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Euro Watch: Central Bank Chief Says He’s Set to Step in After Greek Vote

June 15, 2012 by Leave a Comment

“The Eurosystem will continue to supply liquidity to solvent banks where needed,” Mario Draghi told a group of economists in Frankfurt.

His remarks were a reminder that European officials are increasingly intent on putting in place long-term structures that would make emergencies like Greece and Spain less likely to occur in the future.

Central banks in non-euro countries are also making contingency plans and reinforcing their defenses against spillover from the crisis in currency zone.

In Tokyo, the Bank of Japan governor, Masaaki Shirakawa, said the central bank was “prepared to take all possible measures to ensure the financial system does not come under threat,” calling the European debt crisis “the biggest risk factor we are paying attention to.”

“Whether or not we can maintain the stability of financial markets is critical,” Mr. Shirakawa said. “There is no silver bullet, but if concerns arise about liquidity, we are prepared to inject that liquidity.”

The British government and central bank announced plans Thursday for emergency measures to help increase lending to businesses hurt by the contraction of the credit market. George Osborne, the chancellor of the Exchequer, saying: “We are not powerless in the face of the euro zone debt storm,” he said.

In Bern, the Swiss central bank said it was prepared to spend unlimited amounts of money to hold down the value of the Swiss franc if the euro came under further pressure.

European leaders will hold a video conference call Friday to discuss the global economy and the crisis in the euro region in preparation for the Group of 20 meeting that starts Monday in Los Cabos, Mexico, a spokesman for the British government said.

Mr. Draghi also said Friday that a plan to remake the euro zone, which he is drawing up along with Herman van Rompuy, president of the European Council, and José Manuel Barroso, president of the European Commission, would be made public “in a matter of days” so that it can be considered by European leaders at a summit at the end of the month.

Mr. Draghi did not provide details. But based on public statements he and Mr. Barroso have made, it is likely that a central feature of the plan will be a so-called banking union in which euro zone countries would form a common insurance fund for bank deposits, to prevent bank runs.

The plan would also propose establishing a more powerful common regulator for the biggest banks, which are currently supervised primarily at the national level. It is possible that the E.C.B. would serve as that supervisor. And euro zone nations would establish a fund to close down terminally ill banks, to minimize the cost to taxpayers.

The plan is also likely to reflect Mr. Draghi’s call Friday for countries to take steps to designed to improve economic growth. They should dismantle regulations that make it difficult for companies to hire and fire workers, and remove bureaucratic procedures that make it difficult to start businesses. He also called for countries to get rid of regulations that protect businesses from competition or make it difficult for small businesses to offer services across borders.

A person familiar with the discussions among policymakers, but not authorized to speak publicly, said some of the measures could be adopted at a European Union summit at the end of the month, while leaders would agree on a timetable to implement the rest.

Although it would take some time to implement such a plan, Mr. Draghi said the existence of a credible roadmap would reassure investors and European citizens.

“Markets and people need to be reassured we are still traveling together,” he said.

The euro crisis headlines have been dominated this week by the market’s apparent rejection of Spain’s $125 billion banking sector bailout, but Greece’s moment of truth has been looming.

Greeks return to the polls on Sunday after a May election failed to produce a workable coalition. The country’s fractured political map could again produce a struggle among parties led by the conservative New Democracy, the anti-bailout Syriza and socialist Pasok to muster sufficient allies to form a majority in Parliament.

Article source: http://www.nytimes.com/2012/06/16/business/global/daily-euro-zone-watch.html?partner=rss&emc=rss

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European Markets Start Higher for the Week

August 22, 2011 by Leave a Comment

European markets rose and Wall Street was poised for a higher open Monday as hopes the Federal Reserve might take action to keep the United States from slipping back into recession offset fears of a global slowdown.

Brent crude fell to near $106 a barrel as Libyan rebels captured most of Tripoli, bolstering hopes that oil exports from the OPEC country could resume soon.

Investors in Europe and the United States appeared to recover from a spout of panic selling late last week, when they dumped shares and bought up save-haven assets like gold and the Swiss franc amid concerns about the health of the American and global economies.

However, analysts warned that markets would likely stay volatile in the coming weeks as worries remain about levels of bank funding without a lasting solution for Europe’s debt troubles.

