afternoon trading.

For the first time since the onset of the euro zone sovereign debt crisis and the bailouts of Greece, Portugal and Ireland, ordinary depositors — including those with insured accounts — were being called on to bear part of the cost, €5.8 billion.

The previous bailouts have been financed by taxpayers, and the new direction raised fears that depositors in Spain or Italy, two countries that have struggled economically of late, might also take flight.

A crowd of protesters gathered in front of the presidential palace, shouting angrily at Mr. Anastasiades and inveighing against Germany and European leaders as he entered the building to meet with his cabinet. “Merkel, U stole our life savings,” read one banner tied to a bus stop. “EU, who is next, Spain or Italy?” read another.

Miguel Arias Cañete, Spain’s agriculture minister, told journalists in Brussels on the sidelines of a European Union meeting on Monday that he saw no risk of contagion. Spain’s banking system had undergone “a very rigorous clean-up,” the minister said, and were now in a “magnificent situation” following their bailout last year.

The finance ministers from the euro zone countries were to take up the Cyprus issue on a conference call later Monday. Jeroen Dijsselbloem, the president of the group, had declined Saturday to rule out taxes on depositors in countries beyond Cyprus, although he said such a measure was not being actively considered.

A key question for the finance ministers was expected to be whether any revised formula for the tax on deposits could still deliver the 5.8 billion euros agreed to in the bailout deal. The plan, a so-called bail-in, also would wipe out 1.4 billion euros held by junior bondholders in Cypriot banks. Only senior bondholders, who have paid a premium to be first in line for repayment of their investments, would be fully protected.

Joerg Asmussen, a member of the European Central Bank governing council, suggested that creditors may not object to a revision of the bailout terms.

This article has been revised to reflect the following correction:

Correction: March 18, 2013

An earlier version of this article incorrectly reported the days banks in Cyprus would remain closed. The central bank said they will stay shut through Wednesday.

Article source: http://www.nytimes.com/2013/03/19/business/global/asian-markets-drop-on-latest-euro-concerns.html?partner=rss&emc=rss

Inside Europe: Young People Left Out as European Social Fabric Tears

PARIS — Grigoris Lemonis, a 73-year-old retiree in Athens, uses his monthly state pension of €580 to support his wife and the family of his son, an unemployed cook with two small children and a wife who works occasionally as a cleaner.

Three-generation families surviving on a single income are increasingly common across Southern Europe as mass unemployment tears at the fabric of closely knit societies.

“Daily life has become pure misery,” said Mr. Lemonis, a former painter in the construction industry who owns his home. “We are up to here with bills, and once all that is paid, there’s nothing left to live a decent life,” he said, adding that with the pension — the equivalent of about $750 — the family can afford meat only once or twice a month.

With more than 26 million unemployed in the 27 nations of the European Union, including nearly six million young people, the system is struggling, and in some places failing, to cope. Many of the jobless have exhausted their benefit entitlements.

“In many countries, the poor are getting poorer,” said Laszlo Andor, the E.U. commissioner for employment and social affairs, pointing to a growing North-South divergence. “Europe’s social fabric is clearly under pressure and a stronger response at E.U. and national level is needed.”

Social spending rose across the Continent in the first phase of a prolonged economic crisis that began in 2008, and engulfed the euro zone in a sovereign debt crisis beginning in 2010. But the states that have been hit hardest — Greece, Ireland, Italy, Portugal and Spain — have now had to cut outlays on pensions, health care, education and unemployment benefits.

Countries that direct social spending toward providing services like child care, vocational training, job-search assistance and accessible health care have better results than those that spend most on cash payments to retirees and the unemployed, Mr. Andor said.

Countries like Italy and Poland, which spend a higher share of their social budgets on pensions, tend to be less effective in alleviating poverty because the working-age population most severely hit by the crisis is less well covered, he said.

Political leaders are fretting about the affordability of the European social model in an era of high public debt, low growth and aging populations.

