April 21, 2018

DealBook: Santander Lifts Capital Cushion Months Ahead of Deadline

A branch of Spain's Banco Santander in London.Carl Court/Agence France-Presse — Getty ImagesA Banco Santander branch in London.

Banco Santander of Spain, the bank with the largest market value in the euro zone, said on Monday that its core capital ratio now stood at 9 percent, six months ahead of the deadline set by Europe’s main bank regulator.

Last year, the European Banking Authority ordered Santander to raise 15 billion euros in capital, the most of any bank in the European Union. The bank said it had met the ratio largely by converting 6.8 billion euros of bonds into shares, retaining profits and transferring a 4.4 percent position in its Brazilian unit to an outside investor, thus allowing the stake to be counted as core capital.

“This shows we have plenty of financial flexibility,” said José Antonio Alvarez, the chief financial officer of Santander. “Spain is in recession, but our balance sheet and capital base are in a better situation” than those of competitors.

Still, like all large European banks, Santander has been feeling the effects of the sovereign debt crisis and a very stingy funding market. But the bank is less exposed to its stagnating home market because it has a large presence in Latin America and Britain.

Santander’s quick move to reach the capital reserve requirement for European lenders was aimed at differentiating the bank from its more troubled peers in France and Italy. As with other banks, Santander has also been selling assets and cutting back on loans in order to preserve capital.

In a statement released on Monday, Santander said it planned to increase its capital ratio to 10 percent by June. The bank also said it would maintain its yearly dividend at 60 euro cents a share for a third consecutive year.

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Data Show Euro Area Downturn Deepened at Year-End

Europe’s worsening sovereign debt crisis and the tough cost-cutting response by many governments appear to be driving the 17-nation currency bloc back into recession following the 2008-2009 global financial crisis, while the number of people out of work is rising.

“This data has recession written all over it,” said Martin van Vliet, a euro zone economist at ING. “It is all but guaranteed that we are going to see a contraction in the euro zone in the fourth quarter.”

Economists are divided over how deep the recession — defined by two consecutive quarters of economic contraction — will be, after a free fall in industrial sentiment appeared to stabilize in December.

But it is clear the euro zone, which accounts for about 16 percent of the world economy, will struggle to grow in 2012 and could contract by as much as 1 percent, with its impact reverberating to the United States and Asia.

Retail sales for the bloc fell 0.8 percent in November from October, data released Friday by the European Union’s statistics office Eurostat showed. Economists polled by Reuters had forecast a monthly fall of just 0.2 percent.

The volume of sales fell by 0.9 percent in Germany, the euro zone’s top economy, and was down 0.4 percent in France and 0.7 percent in Spain.

Pointing to the cautiousness of European households even in the run-up to Christmas, the busiest shopping time of the year, the European Commission said Friday that in December, consumer confidence fell 0.7 points in the 17 countries sharing the euro.

In its overall reading of economic sentiment in the euro zone, the commission said its indicator fell 0.5 points to 93.3, its lowest level since November 2009.

A rise in the purchasing managers’ indices for both manufacturing and services in December had been a cause for optimism, but the commission’s figure may dampen that.

One bright spot in the data was the improvement in the commission’s business climate indicator, which increased for the first time in 10 months as factory managers showed optimism about future production plans and export order books.

That indicator was -0.31 points in December, compared to -0.42 points in November and better than the -0.50 point reading seen by economists polled by Reuters for the month.

Unlike the euro zone’s economy, which is expected to contract in the fourth quarter of 2011 and the first quarter of 2012, the U.S. economy is expected to grow about 2 percent in 2012, helping to increase export demand in Europe.

But Christoph Weil, an economist at Commerzbank, cautioned that it was too early to say things had turned around. “With the debt crisis still unsolved, we are reluctant to predict an end to the recession this spring,” he said.

The rate of the deterioration in confidence lost some pace, however, as German economic sentiment improved and returned to September levels. But Italy and Spain, the euro zone’s third- and fourth-largest economies respectively, saw confidence slip.

The sovereign debt crisis has swept to Rome and Madrid, and investors are watching to see if the two countries can raise the billions of euros they need to finance their economies in the first quarter.

Concerns about a possible euro zone break-up subsided over the end-year holiday period, but the focus is still on the European Central Bank’s willingness to help boost growth, such as by taking interest rates to below 1 percent for the first time.

