sovereign debt

Fed Plans New Stress Tests for Biggest Banks

November 23, 2011 by NewsMaker Leave a Comment

Now in their second year, the reviews have quickly become an important tool to help regulators assess the condition of the banks and restore confidence in the financial system. They also have divided the industry between the strongest banks, like JPMorgan Chase and Goldman Sachs, which were permitted to start increasing their dividends and repurchase billions of dollars’ worth of shares this spring, and weaker institutions, like Bank of America, whose requests were denied.

The latest round of tests will give those banks another chance to convince regulators that they have regained their footing and can weather a range of unexpected financial shocks. Banks will have to complete the exams and make any requests to return capital to shareholders by Jan. 9. The Fed is expected to announce its decisions on those plans by early March.

This time, a few new twists are planned.

Unlike the previous exams, which focused on financial conditions in the United States, the new tests will require several of the big Wall Street banks to assess the potential effect of a sudden downturn on European bank loans and sovereign debt. And in an attempt to provide investors with more information, the Fed will publish its revenue and loss estimates for each of the large banks it reviews.

The Fed will also expand the scope of the exams to 31 large banks, up from the 19 biggest.

Despite the fragile economy, federal regulators have been relatively sanguine about the recovery of the nation’s banks, emphasizing that they have far more capital and cash on hand than they did in the months before the financial crisis in 2008.

On Tuesday, the Federal Deposit Insurance Corporation provided fresh evidence that the banking industry was working slowly through its problems when it released its report on third-quarter results. Profits for the nation’s 7,436 lenders rose nearly 50 percent, to $35.3 billion, compared with the period a year ago, while the number of banks at risk of failure shrank for the second consecutive quarter. In the third quarter, regulators closed 25 banks and added only a few new ones to the at-risk list. The list of so-called problem banks stands at 844, down from 865 at the end of June.

With fewer attractive places to lend or invest, banks have been stockpiling billions of dollars of excess profits. In fact, retained earnings in the third quarter reached their highest level since the height of the boom in 2006. That may give banks a freer hand to return capital to shareholders than they had in 2010, when regulators took a relatively tough stance.

Under the guidelines released Tuesday, the Federal Reserve will again evaluate the ability of the 19 largest banks to withstand losses under a set of adverse economic conditions over the next two years. Among the hypothetical situations are ones in which unemployment rises at the average rate of the last several recessions, domestic and global economic output contracts significantly, and stock and bond prices plunge starting in the fourth quarter of 2011. Six of the 19 banks with large trading operations will be required to estimate potential losses from their exposure to European debt.

Fed officials, in turn, will assess the banks’ internal capital management and any plans to increase stock dividends or buy back additional shares. The banks must show that they are strong enough to meet the new capital requirements from international accords and cope with worse-than-expected legal settlements tied to the mortgage and foreclosure mess.

The official stress tests will evaluate the condition of the 19 biggest banks, which have assets of at least $100 billion. Those include Wall Street giants like Citigroup and Morgan Stanley as well as large regional banks like PNC Financial and U.S. Bancorp. Banks owned by MetLife, the insurer, and Ally Financial, the consumer lender once known as GMAC, are also subject to the reviews.

But this year, the Fed has also ordered the next dozen largest lenders with assets of at least $50 billion to undergo what is essentially a do-it-yourself version of the exam. These institutions — including Discover Financial, Northern Trust, and Zions Bancshares as well as the United States subsidiaries of several foreign banks, like BBVA, HSBC, and the Royal Bank of Scotland — had not previously participated in formal stress tests.

They must make similar loss assumptions that will be validated by Fed officials. But the bar for the level of detail and analysis supplied by each of those banks is generally expected to be lower, given the size and scope of their activities. These stress tests, with those required for the 19 biggest banks, will help the Fed satisfy a new requirement for annual reviews of large financial companies under the Dodd-Frank financial overhaul bill.

Article source: http://feeds.nytimes.com/click.phdo?i=11fe584f187ca0d6331d6fbaf9069fa5

Filed Under: Economy News Tagged With: bank of america, jpmorgan chase, sovereign debt

Banks Seek Emergency Funds From E.C.B.

November 22, 2011 by NewsMaker Leave a Comment

Lenders took out €247 billion, or $333 billion, in one-week loans, the E.C.B. said, the biggest amount since April 2009. When banks borrow from the E.C.B., it is usually a sign that they cannot get credit on the open market at reasonable rates.

