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Economix Blog: Simon Johnson: The European Debt Crisis and the G-20 Summit

November 4, 2011 by Leave a Comment

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Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”

The April 2009 London summit meeting of the Group of 20 is widely regarded as a great success. The world’s largest economies agreed on an immediate coordinated approach to the global financial crisis then raging and promised to work together on banking reforms that would support growth. President Obama got high marks for his constructive engagement.

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The G-20 heads of government have met twice a year since then, and in Cannes this week they meet again. Could this meeting help stabilize the world economy? Can President Obama again play a leading role? The answer to both questions is likely to be no.

In 2009, the primary problem was slumping economies in the United States and Western Europe. It was in the perceived individual interest of those economies to engage in some fiscal stimulus – and they were happy to present this as a joint approach. China was also willing to stimulate its economy, as its policy makers feared that slowing global trade would reduce Chinese exports. President Obama’s appeal for fiscal stimulus around the world was pushing on an open door.

Now the issue is quite different. We have a sovereign debt crisis within the euro zone, in which countries that have borrowed heavily are facing the prospect of restructuring their debts. The euro zone summit meeting last week established that privately held Greek debt would fall by about half (relative to face value), although this does not clearly put Greece onto a sustainable debt path. Prime Minister Andreas Papandreou announced a plan on Monday for a referendum on the plan, a move with the potential to build political support for the needed reforms, and on Wednesday his cabinet offered its full support. But another outcome — if the government does not fall in the meantime, making the referendum plan moot — could be a Greek exit from the euro and a default on its debts in disorderly fashion, without any kind of international framework or outside financial support.

But the real issue is Italy, as it has been at least since the summer. The Europeans are only beginning to come to grips with the centrality of Italy in the European debt web – glance at Bill Marsh’s recent graphic to get the point. Italy has more than 1.9 trillion euros in debt outstanding; this is the third-largest bond market in the world. In the aftermath of the Greek referendum announcement, the yield on Italian debt rose above 6.1 percent. The standard view is that if this reaches 6.5 percent, Italy will need to seek assistance in the form of a backstop fund to guarantee there will be no default.

But the International Monetary Fund does not have enough resources available and the existing European Financial Stability Facility is also likely to be too small. People in the know talk of the need for more than two trillion euros in a “stabilization fund,” and while a lot of fuzzy math is involved in contemporary international financial rescues, the I.M.F. and the stability facility combined would be hard pressed to provide more than a third of that.

This might seem like a good time for a summit meeting – so the hat can be passed around among world leaders. And some people do hope that China can provide an enormous loan, either directly or working with the I.M.F. China, after all, has more than two trillion euros’ worth of reserves (not all in euros, of course; much of this is in dollars).

But it’s not clear China that wants to take the credit risk of lending directly – the Europeans might not repay, after all. And the United States is not keen to have China funnel such a large amount through the I.M.F.; this would undermine the traditional American predominance there. In today’s budgetary environment, there is no way that the United States can come up with anything like matching funds at a level that would make a difference – would you like to ask the House of Representatives for $100 billion right now to help keep Silvio Berlusconi in power?

And the heart of the problem is really European, not global. Specifically, the euro zone needs to address its underlying fiscal structure, which has become severely dysfunctional. It needs a proper fiscal union, with the right to tax and to issue debt – backed ultimately by the European Central Bank. And the ability of member governments to issue debt must be severely curtailed.

The United States faced a similar problem, long ago. The original Articles of Confederation proved inadequate, largely because there was no centralized fiscal authority. The Constitutional Convention convened in 1787 in large part because the United States had defaulted on its debts, incurred during the War of Independence – and there was no way forward without a new agreement among the original 13 states and greater fiscal powers (and more) for the federal government.

Europe needs the equivalent of a constitutional convention. But today’s financial markets move so much faster than 200 years ago, and the delay in Europe has already been excessive. The Europeans need to move fast. Will the Cannes summit meeting speed them up?

Article source: http://economix.blogs.nytimes.com/2011/11/03/the-european-debt-crisis-and-the-g-20-summit/?partner=rss&emc=rss

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Stock Slide Extends to Wall Street

November 2, 2011 by Leave a Comment

Meanwhile, the bankruptcy of the brokerage firm MF Global sent some ripples through the markets, reducing trading volumes as its traders were barred from commodity exchange floors in Chicago and New York, but analysts and traders said its effects were minor compared with the actions in Greece.

Declines that started in Asia accelerated in Europe — where the major indexes slumped 5 percent. Bank stocks led the sell-offs, and the broad United States stock market slid nearly 3 percent. In the credit markets, crucial stress gauges moved toward recent highs, while rising interest rates on Italian debt underscored investors’ growing doubts about that highly indebted country, which has become the new focus of concern in the euro zone.

“It is all Europe right now,” said Eric Green, an economist at TD Securities in New York.

The Greek referendum threatened to undo the work of the summit meeting last week in Brussels, where leaders outlined a rescue plan that cheered markets and contributed to the biggest monthly United States stock market rally in October since 1982.