High unemployment is also afflicting the euro zone, hurting consumers. Eurostat said the bloc’s joblessness rate was 10.3 percent of the working population in November, the same as October and up slightly from a year ago, when it was 10 percent.

That compared with an unemployment rate of 8.6 percent in the United States, Eurostat said.

The number of unemployed increased for the seventh consecutive month by 45,000 people to 16.37 million out of work, while hiring intentions fell further in December.

But while unemployment fell in Germany to 5.5 percent, the increase in Spanish and Portuguese unemployment rates to 22.9 percent and 13.2 percent respectively were the largest rises recorded, according to Eurostat.

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German Unemployment Edges Lower, Reaching 6.8%

FRANKFURT — The German economy remained mostly immune to the malaise afflicting the rest of the euro zone in December, with data released Tuesday showing that unemployment fell slightly during the month and that the average number of jobless people for the full year was the lowest in two decades.

With nearly half a million job openings, Germany appears likely to continue to resist the downward pull of the sovereign debt crisis, at least for several months. The seasonally adjusted unemployment rate fell to 6.8 percent in December from 6.9 percent in November.

The jobless figures came after a number of recent indicators that have been better than expected, helping to drive increases in European stock indexes on Tuesday.

But economists question whether Germany, which has Europe’s largest economy, can remain unaffected by the recession spreading across the rest of the Continent. The German jobless rate contrasts with that of the euro area as a whole, at more than 10 percent.

“Germany is no island, and its economy will rock in this crisis just like any other,” Carl B. Weinberg, chief economist of High Frequency Economics, wrote in a note to clients on Tuesday.

Just how much is a matter of renewed debate, after a number of recent indicators were not quite as bad as economists expected. For example, a survey of British purchasing managers published on Tuesday by the data provider Markit Economics was better than analysts forecast, in part because of an improvement in exports.

Confidence in the euro zone has improved somewhat after the European Central Bank in December flooded banks with low-cost loans, which also helped to push down short-term borrowing costs for some countries. An improving United States economy would also help Europe, which exports many of its goods to the country.

“Uncertainty is still high,” said Eckart Tuchtfeld, an economist at Commerzbank in Frankfurt. “However, for the time being the situation does not seem to be deteriorating sharply.” As long as there is no acceleration of the sovereign debt crisis, Mr. Tuchtfeld said, “we are pretty confident it might not get as bad as people have been expecting.”

The German labor market continues to benefit from changes in 2005 that removed some job protections and put more pressure on unemployed people to look for work. The changes helped German companies become more competitive and take advantage of surging demand for industrial goods from China and other developing countries.

Rigid labor rules in other countries are among the root causes of the debt crisis, economists say. Unemployment stands at more than 18 percent in Greece and nearly 23 percent in Spain. A lack of growth and competitiveness have amplified the two countries’ debt problems.

Germany had its best year almost since reunification in 1990. The average number of unemployed workers in Germany averaged less than three million for all of 2011, a rate of 7.1 percent, the lowest level since 1991.

German companies continue to look for workers despite signs of a slowdown. The number of unfilled jobs in December was 467,000, the German Federal Employment Agency said, an increase of 87,000 from a year earlier. Almost all industries were looking for workers, especially in fields like electronics, machinery and health care.

Mr. Tuchtfeld said unemployment was likely to rise in the spring, but not drastically. Companies will probably take advantage of government subsidies that encourage them to put workers on reduced hours rather than cutting jobs. Such programs allowed German unemployment to fall during much of 2009 despite a sharp downturn.

Without adjusting for the rise in unemployment that is typical for December, the German jobless rate rose to 6.6 percent from 6.4 percent. But there were still 231,000 fewer jobless people than in December 2010.

Article source: http://www.nytimes.com/2012/01/04/business/global/german-joblessness-falls-to-lowest-level-in-two-decades.html?partner=rss&emc=rss

The Week Ahead

ECONOMIC REPORTS Data will include the S. P./Case-Shiller home price index for October and consumer confidence for December (Tuesday); weekly jobless claims, the Chicago purchasing managers’ index for December, and pending home sales for November (Thursday).

IN THE UNITED STATES On Monday, financial markets and government offices will be closed for the observed Christmas holiday.

IN EUROPE This week, the European Central Bank will release results of its program to drain 211 billion euros in excess market liquidity created by its purchases of sovereign debt, including Spanish and Italian bonds.