The sovereign debt crisis has undermined the flow of funds to banks in the euro area by raising doubts about the solvency of institutions with a large exposure to European government debt. In particular, U.S. money market funds have severely cut back lending to European banks in recent months, leading many institutions to turn to the E.C.B.

Compounding the problem, many euro area banks have also had trouble selling bonds as a way to raise money that they can lend to customers, raising the specter of a credit crunch that could amplify an impending economic slowdown. In addition, some banks may fail if they are unable to raise short-term cash.

On Tuesday, the Spanish treasury sold three-month bills priced to yield 5.11 percent, more than double the 2.29 percent yield at a sale of similar securities on Oct. 25. It also sold six-month debt at 5.23 percent, up from 3.30 percent in October.

Euro zone bonds reflected continuing stress. Spain’s 10-year bonds were at 6.57 percent, up 6 basis points, while Italy’s 10-year bonds were up 16 basis points at 6.81 percent. French 10-year bonds were at 3.5 percent, up 6 basis points. A basis point is one-hundredth of a percent.

Wall Street stocks traded weakly and European markets gave up early gains after Spanish debt commanded sharply higher yields and revised data showed that the United States grew less than first thought in the third quarter.

The Euro Stoxx 50, a barometer of European blue chip stocks, lost 1 percent on Monday, while the FTSE 100 pulled back 0.3 percent.

The E.C.B. said that 178 banks asked for loans Tuesday. That compares with the 161 banks that borrowed €230 billion last week. Since 2008 the central bank has been allowing lenders to borrow as much as they want at the benchmark interest rate, which at present is 1.25 percent. Banks must provide collateral, and the E.C.B. is not supposed to prop up banks that are insolvent, only those that have a temporary liquidity problem.

At the same time, the E.C.B. continued to resist calls that it stretch its mandate and expand the money supply, as the U.S. Federal Reserve and Bank of England have done. The E.C.B. has been buying bonds from countries like Spain and Italy to try to hold down their borrowing costs, but the amount — €195 billion so far — is modest compared with the “quantitative easing” employed by other central banks.

A growing number of commentators say the E.C.B. should be able to buy government bonds to stimulate the economy. “It is essential to have a central bank free to use all the levers, including variants of quantitative easing,” Adair Turner, chairman of the British Financial Services Authority, told an audience in Frankfurt late Monday that included Vítor Constâncio, vice president of the E.C.B.

Richard Koo, chief economist at the Nomura Research Institute, wrote in a note Tuesday that “the E.C.B. should embark on a quantitative easing program similar in scale to those undertaken by Japan, the U.S. and the U.K.”

“Doubling the current supply of liquidity would not trigger inflation and would enable the E.C.B. to buy that much more euro zone government debt,” Mr. Koo said.

But there has been no sign the E.C.B. will budge from its position that it is barred from financing governments, and that purchases of government bonds are justified only as a way of maintaining control over interest rates and fulfilling the bank’s main task of keeping prices stable.

“By assuming the role of lender of last resort for highly indebted member states, the bank would overextend its mandate and shed doubt on the legitimacy of its independence,” Jens Weidmann, president of the German Bundesbank and a member of the E.C.B.’s governing council, said Tuesday in Berlin.

“To follow this path would be like drinking seawater to quench a thirst,” he said.

Lucas D. Papademos, the new prime minister of Greece and a former vice president of the E.C.B., met with Mario Draghi, the E.C.B. president, when he visited the bank Monday. The bank did not disclose details of their discussions, but Greece’s fate is to a large extent in the E.C.B.’s hands. Because of its bond purchases, the E.C.B. is the Greek government’s largest creditor, and the E.C.B. is one of the institutions that determines whether Greece will continue to receive E.U. aid.

Meanwhile, U.S. money market funds continue to pull cash out of Europe and especially out of France, according to data published Tuesday by Fitch Ratings. The ratings agency said U.S. prime money market funds had reduced their total exposure to European banks by 14 percent from their exposure at the end of August, and by 37 percent since the end of May. U.S. funds have cut their exposure to French banks by 42 percent since the end of August, Fitch said.

Article source: http://www.nytimes.com/2011/11/23/business/global/banks-seek-emergency-funds-from-ecb.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: blue chip stocks, euro stoxx 50, sovereign debt

Greece and Italy Seek a Solution From Technocrats

November 11, 2011 by NewsMaker Leave a Comment

Greece named Lucas Papademos, a former vice president of the European Central Bank, interim prime minister of a unity government charged with preventing the country from default. In Italy, momentum was building behind Mario Monti, a former European commissioner, to replace the once-invincible Prime Minister Silvio Berlusconi as early as Monday.