In London, the FTSE 100 jumped 1.1 percent while the DAX in Frankfurt inched up 0.4 percent. The CAC 40 in Paris gained 1.5 percent.

Wall Street was also set to open higher.

The improved mood came following a jittery day of trading in Asia, where most markets closed in the red.

Throughout the week, investors will be looking with anticipation to a speech Friday by the Federal Reserve chairman Ben S. Bernanke at a retreat in Wyoming.

The Fed pledged earlier this month to keep interest rates super-low through mid-2013. Investors wonder whether Bernanke will announce, or at least preview, further steps to help the economy including a third round of bond purchases known as quantitative easing.

“Given the absence of deflation risk, we do not expect him to announce QE3,” analysts at UniCredit in Milan wrote in a note, referring to a new round of bond buying. “But he is likely to reiterate that the Fed is prepared to ease monetary policy further if needed.”

With no crucial economic indicators scheduled for Europe Monday, investors will be looking at the European Central Bank’s disclosure of how much money it spent on government bonds from struggling countries like Italy and Spain last week. Analysts expect the figure to reach around 15 billion euros or $21.6 billion, down from a record 22 billion euros or $28.8 billion the week before.

Even though most economists see the central bank’s purchases as only temporary sticking plaster in the euro zone’s fight against the debt crisis, they have succeeded in keeping the yields, or interest rates, on Italian and Spanish 10-year bonds below 5 percent, more than a percentage point below record levels seen in the week before the ECB resumed its bond buying program.

Over the weekend, Chancellor Angela Merkel of Germany and the president of the European Union Herman Van Rompuy both ruled out the introduction of eurobonds — debt backed by all 17 euro countries — anytime soon, squashing investor hopes that a more lasting solution to the currency union’s debt troubles may be in the works.

Germany’s finance minister, meanwhile, sought to calm fears that growth in Europe’s biggest economy was running out of steam, saying the Germany economy was still on course to grow by 3 percent this year despite an unexpectedly weak second-quarter performance.

Earlier in Asia, markets ended the day mostly in negative territory, as investors reacted to a steep sell-off of U.S. stocks Friday.

Japan’s Nikkei 225 index lost 1 percent to close at 8,628.13 — a five-month low — as a persistently strong yen rattled nerves. A strong yen hurts exports by making them more expensive.

Japan intervened in currency markets earlier this month to try to reverse the yen’s climb. The decision to sell the yen and buy the dollar worked initially, sending the greenback toward 80 yen. But the dollar has been weighed down by the dimming outlook for U.S. economy and is back down to mid 76-yen levels.

The Shanghai Composite Index lost 0.7 percent to 2,515.86 while the Shenzhen Composite Index lost 0.9 percent to 1,124.17. Hong Kong’s Hang Seng, meanwhile, swung into positive territory to eke out a 0.5 percent gain at 19,486.87.

Asian markets were the first to open after the developments in Libya, with the apparent crumbling of Moammar Gadhafi’s regime after rebels entered the capital of Tripoli on Sunday. Oil prices are expected to fall if the situation can quickly stabilize.

In London, Brent crude for October delivery dell $2.22 per barrel to $106.40 on the ICE Futures exchange.

Benchmark oil for September delivery, however, was up 5 cents to $82.31 a barrel in electronic trading on the New York Mercantile Exchange.

Libya used to export about 1.5 million barrels of oil a day, but production all but ground to a halt in recent months as rebels battled to overthrow Gadhafi.

In currency markets, the dollar dipped to 76.78 yen, while the euro rose 0.3 percent to $1.44.

Article source: http://feeds.nytimes.com/click.phdo?i=a17246fadf9874b528ad85d4f6291b52

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Swiss Central Bank Considers a Peg to the Euro

August 11, 2011 by Leave a Comment

PARIS— Switzerland’s central bank signaled Thursday it was prepared to consider a once-unthinkable step: pegging the nation’s “massively overvalued” currency to the euro, at least temporarily.

Such a move would be a response to the global financial turmoil that has lifted the value of the Swiss franc, which investors consider a safe haven, to levels that are menacing Switzerland’s economy.

