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Anxiety Hits Shares of French Banks

August 10, 2011 by Leave a Comment

French banks are loaded up on the debt of Italy and Greece, among other troubled European countries that share the euro currency.

France has become the newest target in the game of Who’s Next on the shrinking list of nations with AAA debt ratings.

And even though the credit ratings agencies and the French government have insisted that France is not in danger of a downgrade, the market anxieties spread wildly Wednesday, engulfing Société Générale, the second-largest French bank. Its shares slumped as much as 21 percent before closing down 14 percent for the day. Stock in BNP Paribas, France’s largest bank, fell 9.5 percent.

Bank shares in Italy and across Europe also tumbled on worries that efforts by European authorities to stem the debt crisis may work for only so long. The cost to insure French sovereign debt against default jumped to a record.

Because Europe’s banks trade billions of euros and dollars daily with their American counterparts, contagion could easily spread, making the stock plunges all the more worrisome. In the United States, both Goldman Sachs and Morgan Stanley were down more than 7 percent in midday trading.

President Nicolas Sarkozy interrupted his vacation on the French Riviera to return to Paris for an emergency meeting Wednesday with finance officials to discuss “the economic and financial situation” of France, which is among the weakest of any big AAA-ranked nation.

“There has been a lot of market noise about France, rather than ratings agency noise,” said Gary Jenkins, a strategist at Evolution Securities. “On the other hand, there was market noise about the PIGS and the United States before they were downgraded,” he noted, using an acronym for the European countries swept up in the debt crisis — Portugal, Ireland, Greece and Spain.

In contrast to the problems of Lehman Brothers and Bear Stearns in the United States that nearly brought down the global financial system in 2008, this time it is fears about European banks that are driving the wave of selling.

Financial institutions across Europe have huge holdings of government and corporate bonds from Italy and Spain, so doubts about their stability are encouraging investors to flee shares of Europe’s biggest banks.

French banks are among the most exposed to Greek and Italian debt, and hold huge amounts of French sovereign debt. Rumors that French banks have been having trouble getting funds after American regulators discouraged United States banks from lending to their euro counterparts also weighed on shares.

Société Générale in particular was hit by rumors that a Groupama, a large French reinsurer that owns about 4 percent of Société Générale shares — the largest shareholder after BlackRock — needed to raise money. Groupama did not return calls for comment.

But David Thébault, head of quantitative sales trading at Global Equities in Paris, noted that many insurance companies and banks were scrambling after Standard Poor’s downgraded the United States to AA+ from AAA to replace those securities, because they were required to hold only top-rated sovereign debt.

“Volatility is very high — we’re in quasi-crisis mode,” Mr. Thébault said. “The markets are reacting to any little rumor.”

Société Générale issued a statement after the close of trading “categorically denying with the most extreme vigor” the “totally unsubstantiated rumors” that caused it shares to slump.

The bank, which reported a 1.6 billion-euro first-quarter profit last week, said it asked the French stock market regulator to open an inquiry into the source of the rumors.

The big fear in the markets, though, is the threat of contagion — whatever the reason for the tumult.

“We’ve been really cautious, and the sovereign crisis is now escalating,” said Philip Finch, global bank strategist for UBS. “It boils down to a crisis of confidence. We haven’t seen policy makers come out with a plan that is viewed as comprehensive, coordinated and credible.”

David Jolly contributed reporting from Paris, Nelson Schwartz and Louise Story from New York, and Landon Thomas Jr. from London.

Article source: http://feeds.nytimes.com/click.phdo?i=aec848c8d224d940cba9652d4613ec6c

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DealBook: UBS and Deutsche Bank Results Underscore Anxiety Over Risk

July 27, 2011 by Leave a Comment

Kacper Pempel/Reuters

FRANKFURT — Two of Europe’s largest financial institutions delivered a reminder on Tuesday that investment banking remains a fickle source of revenue, as UBS issued a profit warning and Deutsche Bank reported earnings that were below expectations.