The question now, in both Italy and Greece, is whether the technocrats can succeed where elected leaders failed — whether pressure from the European Union backed by the whip of the financial markets will be enough to dislodge the entrenched cultures of political patronage that experts largely blame for the slow growth and financial crises that plague both countries.

Some said there was cause for optimism. “First, the mere fact that they have been asked in such difficult circumstances means that they have a mandate,” said Iain Begg, an expert on the European monetary union at the London School of Economics. “Granted, it’s not a democratic one, but it flows from disaffection with the bickering political class.”

The conventional wisdom from European Union leaders in Brussels has been that greater political consensus in Greece and a change of leadership in Italy could help restore market confidence in the euro. But with investors increasingly viewing European sovereign debt as a toxic asset, it seems doubtful that the markets will truly calm down until both Italy and Greece do more than apply fiscal bandages and until the European Union can put more firepower in its bailout mechanisms.

On the surface, Greece and Italy seem remarkably alike. Both countries have entrenched patronage networks that predate the European Union by centuries and suffocating regulations and work rules. And both Mr. Papademos, 64, and Mr. Monti, 68, the president of Bocconi University in Milan, have close ties to European Union officials, who are taking a strong hand in managing the affairs of both countries because the fate of the euro hangs in the balance.

Both face daunting changes. In Italy, a new government will be asked to carry out labor and tax reforms and other growth-enhancing measures. It will also have to write a new electoral law.

In Greece, the government must push through unpopular wage cuts and public sector layoffs in exchange for more foreign aid, and then try to make more structural changes during its brief mandate than the country has introduced in 30 years.

But the similarities end there. Greece is effectively bankrupt and needs a steady hand to guide it. Prime Minister George A. Papandreou ran out of political capital trying to impose austerity on a restive country. Some have criticized him for failing to carry out reforms fast enough, while no party alone has wanted to bear the political cost of stepping into his shoes.

Mr. Papademos must also negotiate with the European Union and banks on the terms of a delicate voluntary write-down of Greek private debt so as to avoid a default — amid a deep recession, a credit crunch and a climate of growing social unrest.

In Italy, where the economic fundaments are far stronger than those of Greece, there is a new wind of optimism mixed with trepidation this week, as the debt crisis led to the abrupt end of the Berlusconi era.

“It’s a historic moment,” said Roberto Napoletano, the editor in chief of the business daily Il Sole 24 Ore, which has been running campaigns to alert Italians that their savings and businesses are at risk without credible leadership. “Italy has to act, but it can do it.”

Indeed, Italy pulled back from the brink on Thursday as investors gained confidence that Mr. Berlusconi would be gone by Monday, replaced by Mr. Monti, an economist with an international reputation. That impression was underscored by the sight of Mr. Monti arriving at the Quirinal Palace on Thursday, where he met for two hours with Italy’s president, Giorgio Napolitano, who is responsible for picking a new head of government.

Mr. Berlusconi himself sent Mr. Monti a telegram wishing him “fruitful work in the interests of the country,” the news agency ANSA reported.

In contrast to Greece, which resents outside interference, Italy has often looked to technocratic leaders backed by outside powers in moments of political transition. It did so in the early 1990s, after the collapse of the postwar political order, and again in the mid-1990s, when a unity government pushed through changes that helped Italy into the euro.

Article source: http://www.nytimes.com/2011/11/11/world/europe/greece-and-italy-ask-technocrats-to-find-solution.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: disaffection, silvio berlusconi, sovereign debt

DealBook: BNP Paribas Writes Down Greek Debt as Earnings Slump

November 4, 2011 by NewsMaker Leave a Comment

Chris Ratcliffe/Bloomberg NewsA BNP Paribas branch in Paris.

PARIS — BNP Paribas, the largest French bank, announced a sharp decline in third-quarter profit on Thursday and said it was writing off 60 percent of the value of its holdings of Greek debt, a belated acknowledgement that the loans were largely unrecoverable.

The bank, based in Paris, said it was setting aside about 2.1 billion euros ($2.9 billion) of the value of its Greek sovereign debt, while also writing down about 116 million euros of exposure to Greek corporate bonds.

The bank said it had also moved to address its exposure to the debt of other troubled governments in the euro zone, selling 1.9 billion euros worth of Greek sovereign debt, 8.2 billion euros of Italian debt and 2.5 billion euros of Spanish debt.

