December 6, 2023

Federal Reserve’s Easing of Stimulus Could Hamper a European Recovery

Recent fears that the Federal Reserve could begin withdrawing its economic stimulus have prompted interest rates to rise around the world, putting business loans further out of reach for companies in Spain, Italy and France.

For the United States, the Fed easing on stimulus efforts would signal that the American economic rebound has enough momentum to continue on its own. But for most of Europe, still struggling through a recession, the Fed’s moves could make a recovery even harder to achieve.

The problem is evident to companies like Herbert Kannegiesser, which makes equipment here for large commercial laundries. It is the kind of niche industrial business that has continued to grow even during the economic crisis and helped sustain German exports. But laundry systems costing hundreds of thousands of euros are a tougher sell when loans are more expensive.

“Europe is our home market,” Martin Kannegiesser, son of the company’s founder, said in an interview in this rural corner of northwestern Germany. “Banks, especially outside of Germany, are very reluctant to give loans and financing to small and medium-size businesses. That is a problem.”

The Kannegiesser problem is a microcosm of the broad issue confronting Mario Draghi, president of the European Central Bank. He must keep trying to find ways to steer the euro zone out of recession even as his American counterpart at the Fed, Ben S. Bernanke, contemplates how soon to take his foot off the accelerator of the United States economy.

Unfortunately for European executives and central bankers, what happens in Washington does not stay in Washington. Rising yields, or market interest rates, on United States Treasury bonds have had worldwide repercussions.

The yield on the 10-year Treasury bond is now 2.66 percent, compared with 2.19 percent before remarks by Mr. Bernanke on June 19 raised expectations that the Fed would soon begin to taper off its stimulus program of buying government securities.

The better return available on American debt draws money away from Europe and pushes up rates for euro zone government bonds as well as commercial loans. Yields on Spanish and Italian government bonds rose sharply after Mr. Bernanke’s remarks. Euro zone yields have retreated somewhat since but are still higher than they were before June 19. The Spanish 10-year bond is at 4.79 percent, compared with 4.5 percent in early June.

“From the European point of view, the worst thing that could happen is an increase in long-term interest rates, which is what the Fed action is threatening to do,” said Charles Wyplosz, a professor of international economics at the Graduate Institute in Geneva.

The timing is terrible for Europe. The European Central Bank is still fighting a severe credit crisis in Southern Europe, which is making it difficult for countries like Spain to emerge from a prolonged recession that has pushed the unemployment rate to 27 percent.

Even before Mr. Bernanke mentioned the word “taper,” lending in Europe had been in a slump. In May, the most recent month for which data is available, loans to corporations excluding banks fell at an annual rate of 3.1 percent, according to European Central Bank data.

The central bank in early May cut its main interest rate to 0.5 percent, a record low. Last week, in an unprecedented step, Mr. Draghi assured investors that the rate would not rise above 0.5 percent for an extended period and could be cut further.

European political leaders are a long way from addressing the causes of the euro zone crisis and need all the help they can get from low interest rates. On Wednesday, European Union officials announced a plan to deal with failing banks that would include centralized decision making and an emergency fund. But the plan, considered essential to prevent bank failures from taking down entire nations, could face resistance from Germany and other countries wary of giving up control over their banks.

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Economix Blog: How the Revival of Postwar Germany Began


Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

Sixty-five years ago this week, in June 1948, a remarkable economic transformation took place in Germany. Almost overnight, the economy went from stagnation to revival. Most of the credit goes to the German economist Ludwig Erhard.

Ludwig Erhard in 1963.Reuters Ludwig Erhard in 1963.

Today’s Economist

Perspectives from expert contributors.

In 1948, the German economy was a basket case, not merely because of the damage from war but because economic policy was thoroughly confused. Some in the West, including the United States Treasury secretary, Henry Morgenthau, thought Germany’s industrial capacity should be completely dismantled to prevent it from ever again becoming a military threat.

This was a minority point of view, however. The rising Soviet threat overwhelmed any desire for vengeance against Germany and required that it be built up as quickly as possible. The big problem was that Germany was divided into four occupation zones after the war, one each controlled by Britain, France, the Soviet Union and the United States.

Action required agreement among the four powers, which was difficult not only because of Soviet intransigence. In 1945, Prime Minister Winston Churchill of Britain’s Conservative Party had lost his position to Clement Attlee of the Labor Party, who quickly moved to nationalize industry in Britain and adopt other socialist policies. Some new British leaders wanted their socialist ideas implemented in Germany as well.

Thus there were political, ideological and diplomatic divisions among the allies that prevented action in Germany, with economic policy remaining on automatic pilot. Ironically, this led to the continuation of Nazi economic controls, because there was no agreement on what should replace them.

In 1947, the United States and Britain decided to unify the administration of their occupation zones into an area called Bizonia. Mr. Erhard, a respected German business economist from Bavaria, was named economic minister.

In 1948, Britain, France and the United States agreed to end their occupation and establish an independent German state with or without inclusion of the Soviet zone. The handover of power was set to begin on June 15, thus setting up a confrontation with the Soviets.

As soon as German economic autonomy was restored, Mr. Erhard wanted to institute sweeping economic reforms, especially currency reform. Because of inflation, the Germany currency was virtually worthless and the economy largely functioned on barter, which was extremely inefficient and severely hindered the growth of industry.