“If Europe today accounts for just over 7 percent of the world’s population, produces around 25 percent of global G.D.P. and has to finance 50 percent of global social spending, then it’s obvious that it will have to work very hard to maintain its prosperity and way of life,” Chancellor Angela Merkel of Germany told The Financial Times last December, referring to gross domestic product.

Social spending as a proportion of output is, on average, at least 6 percent higher than in 2007 in the 34 countries of the Organization for Economic Cooperation and Development, an association of free market democracies of which 21 are E.U. members. Moreover, aging populations are set to drive up the costs of pensions and health care in coming years, the O.E.C.D said.

The majority of E.U. governments have used the crisis as a reason to raise the retirement age, bringing it more into line with increasing life expectancy, said Willem Adema, an O.E.C.D. expert on employment, labor and social affairs.

Social scientists distinguish three broad welfare models: Nordic, Continental European and Anglo-Saxon.

Nordic countries offer a high level of “cradle to grave” welfare with an emphasis on preschool child care and education, which is designed to keep women and older people in the labor market.

The Continental model features contributory social insurance systems that offer strong protection to insiders with protected jobs, while continuing to regulate employment and the labor market.

The Anglo-Saxon model tends to make welfare payments smaller and more selective and encourages private provision of health care, education and pensions for the better off.

The Nordic model seems to have proved the most effective at reducing poverty without discouraging people from work, although it comes with the highest taxes.

Britain and Ireland pay cash allowances to stay-at-home single mothers, contrary to the O.E.C.D. and E.U. view that such money is better spent on providing public child care.

“It makes more sense to get people into work” than to focus on benefit to stay home, said Mr. Adema of the O.E.C.D. “Yet amazingly, some countries are cutting preschool child care.”

European governments have found it easier to trim welfare systems at the edges than to change them radically. It is politically difficult to spend less on the elderly and more on young children and to teach skills and promote employment among those who leave school. Older people vote more than the young.

“In many countries, it is the middle class who are the direct beneficiaries of social security entitlements,” the analysts Patrick Diamond and Guy Lodge wrote in a paper for the Policy Network, a British research group. “This makes pensions and welfare payments to older cohorts practically untouchable.”

The Netherlands, where retirees enjoy the highest purchasing power in Europe, provides an example. The recently created 50PLUS Party, which campaigns on behalf of pensioners, won two seats in the 150-member Dutch Parliament last year.

Support for the gray movement has soared since the coalition government of the center-right Liberals and the center-left Labor Party agreed to raise the retirement age to 67 from 65 by 2021. A poll this month showed that 50PLUS would win 18 seats if an election were held now, making it the third-biggest party.

Older voters may fight for their interests, but they also should grasp the need to leave resources for social spending for the young. Just ask Mr. Lemonis, the Athens retiree supporting two younger generations on his dwindling monthly allowance.

“At least we pensioners are old and we’ve lived our lives,” he said. “I’m worried about our children. What will they do when we can no longer help them?”

Paul Taylor is a Reuters correspondent. Karolina Tagaris contributed reporting from Athens and Sara Webb from Amsterdam.

Article source: http://www.nytimes.com/2013/03/19/business/global/young-people-left-out-as-european-social-fabric-tears.html?partner=rss&emc=rss

Greece Looks at Offering Creditors a Buyback to Lower Its Debt

Essentially, Greece would propose that its private sector bondholders sell back their sovereign debt holdings for a small profit, but at a price favorable to Greece. The move takes a page from the playbook Greece used earlier this year in which the government pressured banks and other private holders to take a loss on their sovereign bonds so Greece could ease its debt load. This time, they would not be forced to take a haircut, but some would most likely balk at being forced to accept a new deal.

The aim is to further reduce an ever-increasing sovereign debt burden that is fast approaching 200 percent of gross domestic product, far beyond Europe’s ideal of 60 percent or less.

Many different strategies about how to address Greece’s debt load are being discussed by its creditors, with the buyback option being just one of several. The government this month narrowly secured parliamentary approval for yet another round of spending cuts and tax increases, putting Greece on the verge of receiving 31 billion euros, or $39 billion, in desperately needed bailout loans. The euro zone is also weighing measures — like extending loan maturities and paring interest rates — that would further ease the country’s financial burden.