DealBook: MF Global Fights to Stay Afloat After Two Credit Downgrades

October 28, 2011 by NewsMaker Leave a Comment

David Goldman for The New York TimesJon S. Corzine, the chief executive of MF Global, has tried to figure out ways to promote the firm’s financial strengths.

9:07 p.m. | Updated

MF Global, the commodities and derivatives brokerage house, was in a fight for its life Thursday night after the firm drew down its main credit line and two major credit ratings agencies cut their ratings on the firm to junk.

MF Global is scrambling to sell some or all of itself. The firm has enough assets to survive for at least the next few days, said a person outside the firm who was briefed on its condition.

The pressure on MF Global is mounting even as a deal over Greece’s debt has provided market relief to other American financial institutions. Investors have grown increasingly worried about MF Global’s capital position given its exposure to $6.3 billion in debt from Italy, Spain, Belgium, Ireland and Portugal.

But during the market day on Thursday, Fitch Ratings cut its credit rating on the firm to junk status, and shares of MF Global tumbled nearly 16 percent, even as other financial stocks surged.

Late on Thursday, Moody’s Investors Service cut its rating on MF Global for a second time this week, to Ba2 from Baa3. The downgrade to junk status, Moody’s said, “reflects our view that MF Global’s weak core profitability contributed to it taking on substantial risk in the form of its exposure to European sovereign debt in peripheral countries.”

The other major credit ratings agency, Standard Poor’s, warned on Wednesday that it might cut its ratings, too. The ratings downgrades could limit the number of counterparties willing to trade with MF Global.

To bolster its cash position, MF Global has tapped a $1.3 billion credit line at the parent company level, people briefed on the matter said Thursday evening. The firm still has financing available, including at least some of a $300 million revolving credit line in its broker-dealer subsidiary as well as bank overdrafts and letters of credit.

An MF Global spokeswoman, Tiffany Galvin, declined to comment.

People close to MF Global said that as of Thursday afternoon, only a small percentage of client funds — in the low single digits — had left the firm. Most of that appeared to be clients spreading their accounts across multiple brokerage houses.

These people added that the firm had adequate liquidity and that it was not contemplating filing for bankruptcy.

For days, analysts and investors have worried that time is running short for MF Global to solve its multiplying problems. The firm has hired Evercore Partners to help it assess strategic options, which include potentially selling its futures brokerage unit to a larger institution, according to people briefed on the deliberations.

But the firm is still considering other alternatives and has not settled on a definitive course of action, these people cautioned.

Within MF Global’s offices in Midtown Manhattan, the mood among the rank and file has been tense but defiant. Many employees have been working through the night talking to clients concerned about the speculation about the firm.

The firm’s chief executive, Jon S. Corzine, has held several firmwide conference calls to disseminate talking points on the company’s financial strength, according to a person with direct knowledge of the matter.

Many lower-level employees say they believe that talk about the firm’s troubles is overblown, and some have even bet on a comeback by buying MF Global shares for their personal accounts, this person said.

Major exchanges including the IntercontinentalExchange and the CME Group said that MF Global remained a clearing member in good standing as of Thursday afternoon, according to representatives for the bourses.

But that was before Bloomberg News reported that MF Global had drawn down its credit line.

Thursday’s downgrade marks the latest blow to MF Global, which Mr. Corzine, the former Goldman Sachs chief and former New Jersey governor, has sought to transform itself from a derivatives and commodities brokerage into a full-blown investment bank. A centerpiece of that plan included taking on additional risk, and potential profit, by making more trades using the firm’s own capital.

That plan has been dealt sharp setbacks over the past week, starting with a ratings downgrade by Moody’s on Monday and MF Global’s announcement of a $186 million quarterly loss the next day.

Article source: http://feeds.nytimes.com/click.phdo?i=9d1464a4fcbadeeaeff83abcd42f8125

Filed Under: Business News Tagged With: cash position, financial stocks, sovereign debt

DealBook: Deutsche Bank Earnings Beat Expectations

October 25, 2011 by NewsMaker Leave a Comment

Joerg Carstensen/European Pressphoto AgencyJosef Ackermann, the chief of Deutsche Bank.

Deutsche Bank, the largest German lender, on Tuesday reported third-quarter profit that was above expectations, as improvement in its consumer banking business helped offset a plunge in trading revenue that the bank blamed on the European sovereign debt crisis.