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Economic View: Fed’s Moves Offer a Shield Against Europe — Economic View

With such dangers at hand, it’s time for a spot-check on whether financial regulation in the United States has left us prepared. So far — with one notable exception — it’s not looking good.

A core problem in finance is that banks and other intermediaries can take on too much risk, not caring enough that their potential failures may throw people out of work, burden taxpayers and damage the broader economy. The solution — if it can be managed — is to ensure that banks have enough safe, liquid capital so that A) they are betting a lot of their own money, thereby inducing some caution, and that B) they have a large-enough cushion to limit the risk of failure. “Lots of capital, not too much leverage” is the basic formula for a safe financial system.

Such a general approach is needed because it’s again become clear that regulators can’t predict the specifics of the next crisis. Less than two years ago, our government enacted the Dodd-Frank law, the most complex financial regulation bill of all time, based on the work of hundreds of economic and legal experts, all hyper-aware of the issues of risk. Neither this bill nor our government, however, foresaw that we were already living in the onset of the next potential financial crisis, namely the spillover from the euro zone.

Dodd-Frank left questions of capital and leverage largely to the Basel III international banking agreements, the second piece of the new financial regulatory architecture. Basel III, like its predecessors Basel I and Basel II, encourages banks to hold sovereign debt. This has been revealed as a mistake, just as it was wrong for the earlier Basel regulations to encourage banks to hold mortgage securities.

Most fundamentally, Basel III seems obsolete even before it can formally take effect over the next few years. Its standards imply that European banks will have to raise more capital, possibly in the hundreds of billions of dollars. At this point, that’s like wishing a poor man were a millionaire. The question will sooner be one of survival. In lieu of raising new capital, many European banks will stretch the capital they already have and meet minimum capital standards by shrinking, thereby cutting back on lending and damaging economic growth.

The standards may eventually be tossed out or revised, even though they looked good on paper not that long ago. If nothing else, after recent downgrades, there are no longer enough triple-A securities to carry out the requirements.

Despite these problems, the United States may oddly enough be facing this new financial turmoil in a relatively safe position, though whether it’s safe enough remains to be seen. The Federal Reserve took the lead on future capital requirements just last week, but for the shorter run there is a more important Fed policy move. Starting in late 2008, as a response to our financial crisis, the Fed bought government and mortgage securities from banks on a very large scale.

Bank reserves at the Fed rose from virtually nothing to more than $1.6 trillion. Then the Fed paid interest on those reserves to help keep them on bank balance sheets.

It is estimated by Moody’s that America’s biggest banks now have liquid assets that are 3 to 11 times their short-term borrowings. In other words, it’s the cushion we’ve been seeking. Furthermore, a lot of those reserves sit in the American subsidiaries of large foreign-owned banks, protecting the European system, too.

This new safety comes not from regulatory micromanagement but rather from the creation of additional safe interest-bearing assets. While European economies have been losing safe assets through debt downgrades, the United States financial system has been gaining them.

THE Fed’s stockpiled liquid reserves have met some heavy criticism. Hard-money advocates contend that they are a prelude to hyperinflation — although market forecasts and bond yields don’t bear this out — while proponents of monetary expansion have wished that banks would more actively lend out those reserves to stimulate the economy. That second view assumes that the financial crisis is essentially over, but maybe it’s not. As the euro zone crisis continues, it seems that Ben S. Bernanke has been a smarter central banker than we had realized.

The final lessons are scary, but also powerful.

First, don’t assume that the first wave of a financial crisis is the final act. Circa 1931, many people thought that the global economy was recovering, until an additional wave of financial crises caught fire in Europe and later damaged the United States. Mr. Bernanke is a scholar of exactly this period.

Second, no matter what laws are written, good central banking is the most powerful and most influential financial regulator, if only through the broad management of liquidity and safety. The euro zone has put too much responsibility on national governments and too little on its central bank.

Third, good regulation should take account of our rather extreme ignorance. That means emphasizing the more general protections, as embodied in a ready supply of safe liquid assets, rather than obsessing over the regulatory micromanagement of particular bank activities.

On the whole, we still haven’t learned that last lesson. Nonetheless, this time around we may just squeak by, largely because of the prudence of our central bank.

Tyler Cowen is a professor of economics at George Mason University.