While the most pressing need is securing the 31 billion euros Greece needs to survive, arriving at a long-term solution for its bloated sovereign debt is also seen as crucial, given that the economy continues to shrink. An estimate released Wednesday showed Greece’s economy contracted by 7 percent in the third quarter — which makes the debt relative to economic output all the more onerous.

 To that end, a small circle of lawyers and bankers are suggesting that Greece offer to buy back its deeply discounted debt at a price of 27 to 33 euro cents, compared to the 25-cent level where it currently trades. If investors hold out for a higher price, the government could invoke collective action clauses (C.A.C.’s) in the bond contracts that, in theory, would prevent a bidding war, thus allowing the country to retire as much as 40 billion euros of its 340 billion euros in debt.

For example, the 62 billion euros’ worth of new bonds that Greece issued as part of its landmark debt restructuring deal reached with private bondholders in March are now valued at about 15 billion euros, or $19 billion. If Greece were to borrow the money to buy back this debt, it could retire 30 billion to 40 billion euros’ worth of its obligations, depending on the ultimate price it pays.

While borrowing such an amount would be a challenge, Germany — the biggest euro zone economy and thus the biggest contributor to the Greek bailout — could take the view that this would be a better way to reduce Greek debt than to ask taxpayers to swallow a loss via a write-down of public sector bailout loans.

Unlike the last time around, when the protracted wrangling between the Greek government and private bondholders centered on banks, hedge funds and other investors’ accepting a reduction in the bonds’ value, they will not have to suffer a large loss on their bond holdings. Depending on the price, however, they may have to forgo some further upside if the bonds continue to rally after the buyback.

If successful, the debt buyback could significantly reduce Greece’s debt and afford the country a realistic chance of meeting the target of a debt ratio of 120 percent of G.D.P. by 2020 that the International Monetary Fund has set as a condition for it to lend more money. European leaders have said that this benchmark is too stringent and needs to be relaxed.

Of course, the idea has infuriated the many hedge funds that in past months have scooped up more than 22 billion euros’ worth of Greek bonds at rock-bottom prices. With many sitting on big profits after the recent market rally, they are in no mood to sell out cheaply, especially if Greece resorts to wielding a legal cudgel to complete the deal.

“It’s really the dumbest thing that Greece can do right now,” said Hans Humes of Greylock Capital, who has been one of the more aggressive investors in terms of accumulating discounted Greek bonds.

Collective action clauses are legal riders in bond contracts that can make it easier for a debtor country to restructure its loans by forcing holdouts to accept the country’s proposal for a bond swap if a certain majority of creditors agree to it. They were used to great effect during the 100 billion euro restructuring of Greece’s private sector debt earlier this year.

Article source: http://www.nytimes.com/2012/11/15/business/global/greece-looks-at-offering-creditors-a-buyback-to-lower-its-debt.html?partner=rss&emc=rss

DealBook: European Private Equity Firms Seek Nontraditional Loans Amid Debt Crisis

Matthew Sabben-Clare, a partner at the London-based private equity firm Cinven.Bill RobinsonMatthew Sabben-Clare, a partner at the London-based private equity firm Cinven.

LONDON — As the sovereign debt crisis has slammed Europe, Cinven has had to get creative to finance buyouts.

When the London-based private equity firm wanted to buy CPA Global this year for $1.5 billion, Cinven looked beyond banks, the usual source of money. Along with debt from HSBC and JPMorgan Chase, it secured almost $200 million of higher-interest loans from nontraditional lenders. It also had to spend roughly $600 million of its own cash.

“The debt markets have been challenging since 2007,” said Matthew Sabben-Clare, a partner at Cinven. “There’s a degree of selectivity by the banks over geographies and certain industries. Banks are more regionally focused than before.”

Europe’s financial woes are forcing private equity firms like Cinven to revise their deal-making playbooks.