The bank said profit in the three months ended Sept. 30 was 777 million euros ($1.1 billion), after a loss of 1.2 billion euros in the period a year earlier. Analysts surveyed by Reuters had expected a net profit of 400 million euros.

But pretax profit in the corporate banking and securities division, which includes the investment bank, plunged to 70 million euros in the quarter from 1.1 billion euros a year earlier, the bank said.

“During the third quarter, the operating environment was more difficult than at any time since the end of 2008, driven by a deteriorating macroeconomic outlook, and significant financial market turbulence,” Josef Ackermann, the chief executive of Deutsche Bank, said in a statement. “Our performance was, inevitably, impacted by this environment.”

He said the bank had taken steps to reduce risk in investment banking, and put more emphasis on selling banking services to consumers.

Banks in Europe are under pressure to prepare themselves for the likelihood that Greece will default on its government bonds. Deutsche Bank, which reported a loss of 185 million euros related to holdings of Greek bonds in the quarter, is among institutions that may need to raise more capital.

The bank said its core Tier 1 equity, a measure of its ability to withstand financial shocks, was 10.1 percent at the end of the quarter, down from 10.2 percent at the end of the second quarter. European regulators are expected to push banks to raise the ratio to 9 percent by June at the latest.

While Deutsche Bank is above that level, it might still face market pressure to exceed the minimum by a more comfortable margin.

The bank could increase its capital ratio by selling new shares or, more likely, by retaining profit instead of paying it out to shareholders. The bank can also sell assets to raise the ratio of reserves to money at risk.

Article source: http://dealbook.nytimes.com/2011/10/25/deutsche-bank-earnings-beat-expectations/?partner=rss&emc=rss

Filed Under: Global Business Tagged With: consumer banking, corporate banking, sovereign debt

DealBook: Banks in Europe Face Huge Losses From Greece

October 5, 2011 by NewsMaker Leave a Comment

Yves Herman/ReutersShares of Dexia, the large French-Belgian bank, collapsed in recent days. Banking woes prompted a broad market sell-off in Europe on Tuesday.

Europe’s biggest banks may finally be forced to own up to their losses.

While bank executives and government leaders have been reluctant to acknowledge that the hundreds of billions of euros of Greek debt held by financial institutions is worth far less than its face value, they are slowly accepting the grim reality, as investors, clients and lenders grow increasingly wary.

On Tuesday, Deutsche Bank said it would not meet its profit goals for the year, citing investor uncertainty and losses on Greek bond holdings. Government officials are debating dismantling Dexia, the large French-Belgian bank, and warehousing its troubled assets in a bad bank.

The latest woes prompted a broad market sell-off in Europe, hitting banks in France and Germany particularly hard. Wall Street, dragged down early by the problems on the Continent, lifted at the close, after reports that European financial officials were considering ways to shore up the industry.

As Europe’s debt crisis continues to fester, financial firms exposed to troubled sovereign debt face a brutal fallout.

Weaker banks are moving closer to the embrace of their governments. Shares of Dexia — which held more than 21 billion euros of Greek, Italian, Spanish and Portuguese bonds at the end of last year — collapsed in recent days. The situation led the Belgian and French governments, three years after originally bailing out Dexia, to guarantee the bank’s future financing needs.

For stronger banks like Deutsche Bank, the biggest in Germany, the pressure is building to cut costs and raise capital. On Tuesday, Deutsche said that it could no longer meet its 2011 profit target of 10 billion euros, or $13.3 billion. The bank said it would take a loss of 250 million euros on its Greek debt and cut 500 investment banking jobs, most of them outside Germany.

By the numbers, a write-down on Greek debt should be affordable. Some banks have already marked down their holdings to market prices. But several of the biggest holders, including Dexia, Société Générale, BNP Paribas and two German-owned state banks, have resisted admitting that their Greek bonds are worth, at best, 50 percent of their face value. Dexia has 3.4 billion euros on its books while Deutsche Bank holds 1.1 billion euros.

European policy makers are fearful of pushing Greece into default. Regulators want to wait until they can erect a firewall around Italian and Spanish debt and protect the European banks holding the bonds on their balance sheets at near or face value.

“Once you take a write-down on Greek debt for Dexia, this has systemic implications for the French and German banks,” said Karel Lannoo, the chief executive of the Center for European Policy Studies in Brussels. Dexia may be one of the worst-off banks, he said, but “the issue is the same for all banks — it will be the taxpayer that pays for this.”

European policy makers remain deeply divided on how to deal with the shaky banks.