UBS, Switzerland’s biggest bank, warned that it would probably miss an earnings target set two years ago after its profit fell by half in the second quarter, in part because of a dismal performance at its investment banking unit. Deutsche Bank fared better, reporting a 6 percent increase in net profit that still missed forecasts. Revenue from trading fell because of uncertainty caused by Europe’s debt crisis, the bank said, while warning that profit from investment banking would fall short of targets.

The results may help reinforce Deutsche Bank’s decision on Monday to split its leadership between Anshu Jain, the head of its volatile investment banking business, and Jürgen Fitschen, a member of the management board with closer ties to the more stable retail banking business in Germany. They will succeed Josef Ackermann, who is expected to become chairman of Deutsche Bank’s supervisory board, in May.

While banks have experienced a recovery in investment banking profits since the financial crisis, they are under pressure by regulators to reduce risk, and they continue to face market turbulence caused by the European sovereign debt crisis and the budget deadlock in the United States. In addition, there are signs that growth is slowing in Europe.

Deutsche Bank has responded by putting more focus on its network of branches in Germany, while UBS is slashing costs.

“Banks’ returns have declined overall in the last 12 months, reflecting deleveraging and the actions being taken in advance of increased capital requirements,” Oswald J. Grübel, the chief executive of UBS, said in a statement.

UBS’s profit fell to 1 billion Swiss francs ($1.2 billion) in the three months through June, from 2 billion francs in the comparable quarter a year earlier, the company said. Pretax profit in the investment banking unit slumped to 376 million francs, from 1.3 billion francs in the same period last year.

UBS said in 2009 that it intended to reach a pretax profit of 15 billion francs by 2014. But Mr. Grübel said on Tuesday that goal “is unlikely to be achieved in the original time frame.”

Mr. Grübel added that UBS was “likely” to “book significant restructuring charges later this year” after a series of cost cuts.

Mr. Grübel has been focusing UBS on its main wealth management and investment banking activities to repair a bank that was among the hardest hit in the financial crisis.

But some analysts have recently started to doubt that Mr. Grübel’s plan would be enough. Its investment banking unit has continued to struggle, and the stricter capital requirements have hurt profitability.

A string of departures by bankers and lower appetite for risk among clients have hampered efforts to repair the unit.

UBS said Tuesday it plans to cut costs by as much as 2 billion francs over the next two to three years. At the same time, a decline in demand for its services because of a weaker economic outlook is expected to “constrain growth prospects.”

Deutsche Bank, the largest bank in Germany, said it increased revenue from noninvestment banking businesses such as retail banking, helping lift net profit to 1.2 billion euros ($1.7 billion). The numbers showed that Deutsche Bank was making progress in reducing its dependence on investment banking. Pretax profit in the corporate and investment bank was flat at 1.3 billion euros, while pretax profit from private clients and asset management more than doubled to 684 million euros, the bank said.

“Our efforts to recalibrate and rebalance our platform are paying off nicely,” Mr. Ackermann said in a statement.

Deutsche Bank said that Europe’s sovereign debt crisis has unsettled investors and led to lower sales and trading revenue, making it unlikely that the bank would meet its pretax profit goal for 2011 of 6.4 billion euros for the investment banking unit. However, the bank as a whole will still meet its full-year pretax target of 10 billion euros because of improved performance by the other units, Deutsche said.

Deutsche Bank also said it took a charge of 132 million euros to reflect the decline in value of its Greek bonds. It thus became one of the first European banks to recognize losses from Greece following a debt-relief agreement by European leaders.

“While the earnings environment remains tough for investment banks, Deutsche Bank has fared better than European peers and arguably faces lower short-term earnings risk,” Jon Peace, banking analyst at Nomura International, said in a note.

Late Monday, Deutsche Bank resolved a leadership crisis by saying that Mr. Jain and Mr. Fitschen will share chief executive duties. Mr. Ackermann, 63, has been chief executive since 2002.

Investors had favored Mr. Jain, 48, whose unit continues to supply by far the greatest share of profits, as chief executive. But Mr. Jain, a native of India who is not fluent in German, was regarded as not ready to assume the statesmanlike duties expected of the head of an institution that holds a prominent place in the nation’s identity.

Mr. Fitschen, 62, is expected to help overcome reservations by Deutsche Bank staff members about Mr. Jain.