Introduction of a new German mark was set for June 20, 1948. As word of the currency reform leaked out, stores closed until the effects of the new currency could be determined. Simultaneously, the Soviets cut off supplies for Berlin, which was deep in their zone of occupation but administered jointly by the four powers. The Western powers responded by airlifting supplies to the city, the beginning of the famous Berlin Airlift, one of the most dramatic events in postwar history.

A key part of Mr. Erhard’s plan was the elimination of price controls, which was essential for the currency reform to be effective. He needed permission from the allies to change any of the price controls, but Mr. Erhard concluded that he did not need their consent to simply abolish them. As he wrote in his 1958 book “Prosperity Through Competition”:

It was strictly laid down by the British and American control authorities that permission had to be obtained before any definite price changes could be made. The Allies never seemed to have thought it possible that someone could have the idea, not to alter price controls, but simply to remove them.

Gen. Lucius D. Clay, the United States commander in Germany, was well aware of what Mr. Erhard was up to and could have stopped him. But General Clay’s personal economic adviser, the American businessman Joseph Dodge, urged him not to and the general wisely followed his advice, turning a blind eye to Mr. Erhard’s actions. (Mr. Dodge, an extraordinarily important but virtually unknown figure in postwar economic policy, also played a key role in advising Gen. Douglas MacArthur, the United States commander in Japan, on reforming its economy as well.)

Mr. Erhard instituted many other reforms as well, including a 33 percent cut in income taxes. On June 26, the French, British and American authorities ratified Mr. Erhard’s actions. This led the Soviets to tighten the isolation of Berlin, creating a severe political and economic crisis. The allied airlift quickly ratcheted up. By July 4, 362 American and British planes brought 3,000 tons of food into the city in a single day, an amazing accomplishment given the limited landing and takeoff facilities in Berlin.

By August, the Communists were organizing demonstrations against Mr. Erhard and his reforms, but General Clay stood behind him. Fortunately, tangible signs of economic recovery were becoming evident. Rationing was ended completely in September. In October, a bumper crop of potatoes was cheered, with production up 60 percent over 1947.

By November, it was clearly apparent that the western zone of Germany was taking off, economically, leaving the eastern zone, still under Soviet control, behind. According to an article in The New York Times, industrial production was “far better than even the most optimistic economic planners envisaged when currency reform went into effect.”

The strong economic growth in the west was a major factor leading the Soviet Union to call off its blockade of Berlin on May 12, 1949, and the airlift ended.

A year after the Erhard reforms, they were generally viewed as an unqualified success. C.L. Sulzberger of The New York Times interviewed Mr. Erhard in July 1949 and he pointed with pride to the fact that the quality of German goods was rising, prices were falling and the standard of living was improving. On July 20, Mr. Sulzberger wrote, “Germany is coming back.”

The West German economy continued to expand, aided by the Marshall Plan, and Mr. Erhard remained as the nation’s economics minister until 1963, when he became West Germany’s second chancellor. He died in 1977.

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DealBook: To Satisfy Its Investors, Cash-Rich Apple Borrows Money

Timothy Cook, the chief of Apple.Eric Risberg/Associated PressTimothy Cook, the chief of Apple.

9:00 p.m. | Updated

With a $145 billion cash hoard, Apple could acquire Facebook, Hewlett-Packard and Yahoo. Put another way, it could buy every office building and retail space in New York, according to city estimates.

But despite its extraordinarily flush balance sheet, the technology behemoth borrowed money on Tuesday for the first time in nearly two decades. In a record-size bond deal, the company raised $17 billion, paying interest rates that hovered near the low-cost debt of the United States Treasury.

Apple’s return to the debt markets raises a riddle: Why would a company with so much cash even bother to issue debt?

The answer has a lot to do with the frenzied state of the bond markets. Companies are issuing hundreds of billions of dollars in debt to exploit historically low interest rates. They are also feeding strong investor demand for high-quality corporate bonds as an alternative to money market funds and Treasury bills, which are paying virtually nothing.

Apple’s maneuver, however, also reflects the unusual challenges of a fabulously successful company with a sinking stock price. Apple is plagued by concerns that its growth may be slowing, and its shares have plummeted from a high last fall of more than $700 to under $400 last month.

In an effort to assuage a growing chorus of frustrated investors, the company is issuing bonds to help finance a $100 billion payout to shareholders. Apple said last week that it planned to distribute that amount by the end of 2015 in the form of paying increased dividends and buying back its stock. Since that announcement, Apple shares have risen 10 percent, closing at $442.78 on Tuesday

Taking on debt can actually magnify the returns for shareholders and improve stock performance, financial specialists say. It can reduce the overall cost of the capital that a company invests in its business. In addition, after a stock buyback, there are fewer shares, which can increase their value.

Yet even as shareholders and analysts welcome the financial tactics, they emphasize that the maker of iPhones, iPads and Macs must continue to innovate and fend off increasing competition. After all, today’s Apple could be tomorrow’s Palm.

“This is a substantial return of cash and it’s the right thing to do on many levels,” said Toni Sacconaghi, an analyst with Bernstein Research. “But, ultimately, the company has to execute. This is no substitute for that.”