The French government supports an exchange between Greece and bankers, which was negotiated in July as part of a second bailout for Athens.

But Germany has increasingly pushed for the banks to contribute a larger share of Greece’s growing bailout bill. Officials at the German finance ministry argue that the most efficient way to do this is for banks to take a 50 percent loss on their Greek bonds.

Since the private sector deal was forged in July, the prices of Greek bonds in secondary markets have plunged to about 36 percent of face value, from 75 percent. That has put additional pressure on European policy makers to change the terms of the deal. On Monday, Jean-Claude Juncker, the prime minister of Luxembourg, who leads a permanent working group of euro zone finance ministers, cited the changing market conditions and added that Europe was discussing “technical revisions” to the exchange.

Analysts point out that the cost of this private sector initiative has increased significantly. As originally planned, Greece was supposed to borrow 35 billion euros to buy the AAA bonds needed to back the new securities created for the debt swap.

But the global rally in high-quality debt has made the bonds pricier. People involved in the deal now say that Greece may need to borrow an extra 12 billion euros.

While the question remains whether taxpayers or financial firms will make up the difference, European authorities may be moving closer to a coordinated effort on the banks.

Olli Rehn, the European commissioner for economic affairs, told The Financial Times on Tuesday that banks’ capital positions “must be reinforced to provide additional safety margins and thus reduce uncertainty.” He said there was “a sense of urgency,” acknowledging that officials were discussing measures to bolster the banks.

Mr. Rehn’s reported comments appear to be at odds with those of his colleague, Michel Barnier, the European commissioner responsible for financial services. On Tuesday, after a meeting of European Union finance ministers in Luxembourg, Mr. Barnier said that although bank recapitalization was proceeding, there was no need for new measures.

A growing number of economists, and some voices within the International Monetary Fund, argue that banks need to formally acknowledge their losses to restore their credibility.

“It is difficult to see how Greece gets out of this without a write-down of its debt,” said a senior I.M.F. official who refused to be identified because he was not authorized to speak publicly on the sensitive issue.

Stephen Castle contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=e071b29ed9abfd7aa34c3f607f722fe9

Filed Under: Business News Tagged With: face value, government leaders, sovereign debt

Asian Markets Fall on Disappointment Over Fed’s Move

September 22, 2011 by NewsMaker Leave a Comment

The Hang Seng index in Hong Kong led declines across the region, diving 4.5 percent by midafternoon.

The Nikkei 225 index in Tokyo closed 2.1 percent lower, the Kospi in South Korea fell 2.9 percent and the S.P./ASX 200 in Australia dropped 2.6 percent.

European markets followed suit Thursday, with losses of more than 2 percent in morning trading.

The across-the-board declines came from investors’ increasing pessimism over the U.S. and European economies, analysts said.

“It’s just a repetition of the same old stories we have been reading for the past year and a half,” said Stephen Davies, chief executive of Javelin Wealth Management in Singapore.

In Europe, a sovereign debt crisis is threatening to bankrupt Greece and investors fear that Italy will default on its debts, crises that could imperil the banking system across the continent.

On Wednesday the Fed announced it would buy long-term Treasury bonds and sell short-term bonds to help stimulate lending and growth.

But the U.S. central bank also said a complete economic recovery was still years away, adding that the U.S. economy has “significant downside risks to the economic outlook, including strains in global financial markets.”

The Fed pointed to a number of long-term problems in the American economy, including high unemployment and a depressed housing market.

The announcement sent stocks on Wall Street falling. The Dow Jones closed 2.6 percent lower on Wednesday; Standard Poor’s 500 index sank 2.9 percent and the Nasdaq composite dropped 2 percent.

Analysts said the declines in Asia on Thursday showed that investors were unsure that the Fed’s decision would fully address the economic slowdown in the United States.

Meanwhile, House Republican leaders suffered a surprising setback on Wednesday when the House rejected their version of a stopgap spending bill, leaving unclear how Congress will provide money to keep the government open after Sept. 30 and aid victims of a string of costly recent natural disasters.

The export-driven economies in Asia, like South Korea, are most vulnerable to the European and American economic challenges, said Tim Condon, head of Asia research at ING Group in Hong Kong.

Durable goods like automobiles and ships will be hurt most, he said.

Additionally, investors were beginning to worry that China’s rate of growth may slow, said Dariusz Kowalczyk, senior economist and strategist at Crédit Agricole CIB in Hong Kong.