Julia Werdigier reported from London.

Article source: http://feeds.nytimes.com/click.phdo?i=aa5049bc0a5be6b4e29327a0908b0510

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News Analysis: Pain Builds in Europe’s Sovereign Debt Risk

July 18, 2011 by Leave a Comment

LONDON — European banks for years bolstered their balance sheets with assets considered safe and secure: the sovereign debt of European countries.

But now this debt no longer appears so safe, weakening banks when countries still depend on them for loans to help finance their gaping budget deficits.

The results of the latest European bank stress test, released on Friday, revealed in greater detail than was previously known just how exposed Europe’s banks are to the government bonds of Greece, Portugal, Spain and Italy, which are losing more value daily.

Only eight small banks in Spain, Greece and Austria failed the European Banking Authority’s test, and were ordered to increase their reserves to protect against possible losses. But this may turn out to be a sideshow.

While the tests were criticized for not factoring in a Greek default, the more immediate concern could be the effect on bank balance sheets as their sovereign bond holdings — especially in the case of widely held Italian debt — continue to lose value in the bond market sell-off.

With those bonds now worth less, calls are growing for Europe to take urgent action to recapitalize its banks, as the United States and Britain did in 2008 when the financial crisis damaged the balance sheets of their banks. At the same time, the problems of Europe’s banks also mean it will be difficult for the spendthrift faction of European nations to rely on them to borrow aggressively to finance budget deficits, largely with impunity, as they did until 2008.

The prospect that the flu will spread beyond Greece and Spain to infect Italy and perhaps even France and Belgium, is sure to be a point of urgent discussion on Thursday in Brussels at the debt summit meeting for European Union leaders.

The exposure of European banks to sovereign debt is a point that regulators have long underscored, most recently and acutely in an illuminating report issued this month by the Bank for International Settlements.

The report highlighted just how thin the capital buffers are for banks in highly indebted European nations. For example, banking systems in Belgium, Greece and Italy are sitting on local government bond holdings that range from 60 percent to 90 percent of total bank capital.

“Until recently, investors have paid little attention to diversifying their portfolios of government bonds of advanced countries, as these bonds were considered virtually riskless,” the report warned. “This situation has changed: some sovereign securities have already lost their risk-free status, while others may do so in the future,” it said. Take Greece, for instance. The National Bank of Greece passed its test with a Tier 1 capital ratio of 11 percent, compared with a minimum of 5 percent required to pass. But the bank holds 18 billion euros worth of Greek bonds that are, at best, worth half that amount, and if written down accordingly would immediately wipe out the bank’s capital of 8.1 billion euros. 

BNP Paribas in France and Commerzbank in Germany also passed, but they own 5 billion and 3 billion euros, respectively, in Greek bonds. (As is the case with most banks, these assets are held in the banking book, not the trading book, so they do not reflect the true market value until written down.)

But it is to Italy, which, with its huge debt financing burden, is home to the world’s third largest bond market after Japan and the United States, that Europe’s banks remain most heavily exposed. 

It was the Greek finance minister who zeroed in on this point last week. Yes, Greece’s debt is high at 355 billion euros, Evangelos Venizelos said in a speech to his Parliament. But it was not as dire as Italy’s, he argued, because Italy borrows about that amount in a single year to keep current on its own financial obligations, which at 120 percent of gross domestic product are second only to those of Greece itself.

Again BNP Paribas stands out in that regard, owning 28 billion euros in Italian bonds (just about half its core capital at the end of 2010). Other big holders of Italian bonds include Commerzbank with 11 billion euros and Crédit Agricole in France with 10.7 billion euros.

Unicredit, the large Italy-based bank with significant operations outside its core market, remains tied to the fortunes of its home country. At 49 billion euros, its Italian government bond holdings are 140 percent of capital as of 2010, according to stress test data.

Italian government debt does not carry anywhere close to the risk of its Greek counterpart. Italy’s budget deficit of 4 percent of gross domestic product puts it in a different category, and there has been no talk of Italy’s not being in a position to keep paying its obligations.