As banks pull back, private equity firms are increasingly turning to high-yield bonds, mezzanine loans and other types of debt that carry higher interest rates. Some are appealing directly to institutional investors like pensions and sovereign wealth funds to finance specific deals.

Apax, a private equity firm, issued almost $1 billion of high yield bonds to acquire Orange Switzerland.Sebastian Derungs/Agence France-Presse — Getty ImagesApax, a private equity firm, issued almost $1 billion of high yield bonds to acquire Orange Switzerland.

Given the tight credit, most firms are having to put up more capital to get deals done. Cash now accounts for more than 50 percent of the average European buyout, according to the data provider S..P. Capital I.Q. Five years ago, that number was 33 percent. In the United States, cash represents 38 percent of the average buyout, mainly because firms have access to a variety of financing options, like capital markets.

Private equity firms “are having to widen the net to find the loan financing they need,” said Kristian Orssten, head of European high-yield and loan capital markets at JPMorgan Chase in London. “Many lenders in Europe are getting to grips with their own funding challenges.”

The financing troubles for buyouts are reflected in the weak deal-making environment.

Although firms are raising money to buy distressed assets in Europe, many have remained on the sidelines as the debt crisis continues. So far this year, European acquisitions by private equity firms have totaled $23.2 billion, a 38 percent decline from the same period in 2011, according to Thomson Reuters.

Firms have pulled some deals altogether, fearing that asset prices could fall even further. After months of negotiations, Blackstone and BC Partners dropped their $3.2 billion bid for the frozen-food company Iglo after failing to come to terms with its private equity owner, Permira, according to people with direct knowledge of the matter who declined to speak publicly.

In  good times, European buyout firms relied heavily on cheap bank lending. Flush with cash, the Continent’s financial institutions provided almost 80 percent of financing on deals, often keeping the debt on their own balance sheets instead of selling it off to other investors.

But as the debt crisis worsened, banks curbed their lending in an effort to meet stricter capital requirements, which penalize firms for holding risky investments like debt connected to private equity deals. Firms like Deutsche Bank and Royal Bank of Scotland have sold loans at a discount to other investors to shed unwanted assets.

Even when banks are willing to finance deals, they are limiting their bets. Local banks are focusing mostly on deals in their home countries, and they are often willing to finance only a portion of the buyouts.

As a result, private equity firms are often tapping multiple lenders, even when the costs of a buyout are less than $1 billion. To finance its £465 million ($749 million) acquisition of the British company Mercury Pharma, Cinven capitalized on its 20-year relationships with certain banks, securing £235 million of financing from a consortium of firms, including Lloyds Banking Group.

With banks being selective, private equity firms have had to tap other markets.

High-yield debt investors, in search of better yields, have been receptive. The European private equity firm Apax issued almost $1 billion of high-yield bonds in February as part of its $2.1 billion acquisition of the telecommunications company Orange Switzerland. Intelsat, one of the world’s largest satellite operators, owned by a BC Partners-led group, raised $1.2 billion this year in an effort to refinance its debt.

“The high-yield market in Europe is exploding,” said a partner from a leading European private equity firm, who spoke on condition of anonymity. “It’s attracting a lot of institutional investors who are chasing high returns.” The amount of European high-yield bonds connected to investments from private equity firms has risen 49 percent, to $13.5 billion, since 2007, according to the data provider Dealogic.

Private equity firms are also stepping in to fill the void. The Scandinavian firm EQT Partners turned to a consortium of financial players, including Kohlberg Kravis Roberts, for around $510 million of mezzanine financing for its $2.3 billion acquisition of the German medical supplies company BSN Medical in June.

“As bank funding has become more expensive, it has opened up an opportunity for new types of financing,” said Sachin Date, head of private equity for Europe, the Middle East, India and Africa at the accounting firm Ernst Young in London.

But such debt carries its own set of risks. Generally, loans from nontraditional lenders carry higher interest rates, which can be costly for companies, especially in the current economic conditions. If the financial burden became too high, it could force borrowers to default on their loans and exacerbate the region’s woes.