The bank could consider “So long as they are compatible with price stability long-term, temporary measures that influence the exchange rate are within our mandatea temporary link with the euro, as long as the measure is compatible with price stability over the long term,” Thomas Jordan, the vice chairman of the Swiss National Bank, said in an interview published Thursday in Bund, a Swiss newspaper.

“Nothing is excluded,” Jean-Pierre Danthine, a member of the central bank’s governing board, added in a separate interview carried in Le Temps, a Swiss daily.

Linking the franc to the euro could not happen overnight, and would face steep legal and political hurdles. But whether the comments reflected a true intent or were meant mainly to sway currency traders, the remarks helped weaken the franc on Thursday, to 1.0747 euros, after it had risen as high as 1.0257 euros earlier. Against the dollar, the franc traded at 74.1 centimes.

The franc, which has surged more than 30 percent against the euro in the past year, hit a record 1.0075 on Aug. 9.

Pegging the franc to the euro would be considered a drastic move, and the fact that policy makers are discussing it signals that Switzerland is running out of options to manage its runaway currency even as its economy shows signs of slowing.

The Swiss economy, which grew 2.6 percent last year, is expected to slow in coming months as the strong franc makes Swiss-made goods less competitive, especially in Europe, its biggest exporting bloc.

The strong franc is also causing havoc thousands of miles away, in Hungary, Poland and other parts of central Europe, where large numbers of borrowers took out home loans in Swiss francs or euros in recent years to take advantage of lower interest rates outside their own countries.

In Hungary alone, where an economic recovery has faltered recently, about 700,000 homeowners hold mortgages and others loans that were borrowed in francs when the Swiss currency was weaker. A stronger franc makes those loan payments more expensive. Alarm is growing, and Hungary’s financial market supervisory authority warned Thursday that large numbers of foreign currency loan holders would be late with repayments.

Despite Swiss authorities’ efforts to stem the franc’s surge, recent actions — including cutting interest rates close to zero last week and raising the supply of cash in the franc money market this week — have practically fallen into a black hole.

A peg to another currency is considered anathema to many Swiss, who have prided themselves on not joining the European Union, not to mention the euro monetary union, which they believe would only weaken the nation over time.

In any case, a peg would require changing the Swiss constitution, which has regulated the currency since 1850. And it would mean the Swiss central bank would risk ceding some of its independence to the European Central Bank, which manages the euro. It was also not immediately clear how a peg would be implemented at a technical level.

A euro peg “is certainly not the easiest plan to put in place, either politically or legally,” Mr. Danthine acknowledged.

Business people and Swiss citizens would also be loath to see their cherished currency linked to a European monetary union gripped by crisis.

Pegging the currency would be “a big risk,” Thomas Christen, the chief executive of Reed Electronics, a Lucerne-based company, said in a recent interview. “Then you can’t move; you are not free and our reasoning in Switzerland is to be free in these decisions.”

Some politicians had recently floated the idea, he added, “but a lot of Swiss people don’t want to do this step.”

Still, the strong franc has already hit big industrial firms like Clariant and Lonza, two chemical makers. Swatch, the big watchmaker, recently warned about the “extremely problematic” run-up in the currency, even though it reported record half-year profit and sales.

Swiss exporters like Mr. Christen have had to hedge against sharp fluctuations in the currency, and many more Swiss businesses have already been hit at the margins. Many are starting to buy cheaper materials to make even high-caliber products in order to offset the cost.

OSEC, a large trade group that represents Swiss businesses, said it has been encouraging Swiss firms to sell more goods in emerging markets and the Middle East in order to offset the exporters’ traditional dependence on Europe and the United States.

And many will simply be forced to become more innovative. “Because we’re not a big country we can move very fast, and try to use this as an opportunity to become more competitive,” Mr. Christen said.

In the meantime, “the problem is the rest of the world knows Switzerland is safe,” he said. “But we don’t say, ‘be careful,’ because it will also make our economy go down.”

Article source: http://www.nytimes.com/2011/08/12/business/global/swiss-central-bank-considers-pegging-franc-to-the-euro.html?partner=rss&emc=rss

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Market Rally in U.S. and Asia Starts to Falter in Europe

August 10, 2011 by Leave a Comment

The Euro Stoxx 50 index of euro zone blue chips opened higher but was down 0.4 percent by mid-morning, while the FTSE 100 index in London was up 0.2 percent. BNP Paribas, the French bank, fell 3.3 percent, dragging on the European market. Trading in U.S. equity index futures suggested Wall Street stocks would open modestly lower, hardly surprising considering the 4.7 percent rise in the Standard Poor’s 500 index Tuesday, which came a day after the market bombed.