But as foreign and domestic holders of Italian bonds keep selling their holdings — bankers remark that many of the sellers are weak holders who were attracted to the higher yield but never thought that Italy would be lumped with Greece and others —  the price of the benchmark Italian bond has plummeted and the yield has spiked. 

What was once seen as more or less a risk-free asset is becoming increasingly less so, as the Bank for International Settlements’ report notes.

Beyond the sovereign debt question, other revelations are to be found in the individual bank disclosures.

The British banking giant Barclays, for example, has significant exposure to the troubled Spanish economy. After its home country and the United States, Spain represents the third largest credit market for Barclays. (Of this 43.9 billion euros, close to half is loans to Spain’s devastated mortgage and commercial real estate sectors.) 

And the British-government controlled Royal Bank of Scotland has 64 billion euros of dubious Irish loans on its books (12 billion euros of which is already in default), compared with a capital level of 58 billion euros at the end of 2010.

For now, all these banks can say that they have passed Europe’s latest banking crucible. Many have also raised equity over the last year to address market concerns.

But as the crisis worsens, it may well be the case that today’s capital cushion will not be enough to cover tomorrow’s sovereign bond losses.  

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Economix: What Is Capital?

July 16, 2011 by Leave a Comment

The European bank stress test results are out, and we are told that all but eight — or is it nine? — banks passed.

FLOYD NORRIS

FLOYD NORRIS

Notions on high and low finance.

There is a lot of talk about how stressful the tests really were. Are they not treating sovereign debt as being as risky as markets now believe it to be? That is interesting, but may not be very enlightening. We can take for granted that most or maybe all banks in any country would be in trouble if that country defaulted on its debts. It appears that we now will know more than ever before about the specific exposures of each bank.

You can check out the numbers for any particular bank here.

The tests covered 91 banks, but the European Banking Authority, which conducted the exercise, is releasing results for just 90 of them. The other one is Helaba, a German bank owned by two states. It told the agency that it could not release its results. (There is an interesting commentary on power. The bank can order the European agency to keep its opinion quiet.)

Helaba Landesbank Hessen-Thüringen, to use the full name, has posted its own stress tests results, which show it is in fine condition.

The dispute is over what counts as capital. Helaba is outraged that the E.B.A. will not count “hardened silent participations” as core capital. And what is that? As near as I can tell, it amounts to promises by the two states that own the bank that the states will put up more money if needed.

Spanish banks that failed also are complaining about the definition of capital. They want “generic provisions” to count. Apparently that is reserves put aside to cover losses not yet identified.

In each case, previous stress tests counted the disputed capital.

The fact that these arguments are going on does provide some evidence that the stress tests are more credible than previous ones. They also remind us that one of the games that banks have played in the past — often with support from bank regulators — has been to count some pretty dubious things as capital. When the crisis hit, a lot of that “capital” turned out to not be of much use.

Article source: http://feeds.nytimes.com/click.phdo?i=030a7c2f11dff1f594d96bb04a14241d

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European Banks Urged to Bolster Reserves Following Stress Tests

July 15, 2011 by Leave a Comment

European regulators said 8 of 90 banks whose tests were disclosed had failed the so-called stress tests, a vast data-crunching exercise designed to expose risk and restore confidence in the overall health of the European financial system. A ninth bank, Helaba of Germany, would have failed but refused to disclose its data. An additional 16 passed narrowly, and will be asked to take steps to “promptly” increase their resilience, for example by raising more capital, the regulators said.

Of the banks that failed, five were in Spain, two in Greece and one in Austria, said the European Banking Authority, which conducted the tests.

All were relatively small players. But the stress test results could also put pressure on some giant banks that have been regarded as healthy, including Deutsche Bank in Germany, UniCredit in Italy, and Société Générale in France. Capital reserves at all three were uncomfortably close to the level where they would have formally been asked to raise more capital or reduce risk.

The test results arrive amid acute anxiety that Greece is on the verge of defaulting on its debt, an event that could provoke a banking crisis because so much of those bonds are parked on the balance sheets of European financial institutions. As a result, the stress tests have clear implications for the overall health of the euro zone.

“To me the real question is not stress in the institutions but the ability of states to control the sovereign debt” problem, Paolo Bordogna, head of financial services in Europe for the consulting firm Bain Co., said ahead of release of the results.