By raising cheap debt for the shareholder payout, Apple also avoids a potentially big tax hit. About two-thirds of Apple’s cash — about $102 billion — sits overseas in lower-tax jurisdictions. If it returned some of that cash to the United States to reward its investors, it could have significant tax consequences for the company. In some ways, the bond issue is a response to that tax situation.

“They have been so successful with their tax planning that they’ve created a new problem,” said Martin A. Sullivan, chief economist at Tax Analysts, a publisher of tax information. “They’ve got so much money offshore.”

The $17 billion debt sale by Apple is the largest corporate issuance on record, surpassing a $16.5 billion deal from the drug maker Roche Holding in 2009, according to Dealogic.

Apple joins a parade of large companies issuing debt with astonishingly low yields. Last week, Nike sold bonds that mature in 10 years that yielded only 2.27 percent. In November, Microsoft set the record for the lowest yield on a five-year bond, issuing the debt at 0.99 percent. In comparison, the yield on the 10-year Treasury on Tuesday was 1.67 percent, while the five-year note yielded 0.68 percent.

“If you look at these big companies like Apple and Microsoft doing these big, low-cost bond offerings, it’s a way for them to raise money in an effort to create better returns for their shareholders,” said Steven Miller, a credit analyst with Standard Poor’s Capital IQ. “The bond markets are practically begging these corporations to issue debt because of how cheap it is to raise money.”

On Tuesday, Apple issued six different securities, with maturities ranging from a three-year note yielding 0.45 percent to a 30-year bond that yields 3.85 percent. The largest piece, a $5.5 billion issue, is a 10-year yielding 2.4 percent. While good for the company, longer-term bonds with yields this low can fall steeply in price if interest rates go up, hurting investors who hold them. Still, $3 billion of the Apple debt are notes whose interest rates are periodically reset.

Despite all the cash held by Apple, the credit-rating agencies have not awarded it their coveted AAA ratings, citing increased competition and a concern that its future product offerings could disappoint. Moody’s Investors Service gave Apple its second-highest rating, AA1, as did Standard Poor’s, rating the company AA+. (Microsoft, Exxon Mobil, Johnson Johnson, and Automatic Data Processing have the highest credit ratings from Moody’s and S.. P.)

“There are inherent long-run risks for any company with high exposure to shifting consumer preferences in the rapidly evolving technology and wireless communications sectors,” wrote Gerald Granovsky, a Moody’s analyst.

Apple’s less-than-perfect rating did not drive away investors on Tuesday. The offering generated investor demand of about $52 billion, according to Goldman Sachs and Deutsche Bank, which led the sale of the issuance.

Desperate for returns in a yield-starved world, investors like insurance companies, pension funds and foreign governments have been snapping up corporate debt. Individual investors are also driving the demand: this year, through last Wednesday, a record $55 billion has flowed into mutual funds and exchange-traded funds that invest in corporate debt with high-quality ratings, according to the fund data provider Lipper.

Steve Jobs, Apple’s co-founder and former chief executive, had long resisted calls to dispense big sums to investors. In 2010, when Apple’s cash stood at $50 billion, he rejected pressure to make large distributions to shareholders. The company’s cash balance continued to grow after Mr. Jobs’s death in 2011, as it generated billions of dollars in earnings each quarter. Over the last 12 months, Apple operations have been generating about $150 million of cash a day.

A year ago, the new chief executive, Tim Cook, announced a decision to start returning $45 billion to shareholders. But that did not satisfy everyone. David Einhorn, chief executive of the hedge fund Greenlight Capital and an Apple shareholder, pressed the company to do even more.

The excitement surrounding Apple’s bond deal on Tuesday stood in stark contrast to the gloom that hung over the company when it last issued debt. In 1996, Apple faced a crisis, with shrinking sales of its niche computers and a weakening balance sheet that earned a junk credit rating. In the middle of the year, its shares reached a 10-year low.

“Will Apple Computer run out of cash soon?” asked an article in The New York Times on April 7, 1996. That summer, it tapped the bond markets, raising about $600 million and averting a crisis.

Later in the year, Mr. Jobs, who had left Apple more than a decade before, returned to the company.

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DealBook: Geithner Tried to Curb Rate Rigging in 2008

When Timothy F. Geithner ran the Federal Reserve Bank of New York, he acknowledged fundamental problems with the process for setting key interest rates in the midst of the 2008 financial crisis, according to documents provided to The New York Times.

Mr. Geithner, who is now the United States Treasury secretary, questioned the integrity of the benchmark as reports surfaced that Barclays and other big banks were misrepresenting the rates. In 2008, Barclays had several conversations with New York Fed officials about the matter.

Mr. Geithner then reached out to top British authorities to discuss issues with the interest rate, which is set in London. In an e-mail to his counterparts, he outlined reforms to the system, suggesting that British authorities “strengthen governance and establish a credible reporting procedure” and “eliminate incentive to misreport,” according to the documents.

But the warnings came too late, and Barclays continued the illegal activity.

For years, Barclays reported false rates in an effort to bolster its profit and deflect concerns about the British bank’s health. Last month, the bank agreed to pay $450 million to American and British authorities to settle claims that it had manipulated key benchmarks, including the London interbank offered rate, or Libor.