Article source: http://www.nytimes.com/2011/12/25/business/feds-moves-offer-a-shield-against-europe-economic-view.html?partner=rss&emc=rss

DealBook: Fewer Parties on Wall St. This Season

Three years after the financial crisis, the Grinch still hovers over Wall Street.

In the precrisis era, big banks were renowned for their extravagant holiday parties. Goldman Sachs once rented out huge halls for its end-of-year galas, which featured appearances by performers such as Harry Connick Jr. and Bette Midler. In 2007, Morgan Stanley took over several floors of Lotus, then a popular Manhattan nightclub.

But, mindful of mass layoffs, flagging profits and sustained anger on Main Street, the nation’s largest banks have canceled firm-sponsored celebrations or moved them in-house to avoid the costs and the criticism.

For the fourth year in a row, Goldman Sachs and Morgan Stanley have shelved their official holiday parties. The investment banking divisions of JPMorgan Chase, Citigroup and Bank of America have also decided against them. But groups of employees at all five firms were permitted to hold — and pay for — their own festivities.

European firms, hit hard by the sovereign debt crisis, have also scaled back. The Royal Bank of Scotland, which is still part-owned by the British government, allowed some division heads to partially subsidize their employee parties with up to £10, or about $15, a person in company money. But employees in the American branches of the bank had to pay for their own parties this year, according to a company spokeswoman.

Corporate holiday parties, in general, are on the wane. This year, only 74 percent of companies are holding them, down from 95 percent in 2006, according to a survey of 120 companies conducted by Amrop Battalia Winston, an executive search firm.

The dearth of company-sponsored holiday parties has jolted the owners of the bars, restaurants and lounges that housed the parties, the tabs for which could run into the hundreds of thousands of dollars. Steven Greenberg, the owner of 230 Fifth, a rooftop lounge in Manhattan, estimates that Wall Street nightlife used to account for 20 percent of his business.

Now, bank parties at 230 Fifth “are nonexistent, period,” said Mr. Greenberg, though he said that business from foreign tourists has helped replace lost bookings. “They’re concerned about doing layoffs and on the same day having a press report saying that they’re having a big holiday party,” he said.

Goldman, Morgan Stanley, Bank of America, JPMorgan, and Citigroup all declined to comment.

With large American firms cutting back on holiday parties, private equity firms, hedge funds and others that operate farther from the public eye are taking their place.

Bridgewater Associates, the giant hedge fund headquartered in Westport, Conn., rented out the Webster Bank Arena, a 10,000-seat arena in nearby Bridgeport, for its holiday party, according to several people with knowledge of the event. The Royal Bank of Canada held a party for its New York office at Chelsea Piers, in a high-end event space that can accommodate up to 2,000 guests, according to two people who attended but were not authorized to speak on the record about it.

Credit Suisse’s investment banking division held its celebration at Bar Basque, owned by the restaurateur Jeffrey Chodorow. The bank provided an open bar and food including chicken parmesan sandwiches and fried olives.

Still, even that party “paled in comparison to last year’s,” said a person who attended Credit Suisse’s party and spoke on the condition of anonymity.

At banks without official parties, some employees are making do with less.

A group of Morgan Stanley employees held an unofficial holiday party with an “ugly sweater” theme at an Upper East Side bar, according to a person with knowledge of the event, while other employees of the firm partied at Dream, a hotel with a rooftop bar in Midtown Manhattan. A group of R.B.S. employees held an informal event at the Powerhouse Lounge in Jersey City.

Other firms have emphasized charitable giving programs intended to draw attention to their good works. One year after holding a grand gala at the Metropolitan Museum of Art to celebrate its 25th anniversary, the Blackstone Group, the private equity firm co-founded by Stephen A. Schwarzman, held a coat drive at its holiday party, a low-key affair in the Waldorf Astoria hotel, according to a person with knowledge of the event.

Those kinds of events can provide the morale boost of a holiday party without the reputational risks, experts say.

“At this point, the crazy, expensive caviar nights don’t make sense, but maybe something more subdued would be more appropriate,” said Alison Brod, who runs a New York-based public relations firm. “It’s pretty sad to do nothing.”

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Leaders Struggle for Deal to Keep Euro Intact

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

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

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

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

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

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

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

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

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

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

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

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

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DealBook: Regulators Pledge New Rules After MF Global’s Demise

Gary Gensler, chairman of the Commodity Futures Trading Commission, testifying at a Senate Agriculture Committee hearing.Joshua Roberts/Bloomberg NewsGary Gensler, chairman of the Commodity Futures Trading Commission, testifying at a Senate Agriculture Committee hearing.