Analysts have been skeptical that the tests this year were rigorous enough to clear up doubts about the European banking system — and to encourage institutions to begin lending to each other again rather than relying on the European Central Bank for funds.

The European Banking Authority, or E.B.A., did not examine what would happen if Greece defaults, for example, which critics saw as a major flaw.

“This year’s tests still did not include the impact of a formal debt default by a European government, which is the single greatest risk facing the European banking sector at present,” Marie Diron, an economist who advises the consulting firm Ernst Young, wrote in a note. “The publication of these results will not assuage investors’ fears over the resilience of the E.U. banking sector,” she wrote, referring to the European Union.

But European officials argued that, even if people thought the test was too forgiving, they now had a huge amount of data they could use to run their own stress evaluations, including detailed information on bank holdings of government debt.

“We are putting out a lot of information so that investors and analysts can make up their own minds,” Andrea Enria, the chairman of the E.B.A., said by telephone. Mr. Enria defended the integrity of the stress test. It imagined that banks had to absorb a sharp recession and surge in unemployment, which implied banking losses that were twice as high as in 2009, the height of the financial crisis, he said.

The E.B.A. said that at the end of last year, 20 banks would have failed the test. But in the first four months of this year, banks raised about €50 billion, or $71 billion, in new capital.

Seven banks in Greece, Germany and Spain failed the tests last year and several others came close. But unlike the tests this year, there was no requirement for those that squeaked by to raise capital, just market pressure. The regulators argue that, since then, many banks have raised money, gotten rid of risky assets or taken other steps to become stronger, so that the fail rate this year is a sign of a stricter test.

The banks that failed or passed narrowly must now seek more capital from markets or governments. In extreme cases, they may have to be sold to other institutions or wound down.

Article source: http://www.nytimes.com/2011/07/16/business/global/european-banks-urged-to-bolster-reserves-following-stress-tests.html?partner=rss&emc=rss

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British Consumer Price Inflation Unexpectedly Slows

July 12, 2011 by Leave a Comment

LONDON — British consumer price inflation unexpectedly slowed in June, offering a temporary respite to the Bank of England while the sovereign debt crisis in Europe intensified.

The pace of consumer price increases slowed to 4.2 percent from 4.5 percent in May but remained well above the 2 percent Bank of England target, the Office for National Statistics said Tuesday.

The first drop in inflation in three months came as a surprise to some economists, who had expected higher food and commodity prices to continue to push overall prices up.

Slower inflation would reduce pressure on the Bank of England, which has kept interest rates at a record low of 0.5 percent to support a weak economic recovery even though inflation had continued to creep up well above its target.

The European Central Bank raised its interest rate to 1.5 percent last week to keep inflation in check.

Some economists warned that the inflation figures released Tuesday were just a temporary improvement, mainly due to stores starting to offer discounts early as consumer confidence floundered. Higher utility prices would probably still push inflation up to 5 percent this year, they warned.

“Most people were surprised by the figures,” Andrew Goodwin, an economist at Ernst Young in London, said. “Retailers are under so much pressure that they had to reduce prices early.”

The decline was led by clothing and items such as televisions, toys and computer games, the statistics office said. Retailers cut prices to lure consumers, who are putting off purchases amid concern about rising unemployment as a result of a wide-ranging government austerity program that started earlier this year.

Shares in the travel company Thomas Cook fell 28 percent Tuesday in London after it warned it would miss its profit forecast. Shares of Britain’s two largest supermarket chains, Tesco and J Sainsbury, also dropped.

The governor of the Bank of England, Mervyn A. King, said this month that factors responsible for higher inflation in the past, including a sales tax increase and higher commodity prices, would “not continue to push up the price level in the future” and that “inflation should fall back towards the target during the next two years.”

There are signs, however, that price increases could accelerate again. Centrica, Britain’s biggest energy supplier, said last week that it planned to raise gas and electricity prices by more than 15 percent as of August.

A drop in the euro against the pound could put pressure on the British economy, which probably grew just 0.1 percent in the second quarter from the first, according to the National Institute for Economic and Social Research.