The aversion to riskier assets helped prop up the U.S. dollar in foreign exchange markets on Thursday. The Australian dollar fell closer to parity with the U.S. dollar, and the euro was trading at $1.3550, down from around $1.36 in late New York trading.

The yield on 10-year U.S. Treasuries hit a new low of 1.82 percent during Asian trading.

“It really comes down to political immaturity in both the U.S. and Europe,” said Mr. Davies of Javelin Wealth Management. “The increasing chance of a U.S. recession and European implosion has shortened the odds of an overall second recession.”

Christine Hauser contributed reporting from New York and Robert Pear and Jennifer Steinhauer from Washington.

Article source: http://www.nytimes.com/2011/09/23/business/global/daily-stock-market-activity.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: economic outlook, kospi, sovereign debt

Fair Game: As Europe’s Crisis Grows, Over There Is Over Here

September 17, 2011 by NewsMaker Leave a Comment

Some of these banks are growing desperate for dollars. Fearing the worst, investors are pulling back, refusing to roll over the banks’ commercial paper, those short-term i.o.u.’s that are the lifeblood of commerce. Others are refusing to renew certificates of deposit. European banks need this money, in dollars, to extend loans to American companies and to pay their own debts.

Worries over the banks’ exposure to shaky European government debt have unsettled markets over there — shares of big French banks have taken a beating — but it is unclear how much this mess will hurt the economy back here. American stock markets, at least, seem a bit blasé about it all: the Standard Poor’s 500-stock index rose 5.3 percent last week.

But stock investors have a bad habit of dismissing problems in the credit markets until it is too late. Back in the summer of 2007, the stock market was roaring, despite obvious problems in the mortgage market.

Make no mistake: the troubles of Europe and its debt-weakened banks will imperil the United States. For many, it is no longer a question of whether but when Greece will default on its government debt. How far the sovereign debt crisis might spiral, and its precise ramifications, are unknowable, but some fault lines are evident.

Carl B. Weinberg, chief economist at High Frequency Economics in Valhalla, N.Y., outlined what he sees as the major risks — and they fall into two categories. One is the potential for losses incurred by financial institutions that wrote credit insurance on European government debt and the European banks that own so much of that paper. The other is the likely economic hit as banks in the euro zone curb lending significantly.

A crucial mechanism linking financial players in the United States to the problems in Europe involves credit default swaps, those insurance-like products that did so much damage during the 2008 financial crisis. (Think American International Group.)

Billions of dollars in swaps have been written on sovereign debt, guaranteeing that those who bought the insurance will be paid if Greece or other countries default. As of Sept. 9, some $32 billion in net credit insurance exposure was outstanding on debt of Greece, Portugal, Ireland and Spain, according to Markit, a financial data provider. An additional $23.6 billion has been written on Italy’s debt. Billions more in credit insurance have also been written on European banks, many of which hold huge positions in troubled sovereign obligations.

But since these instruments trade in secret, investors don’t know who would be on the hook — as A.I.G. was in its ill-fated mortgage insurance — should a government default or a bank fail.

“If Greece folds its tent and that takes out a big institution, we don’t know who wrote the swaps,” Mr. Weinberg said. “Can they raise the cash to perform on their obligations? Can they take the balance-sheet hits? We have a lot of unknown unknowns.”

Even after what we went through with A.I.G., the huge market in credit default swaps remains unregulated and still operates in the shadows. You can thank big banks that trade these instruments — and their lobbyists — for that.

As for the broader economic effects of Europe’s woes, Mr. Weinberg expects credit around the world to become even scarcer. “Outside the U.S., we never really resumed credit growth since 2009,” he said. “Another hit now would bring credit down and impose a huge squeeze on small businesses throughout Europe and over here also.”

ONE troubling aspect of the euro zone crisis is just how large the European banks’ sovereign debt holdings are. At many institutions, the positions dwarf what American institutions held in mortgage-related securities, for example, when compared to book values.

Why? Regulators encouraged European banks to hold huge amounts of European government debt by letting them account for these investments as if they posed zero risk. That meant the banks didn’t need to set aside a single euro in capital against those holdings.

Now, according to an analysis by Autonomous Research, 43 large European banks hold debt in troubled sovereigns that is equal to 63 percent of those institutions’ book values.

Adding to the peril is that these banks are funded primarily by short-term investors, like buyers of commercial paper, rather than by depositors, as is more often the case with American banks. This was the same problem faced by Bear Stearns and Lehman Brothers, which collapsed after short-term lenders fled in panic.