Libor and other such rates affect the cost of borrowing for consumer and companies, providing a benchmark for trillions of dollars in mortgages and other financial products. The case against Barclays is the first action to stem from a broader multiyear investigation into how big banks set the rates. Authorities around the world are pursuing investigations against more than 10 big banks, including UBS, JPMorgan and Citigroup.

Since the Barclays settlement, regulators have faced scrutiny of their roles in the rate-manipulation scandal.

Lawmakers in London and Washington have questioned whether government officials turned a blind eye to years of misconduct at Barclays. The bank has disclosed that it informed regulators, including the Bank of England and the Federal Reserve Bank of New York, that it had reported artificially low rates, along with the rest of the Wall Street.

This week, the oversight panel of the House Financial Services Committee sent a letter to the New York Fed seeking transcripts from several phone calls involving regulators and Barclays’ executives. The New York Fed plans to release the transcripts on Friday.

Mr. Geithner is not mentioned in the transcripts, a person briefed on the matter said who did not want to be identified because the investigation was continuing. But it is unclear if other documents will detail whether he had deeper knowledge of the issues with Libor, and what further actions — if any — Mr. Geithner took. According to the person briefed on the matter, New York Fed officials told regulators in Washington about the problems with Libor.

The New York Fed, which oversees the holding company at some of the nation’s biggest banks, first got wind of brewing problems with Libor in the summer of 2007. At the time, Barclays executives started briefing the regulators in the United States and Britain about their interest rate submissions.

In April 2008, a Barclays employee acknowledged to the Financial Services Authority of Britain that the bank was lowering its Libor submissions. “So, to the extent that, um, the Libors have been understated, are we guilty of being part of the pack? You could say we are,” the Barclays manager said, according to regulatory documents. Barclays made similar comments to the New York Fed, the documents say.

The bank never explicitly told regulators that it was reporting false interest rates that amounted to manipulation, according to regulatory documents.

In Basel, Switzerland, Mr. Geithner discussed the Libor with Mervyn King, the governor of the Bank of England, Britain’s central bank, according to the documents provided to The New York Times. Mr. Geithner then followed up with a June 2008 e-mail to Mr. King, outlining in a two-page memo his suggested changes to the way big banks set the interest rate, a copy of the memo shows. Mr. Geithner made six main recommendations for “enhancing the credibility of Libor.”

“We would welcome a chance to discuss these and would be grateful if you would give us some sense of what changes are possible,” Mr. Geithner wrote.

Mr. King responded “favorably” the person briefed on the matter said. The person added that the respective regulators continued discussions.

The memo raises new questions about why the Bank of England failed to halt the actions. At a hearing this week, British politicians hammered a senior Bank of England official for failing to thwart the misconduct. The official, Paul Tucker, was copied on Mr. Geithner’s June 2008 e-mail.

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Stocks & Bonds: American Stock Markets End 2011 Where They Started

The Standard Poor’s 500-stock index, the main gauge of broad market performance, closed on Friday at 1,257.60, finishing the year nearly dead even with its 2010 close of 1,257.64, which is technically down 0.003 percent. The Dow Jones industrial average of 30 blue-chip American stocks fared better, closing the year with a 5.5 percent gain at 12,217.56.

Market strategists predict the S. P. will stay in a range of 1,100 to 1,500 by the end of 2012, depending on how investors balance economic growth, fiscal policy, corporate earnings and the European debt crisis, as well as the potential for change after the November election.

Yet, looking back at 2011, it was a flat finale that told little of the volatility preceding it, when political turmoil, financial upheaval and even natural disasters left almost no corner of the markets untouched.

On 35 trading days in the year, the broader market closed with a gain or loss of 2 percent or more — the most number of days of that magnitude since the financial crisis of 2008-9 and making 2011 among the most volatile on record for stocks.

“It has been such a difficult year,” said Rick Bensignor, the chief market strategist for Merlin Securities. “Things changed on a dime.”

Oil prices shot up to $114 a barrel before plunging to $76 and rising again to $100 in reaction to revolutions in the Middle East and North Africa. Investors piled into the perceived haven of United States Treasury bonds even after the nation’s credit rating suffered its first-ever downgrade. The earthquake and tsunami in Japan exacted a devastating human and economic toll.

And the debt crisis in Europe upended governments, stirred fears of sovereign defaults and imposed severe financing strains on banks. Possibilities that were once remote became questions for debate in 2011: Will the euro zone break up? Is this a replay of the 2008 financial crisis?

Sentiment was also hobbled by a deadlock in Washington over fiscal policy and by the potential for slowing growth in emerging markets.

“Investors are scared to death,” said Philip J. Orlando, a chief market strategist for Federated Investors. “You have a massive flight to safety.”

Despite the bruising it took in 2011, Wall Street managed to score one of the better global performances. Major European and Asian indexes lost anywhere from 6 percent (Britain) to 26 percent (Italy) for 2011.

Looking ahead, some analysts see the United States faring even better in 2012. Binky Chadha, the chief strategist for Deutsche Bank, who forecast that the S. P. 500 would end closer to 1,500 in 2012, wrote in a market commentary that “very healthy” corporate fundamentals and cheap valuations would help equities eventually win out over the euro crisis and American fiscal issues.

Some analysts said investors would most likely be better braced to handle policy changes in the nations that use the euro.