Concerns this week that the sovereign debt crisis could spread to Italy weighed on the euro, making British exports to the euro zone more expensive and less competitive. The British government is relying partly on increasing exports to accelerate Britain’s economic recovery.

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Worsening Debt in Europe Is Called Major Threat to British Banks

June 25, 2011 by Leave a Comment

Mr. King urged British banks to be especially diligent and clear in disclosing their exposure to European sovereign debt, to avoid a collapse of confidence among investors. He also called on banks to set aside more capital when earnings were strong instead of distributing it to shareholders or employees.

“The most serious and immediate risk to the U.K. financial system stems from the worsening sovereign debt crisis in several euro area countries,” Mr. King said during a briefing on financial stability by the interim Financial Policy Committee, of which he is chairman.

The new committee, which includes executives from the Bank of England and the Financial Services Authority, is a result of Prime Minister David Cameron’s revamp of the country’s financial regulation after the banking crisis.

Mr. King’s comments came as European Union leaders met in Brussels to discuss a second bailout for Greece and ways to stabilize the euro zone area. Greece has until the end of the month to meet conditions for its next aid payment of 12 billion euros, or $17 billion, ahead of a finance ministers’ meeting on July 3.

Some investors remain concerned that the Greek prime minister, George A. Papandreou, could struggle to gather enough support to push through the necessary budget cuts, which has pushed down the euro and weighed on European stock markets. Jean-Claude Trichet, the president of the European Central Bank, warned earlier this week that the sovereign debt crisis posed a serious threat to the financial stability of Europe.

The Financial Policy Committee warned that “any escalation of stresses could also be transmitted via interconnected global markets, including via the United States, leading to a tightening of bank funding conditions.” It said “such contagion could be amplified if bank creditors were unsure about the resilience of their counterparties.”

Mr. King said he was less worried about British banks’ direct exposure to Greek debt, which he said was “very small,” than the chances that a lack of transparency and increased risk awareness could paralyze financial markets.

“If there’s uncertainty about exposures and a lack of transparency, there’s always the risk that people may feel it’s just not worth continuing the rollover funding to institutions,” Mr. King said. “Greater clarity about the extent of these exposures would help to limit the transmission of problems to U.K. banks.”

The European Banking Authority said Friday that it had adjusted its stress tests of European banks to better account for potential trading losses on sovereign debt from troubled economies, including Greece. The results are due next month.

“It’s necessary that stress tests are credible,” Mr. King said. The hope is that detailed data on the banks’ capital and government debt exposure would calm those investors who fear a Greek default.

The committee also warned that British banks should improve their provisioning for real estate loans that are in arrears or had breached some covenants. The committee implied that some banks were not diligent enough in setting aside money to cover such loans, which were mainly for commercial real estate.

The committee also said it was increasingly mindful of risks linked to exchange-traded funds, which were now worth $300 billion in Europe, and asked the Financial Services Authority to monitor the industry more closely.

Floyd Norris, whose Off the Charts column normally appears on this page, is on vacation.

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Spain’s Building Spree Leaves Some Airports and Roads Begging to Be Used

June 25, 2011 by Leave a Comment

To justify the grand opening, Carlos Fabra, the head of Castellón’s provincial government, argued that it was a unique opportunity to turn an airport into a tourist attraction, giving visitors full access to the runway and other areas normally off-limits. This Sunday, it will be used as the starting point for part of Spain’s national cycling championships, featuring the three-time Tour de France champion Alberto Contador.

Castellón Airport, built at a cost of 150 million euros ($213 million), is not the only white elephant that now dots Spain’s infrastructure landscape. Spain’s first privately held airport — in Ciudad Real in central Spain — was forced to enter bankruptcy proceedings a year ago because of a similar lack of traffic.

Across the country, nearly empty toll roads are struggling to turn a profit. Other projects are surviving only with continued public financing, which has been cast into doubt by Europe’s sovereign debt crisis.