“The markets don’t know which way to look,” said Andrew Wilkinson, an economist at Miller Tabak Company.

“This has absolutely blindsided markets.”

The declines in Europe wiped out the exuberant gains of last week after the Brussels deal, which initially led some investors to believe Europe was addressing the Greek problem. The reversal in Greek markets included insurance contracts on bonds pricing in a higher likelihood of default.

Even last week doubts grew that the grand European plan would be enough to stop the crisis from spreading to Italy, a much bigger economy that has to refinance billions of euros of debt in the coming year.

Italy has a small budget deficit of about 3 percent of its gross domestic product, which means it has a relatively small amount of net new borrowing to do, although this percentage may be revised upward if growth slows next year as expected.

The much bigger problem is its mountain of existing debt that must be rolled over as it matures — about 52 billion euros this year and 307 billion more next year, according to Tobias Blattner, an economist at Daiwa Securities in London.

As Italy’s borrowing costs shoot up — the 10-year government bond yield jumped to a record 6.33 percent on Tuesday — investors are concerned that too much of its strained budget will be consumed by the costs of its enormous debt.

In signs of a reappearance of stress in the European credit markets, the rates that banks charge to lend euros to one another rose, and the costs to banks of swapping euros for dollars in the open foreign exchange market — the three-month euro-dollar cross-currency basis swap — also increased sharply.

The cost of insuring the debt of a basket of European banks against default rose to the highest level since Oct. 5. It now costs $261,000 to insure $10 million of bank debt annually for five years, compared with $207,000 at the end of last week, according to the data provider Markit.

Analysts said European leaders had so far failed to come up with a clear solution to cope with a problem on the scale of Italy’s debt.

Officials had proposed maximizing the European bailout fund, though they did not offer details, and in particular had not defined a role for the European Central Bank, analysts said.

The central bank was buying bonds to support the Italian bond market on a large scale on Tuesday, traders said. But many analysts say it is inevitable that the central bank will have to act much more aggressively, in effect printing money by buying hundreds of billions of euros of bonds from peripheral countries like Italy.

Such an action, however, is politically poisonous in countries like Germany where the public fears inflation. It would be a big test for Mario Draghi, the new president of the European Central Bank, whose first day in office was Tuesday.

Article source: http://www.nytimes.com/2011/11/02/business/daily-stock-market-activity.html?partner=rss&emc=rss

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Europe’s Leaders Get Testy as Crucial Summit Nears

October 26, 2011 by Leave a Comment

On Sunday, when the 27 leaders had their first round of deliberations, emotions ran high and some tough exchanges soon leaked out to the news media, designed as ever to make individual leaders look smarter, more intelligent or more courageous than the others.

For all the talk of European solidarity, these summit meetings tend to be covered — and briefed by officials — as boxing matches, with every national delegation trying to show its boss as the champion of national interests against the collective horde.

Prime Minister David Cameron of Britain tried that on Sunday, insisting that there be a full summit meeting of all 27 members of the European Union on Wednesday, as well as a meeting of the 17 nations in the euro zone. Facing an internal party revolt, he means to protect Britain’s interests, he said, in case the euro zone countries get ahead of themselves and do damage to the single market that is one of the European Union’s greatest strengths.

But President Nicolas Sarkozy of France turned on him, fed up with criticism of the euro crisis from Mr. Cameron and especially from George Osborne, the young British chancellor of the exchequer, or treasury minister.

“You’ve lost a good opportunity to shut up,” Mr. Sarkozy told Mr. Cameron, the same phrase his predecessor, Jacques Chirac, once used about his Polish counterpart. “We’re sick of you criticizing us and telling us what to do. You say you hate the euro, and now you want to interfere in our meetings.”

This exchange was leaked by British diplomats and officials, but French officials did not deny the essence of it. Mr. Sarkozy, they confirmed, is not a great fan of kibitzing from outside the euro zone (Britain is not a member). Mr. Sarkozy barked at a French journalist, too, saying essentially that comment is cheap and governing is hard.

Mr. Sarkozy and the German chancellor, Angela Merkel, are compelled to work together, but find each other difficult and even odd. She has been known to make fun of the way he gestures and walks, comparing him to the old French comic Louis de Funès, with his wavy hair and prominent nose. He has been known to call her “La Boche,” an offensive French version of “Kraut,” and mocks what he sees as her matronly caution.

But their relationship is said to have improved of late, and Sunday evening there were “informal” photos of the two of them as he opened her present, a Steiff teddy bear, for his newborn daughter, Giulia.

The “Franco-German couple” ganged up on the Italian prime minister, Silvio Berlusconi. They criticized him for not following through on his promises of economic and governmental restructuring, saying Italy’s failure to move quickly was putting not just Italy but also the euro at risk.

The whole point of beefing up a new bailout fund, the European Financial Stability Facility, was to be able to protect Italy from bond speculators, but Italy had to act too, they told him, officials said. Mr. Berlusconi pretended to fall asleep at one point, officials said, and afterward said he had never been held back a year at school.