“The crisis has hit much harder than people had expected,” said Nicolas de Nazelle, a managing partner at the private equity adviser Triago in Paris.

Article source: http://dealbook.nytimes.com/2012/10/04/with-banks-skittish-europes-private-equity-firms-look-elsewhere/?partner=rss&emc=rss

DealBook: In Europe, a Conflict Over Bank Capital

UniCredit headquarters in Milan. Banks in Europe need to find $147 billion to raise their Tier 1 capital ratios.Luca Bruno/Associated PressUniCredit headquarters in Milan. Banks in Europe need to find $147 billion to raise their Tier 1 capital ratios.

LONDON — Europe’s banks and regulators are at odds about how financial institutions should increase their capital reserves.

Authorities want European banks to tap existing shareholders and reduce employee bonuses to find a combined $147 billion to increase their core Tier 1 ratios, a measure of a firm’s ability to weather financial shocks, to 9 percent by June. Citigroup estimates that Europe’s financial institutions, minus the Greek banks, had raised at least 40 billion euros, or $51 billion, as of the fourth quarter of 2011.

Banks, however, would prefer to sell or write down unprofitable operations, as well as adjust their balance sheets, to free up cash to meet the new requirements.

One solution could be to increase capital reserves through rights offerings, which allow existing shareholders to buy new stock at a discount. But volatility in the financial markets amid Europe’s sovereign debt crisis has damped investor interest.

Many banks are waiting on the outcome of the Italian bank UniCredit’s 7.5 billion euro rights issue, which closes at the end of this week. After initial investor skepticism, market participants say the Milan-based bank, which must raise almost 8 billion euros by June, is now expected to gain shareholder backing for the multibillion-euro capital increase.

“Everyone is looking at the UniCredit deal as a litmus test for future capital raisings,” said a senior investment banker from a leading bank in Europe, who spoke on the condition of anonymity because he was not authorized to talk publicly.

If other options are not attractive, some banks may eventually turn to local governments for a helping hand. Last year, the European Union created the European Financial Stability Facility, a 440 billion euro fund that can be used to shore up firms’ capital reserves.

Banks will soon find out what regulators think of their plans. Financial institutions, including Deutsche Bank of Germany and BNP Paribas of France, had to submit their recapitalization strategies to national regulators by Friday. The European Banking Authority will review the plans in early February, and regulators have the power to veto any capital-raising plan they don’t agree with.

Much of Europe is expected to enter recession this year, so authorities are likely to reject capital-raising efforts, like cutting lending to businesses, that reduce support for the European economy.

The banking authority has called on banks to raise the money through cuts in shareholder dividends and issuance of new stock. It has warned that the sale of any operation, particularly in banks’ home markets, that hurts business lending won’t be allowed.

“Regulators are asking for the impossible,” said Etay Katz, a banking regulatory partner at the law firm Allen Overy in London. “They want banks to keep lending to the real economy, and there’s an expectation banks will have to swallow the bitter pill of offering new equity at times when investors’ appetite is negative.”

Nonetheless, some banks have been following authorities’ demands. Société Générale must raise 2.1 billion euros, and announced last November it was slashing bonuses and scrapping its 2011 shareholder dividend to meet the new regulatory requirements. It also plans to cut almost 1,600 jobs in its investment bank unit and has offloaded billions of euros of sovereign bonds to reduce its exposure to euro zone debt. As of the end of September, Société Générale’s core Tier 1 ratio stood at 9.5 percent.

Not every European bank, however, can rely on its own earnings. Many midsize banks, especially in Southern Europe, face deteriorating local economic conditions and rising customer defaults. In Spain, for example, authorities say the ratio of bad loans to bank lending has hit a 17-year high. And the European Union expects the country’s economy to grow a mere 0.7 percent this year, compared with 1.5 percent for the United States.

“The outlook is mostly negative for banks in countries like Spain, Italy and Portugal,” said James Longsdon, managing director in Fitch Ratings’ financial institutions group, in London.