“Investor reaction should continue to get better,” said Jack A. Ablin, chief investment officer of Harris Private Bank. “For as lousy as Europe’s news is, it has got to be the slowest moving train wreck in the history of the financial world. It’s the stuff that comes over the transom that kills us.”

Among the best 2011 performers in the S. P. 500 were utilities, up 14.8 percent; health care, up 10.2 percent; and consumer staples, 10.5 percent. The financial sector fared the worst, finishing down 18.4 percent.

Macroeconomics ganged up on market sentiment this year to such an extent that investors backed off stocks even as American companies set records for profits, mostly via cost-cutting.

In the third quarter, for example, earnings per share for companies in the S. P. 500 were $25.29, their highest ever for a quarter, according to statistics compiled by Standard Poor’s. But in an “enormous disconnect,” said Howard Silverblatt, senior index analyst for S. P., the index was still down 14 percent in that period.

“The fundamental underpinnings of investing didn’t matter” in 2011, Mr. Ablin said. “All it took was one headline and just like a tidal wave, it was lapping across the market.”

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Shares Rise After European Interest Rate Cut

Equity markets in Europe accelerated their gains and Wall Street opened up on the move by the E.C.B., which came after the Organization for Economic Cooperation and Development earlier this week added its voice to the chorus calling for lower borrowing costs to stimulate growth. Bond prices fell.

Hours later, amid continued uncertainty over his political future, Prime Minister George Papandreou of Greece called off his plan to hold a popular vote on Greece’s new loan deal with foreign creditors. The referendum was seen as a risky move that could have had serious repercussions for the entire euro zone.

Mr. Papandreou reversed course after meeting with his French and German counterparts in the south of France, where President Obama and other leaders from the Group of 20 nations were holding a summit meeting focused on the European sovereign debt crisis.

The Euro Stoxx 50 index, a barometer of euro zone blue chips, closed up 2.5 percent, with Germany’s DAX up 2.8 percent and the CAC 40 in Paris up 2.7 percent. The FTSE 100 index in London rose 1.1 percent.

At 4 p.m., the Standard Poor’s 500 index was up 1.9 percent, the Dow Jones industrial average gained 1.8 percent, and the Nasdaq rose 2.2 percent.

Treasury prices fell. The United States Treasury’s benchmark 10-year note was up to 2.063 percent in yield from 1.99 percent on Wednesday.

Investors are closely watching some of the more highly indebted countries with struggling economies in Europe.

The Italian bond yield rose to a high of 6.353 percent on Thursday before pedaling back to 6.167. Spanish bond yields were 5.463 percent, slightly higher than on Wednesday.

“It is obvious that the E.C.B. has caught the crisis virus and is trying everything it can to prevent a full-fledged recession,” Carsten Brzeski, an economist with ING in Brussels, wrote in a report.

The question now, he added, “is whether the E.C.B. is also willing to do everything to prevent a further escalation of the sovereign debt crisis, becoming the unconditional lender of last resort of the euro zone.”

The sovereign debt troubles have overshadowed global markets for more than a year. Most recently, equities markets have bounced around since an agreement reached in Europe last month, staging a strong rally before falling back as uncertainty grew about the details of the plan.

While the latest developments in Greece were seen as supportive for stocks, “the big thing was the European rate cut and that is what is driving the market,” said Doug Cote, chief strategist at ING Investment Management. “Investors are going to start nibbling around and going back to risk.”

The E.C.B had raised its benchmark interest rate twice this year, to 1.5 percent from 1 percent. On Thursday, the bank cut it to 1.25 percent.

Stanley Nabi, the chief strategist at Silvercrest Asset Management Group, said the E.C.B. had made a mistake when it raised rates, and was now correcting it in the context of a rapidly deteriorating situation in Greece and economic troubles in Europe.

“To an increasing degree every one of the countries in the euro zone is now experiencing a sluggish economy or is on the precipice of a recession,” he said. “I think what they are trying to do is just in case Greece pulls out of the euro zone or is thrown out, they want to build a moat around the other countries so that it won’t have a very deep impact on the global economy and European economies.”

Asian shares closed mostly lower. The Sydney market index S.P./ASX 200 fell 0.3 percent. In Hong Kong, the Hang Seng index fell 2.5 percent. Shanghai bucked the trend, with the composite index rising 0.2 percent. Tokyo markets were closed for a national holiday.

Officials meeting in Cannes were grappling with the growing possibility that Greece will leave the euro zone, leaving a trail of scorched lenders in its wake and possibly shifting the focus of market turmoil to bigger countries like Italy and Spain. But even as they address those questions, the disarray in Europe threatens to weigh more broadly on the global economy.

On Wednesday, the Federal Reserve offered a sobering outlook for growth in the United States, predicting the economy would expand 2.5 percent to 2.9 percent in 2012, down from its prior forecast of 3.3 percent to 3.7 percent. It said the unemployment rate would probably remain at 8.5 percent or above through the end of next year.

The euro was at $1.3845 from $1.3747 late Wednesday in New York.

David Jolly reported from Paris. Jack Ewing contributed reporting from Frankfurt, and Rachel Donadio and Niki Kitsantonis contributed reporting from Athens.