8:22 p.m. | Updated

Federal regulators are considering a flurry of new rules for the brokerage industry after MF Global’s collapse and the revelation that customer money is missing from the firm, top officials told Congress on Thursday.

The Commodity Futures Trading Commission will vote next week on a rule that would restrict the industry’s use of customer money, and the Securities and Exchange Commission could soon enforce new accounting disclosures for brokerage firms. MF Global’s bankruptcy has also renewed calls for federal regulators to more closely monitor brokerage firms rather than continue to outsource oversight duties to for-profit exchanges like the CME Group.

Such self-regulatory organizations are “the front line” of oversight, Gary Gensler, chairman of the trading commission, told the Senate Agriculture Committee, which is examining MF Global’s downfall. The committee will hold a second hearing about MF Global on Dec. 13.

Mr. Gensler said he planned to complete new constraints on risky bets with customer money. Brokerage firms can now invest client money in a range of securities, including sovereign debt. Firms can also, in essence, borrow from their customers, using client money for a loan to the firm.

“We need to tighten that up,” Mr. Gensler told the committee. “I think it’s important that we limit how funds can be used.”

The agency planned to finish the rule earlier this year, but delayed the changes amid a fierce lobbying campaign by Jon S. Corzine, who at the time was the chief executive of MF Global. The rules were unnecessary, Mr. Corzine had argued, because federal laws already prevented brokerage firms from mixing client money with company money.

But in MF Global’s final days, the firm broke that sacrosanct rule. Investigators now fear that MF Global tapped anywhere from $600 million to $1.2 billion to meets its own financial obligations.

Regulators are also examining MF Global’s risky bets on European sovereign debt, positions that caused a crisis of confidence among ratings agencies, the firm’s creditors and regulators. MF Global financed those positions through off-balance-sheet deals known as “repurchase to maturity” transactions.

On Thursday, lawmakers asked why the firm was allowed to keep regulators in the dark about such transactions.

“That is a loophole so big you can drive a Mack truck through it,” said Senator Kent Conrad, Democrat of North Dakota. “If that’s not closed, we should ask ourselves what we’re doing.”

Mary L. Schapiro, chairwoman of the S.E.C., said her agency was already considering such a crackdown. The agency, Ms. Schapiro said, was also investigating whether MF Global violated accounting rules.

“We are investigating very carefully both the accounting treatment and the disclosure by the firm,” she said at the hearing.

Article source: http://feeds.nytimes.com/click.phdo?i=f4083dbcf2836343ac52bfa25b8b4e0e

Markets Surge on Action By Several Central Banks

As the crisis has worsened over the last 18 months, pronouncements of plans to fix the euro zone debt problems have led to more than a half-dozen rallies that just as quickly withered as the proposals fell short of hopes.

Wednesday’s rally was among the biggest yet, with the three main indexes on Wall Street rising 4 percent or more, and the Dow Jones industrial average rising 490.05 points, its largest gain since March 23, 2009. Still, some analysts warned that the central banks’ action addressed only some symptoms of the euro financial crisis, so this rally, too, could evaporate.

“It helps to prop up the banks for a while which is going to buy time for Europe to fix the problem,” Burt White, the chief investment officer for LPL Financial, said. “This is basically a Band-Aid.”

Financial shares in particular were lifted by the news.

Bank of America shares, which on Tuesday fell more than 3 percent, to $5.07, their lowest closing level since March 2009, were up 7.3 percent, at $5.44, on Wednesday. JPMorgan rose more than 8 percent to $30.97. Morgan Stanley was up more than 11 percent at $14.79.

On Wednesday, the Federal Reserve, the Bank of England, the European Central Bank, the Bank of Japan, the Bank of Canada and the Swiss National Bank, trying to bolster financial markets as the euro zone debt crisis grinds on, announced that they would reduce by about half the cost of a program under which banks in foreign countries could borrow dollars from their own central banks, which in turn get those dollars from the Fed. The banks also said that loans would be available until February 2013, extending a previous deadline of August 2012.

The move is intended to free up liquidity and ensure that European banks have funds during the sovereign debt crisis. But some analysts saw it as a stop-gap measure to avoid a looming crisis that some compared to that set off by the collapse of Lehman Brothers in 2008.