Even in public, at a news conference, Mrs. Merkel lectured Italy about making “credible” reductions in its huge debt — 120 percent of its gross domestic product. And Mr. Sarkozy, when asked if he had confidence in Mr. Berlusconi, said only that he had confidence in the whole of Italian society — “political, financial, economic.”

Part of Mr. Sarkozy’s annoyance is not just economic, but stems also from a sense of betrayal. The new head of the European Central Bank is to be Mario Draghi, an Italian who replaces a Frenchman, Jean-Claude Trichet, in part because the obvious German candidate quit the bank in disgust over its supposedly overly liberal credit policies.

In return for supporting Mr. Draghi, Mr. Sarkozy got Mr. Berlusconi to agree to move another Italian, Lorenzo Bini Smaghi, from the bank’s executive board to make room for a French banker. Mr. Bini Smaghi said he would quit only if he replaced Mr. Draghi as head of Italy’s Central Bank. But in the end, Mr. Berlusconi felt compelled by domestic politics to give that job to another person, so Mr. Bini Smaghi remains where he is and Paris has no one on the board, a political humiliation for Mr. Sarkozy.

Article source: http://www.nytimes.com/2011/10/26/world/europe/europes-leaders-testy-as-summit-nears.html?partner=rss&emc=rss

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European Finance Ministers Call Off Pre-Summit Meeting

October 26, 2011 by Leave a Comment

With less than 24 hours before the summit meeting of government chiefs in Brussels, banking representatives and European officials were locked in negotiation over what losses banks should accept.  

The banks have taken a hard line and warned that the write-off of debts they are being asked to accept — of about 55 percent — could result in a default or similar shock to the financial system, something European officials are desperate to avert. That has prompted a search for so-called complementary measures which might help to sweeten the deal for the bankers.

Italy, meanwhile, has come increasingly under the spotlight as investors doubt the government’s commitment to reduce curb the country’s 1.9 trillion euro, or $2.6 trillion, debt.

European Union leaders want the Italian prime minister, Silvio Berlusconi, to present firm plans on growth and debt reduction in time for the meeting.

Italian news agencies reported late Tuesday that  Mr. Berlusconi had reached an accord with the Northern League,  his principal coalition partner. The league’s leader, Umberto Bossi, said earlier in the day that Mr. Berlusconi’s government could  fall over the issue of raising the standard retirement age to 67 from 65, a move Mr. Bossi opposed.

With the clock ticking, a senior German official, Jörg Asmussen, and a French counterpart, Ramon Fernandez, joined intensive discussions with the banks in Brussels.

Under one of about five plans being debated, Greek bonds might be swapped for those of much lower face value issued by the euro zone’s bailout fund, according to two officials briefed on talks, who added that the idea might make a write-down more attractive for the banks.

The Institute of International Finance, which represents the banks involved, intends to send its own proposal to European leaders on Wednesday, according to a person with direct knowledge of the negotiations. That would involve banks taking more than the 21 percent loss they had agreed to in July, in exchange for sweeteners that would help mitigate some of the additional loss, such as allowing banks to buy bonds from the bailout fund.

“It’s clear that circumstances have changed too much for the July 21 agreement to work at this point,” said the person, who spoke on condition of anonymity because the discussions are ongoing. “We are prepared to adjust to new circumstances within limits. The question is are the governments prepared to meet us halfway.”

Adding to the mood of anxiety, a meeting of E.U. finance ministers on Wednesday, which was to precede the second gathering in a week of European leaders, was abruptly canceled on Tuesday by the Polish government, which holds the bloc’s rotating presidency.

Though that was a recognition that the deal with the banks will not be ready by Wednesday morning, it did not mean that agreement was impossible later in the day, when the leaders meet, diplomats and officials said.

The summit meeting will still take place and “work on the comprehensive package of measures to curb the sovereign debt crisis” will continue there, the Polish statement said.

Those measures include a recapitalization of European banks and an expansion of the firepower of the euro zone’s 440 billion euro bailout fund, probably to more than 1 trillion euros. This will likely be achieved through two methods that are likely to run alongside each other.

The rescue fund, known as the European Financial Stability Facility, is expected to offer insurance against a portion of the losses on bond purchases. A separate mechanism is expected to be set up to purchase bonds, drawing in funds from the International Monetary Fund and other investors from the emerging world.

Though France is reluctant to bring other powers, like China, into the heart of the euro zone, it will probably have to overcome its reservations because of the gravity of the situation.

Jack Ewing reported from Frankfurt. Liz Alderman contributed reporting from Paris and Elisabetta Povoledo contributed reporting from Rome.