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Europeans Struggle Toward Debt Solution

With Europe’s economic and financial woes weighing on prospects for global growth, officials said they had agreed to take “all necessary measures needed to stabilize the financial system” and to contain the troubles. The officials did not provide specifics, but said they were working toward introducing a grand plan at a meeting on Oct. 23 in Brussels.

The United States Treasury Secretary, Timothy F. Geithner, who along with President Obama has urged the Europeans to move more forcefully to keep the crisis from infecting the global economy, said he was “encouraged by the direction and speed” at which the Europeans were moving, and by French and German pledges to find a solution.

“But as you know,” Mr. Geithner said, the ultimate impact of Europe’s efforts is “all in the details, and it’s very hard to judge the impact that something will have until you see it take shape.”

“They clearly have more work to do on strategy and details,” he added.

European leaders have sharply raised expectations that a comprehensive solution will be introduced by the time the presidents and prime ministers of G-20 nations gather in Cannes, France, in early November to address the troubles in the global economy.

By doing so, they have set a high bar: investors have calmed the wild volatility that hit global stock markets the past couple of months, on the belief that leaders will produce measures to tackle the crisis within weeks.

It remains to be seen whether that trend will reverse if investors are unconvinced that the package will keep the crisis that started in Greece from spreading to Spain and Italy. That is the foremost goal of all the European efforts.

“The results of Oct. 23 will be decisive,” France’s finance minister, François Baroin, said at a news conference.

In the search for answers, the International Monetary Fund, which is overseeing the bailout of Greece, Ireland and Portugal, also floated the idea of raising hundreds of billions in new funds from its emerging market and other members. But Europeans want to avoid the perception that they need additional help from the I.M.F., and the plan seemed unlikely to gain traction.

The specter of a downturn in Europe has started to trouble leaders in other countries, including the United States and Britain, where officials have pressed the Europeans to strengthen their rescue fund for weak European economies and banks, and to ensure that the troubles in Greece do not engulf bigger countries like Italy and Spain.

Indeed, while officials pledged unity in fighting the crisis, some thorny divisions still lingered. G-20 leaders said they looked forward to “further work” to maximize the impact of the rescue fund, the European Financial Stability Facility, that is meant to keep the sovereign debt crisis in Greece from spreading to other nations and the European banking system at large.

German financial officials continued to express skepticism about expanding the facility, either by injecting additional cash into it, or through other, less conventional means.

Wolfgang Schäuble, the German finance minister, said proposals for expanding the effective size of the facility by letting it borrow from the European Central Bank were “not on the table,” saying this was against the bank’s mandate.

“Of course there are ways of taking advantage of the size of the E.F.S.F. in efficient ways to avert infection, but there is no sense, on the weekend before we have to decide on these things, to speculate about them,” he added.

After playing down calls by the I.M.F. for Europe’s banks to raise more capital, leaders now acknowledge that banks need to set aside hundreds of billions of euros in additional cash. The case became more urgent after Dexia, a troubled French-Belgian lender, had to be bailed out last week, raising questions about the need to recapitalize other banks.

Eric Pfanner contributed reporting from Paris.

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Wealth Matters: In a Volatile Market, Some Turn to Insurance Instead of Bonds

But given low interest rates on government bonds, some financial advisers have begun encouraging clients to buy permanent life insurance — permanent because it does not lapse, like term insurance, after a set time — as a substitute for bonds in their portfolio.

Their argument is threefold: the rate of return on permanent life insurance is 3 to 5 percent, the money in a policy ultimately passes to beneficiaries free of income tax, and owners can borrow against the policy without incurring any taxes. If they do not repay the loan, it will simply be deducted from the death benefit.

But there are plenty of advisers who point to the layers of fees in any insurance policy — for the management of the underlying investments, for expenses and for the cost of covering the risk of people dying without making all their premium payments. The advisers also say that insurance policies limit the gains that someone gets on the money invested and that the gains go down the longer you live.

But given the continued volatility in the stock market and low yields on United States Treasury bonds for the foreseeable future, there has been an increase in interest in insurance policies for their steady, if low, returns.

Is this a good thing? It depends whom you ask. “As far as saying your bonds aren’t performing well right now, let’s put them all in the insurance policy, I don’t agree with that,” said Larry Rosenthal, president of Financial Planning Services, a wealth management firm in McLean, Va. “But I understand it from the perspective of accumulation, death benefits and tax deferrals.”

Bob Plybon, chief executive of Plybon Associates, an insurance agency and wealth adviser in Greensboro, N.C., took the other side. “I think where we are from an economic standpoint it makes tremendous sense to look at it as an asset class,” he said. “Right now, you have the ability to generate yields that are competitive with other investments.”

Surprisingly, some people in the insurance industry are cautious about treating life insurance as an asset class. “I believe insurance should be used as insurance,” said Ron Herrmann, senior vice president of sales and distribution at the Hartford. “Taking money out of the life insurance has ramifications to the life insurance itself.”

So what do you need consider if your adviser suggests you think about putting money into a permanent life insurance as an investment?

WHEN IT WORKS People who want to use permanent life insurance policies to build wealth do so by paying more than the premium, a practice known as overfunding. This can mean anything from increasing annual payments to making a lump sum payment.

“Overfunding could be a good use because it enables you to get a longer-term return,” Mr. Herrmann said. “If someone was doing this to take money out in one year, it’s probably not a good thing. If you’re looking 15 to 20 years down the road, it works better.”