The Fed’s pledge to hold short-term interest rates near zero for at least two more years to support the faltering U.S. economy “has helped to stabilize sentiment in equities and other risky asset markets — at least for now,” analysts at Standard Chartered wrote in a research commentary.

But, they added, “The heavy emphasis on downside risks to growth suggests the pendulum of investor sentiment can quickly rotate back to a more risk-averse stance in coming days.”

Stress indicators suggested that the turmoil would continue.

President Nicolas Sarkozy of France returned from vacation on the French Riviera to meet with officials, including his finance minister and the governor of the Bank of France, on what his office called ‘the economic and financial situation.”

Mr. Sarkozy and other European politicians have come under criticism for vacationing at a time of crisis.

Gold, seen by many investors as a safe haven, continues to trade near record levels, while the dollar remains near its lows against both the Swiss franc and the yen. Indeed, the Swiss National Bank on Wednesday announced new measures to weaken the franc, while Japanese officials said they were prepared to intervene in the currency market to weaken the yen.

Worried investors were looking ahead to a conference call later Wednesday with the Bank of America chief executive, Brian Moynihan. Bank of America has been under pressure, with its share price falling 43 percent so far this year. Mr. Moynihan is expected to discuss his plans for bringing the largest American lender back onto an even keel.

On the heels of the rally Tuesday on Wall Street, Asian shares were stronger across the board. The Tokyo benchmark Nikkei 225 stock average rose 1.2 percent. The main Sydney market index, the SP/ASX 200, gained 2.6 percent. In Hong Kong, the Hang Seng index rose 2.5 percent, and in Shanghai the composite index added 0.9 percent.

The Fed was hoping that its announcement, to which three members of the Federal Open Market Committee dissented, will encourage investment and risk-taking by convincing the markets that the cost of borrowing will not rise until at least mid-2013. Still, it suggests the U.S. monetary authorities are now adopting the same policy pursued by the Bank of Japan over the last decade with marginal effect.

Masaaki Shirakawa the Bank of Japan governor, told Parliament on Wednesday: “The Fed’s latest commitment is close to what we already have in place,” Reuters reported.

The Fed announcement led analysts to revise their outlook for the European Central Bank’s rate policy, as well.

Jörg Krämer, chief economist at Commerzbank in Frankfurt, said he now believed that instead of raising rates again in 2011 the E.C.B. would leave its main interest rate target pegged to 1.5 percent until the middle of next year.

“Thereafter, the E.C.B. would resume the rate normalization process only if the sovereign debt crisis de-escalated,” he added.

U.S. crude oil futures for September delivery rose 3.7 percent to $82.22 a barrel. Comex December gold futures for rose 1.2 percent to $1,764.30 an ounce.

The dollar was mixed against other major currencies. The euro ticked up to $1.4378 from $1.4376 late Tuesday in New York, while the British pound fell to $1.6260 from $1.6316. The dollar fell to 76.67 yen from 76.96 yen — not far from its all-time low of 76.25 yen, set in March — and to 0.7233 Swiss francs from 0.7209 francs.

The Swiss currency fell after the central bank said in a statement that it was “keeping a close watch on developments on the foreign exchange market and on financial markets,” and “if necessary, it will take further measures against the strength of the Swiss franc.” The central bank said it would use an increase in bank overdrafts and currency swaps to “significantly increase the supply of liquidity to the Swiss franc money market.”

Bond prices were mostly higher, with the yield on the benchmark U.S. 10-year Treasury note slipping 2 basis points to 2.23 percent. German 10-year bonds, considered the safest in Europe, traded 7 basis points lower to yield 2.3 percent.

The bonds of Italy and Spain, which have been in the spotlight since the European Central Bank intervened in the secondary market to support Rome and Madrid as they battle to restore market confidence in their finances, were also slightly higher. The Italian 10-year fell 6 basis points to yield 5.09 percent, while its Spanish counterpart fell 6 basis points to yield 4.97 percent.