Article source: http://www.nytimes.com/2011/10/26/business/global/european-finance-ministers-call-off-pre-summit-meeting.html?partner=rss&emc=rss

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Leaders Say Progress Made in Dealing With Euro Crisis

October 24, 2011 by Leave a Comment

The hope is that the seriousness of the leaders’ effort to finally solve the interrelated problems of Greek debt, weakened banks and a bailout fund in need of reinforcement will keep speculators at bay when the financial markets open on Monday morning. But now there is heavy pressure on the leaders to deliver the goods at their next meeting, set for Wednesday.

“Further work is still needed, and that is why we will take the decisions in the follow-up euro zone summit,” said Herman Van Rompuy, the president of the European Council.

Pervading the summit meeting on Sunday was a consensus that Europe had to attack fundamental issues and stop merely putting out the brushfire of the moment. “We all have a sense that the crisis in the euro zone is reaching very worrisome levels,” said Donald Tusk, the prime minister of Poland, which now holds the rotating presidency of the union. “We have to be happy that the decision-making progress has gained some momentum, although we can’t say we have reached the finish line today.”

Two factors especially drove the urgency of the meeting, which had already been postponed once: the worsening situation in Greece, where strikes and protests erupted last week, and the rising cost for Spain and Italy to borrow money, a sign of mounting speculative pressure. Washington also put considerable pressure on European leaders to make decisions before the Group of 20 summit meeting in early November, because the long euro crisis is straining the global economy.

Even so, participants at the summit meeting, originally intended to be definitive, had to put off some final decisions until Wednesday because of political and financial complexities.

The meeting on Sunday, which included a separate session of the 17 nations that share the euro currency, was tense and sometimes acrimonious. French and German leaders told Prime Minister Silvio Berlusconi of Italy in blunt terms that he must move faster to reduce his country’s huge debt of nearly two trillion euros ($2.8 trillion), or about 120 percent of gross domestic product, which makes his country a target of speculators.

Chancellor Angela Merkel of Germany urged Mr. Berlusconi to make “credible cuts” in an effort to reduce pressure on the euro. President Nicolas Sarkozy of France, asked if he had confidence in Mr. Berlusconi, said that he had confidence in the collectivity of Italian authorities, “political, financial, economic.”

Mr. Sarkozy, who said that today’s leaders could not be blamed for the mistakes of the past, told Prime Minister David Cameron of Britain, which does not use the euro, to stop criticizing the work of the euro zone leaders. Mr. Sarkozy told him, in essence, that if he wanted a say, Britain should join the currency union, officials said. “You say you hate the euro, and now you want to interfere in our meetings,” Mr. Sarkozy said, according to the officials.

Despite the friction, concrete progress was made. The leaders reached overall agreement on recapitalizing Europe’s shaky banks, which they decided required an extra 100 billion euros. They agreed that banks should first raise what capital they can privately, and then turn to their own governments if necessary. If those governments already have debt problems, then the bailout fund, called the European Financial Stability Facility, could be drawn upon, but only “as a last resort,” Mrs. Merkel said.

One big issue remaining to be decided is how to make the stability fund, now set at 440 billion euros ($606 billion), large enough to cover Spain and especially Italy as well as Greece and the smaller troubled countries of the zone. Germany has been firm in rejecting a French idea to turn the bailout fund into a special-purpose bank backed by the European Central Bank, arguing that doing so would violate European treaties, so another approach is needed.

Both France and Germany are reluctant to put more of their own money into the stability fund, so the leaders are discussing how the International Monetary Fund could help expand the pot. There is also a serious conversation about creating a separate fund linked to the stability fund that would be open to investors and sovereign-wealth funds from outside Europe, like the Chinese, Indians and Brazilians, as well as non-euro countries like Sweden and Norway. The goal is to amass resources of 750 billion to 1.25 trillion euros in all, a European official said.

The leaders are also discussing ways to use the stability fund as insurance against partial losses that might be suffered by holders of sovereign bonds, another way to get greater impact from the fund’s resources.

Before the Wednesday summit meeting, the European Union must also strike a deal with bankers who hold Greek government bonds that Greece cannot repay in full. The banks agreed in July to take a 21 percent loss on the bonds, but after a worse-than-expected report on the state of Greece’s finances, they are now being asked to take a “haircut” of as much as 60 percent of the bonds’ value. A deal with the private bondholders is essential to making the rest of the package of measures add up, and there was talk on Sunday that Mr. Sarkozy and Mrs. Merkel would personally take over negotiations with the bankers if necessary.

There was also some discussion of limited changes to the European Union treaty.

Mr. Van Rompuy, president of the European Council, raised the prospect of “deepening economic union, including exploring the possibility of limited treaty changes,” but underlined that such measures would need approval from each of the 27 member countries. “If we need treaty changes in a limited way, it is not a taboo, but it’s not the aim,” he said. “The aim is deepening our economic union and strengthening fiscal discipline.”

“It is normal that those who share a common currency must take some common decisions relating to that currency,” he added. “In fact, one of the origins of the current crisis is that almost everybody has underestimated the extent to which the economies of the euro zone are linked, and we are now remediating that,” Mr. Van Rompuy said.