Over the last 18 months, Spain has been in investors’ line of fire after permitting its budget deficit to balloon during a long property bubble, which finally burst alongside the worldwide financial crisis. To clean up the mess, the Socialist government of José Luis Rodríguez Zapatero introduced austerity measures last year that, among other things, shrank spending on infrastructure. That has left some projects in limbo, despite political pledges to keep them alive.

Over the last two decades, Spain built transportation networks at a rate that few other European countries approached.

Having opened its first high-speed train connection between Madrid and Seville in 1992, Spain overtook France last December as the country operating Europe’s biggest high-speed rail network, covering just over 2,000 kilometers, or 1,200 miles.

Growth in road and air transport has been just as spectacular. Between 1999 and 2009, Spain added over 5,000 kilometers of highways — the biggest road construction endeavor in Europe. And its 43 international airports handle more cross-border passengers than any other country in Europe.

Such expansion has been a source of intense national pride. It has also brought major economic benefits to some previously isolated and impoverished regions.

Yet like Castellón Airport, not all the projects were necessarily well thought out. Some experts suggest that Spain’s approach to development during the boom years placed speed ahead of risk assessment.

Joseph Santo, logistics and transportation director in the Iberian subsidiary of the consulting firm Booz Company, said there were differences between Spain and Britain, for example, when it came to forming so-called public-private partnerships in transportation.

“In the U.K, they try to get everything into the agreement ahead of time and think of every contingency, so that it can take years to negotiate the deal,” Mr. Santo said. “In Spain, they do the reverse. They make the deal in six months and then if something comes up, they see how they can fix it.”

In separate interviews, the heads of some of Spain’s largest construction and infrastructure management companies conceded that spending had gotten out of control before the crisis. But they also predicted that most building projects, particularly in transport, would eventually yield profits.

“The problem is that such projects are generally conceived at a time when everything seems bound to succeed — even sometimes badly conceived projects — and there were no doubt some planning problems,” said Salvador Alemany, the chairman of Abertis, an infrastructure management company that is based in Barcelona. “At the same time, such projects have to live with the realities of an economic cycle that brings lows as well as highs, and there are plenty of examples of highways around the world that had difficult takeoffs.”

Baldomero Falcones, chairman and chief executive of FCC, a builder, recalled the painful opening of toll roads in the region of Catalonia in the 1970s — roads that have recently required expansion to cope with soaring traffic.

“I have never seen any transport infrastructure that at the end of the day has not proved profitable,” he said.

Article source: http://www.nytimes.com/2011/06/25/business/global/25iht-transport25.html?partner=rss&emc=rss

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Stress Tests for Europe’s Banks Take Longer Than Expected

June 4, 2011 by Leave a Comment

LONDON — The stress testing of European banks is taking at least a month longer than initially expected because some banks submitted figures that were too optimistic or lacked detail, a person with direct knowledge of the process said on Thursday.

Banks were asked for more information about their calculations of how they would fare in distressed financial markets and to resubmit their results to the European Banking Authority, said the person, who spoke on condition of anonymity because the process is not public. The European Banking Authority, which is based in London, is expected to publish the results next month instead of this month.

“The tests are important because they give disclosure that is consistent across all banks,” said Philip Richards, an analyst at Société Générale in London. “It’s not about who fails but about getting more information including on sovereign debt risks.”

The delay, announced in a statement late Wednesday, comes after a similar test conducted last year drew criticism that the parameters used were not rigorous enough, and that the tests were too easy to restore confidence in the 91 European banks covered. Some economists said they excluded the possibility of a Greek debt default.

The banking authority released a stricter test methodology in March and the 91 banks submitted their data in April and May. But erroneous or missing data meant the banking authority would need more time to analyze the results.

“Errors will have to be rectified and amendments made where there are inconsistencies or unrealistic assumptions,” the authority said in the statement.

Some banks complained about the additional workload caused by the stress tests and others questioned their relevance. Hypo Real Estate, which failed the previous round of stress tests, said last year that the tests had “limited relevance” because it was already transferring troubled assets into a vehicle backed by the German government. Hypo Real Estate failed last year’s stress test along with ATEBank of Greece and five Spanish savings banks.