Analysts at LGT Capital Management commented in a note on Wednesday that policy makers should be able to stabilize the market in the United States, “given that the economy is not in recession and many companies remain financially strong and profitable.”

But they added that it remained to be seen whether the new measures would produce a lasting effect.

“We believe that uncertainties about the economy and the debt issues are likely to persist for a while, and exert pressure on markets again in the near future,” they wrote.

Article source: http://feeds.nytimes.com/click.phdo?i=49e3d99f69f0f14d83c6a16e28cd43d8

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Switzerland Takes Surprise Action to Weaken the Franc

August 3, 2011 by Leave a Comment

Declaring their currency “massively overvalued,” the Swiss National Bank cut its key interest rate target, and said it would raise the supply of liquidity to the Swiss franc money market in the next few days in a bid to weaken the franc.

An avalanche of dollars and euros has been tumbling into this Alpine outpost at record rates, as investors see the franc as a haven from the twin debt crises in the United States and Europe. But its resulting strength risks undermining economic growth in Switzerland and stoking inflation, the central bank said.

“The franc is like the new gold,” said a Geneva banker who would give only his first name, Dmitri, insisting on the discretion that is the hallmark of this reserved nation. “It’s crazy and it’s all anyone is talking about, in the morning, at lunch, at dinner parties.”

It was certainly Topic A at the noon lunch hour, where Dmitri and other dark-suited bankers had emerged from the doors of Credit Suisse, UBS, Goldman Sachs and many other wealthy banks to perch near the broad expanse of Lake Geneva to chew on grilled fish and the issues of the day.

Switzerland is vaunted as a country that attracts money for its secretive bank accounts and the less savory business of tax evasion. But it is also the home of “le franc fort,” a muscular currency long seen as second perhaps only to the dollar because this nation — unlike some others — tends to have its finances in order.

Now the Swiss franc is  second no more.

Despite the passage at long last of a Washington deal to lift America’s debt ceiling, the dollar has plunged to record lows against the Swiss franc on fears the American economy will slow further. It was trading at 77 Swiss centimes Wednesday, down about a third from the level of a year ago.

The euro has fared little better. As Europe succumbed to its own debt troubles last year, the franc took off against the euro. Now, as the latest European bailout for Greece fails to shield big countries like Italy and Spain from the credit contagion, one euro buys 1.11 Swiss francs — far less than the 1.38 francs it was worth a year ago.

With the rest of the world so untidy, Switzerland looks pristine. Despite a generous safety net, this tiny nation does not have other onerous expenses, like a big military. Its current account surplus is an enviable 15 percent of gross domestic product, and it has low debt. The economy grew 2.6 percent last year; unemployment is around 3 percent.

Still, while it’s easy for Switzerland to lure other people’s money, there may be such a thing as too much of it. Even for the Swiss.

The Swiss central bank sought to tamp down demand on Wednesday by narrowing its target band for a key rate, the 3-month Libor, to 0.00-0.25 percent from 0.00-0.75 percent to fight the franc’s appreciation.

Authorities declared they “won’t tolerate” a “tightening of monetary conditions,” and would take further steps as necessary to curb the franc’s rise.

The cost of fine Swiss-made goods, from watches to precision machinery, has gone from eye-popping to eye-watering, and Swiss companies are warning of peril.

“This is bad for the Swiss economy,” said Thomas Christen, the chief executive of Lucerne-based Reed Electronics, who has started buying cheaper materials to offset his costs.

Everything from a cup of coffee to a Swiss Alpine ski vacation has been priced to the stretching point or beyond reach for many tourists.

Mark Tompkins and Serena Koenig of Boston were stunned during a recent visit. “A mixed drink at an average bar,” Mr. Tompkins said, “was 18 to 20 Swiss francs” — $23 to $25 — “so two rounds of drinks for four people was crazy expensive.”

In downtown Geneva, where a phalanx of regal storefronts glitter with diamonds and gold, Jean Loichot said his business from Americans and Europeans had slowed to a trickle.

Article source: http://feeds.nytimes.com/click.phdo?i=8c5a3cb06e29cf1ace7ed2753714aba1

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Optimism on Wall St. Tempered by Hurdles Ahead

August 1, 2011 by Leave a Comment

The doomsday discussions that dominated conversations of late quickly faded as political leaders in Washington first signaled a compromise was close, then finally announced a deal on Sunday night.