As usual, Mrs. Merkel emphasized that there was no “magic wand” to solve the problems of the euro in one meeting or proposal. Individual steps mattered, but so does responsible government by all nations that use the euro, she said. “Trust will not be achieved alone through a high firewall,” Mrs. Merkel said. “Trust will not happen from a new package for Greece. Trust will only happen when everyone does their homework.”

European leaders were struggling today with the results of decisions made decades ago by other people, she said. “That’s why there will be many steps to be taken,” she said, and they must fit together.

James Kanter contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=55c94e787d7715a22e33bdfc64e49ec8

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European Leaders Seek Bold Debt Deal, Despite Hurdles

October 22, 2011 by Leave a Comment

As ever, the focus is on Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France, who have made a habit of cobbling together deals to present to their European Union colleagues. But forging an agreement now is harder than before, as Paris and Berlin face core differences over how to maximize the euro zone’s financial rescue fund and how far the European Central Bank should intervene in the bond markets, either on its own or through the bailout fund.

Already the two leaders have announced that Sunday’s summit meeting, which had already been delayed to allow more time for negotiations, would be followed by another summit meeting as early as Wednesday. That announcement, paradoxically, seemed to buoy stock and bond markets, apparently because the Europeans at least appeared to be focusing intensely on resolving the crisis.

But the delay may have been because Mr. Sarkozy needs pressure from other nations to bring Mrs. Merkel around to a more flexible position on how to use the bailout fund, called the European Financial Stability Facility, and the central bank.

Mr. Sarkozy has now rushed twice to Germany for talks with Mrs. Merkel, the last time on Wednesday, as his wife was giving birth, to press for a deal. The meeting was testy, said German officials, who have complained that France is “not budging an inch.” Mr. Sarkozy, clearly the supplicant in the relationship, speaks openly of a “European rendezvous with history,” while Mrs. Merkel keeps repeating that “there is no magic wand” and that a long-term solution will take time.

Jean-Claude Juncker, who also leads the meetings of euro zone finance ministers, said that Thursday’s move to delay final decisions until the second summit meeting Wednesday looked “disastrous” to the outside world. He canceled a news conference scheduled for after Friday’s meeting of the finance ministers of the 17 countries that use the euro, suggesting that no breakthrough was imminent.

The “Franco-German couple” has been vital to each of the agreements reached by the European Union during this two-year crisis. But so far none of the deals have been sufficient to solve even the problem of Greek indebtedness, which is growing worse in an austerity-driven recession, let alone the problem of contagion spreading now to Italy and Spain. Nor has there been an agreement yet on how much capital needs to be injected into European banks so that they can reassure investors that they will remain solvent even as the sovereign debt of Greece, Italy, Spain and other hard-hit countries loses value.

These are the main issues on the agenda.

On Greece, Germany appears willing for a deal to restructure Greek debt to no more than half of its face value, to try to bring Greece’s debt burden to a sustainable level. But Germany wants private investors and banks to accept such losses voluntarily to avoid a formal default, which would be a first for the euro zone.

Big European banks had already agreed to what was billed as a 21 percent reduction in the value of their Greek debt in July, a deal not yet implemented, and they are reluctant to reopen the matter. Nor are they confident that enough private bondholders would agree to such a large cut.

France and the European Central Bank do not want to restructure Greek debt further, fearing market contagion and, for Paris, additional pressure on French banks that hold significant amounts of Greek, Spanish and Italian debt. A major recapitalization of French banks would put more strain on France’s budget and require new cuts elsewhere to meet deficit targets, and could thus jeopardize France’s coveted AAA credit rating. That would be bad politics with elections six months away and Mr. Sarkozy already unpopular.

There is also a fear that banks would cut back on lending rather than try to raise more capital while their stock prices are down, which could lead to a new credit crunch at a time when the entire euro zone is on the brink of a new recession.

France wants Europe to collaborate on recapitalizing banks, ideally by turning the bailout fund into a bank, which could then draw on loans from the European Central Bank, which has the authority to print euros as needed.

But Germany and the central bank itself have resisted that option. “The path is closed for using the E.C.B. to ease liquidity problems,” Mrs. Merkel told her parliamentary caucus in Berlin on Friday, Reuters reported.

Mrs. Merkel wants each country to be responsible for injecting funds into its own banks, and only then turn to the regional bailout fund in an emergency. Politically, it is easier for her to explain to Germans that German money is being used to recapitalize German banks than to concede that it is going to everybody’s banks. Mrs. Merkel is also compelled by German law to seek a mandate from Parliament’s budget committee before committing new funds. Mr. Sarkozy does not face such restrictions.

Article source: http://www.nytimes.com/2011/10/22/world/europe/hopes-high-for-a-europe-debt-deal-despite-french-and-german-disagreements.html?partner=rss&emc=rss

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Debt Anxiety Raises Cost of Borrowing for Spain

July 20, 2011 by Leave a Comment

In an added sign of mounting anxiety ahead of a European Union summit meeting on Thursday, borrowing from the European Central Bank rose sharply Tuesday, indicating that many banks were having trouble raising money on open markets.