Measuring the loans made to European banks against their deposits tells the story. Across Europe, according to Autonomous Research, loans to banks exceed their deposits by 6 percent. Among French banks, loans exceed deposits by 19 percent. In Greece, they swamp deposits by 32 percent.

In the United States, by contrast, banks are borrowing less than 90 percent of their deposits, on average.

This is why it is becoming such a problem for European banks that so many short-term lenders are declining to renew when loans come due. Money market funds, traditionally big investors in short-term paper issued by European banks, have been reducing exposures. A recent Fitch Ratings report shows that for the two months ended July 31, the 10 largest United States prime money market funds pared their holdings in European banks by 20.4 percent, in dollar terms. In the same period, the funds cut their exposure to Italian and Spanish banks by 97 percent.

But these money funds, with total assets of $658 billion, held $309 billion in debt obligations issued by European banks. That’s equivalent to 47 percent of these funds’ total assets.

“We’re seeing a lot of the same things in the markets that we saw in the Lehman era,” Mr. Weinberg said, referring to that awful episode three years ago. “I can’t tell you specifically and exactly how the fallout from Europe will pass through to us, but I certainly can’t tell you it won’t.”

Article source: http://feeds.nytimes.com/click.phdo?i=55444b7e1858e4d40fb82fcf20d8c769

Filed Under: Economy News Tagged With: credit markets, sovereign debt, stock investors

Central Banks Act in Concert to Ease Fears on Europe Debt

September 15, 2011 by NewsMaker Leave a Comment

The banks, in a coordinated action intended to restore market confidence, agreed to pump dollars into the European banking system in the first such show of force in more than a year.

The move, coming almost exactly three years after the collapse of the investment bank Lehman Brothers, sharply increased the value of shares in banks heavily exposed to debt from Greece and the other struggling members of the 17-nation euro zone.

The euro, which had been falling in recent days, rebounded, rising roughly 1 percent in European trading Thursday. But whether the central bank action would provide lasting relief remained to be seen.

The European Central Bank said it would allow banks to borrow dollars for up to three months, instead of just for one week as before. The E.C.B. said it was acting in cooperation with the Federal Reserve of the United States, the Bank of England, the Bank of Japan and the Swiss National Bank.

It was the first coordinated effort to provide dollars since May 2010, and seemed to go beyond just providing reassurance that European banks would not be cut off by U.S. lenders wary of their financial state. It also echoed a similar move undertaken just a few days after the Lehman Brothers bankruptcy nearly brought the world’s financial system to its knees.

The central banks seemed determined to demonstrate that they would not hesitate to deploy their combined weight to keep the European sovereign debt crisis from leading to a collapse of the euro zone.

“They are getting together and acting together,” Christine Lagarde, the president of the International Monetary Fund, said in Washington on Thursday. “To me, that is the most important message.”

But Ms. Lagarde also warned that policy makers had depleted their ammunition since the financial crisis of 2008, and suggested more action was needed.

“We have entered into a dangerous phase of the crisis,” she said. There is still a path to recovery, she said, but it is “a narrow one.”

The central bank action comes as European finance ministers and other key policy makers were gathering in Wroclaw, Poland, for meetings on Friday and Saturday. The U.S. Treasury secretary, Timothy F. Geithner, who was scheduled to attend, was expected to urge European officials to act more aggressively to contain the crisis, which has already begun to undercut growth in Europe.

An official forecast warned Thursday that growth in Europe would come “to a virtual standstill” toward the end of the year. The European Commission, the bloc’s executive, cut the growth forecast for the euro area to 0.2 percent for the third quarter and 0.1 percent in the fourth, down from 0.4 percent for both periods. It predicted, though, that Europe would just barely avoid a double-dip recession.

Analysts said they expected Mr. Geithner to press European ministers in Wroclaw to increase the resources available to their bailout fund for the euro zone countries. But among European leaders, and even within the E.C.B., deep disagreements exist over how to prevent the problems of Greece from undermining the common currency.

Members of the euro area are still struggling to ratify an expansion of the bailout fund that they agreed to in July. A further expansion of the fund has raised fears that the increased obligations could hurt some countries’ credit ratings.

“Part of the problem for policy makers is that they are still waiting for last big initiative to get off the ground,” said Peter Westaway, chief European economist in London for Nomura. “We’re all kind of on hold until then.”

Article source: http://www.nytimes.com/2011/09/16/business/global/borrowing-costs-stubbornly-high-at-spanish-auction.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: investment bank, sovereign debt, swiss national bank