Wall Street was hesitant to declare total victory, though, because lawmakers still faced the hurdle of getting a bill through both chambers of Congress.

The optimism was further tempered by the broader economic challenges that continue to confront the United States and global markets.

“The debt ceiling is out of the way, but the current picture is far from rosy,” said Ajay Rajadhyaksha, head of United States fixed-income and securitized strategy at Barclays Capital. “Economic growth is so much weaker than many people thought just six months ago, and we are heading into a period of austerity.”

Analysts and investors warned that the markets could remain turbulent in the weeks ahead. Besides sluggish economic growth, the threat of a ratings downgrade on United States debt and Europe’s continuing financial troubles loom.

Still, the first signs of market reaction to the deal were positive. Stock markets in Japan and South Korea rallied 1.3 percent in early trading, and picked up steam as the deal was announced by President Obama. Futures contracts on the American stock market also jumped, indicating that Wall Street may recoup some of the past week’s losses once trading starts in New York on Monday.

Gold, a traditional haven that struck record highs amid the uncertainty of the past weeks, fell 1 percent to $1,610 an ounce. Oil rose about $1, to $97 a barrel.

In the currencies markets, the dollar gained against the yen and the Swiss franc after falling last week. It was barely changed against the euro.

For Wall Street executives, it was a roller-coaster weekend. Although optimistic that Congress would reach an 11th-hour agreement, bankers had been planning for the worst in case a deal was not struck.

But there was little of the market panic that in the 2008 financial crisis had bankers traders stuck at their desks for much of every weekend. Citigroup, Goldman Sachs and Morgan Stanley executives were monitoring the news from home.

“Everybody still has the fireman boots and fireman hat on, but there is a significant sigh of relief these guys are moving in the right direction,” said one senior Wall Street executive, who spoke on condition of anonymity on Sunday afternoon as the deal was coming together.

At JPMorgan Chase, Jamie Dimon huddled with his senior managers at the bank’s Park Avenue headquarters. Bank executives also set up a war room at an operations center in Columbus, Ohio, to react to customer issues stemming from the political developments — just as they did for natural catastrophes like Hurricane Katrina.

By Sunday night when the deal had been announced, lobbyists and financial executives were almost gleeful. “This is huge,” said Scott E. Talbott of the Financial Services Roundtable, an industry lobbying group. “It provides much-needed certainty during an uncertain economic time.”

Mr. Talbott said his group was still reviewing details of the deal, but would likely move forward with a lobbying blitz over the next two days. “We will light it up with Hill visits, joint-letters, and encourage our member companies to consider contacting members of Congress, too,” he added.

Indeed, BlackRock, the giant asset manager, issued a statement urging lawmakers to take prompt action. “Every day of delay in resolving this situation will erode economic confidence, jeopardize job creation and undermine the credibility of the United States in global financial markets,” it said.

With the deal yet to be approved by lawmakers, Chase announced that it would temporarily waive overdraft fees and other account charges for Social Security recipients, military workers and other federal employees if their government-issued checks were not posted. Last week, the Navy Federal Credit Union pledged that it would advance pay to active military and civilian defense workers in the event of a breach of the debt ceiling.

Investors were hopeful that approval of the deal by Congress would cause the markets to rebound. after tumbling 3.9 percent last week.

“It isn’t a ‘grand bargain’ to cut the deficit — that would have been great for the market,” said Byron Wien, the vice chairman of Blackstone Advisory Partners. But he said that the current blueprint, if passed, at least deals with the debt ceiling and that the government’s bills will be paid.

“This is a positive, but there was so much negative momentum going into the weekend,” he added.

Indeed, some investors cautioned that failure to pass the bill would be catastrophic, recalling how the market dropped precipitously in 2008 when Congress initially voted down a huge bailout package for the nation’s banks. “You are looking at Dow 10,000 if this doesn’t get resolved in a very short period of time,” said M. Jake Dollarhide, chief executive of Longbow Asset Management in Tulsa, Okla. That would be a 21 percent drop from where the Dow Jones industrial average closed on Friday.