The treasury of Spain sold 12-month notes worth 3.79 billion euros, or $5.4 billion, and 18-month notes worth 661 million euros, meeting the target amount. Borrowing costs were much higher than they were a month earlier, however: 3.702 percent for the one-year bills, compared with 2.695 percent in June. The yield on 18-month bills rose to 3.91 percent, from 3.26 percent.

Separately, the European Central Bank reported that banks borrowed 197 billion euros in its weekly funding operation, the largest amount since February. A total of 291 banks asked for central bank loans, the highest number in four weeks.

When banks borrow from the European Central Bank, it often means that other banks are refusing to lend to them at rates competitive with the 1.5 percent that the central bank charges for one-week loans.

The demand for central bank loans was also a sign that bank stress tests carried out by European regulators, whose results were released Friday, had not restored confidence in the banking system, as hoped.

Five Spanish banks were among the eight institutions that failed the tests, highlighting the national banking sector’s exposure to a collapsed property market. Still, two Spanish savings banks are set to defy volatile market conditions by listing their shares this week, in what is seen as a crucial test of whether banks, known as cajas, can tap the stock market to meet stricter capital requirements.

Shares in Bankia are to start trading Wednesday, followed by those of a smaller caja, Banca Civica, on Thursday.

Bankia, formed by a seven-way merger led by Caja Madrid, is the largest among the unlisted cajas. With an initial market valuation of 6.5 billion euros, Bankia will also be among the country’s biggest listed companies despite being forced to sharply cut the price of its initial public offering to attract sufficient demand.

On Monday, Bankia set a final price of 3.75 euros a share, 15 percent below its initial pricing range.

Investor appetite for Spanish government bonds will also be tested Thursday, when the treasury is planning to sell 2.75 billion euros of 10-year and 15-year bonds.

In April, when Portugal was forced to join Greece and Ireland in seeking an international bailout, yields on Spanish government debt remained relatively stable. Any notion of decoupling between Spain and other suffering euro economies, however, has since been wiped out by the deepening crisis in Greece, as well as by more recent concerns over Italy’s finances and Prime Minister Silvio Berlusconi’s tense relationship with his finance minister.

Haggling by European Union leaders over whether, and how, private investors should contribute to a second bailout for Greece has also rekindled contagion fears.

Chancellor Angela Merkel of Germany sought to damp expectations that the summit meeting would provide the final word. “Further steps will be necessary, and not just one spectacular event which solves everything,” she said, according to Reuters.

Last week, the yield spread between Spanish and German government bonds reached 3.76 percentage points, the highest level since the introduction of the euro.

Raphael Minder reported from Madrid, and Jack Ewing from Frankfurt.

Article source: http://www.nytimes.com/2011/07/20/business/global/borrowing-costs-rise-for-spain.html?partner=rss&emc=rss

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Mario Draghi to Head Europe’s Central Bank

June 25, 2011 by Leave a Comment

Mr. Draghi, the 63-year-old governor of the Bank of Italy, will succeed Jean-Claude Trichet as Europe’s most powerful central banker, according to a communiqué from the 27 member states at a two-day summit meeting that ended Friday.

The announcement had been delayed because of concern expressed by France over losing a powerful voice when Mr. Trichet, a Frenchman, leaves his post in autumn. France asked that another French citizen be appointed to the central bank’s executive board to bolster France’s influence. To do so, a vacancy had to be created, and because Mr. Draghi is Italian, the obvious candidate to go, in France’s view, was Lorenzo Bini Smaghi, an Italian on the six-member board.

Mr. Bini Smaghi had to be persuaded to leave voluntarily before his term expired in 2013 because board members cannot be fired. But the Italian prime minister, Silvio Berlusconi, had refused to provide one possible incentive: giving Mr. Bini Smaghi the job at the Bank of Italy soon to be vacated by Mr. Draghi.

But after speaking Friday with Herman Van Rompuy of Belgium, who led the summit meeting as president of the European Council, Mr. Bini Smaghi called the French President Nicolas Sarkozy to say that he would step down. That is expected to occur by the end of the year, Mr. Berlusconi said.

Aside from straining relations between France and Italy, the dispute over the executive board had also been seen by some as a test of the independence of the central bank. At one point, Mr. Bini Smaghi had appeared to compare his predicament to that of Thomas More, who was sentenced to death in 1535 in Britain for defying King Henry VIII.

Mr. Draghi has not signaled plans to make any major policy shifts in his new job, which he is to assume on Nov. 1.

On the contrary, Mr. Draghi has kept a low profile since he emerged as the default candidate earlier this year. In an interview in February he stuck to the central bank’s hymn sheet, refusing to talk about himself and emphasizing his credentials as a crusader against inflation.

Monetary policy should “first and foremost be geared toward price stability,” Mr. Draghi said.