Other banks are hoping the sale of so-called noncore assets in overseas markets will help to increase their capital reserves. The fire sale could be enormous. The European financial sector is expected to sell or write down more than $1.8 trillion in loan assets during the next decade, according to the consulting firm PricewaterhouseCoopers. That compares with just $97 billion from 2003 to 2010.

Last week, the Royal Bank of Scotland, which already has met the European Banking Authority’s capital requirements, sold its aircraft leasing business to a consortium of Japanese companies for $7.3 billion. Ireland’s nationalized Anglo Irish Bank also has offloaded $3.3 billion in commercial real estate loans in the United States to Wells Fargo. In all, the Irish bank wants to cut nearly $10 billion in American loans as part of a government requirement to reduce its assets and trim its operations.

Potential buyers, including American private equity firms, are lining up to take advantage, though analysts say the amount of assets up for sale will depress prices. That could reduce the impact on banks’ capital reserves. Local European politicians also may block deals that they believe will hurt domestic consumers.

“Banks may be restricted on deleveraging within Europe,” said Simon McGeary, managing director for European new products at Citigroup in London.

Banks also are restructuring their balance sheets to squeeze out extra capital. In a move known as liability management, banks can improve capital levels without raising additional funds. The strategy involves buying back or exchanging hybrid securities — investments that pay dividends like bonds, but can be converted into equity — at a discount from investors.

Under accounting rules, financial institutions can then book the difference between the original face value of the securities and the current discounted price as a profit toward core Tier 1 equity.

The strategy has been popular. Morgan Stanley estimates financial institutions, including Commerzbank of Germany and the Lloyds Banking Group of Britain, will raise a combined 8.7 billion euros by buying back, or exchanging, hybrid securities from investors.

The adjusting of companies’ balance sheets also includes so-called capital optimization, which involves tweaking banks’ back-office systems to free up funds to meet the capital requirements. Credit Suisse estimates that Spanish banks, which must raise a combined 26.1 billion euros, could free up more than 3 billion euros by fine-tuning how they use capital without raising any new funds.

“The only way for banks to succeed is to be more efficient with the limited capital available,” said Steve Culp, global managing director of the risk management practice at the consulting firm Accenture in London.

Banks, particularly in struggling southern European economies, may eventually have to turn to government bailouts. Deals already have been announced. In December, the National Bank of Greece and its local rival Piraeus Bank sold a combined 1.4 billion euros of shares to the government to increase their core Tier 1 ratios.

“There’s no magic bullet to this problem,” said Karl Goggin, a banking analyst at NCB Stockbrokers in Dublin. “The market has a finite appetite for banking stocks, so governments may have to step in.”

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U.S. Trade Deficit and Consumer Sentiment Rise

A separate survey released on Friday showed that consumer sentiment hit an eight-month high in early January as Americans grew more optimistic about job prospects.

The Thomson Reuters/University of Michigan preliminary January reading on its overall index of consumer sentiment rose to 74 from 69.9 in December for the fifth month of gains and the highest level since May 2011.

The report topped expectations of 71.5 and contrasted with December’s weaker-than-expected retail sales reported on Thursday.

“This shows even though the retail sales number this week was disappointing, there could be a little more underlying strength,” said Kathy Lien, director of research at GFT Forex in Jersey City. “I’d be wary of looking at this as a shift in long-term confidence, but I’d look at this as good news today.”

Commerce Department data showed that the trade gap was $47.8 billion in November, exceeding analysts’ forecast of a $45 billion deficit.

“The trade balance deteriorated pretty significantly, and it could shave a few tenths of a percent off our expectation for fourth quarter,” said Russell Price, senior economist at Ameriprise Financial.

JPMorgan Chase said gross domestic product growth for the fourth quarter was now tracking closer to 3 percent than the company’s forecast of 3.5 percent.

A wider deficit shows that more goods and services bought by American businesses and consumers were produced outside the country, subtracting from gross domestic product.