“What it does do is take off some of the pressure from this boiling pot,” Mr. White said.

As the exuberance set in and funding pressures appeared to ease, bond prices fell, commodity prices rallied and financial shares soared as investors bought shares on the hope that the central banks had smoothed the way for Europe to take more forceful action in advance of a European summit meeting Dec. 9. The jump in stocks was also an extension of the turmoil and volatility that have characterized global markets for more than a year.

It was unclear even after Wednesday’s move whether banks would loosen up lending or whether the market enthusiasm would last.

Some noted sharp gains in equities in previous trading sessions have often failed to carry through, as European leaders had tried many times over the last two years to stave off a deterioration in the debt crisis. A recent attempt was on Oct. 27, when the broader market as measured by the Standard Poor’s 500-stock index rallied 4 percent on the hope that a new European plan could solve its problems. But it failed to sustain its gains.

That rally was one of eight times that the S. P. had spiked up at least 4 percent since the end of 2008, while in the same period it experienced 10 declines of that size.

In addition, a summit meeting in July caused a global stock rally that collapsed in the subsequent days, with the S. P. eventually sinking to its lowest level for the year.

Analysts were skeptical about whether Wednesday’s market enthusiasm would endure, and they also warned that the central banks’ move addressed only some symptoms of the euro zone financial crisis. Stanley A. Nabi, chief strategist for the Silvercrest Asset Management Group, said the coordinated action on Wednesday signaled that the problem had reached a crisis point, and that the central banks recognized there was a “lot of danger” in letting the current situation continue.

Steve Blitz, the senior economist for ITG Investment Research, said the central banks “are going to do what they can to ring-fence the European financials’ problems and keep them inside Europe.”

“They are trying to prevent them from seizing up global liquidity and capital flows and impacting banks and financial institutions throughout the world,” he said.

The S. P. 500-stock index closed up 51.77 points, or 4.33 percent, at 1,246.96. The Dow was up 4.24 percent, to 12,045.68, and pushed into positive territory for the year and for the month of November. The Nasdaq composite index rose 104.83 points, or 4.17 percent, to 2,620.34.

Interest rates were higher. The Treasury’s benchmark 10-year note fell 24/32, to 99 12/32, and the yield rose to 2.07 percent, from 1.99 percent late Tuesday.

Ralph A. Fogel, head of investment strategy for Fogel Neale Wealth Management, said rates would probably remain low.

As for equities after the central bank announcement, Mr. Fogel said “the fear is off that there is going to be any sort of tremendous move down like there was in 2008,” referring to the financial crisis.

Analysts said they believed the central banks’ action targeted one of the symptoms, rather than the root or cause, of the euro zone problems.

Energy, materials and industrial sectors all powered ahead by more than 5 percent.

The dollar fell against an index of major currencies. The euro rose to $1.3433 from $1.3328.

The Euro Stoxx 50 closed up at 4.3 percent, and the CAC 40 in Paris ended up 4.2 percent, while the DAX index in Germany was up almost 5 percent. The FTSE 100 in London rose 3.16 percent.

Article source: http://feeds.nytimes.com/click.phdo?i=889c015f4f575e78492b43186a11b6ee

Time Runs Short for Europe to Resolve Debt Crisis

LONDON — Eighteen months into a sovereign debt crisis — and after many futile efforts to resolve it — the endgame appears to be fast approaching for Europe.

While its leaders may well hold to the current path of offering piecemeal solutions, nervous investors are fleeing European countries and banks.

Two main options exist: either the euro zone splits apart or it binds closer together.

Each of these paths — Greece, and possibly others, dropping the euro or the emergence of a deeper political union in which a federal Europe takes control of national budgets — would lead to serious political, legal and financial consequences.

But with financial panic now threatening to move beyond Italy and Spain to Belgium, France and Germany, the euro zone’s paymaster, the pressure to arrive at a solution is at a new level of intensity.

In Britain, even the satirical weekly Private Eye has weighed in, proposing last week that the answer was for Europe itself to leave the European Union.

Underlying these possible outcomes has been Europe’s persistent inability to address the central weakness of its common currency project: how to get money from the few countries that have it, mainly Germany and the Netherlands, to the many that need it — Greece, Italy, Spain, Portugal, Ireland and perhaps even France.