Mr. Draghi is already an influential member of the central bank’s broader governing council, and is well known in international policy-making circles as chairman of the Financial Stability Board, a European Union panel that is formulating new banking rules intended to prevent future financial crises. He is expected to retain that post.

He will take over the bank as it navigates the worst crisis since the euro was introduced in 1999. Because the 17-nation euro zone lacks a strong central government, the bank has been forced to act as crisis manager, providing emergency funds to stricken banks, buying government bonds to try to stabilize markets, while often clashing with political leaders on policy.

So far, Mr. Draghi seems to have many of the same qualities as Mr. Trichet, including discretion born of years of government service and an ability to stand up to political pressure.

Once in office he could forge his own path, but it would be a surprise if he made any striking changes. At the Bank of Italy, Mr. Draghi has been known for being cautious and deliberate, to the point where some said he was too slow to make decisions.

Germany had been expected to name the next president of the central bank, but the selection process was thrown open in February after Axel Weber, the president of the Bundesbank, unexpectedly announced he would resign and took himself out of the running.

Unlike Mr. Weber, who now teaches at the University of Chicago, Mr. Draghi has not dissented publicly from other members of the bank’s governing council in responding to the sovereign debt crisis involving Greece. Analysts regard Mr. Draghi as a hard-liner on inflation, though less so than Mr. Weber would have been.

Mr. Draghi, who holds a doctorate in economics from the Massachusetts Institute of Technology, was the consensus choice of economists for the job but had to overcome political resistance because he is from a country that, unlike Germany, is associated with fiscal irresponsibility.

Mr. Draghi also overcame questions from the European Parliament about his stint from 2002 to 2005 as vice chairman and managing director of Goldman Sachs. The American investment bank was the lead manager in a 2001 derivatives transaction that allowed Greece to dress up its books in a way that helped it become one of the countries using the euro.

“I joined Goldman after these operations had been undertaken, and that’s it,” Mr. Draghi said in February. “I was never involved in this.”

Before joining Goldman, Mr. Draghi spent a decade as the top bureaucrat in the Italian treasury, where he was known for deftly navigating the minefield of Italian power politics. He became governor of the Bank of Italy at the end of 2005, and since then has sometimes annoyed Italian leaders by pushing them to do more to make the economy competitive and reduce public debt.

Article source: http://feeds.nytimes.com/click.phdo?i=88a17a7cf40c67dce02e6f372b8373c7

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Europe’s Leaders Endorse Draghi as E.C.B. Chief

June 24, 2011 by Leave a Comment

BRUSSELS — European leaders Friday endorsed Mario Draghi as the next president of the European Central Bank after resolving a dispute between France and Italy over representation on the bank’s executive board.

In the communiqué of their two-day summit meeting, which ends Friday, the 27 member states formally named the 63-year-old governor of the Bank of Italy to succeed Jean-Claude Trichet as Europe’s most powerful central banker.

The agreement had been delayed because of concerns in Paris that it would lose its most powerful voice in Frankfurt when Mr. Trichet leaves this autumn unless another Frenchman could be appointed to the E.C.B.’s executive board. To do so, a vacancy had to be created, and since Mr. Draghi is Italian, the obvious candidate to go, in France’s view, was Lorenzo Bini Smaghi, an Italian who is currently on the six-member board.

Since board members cannot be fired, Mr. Bini Smaghi had to be persuaded to leave voluntarily before his term expires in 2013. But the Italian prime minister, Silvio Berlusconi, has refused so far to provide one possible incentive: giving Mr. Bini Smaghi the job at the Bank of Italy currently occupied by Mr. Draghi.

But after speaking Friday with Herman Van Rompuy, who chaired the summit meeting as president of the European Council, Mr. Bini Smaghi called the French President Nicolas Sarkozy to say that he would step down. This would happen by the end of the year, Mr. Berlusconi added.

Aside from straining relations between Rome and Paris, the dispute had also been seen by some as a test of the independence of the E.C.B. At one point, Mr. Bini Smaghi had appeared to compare his predicament to that of Thomas More, who was sentenced to death in 1535 in Britain for defying King Henry VIII.

Mr. Draghi has not signaled plans to make any major policy shifts in the job, which he is set to assume on Nov. 1.

On the contrary, Mr. Draghi has kept a low profile since he emerged as the default candidate earlier this year. In an interview in February he stuck to the E.C.B. hymn sheet, refusing to talk about himself and emphasizing his credentials as a crusader against inflation.

Monetary policy should “first and foremost be geared toward price stability,” Mr. Draghi said.

Mr. Draghi is already an influential member of the E.C.B.’s broader governing council, and is well known in international policymaking circles as chairman of the Financial Stability Board, a European Union panel that is formulating new banking rules designed to prevent future financial crises. He is expected to retain that post.

He will take over the E.C.B. as it navigates the worst crisis since the euro was introduced in 1999. Because the now 17-nation euro area lacks a strong central government, the E.C.B. has been forced to act as crisis manager, providing emergency funds to stricken banks, buying government bonds to try to stabilize markets, and often clashing with political leaders on policy.