The new rules laid out by the authority this year have become a heated political issue again in Germany because they appear to create a problem for some German landesbanks by disqualifying a part of the funds they now use to meet regulations on shock-absorbing reserves. The economics minister of the state of Hessen, Dieter Posch, said in April that the state’s landesbank, Helaba, should boycott the stress test.

As part of the test, European banks would have to reveal how much sovereign debt from a European country they hold. At a time when some analysts say that a restructuring of Greece’s debt remains an option, such numbers will be closely watched by investors.

Jack Ewing contributed reporting from Frankfurt.

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I.M.F. Warns Europe’s Debt Crisis Could Still Spread

May 12, 2011 by Leave a Comment

FRANKFURT — Despite bailouts for Greece, Ireland and Portugal, Europe’s debt crisis could still spread to core euro zone countries and the emerging economies of eastern Europe, the International Monetary Fund warned on Thursday.

The IMF said it stood ready to provide more aid to Greece if requested, though the country that triggered the sovereign debt crisis in 2009 still had plenty of untapped options for raising extra cash itself though privatizations.

“Contagion to the core euro area, and then onwards to emerging Europe, remains a tangible downside risk,” the global lender’s latest economic report on Europe said.

Finance ministers of the 17-nation single currency area are set to approve a €78 billion, or $111 billion, rescue plan for Portugal next Monday after Finland’s prime minister-in-waiting clinched a deal to ensure parliamentary approval of the package.

But markets are increasingly concerned that Greece may never be able to pay back its €327 billion debt pile and will have to restructure, forcing losses on investors with severe consequences in the euro zone and beyond.

Asked whether there could be new aid package to help Greece work through its fiscal recovery program, the I.M.F.’s European department director, Antonio Borges, said the fund was open to the possibility.

“The Greeks have to take the initiative, and so far they have not approached us. The I.M.F. stands ready” to provide additional support “as a matter of policy,” he told reporters.

However, Athens also had the potential to raise funds by selling state assets, with the €50 billion mentioned as a possible estimate of revenues from a privatization program “probably less than 20 percent of all the assets the Greeks could privatize.”

The semi-annual I.M.F. report said peripheral members of the euro zone needed to make “unrelenting” efforts to overcome the debt crisis and prevent it spreading further.

It also urged the European Central Bank to tread carefully on further rises in interest rates after last month’s first increase since 2007, saying euro zone monetary policy could “afford to remain relatively accommodative.”

Mr. Borges said the program of austerity measures and structural reforms agreed a year ago was “probably the best thing that can happen” to Greece, though there was always the question of whether it was too ambitious.

Greece has implemented harsh cuts in public spending, public sector wages and pensions but has struggled to raise revenue due to a deep recession and chronic tax evasion. The government faces growing resistance to austerity, highlighted by a general strike on Wednesday.

Greek sovereign bond yields soared to fresh euro-era highs on a growing belief that euro-zone finance ministers will not deliver fresh aid for Athens at their monthly meeting next week. The yield on two-year Greek bonds rose to an eye-watering 27 percent.

By contrast, Portuguese and Irish yields eased after the Finnish deal on Thursday removed one key political uncertainty.

The euro-skeptical True Finns party, which scored big gains in last month’s general election by vehemently opposing the Portuguese bailout, said it would not take part in talks to form the next Finnish government.

The Washington-based fund’s views about Greece are being closely watched ahead of next month’s decision on whether Athens receives the next €12 billion tranche of its €110 billion E.U./I.M.F. bailout.

Ireland and Greece are already dependent on €52.5 billion of I.M.F. aid while Portugal is awaiting a €26-billion, three-year lifeline from the fund.

Banks in the troubled countries are being kept above water by unlimited E.C.B. liquidity, and the I.M.F. said the central bank might need to extend that system again beyond June 12.

Financial markets and economists are overwhelmingly convinced that Greece will have to restructure its debt mountain and force investors to take losses.

But Mr. Borges said the I.M.F. believed Greece was not bankrupt despite its high debt.

“All I.M.F. programs are based on debt sustainability, so as long as a program is in place that means that the I.M.F. believes Greek debt is sustainable,” he said.

Article source: http://www.nytimes.com/2011/05/13/business/global/13iht-imf13.html?partner=rss&emc=rss

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