The consequences of continued inaction are dire. Uncertainty and austerity have decimated the euro zone’s growth prospects, and analysts now expect the region’s economy to shrink 0.2 percent next year — a blow for the many American companies that export there.

American financial institutions are also at risk. According to the Institute of International Finance, they have $767 billion worth of exposure through bonds, credit derivatives and other guarantees to private and public sector borrowers in the euro zone’s weakest economies.

With the European Central Bank continuing to refuse to print money as its counterparts in the United States and Britain have done, investors now foresee a much greater likelihood of a broad market crash and a worldwide recession.

Such anxieties were on display last week when Vítor Constâncio, the vice president of the central bank, gave a speech to investors in London.

It was billed as an address on the international monetary system, but given the circumstances, there was little interest among investors in Mr. Constâncio’s views regarding fixed versus floating-exchange rates and quite a lot about what steps the central bank might take to address the crisis.

One somewhat frantic investment banker noted that beyond the Italians and the Spanish, even the Germans were having problems selling their bonds. What, he asked, was the European Central Bank going to do about it?

Mr. Constâncio mentioned the central bank’s bond buying program and making loans available to banks, but he was blunt in saying that unless countries like Greece and Italy followed treaty rules and reduced their budget deficits, there was not much the central bank could do.

“The countries must deliver,” said Mr. Constâncio, a former governor of the Portuguese central bank. “In the end, it is governments that are responsible for the euro area — it is not just the E.C.B.”

It is this eat-your-spinach policy approach, however, that many analysts now say is making the situation worse as countries throughout the euro area — including Germany, the region’s economic locomotive — cut spending and raise taxes to meet budget deficit targets.

In a recent paper, Simon Tilford, an economist at the Center for European Reform in London, argues that imposing additional rules rather than creating a federal framework to allow the euro zone to commonly transfer or borrow money — as can be done in the United States — will end in disaster.

“The solution to the problem has become the problem itself,” he said. “And investors see this: you cannot just keep cutting spending in the teeth of a recession.”

Bernard Connolly, a persistent critic of Europe, estimates it would cost Germany, as the main surplus-generating country in the euro area, about 7 percent of its annual gross domestic product over several years to transfer sufficient funds to bail out Europe’s debt-burdened countries, including France.

That amount, he has argued, would far surpass the huge reparations bill foisted upon Germany by the victorious powers after World War I, the final payment of which Germany made in 2010.

Analysts say it is the unbending attitude of Germany, Europe’s richest country, that it not become responsible for the debts of weaker economies that has so far stymied progress on the widely supported idea of a euro area able to issue its own bonds.

Lack of movement on a federal Europe has pushed investors to consider what would happen if a country like Greece exited the euro zone. Analysts predict dire consequences for the departing country, ranging from default to a collapse of its banking system.

A recent report by UBS estimated that in the first year, the citizens of the exiting nation would face costs of as much as 11,000 euros a person on top of the austerity-induced pain already incurred.

Such a move might be legally impossible: there is no provision in any European treaty for a country to leave or be expelled from the euro zone — a conscious choice by the framers of the project.

But if a country made such a decision, it would have to leave the 27-member European Union as well, thus entering a more profound state of exile.

A view is now taking hold among many European leaders that the ever-worsening crisis may result in Brussels being given direct control over the budgets of countries that continue to run excessive deficits — a proposal made recently by the euro’s most passionate advocate, Jean-Claude Trichet, former president of the European Central Bank.

“The will to make this thing work is stronger than you might think,” said Larry Hatheway, an economist at UBS and one of the authors of the report on the cost of one or more countries leaving the euro zone.

In this vein, several economists at Bruegel, a research institute in Brussels, are calling for a euro zone finance minister, elected by the European Parliament, who would have limited federal powers to raise revenue.

This is a radical measure, to be sure. Not only would it challenge the sovereignty of nations, but it would also require time and treaty changes.

With time short, pressure is building on the European Central Bank to defy German objections and buy more distressed government bonds, but there is little indication the bank has decided to do so.

Last week, Mr. Constâncio actually appeared to boast about the bank’s restraint thus far, explaining to harried investors that the central bank’s bond-buying effort represented about 2 percent of euro area G.D.P. That compares with an intervention of 11 percent of G.D.P. by the Federal Reserve in the United States and 13 percent by the Bank of England.

“We are not financing the deficits of countries,” he said.

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