For people with substantial wealth, above $5 million, the advantage is predictable growth on a part of their portfolio that they hope not to need.

“Over a 20-year holding period, most permanent life insurance policies have an internal rate of return of 3 to 5 percent depending on the company,” said Adam Sherman, chief executive of Firstrust Financial Resources, a wealth manager and insurance broker in Philadelphia. “Given how the world looks, is it bad to have a 5 percent tool in your investment box? It’s not going to hurt you.”

Or put another way, life insurance gives you guaranteed growth: the death benefit will be worth more than what you put in. Critics would argue that you could earn more money investing that money outside an insurance policy, but even some very wealthy people do not want to take the risk.

Mr. Plybon said he worked with a couple in their 70s who wanted to buy a large insurance policy after watching their net worth drop to $20 million from $30 million in 2008. While they clearly did not need money to live on, they wanted to find a way to get it back, since they had earmarked it for their family foundation. For a premium of about $1 million, he sold them a policy that would pay out $10 million after both spouses died.

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High Corporate Profits Could Reduce Risk in Junk Bonds

High-yield — often called junk — bonds paid about 8.34 percentage points more than United States Treasury issues of comparable maturity, on average, on Sept. 30. Although that is well under the double-digit point premiums that prevailed at market bottoms during the last decade, specialists say that this may still be a profitable time to consider high-yield mutual funds, which are particularly appropriate for tax-sheltered accounts.

“I think the market is attractive,” said William J. Morgan, senior high-yield portfolio manager for J. P. Morgan Asset Management. Junk bonds were trading as if almost 9 percent of issues will default over the coming year, Mr. Morgan observed, even as Moody’s Investors Service projects that only 1 percent to 2 percent will do so.

“I see high-yield as offering pretty decent value here,” agreed Matt Eagan, co-manager of the Loomis Sayles Bond fund, which invests up to 35 percent of assets in lower-rated securities.

Mr. Eagan noted that despite weak economic growth, American companies are enjoying hefty profits, indicating that they cannot only handle interest and principal payments on their bonds but also can take advantage of today’s low interest rates should they need to refinance.

“The default rate is likely to remain low,” he said, and is quite unlikely to rise much above 5 percent even if the economy skids back into recession. Default rates peaked at more than 10 percent after the 2008 meltdown, in the early 2000s and in the early 1990s.

Investors who cringe at the idea of buying low-quality debt — the BBB rating is generally considered the border with investment-grade bonds — should recognize that it can act as a kind of stabilizing portfolio ballast, some specialists maintain.

“A certain mix of higher-quality and high-yield bonds lowers volatility while boosting and smoothing returns,” Mr. Morgan said.

Major companies, not just start-ups or fringe telecoms, are now among the biggest issuers of high-yield — the likes of Ford Motor Credit, the CIT Group, the Hospital Corporation of America, Ally Bank and Sprint Nextel.

Still, the market for high-yield bonds is highly volatile and subject to periodic bouts of illiquidity like the one that occurred in August. That is when the fund category, which had been posting double-digit returns during the preceding 12 months, suffered its biggest monthly loss — 4.37 percent — since 2008, according to Morningstar. (The high-yield market had a lesser skid in the second half of September.)

PRICES slumped after Standard Poor’s, citing the political stalemate after a rancorous Congressional debt-ceiling debate, cut the United States’ credit rating. High-yield investors are very attuned to talk of defaults, but the market also suffered from the European financial turmoil and even the effects of the Japanese tsunami.

“The market had a mass anxiety attack, as all risk assets did,” said Mark Vaselkiv, manager of the T. Rowe Price High Yield fund.

The performance of high-yield bonds, unlike that of investment-grade issues, is very sensitive to the stock market and the economy. Good times indicate that borrowers have a greater ability to service debt, which is far more important to high-yield buyers than the rising interest rates that typically accompany faster growth and that depress the prices of better-quality bonds.

The risk of rising rates, in fact, is limited for high-yield bonds because they almost always come due in 5 to 10 years, compared with 30 years or more for most other corporate bonds. Moreover, their high interest rates provide a cushion against falling prices in a rate upswing. “High-yield will outperform when interest rates go up,” Mr. Morgan said.

Many specialists say the only sensible way for ordinary investors to buy high-yield debt is through mutual funds — both to obtain essential diversification and to avoid being victimized by wide gaps between buying and selling prices in a market that may have relatively little activity.

Retail investors in individual bonds are taking big risks, partly because of the likelihood of unfavorable execution of orders, Mr. Vaselkiv said.

Jeff Tjornehoj, a senior research analyst at Lipper, said that one excellent fund was Fidelity Capital and Income, because of consistent long-term performance, tax efficiency and annual expenses of a reasonable 0.76 percent. It returned 7 percent, annualized, in the five years through Sept. 30 but lost 10.8 percent in the quarter, according to Morningstar. Some 43 percent of its portfolio is in bonds rated B, and 12 percent are rated CCC or below; 17 percent of the fund is invested in stocks.

He said the Vanguard High-Yield Corporate fund has been a high-quality “middle of the road” performer with a portfolio averaging a B rating. It returned 3.7 percent in the quarter , while charging just 0.25 percent in expenses, according to Morningstar.