Even as attention has shifted to the domestic fiscal problems, the European Union financial health continues to deteriorate despite a second bailout package it put in place for Greece last month in an effort to stem its sovereign debt crisis. In one sign of worsening trouble, the spreads on credit-default swaps on the debt of Italy and Spain are nearing their widest level of the year. Investors are betting that those countries are becoming more likely to default on their debts.

Meanwhile, new data released on Friday showed the United States economy had experienced a significant slowdown during the first half of 2011, underscoring the weakness of the recovery. And the political mayhem in Washington has done little to bolster consumer confidence, a crucial economic engine.

Daniel J. Arbess, manager of the Xerion fund at Perella Weinberg Partners in New York, said the fiscal problems in the United States and Europe were “chronic and will be persisting” for some time. “Investors need to get used to them,” he said. “No single episode of tension is the ultimate one, nor is any patch the ultimate solution.”

Nelson D. Schwartz, Susanne Craig and Bettina Wassener contributed reporting.

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Investors, Worried About Debt Talks, Look for Havens

July 28, 2011 by Leave a Comment

Investors are seeking alternatives to United States Treasury bonds as worries escalate that lawmakers will fail to reach an agreement to rein in the deficit and raise the federal debt limit in the coming days. Some have shifted funds into corporate bonds, others are forgetting about yields entirely and parking their money in cash, and more are looking to those classic safe havens of yore, gold and the Swiss franc.

Investors are getting leery of stocks, however. Shares dropped on Wednesday amid growing worry about the deadlock in Washington and the economic outlook for the country. The broader market as measured by the Standard Poor’s 500-stock index closed 2.03 percent lower, or 27.05 points, to 1,304.89. The Dow Jones industrial average was down 198.75 points, or 1.59 percent, to 12,302.55, its fourth straight decline.

Still, Treasury bond prices remained firm on Wednesday, with the benchmark 10-year bond rising two basis points to 2.98 percent. That shows demand is still healthy for the roughly $10 trillion of United States government debt circulating in the global financial system.

Investors are concerned that a downgrade of United States government debt by the rating agencies, or even the more remote possibility of a default, would erode the value of Treasury securities, which have long been considered virtually risk-free. The trouble is that in the end, safety is hard to find.

“Where are you going to go?” asked Carl Kaufman, who helps manage just under $2 billion at the Osterweis Strategic Income fund in San Francisco. Mr. Kaufman said he was loading up on high-yield bonds, like those issued by HCA, the hospital operator, and Dollar General, the retailer.

Other institutional investors are looking to faster-growing emerging markets.

Daniel Arbess, manager of the $3 billion Xerion fund at Perella Weinberg Partners in New York, is investing in companies that are benefiting from strong growth overseas, especially in countries like China and other Asian markets. Another strategy he favors is investing in natural resources and precious metals like gold that will preserve their worth even if paper currencies decline in value.

“These are our safe havens, not U.S. Treasuries,” he said. “You’ve got to hold your positions with conviction and concentrate on the fixed points on the horizon.”

Gold, already trading near record levels, dipped slightly Wednesday to close at $1,615 but is still up about 40 percent from a year ago. The Swiss franc, another classic refuge for safety-conscious investors, has jumped nearly 17 percent this year versus the United States dollar.

Other traditional havens, including stock and currency markets in Japan and Europe that might have been tempting in the past, are hardly appealing today, given the slow growth and mushrooming debt problems in those areas.

“Safety is a relative concept,” said Tobias Levkovich, chief equity strategist at Citigroup. “There have to be alternatives and the alternatives aren’t that wonderful.”

Corporations are also striking a defensive posture, stockpiling cash at record levels. And as the deadline for Washington to reach an agreement on raising the debt ceiling nears, many could start taking action, according to a survey this month of 305 large corporations by the Association of Financial Professionals.

Nearly one-quarter of the companies said they would sell some or all of their holdings of Treasury securities, while another 28 percent said they would not add Treasuries to their portfolios. A little fewer than half of the companies said they would not make any significant changes to their positions.

Even though default on government debt remains a remote possibility, some companies are already trying to get out in front of the market jitters. Capital One Financial, for example, moved up a $5 billion sale of billions in stock and bonds to avoid possible turbulence ahead of the Aug. 2 deadline the Treasury had set for lawmakers to raise the $14.3 trillion debt ceiling.

Louise Story contributed reporting.

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