“The external outlook does not bode well for U.S. exports, as a deceleration in global growth will coincide with a stronger U.S. dollar due to lingering financial concerns regarding Europe’s sovereign debt turbulences,” wrote Martin Schwerdtfeger, a senior economist at the TD Bank Group, in a note.

A dip in import prices showed that inflation pressures were still muted, giving the Federal Reserve wiggle room as it holds benchmark interest rates at ultralow levels.

Import prices were down 0.1 percent in December after a 0.8 percent gain in November as oil prices fell, in line with economists’ expectations.

Economic growth in the final quarter of 2011 is likely to have accelerated from the third quarter’s 1.8 percent rate, with many economists expecting an annualized rise of around 3 percent.

Consumer spending, once a crucial pillar of the economy, remains lackluster and sensitive to shocks.

Although some Federal Reserve officials have said further steps may be needed to stimulate the economy, no action is expected at the next Fed policy meeting at the end of the month.

Thirty-four percent of consumers polled in the confidence survey said they had heard of recent job gains, a record high in the survey’s history and well above the 21 percent recorded in December.

“The data suggest a stronger consumer spending outlook, rising to about a 2.1 percent gain in 2012,” Richard Curtin, the survey director, said in a statement.

But consumers still lacked confidence in government economic policies, with the majority rating them unfavorably for the sixth consecutive month.

Americans also remained dour on their personal finances, with just 24 percent expecting their finances to improve in January, compared with 25 percent last month.

The survey’s barometer of current economic conditions rose to the highest level since February at 82.6, from 79.6, while its gauge of consumer expectations rose to 68.4 from 63.6.

Article source: http://feeds.nytimes.com/click.phdo?i=b55d071f1562025bae74effb669dce56

Trade Deficit and Consumer Sentiment Rise

A separate survey released on Friday showed that consumer sentiment hit an eight-month high in early January as Americans grew more optimistic about job prospects.

The Thomson Reuters/University of Michigan preliminary January reading on its overall index of consumer sentiment rose to 74 from 69.9 in December for the fifth month of gains and the highest level since May 2011.

The report topped expectations of 71.5 and contrasted with December’s weaker-than-expected retail sales reported on Thursday.

“This shows even though the retail sales number this week was disappointing, there could be a little more underlying strength,” said Kathy Lien, director of research at GFT Forex in Jersey City. “I’d be wary of looking at this as a shift in long-term confidence, but I’d look at this as good news today.”

Commerce Department data showed that the trade gap was $47.8 billion in November, exceeding analysts’ forecast of a $45 billion deficit.

“The trade balance deteriorated pretty significantly, and it could shave a few tenths of a percent off our expectation for fourth quarter,” said Russell Price, senior economist at Ameriprise Financial.

JPMorgan Chase said gross domestic product growth for the fourth quarter was now tracking closer to 3 percent than the company’s forecast of 3.5 percent.

A wider deficit shows that more goods and services bought by American businesses and consumers were produced outside the country, subtracting from gross domestic product.

“The external outlook does not bode well for U.S. exports, as a deceleration in global growth will coincide with a stronger U.S. dollar due to lingering financial concerns regarding Europe’s sovereign debt turbulences,” wrote Martin Schwerdtfeger, a senior economist at the TD Bank Group, in a note.

A dip in import prices showed that inflation pressures were still muted, giving the Federal Reserve wiggle room as it holds benchmark interest rates at ultralow levels.

Import prices were down 0.1 percent in December after a 0.8 percent gain in November as oil prices fell, in line with economists’ expectations.

Economic growth in the final quarter of 2011 is likely to have accelerated from the third quarter’s 1.8 percent rate, with many economists expecting an annualized rise of around 3 percent.

Consumer spending, once a crucial pillar of the economy, remains lackluster and sensitive to shocks.

Although some Federal Reserve officials have said further steps may be needed to stimulate the economy, no action is expected at the next Fed policy meeting at the end of the month.

Thirty-four percent of consumers polled in the confidence survey said they had heard of recent job gains, a record high in the survey’s history and well above the 21 percent recorded in December.