But there is substantial variation among the more than 500 high-yield funds, with some embracing bonds rated CCC or even lower, as well as common and preferred stocks, convertibles or even derivatives.

The unwary may find the junk market downright treacherous, Mr. Tjornehoj cautioned. “The investor must accept greater volatility and a real risk of loss,” he said, pointing to the Oppenheimer Champion Income fund, which lost about four-fifths of its value in 2008 because of heavy losses on credit default swaps and mortgage-backed securities.

Potential buyers should at least check a fund’s portfolio to make sure it isn’t committed to more low-quality risk than they want and isn’t overly concentrated in certain industries. Good credit analysis by fund managers should uncover issues that are candidates for a ratings upgrade.

Zane E. Brown, a fixed-income strategist at Lord Abbett, noted that gambling, leisure and automotive companies are frequent high-yield borrowers, which could lead to unbalanced fund portfolios if such companies are overrepresented. He now frowns on the bonds of home builders and companies in the paper, publishing and printing industries because, he says, their prospects are generally poor.

While defaults are the biggest hazard in the junk market, analysts also try to predict how much can be salvaged when they occur. The average recovery has run at 44 percent, Mr. Morgan said.

ALTHOUGH many high-yield managers include a wide variety of securities in their portfolios, Mr. Brown sticks closely to corporate bonds. He avoids foreign government bonds because they are harder to analyze and are subject to sudden political change.

Investors should beware of funds offering the very highest current returns, experts also said. Not only might their holdings be of very low quality, but the managers may be paying premium prices, thereby returning some principal in the guise of interest, Mr. Eagan said.

With these cautions, high-yield may be appealing these days — though not the screaming bargain it proved to be when market liquidity evaporated in 2008. But Mr. Vaselkiv issued a caveat: This market may be good “as long as we don’t go into a double-dip recession,” he said. “It’s really a bet on the U.S. economy.”

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Stocks Slip After Jobs Report

The Labor Department reported that the American economy last month added more jobs than expected, easing investors’ fears that the country was slipping into recession. But Fitch downgraded its rating on the government debt of Spain and Italy, sending the stock market and the euro marginally lower in afternoon trading.

The Standard Poor’s 500-stock index closed down 0.8 percent, while the more narrow Dow Jones industrial average fell 20.21 points, or 0.2 percent, to 11,103.12. The technology-heavy Nasdaq composite index lost 1.1 percent. Yields on 10-year United States Treasury bonds rose to 2.06 percent.

The Labor Department said that American employers added 103,000 jobs in September, while the unemployment rate remained at 9.1 percent. Some investors pointed to gains in average hourly earnings and an uptick in hiring of temporary workers as signs in the report of an improving outlook in the labor market.

Still, economists cautioned that the numbers were weak and noted that the report seemed positive only in light of low expectations.

The jobs report shows an economy that is “neither reaccelerating nor shifting into recession,” wrote Steve Blitz, senior economist for ITG Investment Research, in a report to investors. Mr. Blitz said the American economy remained particularly vulnerable because of its reliance on exports during a time of global economic uncertainty.

“The employment data in the coming months should be more of the same, which isn’t much, and if growth starts to decelerate more rapidly around the world, negative jobs numbers are more likely than not,” he wrote.

The jobs report, coupled with somewhat optimistic reports on same-store retail sales and auto sales for September, quelled fears of an immediate recession, said David Kelly, chief market strategist for JPMorgan Funds, but traders were likely cashing in on gains from earlier in the week.

“With this dollop of good news, it’s natural for people to take money off the table,” he said. “But when you’re investing, rather than trading, you do need to look at the fundamentals. The fundamentals do justify both higher interest rates and higher stock prices than prevail today.”

Fitch downgraded its rating on Italian debt by one level, following similar moves by the other major rating agencies in recent weeks. It also lowered its rating on Spain two levels. In both cases, the agency cited concerns about debt coupled with low growth. The outlook on both countries was negative.

The move weighed on Wall Street, particularly on banks, whose exposure to the debt crisis in Europe is unclear. Shares for JP Morgan slipped 4.1 percent, Citibank shares dropped 3.9 percent and Bank of America dropped 4.3 percent.

The value of the euro also fell in the wake of Fitch’s action, to $1.3385 from $1.3437.

Marc Chandler, an analyst at Brown Brothers Harriman, said that investors would continue to put more weight on the situation in Europe than on the domestic economy.

“The U.S. is not the crosshairs,” he said. “Europe is in the crosshairs.”

European markets, which closed before the downgrades, were moderately higher. Governments there are simultaneously contemplating making banks take a bigger write-down on Greek debt, taxing their financial transactions and boosting their capital base.

The Euro Stoxx 50 index of blue chip shares closed up 0.9 percent for the day and 4.1 percent for the week. The FTSE 100 in London gained 0.2 percent to end the week up 3.4 percent, while the DAX in Frankfurt gained 0.5 percent on Friday and 3.2 percent for the week.

In another downgrade, Moody’s Investors Service cut its ratings on 12 British financial institutions, including Lloyds TSB Bank and Royal Bank of Scotland, saying that it believed they were less likely to be bailed out than European banks in the event of their failure. Lloyds shares were down 2.7 percent, and the Royal Bank of Scotland were down 3.3 percent.

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