So far, Mr. Draghi seems to have many of the same qualities as Mr. Trichet, including discretion born of years of government service and an ability to stand up to political pressure.

Once in office he could forge his own path, but it would be a surprise if he made any striking changes. At the Bank of Italy, Mr. Draghi has been known for being cautious and deliberate, to the point where some said he was too slow to make decisions.

Germany had been expected to name the next E.C.B. president, but the selection process was thrown open in February after Axel Weber, the president of the Bundesbank, unexpectedly announced he would resign and took himself out of the running.

Unlike Mr. Weber, who now teaches at the University of Chicago, Mr. Draghi has not dissented publicly from other members of the E.C.B. governing council on the banks’ response to the sovereign debt crisis. Analysts regard Mr. Draghi as a hard-liner on inflation, though less so than Mr. Weber would have been.

Mr. Draghi, who holds a doctorate in economics from the Massachusetts Institute of Technology, was the consensus choice of economists for the job but had to overcome political resistance because he is from a country that, in countries like Germany, is associated with fiscal irresponsibility.

Mr. Draghi also overcame questions from the European Parliament about his stint from 2002 to 2005 as vice chairman and managing director of Goldman Sachs. The U.S. investment bank was the lead manager for a 2001 derivatives transaction that allowed Greece to dress up its books in a way that brought it into the euro club.

“I joined Goldman after these operations had been undertaken, and that’s it,” Mr. Draghi said in February. “I was never involved in this.”

Prior to joining Goldman, Mr. Draghi spent a decade as the top bureaucrat in the Italian treasury, where he was known for deftly navigating the minefield of Italian power politics. He became governor of the Bank of Italy at the end of 2005, and since then has sometimes annoyed Italian leaders by pushing them to do more to make the economy competitive and reduce public debt.

Jack Ewing reported from Frankfurt. Matthew Saltmarsh contributed reporting from Paris.

Article source: http://feeds.nytimes.com/click.phdo?i=88a17a7cf40c67dce02e6f372b8373c7

Filed Under: Business News Tagged With: , ,

High Unemployment ‘Most Pressing Legacy’ of Financial Crisis, Report Says

May 25, 2011 by Leave a Comment

PARIS — The world economy is moving into a self-sustaining recovery, but high unemployment remains a threat three years after the financial crisis, a prominent economic research organization said Wednesday.

“The global recovery is getting stronger, more broad-based, more self-sustained,” Pier Carlo Padoan, the chief economist at the Organization for Economic Cooperation and Development, said.

“The private sector is driving growth,” he added, “especially through a pick-up in trade,” while at the same time, support through government spending programs “is being withdrawn slowly.”

The O.E.C.D. represents 34 leading developed economies, including the United States and the other members of the Group of 7 industrialized nations. The Paris-based organization is marking its 50th anniversary this week, with the celebration timed to overlap with a Group of 8 summit meeting taking place in Deauville, France, on Thursday and Friday.

In its Economic Outlook report, the O.E.C.D. said global gross domestic product will likely grow by a healthy 4.2 percent this year and by 4.6 percent in 2012. But that figure reflects strong growth in emerging economies; O.E.C.D. members’ G.D.P. is expected to rise by a more modest 2.3 percent in 2011 and by 2.8 percent next year.

The organization forecast U.S. growth of 2.6 percent this year and 3.1 percent in 2012. It said it expected the euro-zone economy to expand by 2 percent in both 2011 and 2012. Japan’s economy, hurt by the March 11 earthquake and tsunami, will likely shrink by 0.9 percent this year before rebounding to 2.2 percent growth in 2012, the O.E.C.D. said.

Still, it noted, “high unemployment remains among the most pressing legacies of the crisis,” and that “should prompt countries to improve labor market policies that boost job creation and prevent today’s high joblessness from becoming permanent.”

Unemployment, which affects more than 50 million people in the O.E.C.D. area, is an important political consideration, as evidenced by recent demonstrations in Spain, which, with more than 20 percent of the population out of work, has the highest jobless rate in the European Union.

The O.E.C.D. called on governments to provide appropriate employment services and training programs and to encourage temporary work, while considering employment tax cuts and workshare arrangements.

Angel Gurria, the O.E.C.D.’s secretary general, called in a statement for governments to work toward fiscal consolidation, noting that government debt is expected to rise to an average of 96 percent of G.D.P. in the euro zone this year, and to just over 100 percent of G.D.P. in the overall O.E.C.D.

Mr. Padoan, the chief economist, warned that there remained a number of downside risks for the global economy, including high energy and commodity prices, a slowdown in China caused by the government’s efforts to fight high inflation, and the crisis among the euro states.

“There is a concern that these downside risks could accumulate and possibly prompt some stagflationary risks in some advanced economies,” he added.

Article source: http://feeds.nytimes.com/click.phdo?i=263b53f2f4b0e822bbcbb83f63b3a2f4

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