“The data suggest a stronger consumer spending outlook, rising to about a 2.1 percent gain in 2012,” Richard Curtin, the survey director, said in a statement.

But consumers still lacked confidence in government economic policies, with the majority rating them unfavorably for the sixth consecutive month.

Americans also remained dour on their personal finances, with just 24 percent expecting their finances to improve in January, compared with 25 percent last month.

The survey’s barometer of current economic conditions rose to the highest level since February at 82.6, from 79.6, while its gauge of consumer expectations rose to 68.4 from 63.6.

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DealBook: Talks on Greek Debt Are Halted

Charles Dallara, the head of the Institute of International Finance, represents Greece's private bondholders.Petros Giannakouris/Associated PressCharles Dallara, the head of the Institute of International Finance, represents Greece’s private bondholders.

LONDON — Talks between Greece and private sector creditors over a restructuring of the country’s crushing debt paused on Friday amid a continuing disagreement over how much of a loss banks and investors should take on their holdings.

In a statement, Charles Dallara of the Institute for International Finance, the bank lobby that represents private sector bond holders, said that discussions had “not produced a constructive consolidated response by all parties, consistent with a voluntary exchange of Greek sovereign debt.”

The statement came at the conclusion of talks between Mr. Dallara and the Greek finance minister, Evangelos Venizelos, in Athens on Friday.

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While people involved in the talks described it as a negotiating tactic, the disagreement is a reminder of how wide the gap remains between the two sides, even after months of discussions, and underscores how close Greece is to defaulting on its debt.

At issue, bankers and government officials say, is less the 50 percent haircut that investors would absorb with their new bonds and more the coupon or interest these new instruments would carry.

Evangelos Venizelos, the Greek finance minister.Petros Giannakouris/Associated PressEvangelos Venizelos, the Greek finance minister.

Investors are pushing for a higher interest payout to mitigate both their loss and the fact that their exposure to Greece will be lengthened considerable with the new bonds.

The International Monetary Fund and Germany, both of whom have become increasingly worried about Greece’s ability to service its debts as its economy continues to plummet, are pushing for a lower rate, which would ease Greece’s debt payments and force investors to take a bigger loss on their holdings.

As foreseen, the deal is expected to lower Greece’s debt to 120 percent of its gross domestic product by 2020 from about 150 percent currently. But the I.M.F. in particular has become pessimistic about Greece’s ability to recover economically and believes its debt burden must decrease at a faster rate.

Within the fund, as well as in Europe, there is a view that the private sector needs to pay a larger share. Europe’s sickly banks counter that they are in no position to take on more losses.

In its statement, the bank lobby said that “discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach.”

The not-so-subtle message is that if Europe pushes too hard on this point, then the creditors can no longer accept the agreement as a voluntary one. This is important as an involuntary restructuring would be seen by creditors as a default and would trigger credit default swaps — a step Europe and Greece are trying hard to avoid.

One person involved in the discussions said that the move should be seen more as a negotiating tactic than a sign than a sign that Greece was going to default. The person, who spoke on condition of anonymity, said that the talks would resume Wednesday.

That may be so, but for every day’s delay, the stakes increase as Europe and the I.M.F. have said repeatedly that without a private sector deal, Greece will not get the 30 billion euros in bailout money that it needs to avoid bankruptcy.

Greece faces a critical 14 billion euro bond payment on March 20. A delegation from the I.M.F is due in Athens next week to start talks with the government on the progress or lack thereof in enacting major reforms and raising money via state asset sales.

The negotiations on the debt have been complicated by the increased influence of a bloc of investors, largely hedge funds, who have bought billions of euros of discounted Greek debt and have said they will not participate in a restructuring. They are betting that Europe will blink and give Greece its money, and because the deal would be voluntary, these holdouts would get their pay day.

With the breakup of the talks, and the increased threat of a default, these investors may well choose to participate in the deal — in the hopes of getting something as opposed to the very little they would get if Greece went bankrupt.

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