Double-dip fears over worldwide credit stress
The global credit system is flashing the most serious warning signals in almost a year on triple fears of a Spanish banking crisis, escalating political risk in Asia, and a second leg to the US housing slump.
By Ambrose Evans-Pritchard
Published: 9:20PM BST 25 May 2010
Flight to safety drove yields on 10-year German Bunds to 2.56pc, below the levels touched in the depths of the Great Depression. The spreads over peripheral European debt rose sharply again, jumping to 137 basis points for Italy, 157 for Spain and 220 for Ireland.
The strains in Europe's sovereign debt markets are nearing levels that forced EU leaders to launch their "shock and awe" rescue package. "If a $1 trillion (£700bn) bail-out did not finally turn sentiment, I struggle to see what can," said Tim Ash, an economist at RBS.
Dollar Libor rates gauging stress within the interbank lending market have jumped to a 10-month high of 0.5363pc, with credit contagion spreading to every area. The iTraxx Senior financials index – banks' "fear gauge" – rose 20 basis points on Tuesday to 184. "It turns out we weren't seeing the light at the end of the tunnel after all, but a train with a big light on it coming towards us of double-dip," said Dr Suki Mann, at Societe Generale.
While the Libor rate is still far below peaks reached during the Lehman crisis, the pattern has ominous echoes of credit market strains before the two big "pulses" of the credit crisis in August 2007 and September 2008. In each case a breakdown of trust in the interbank market was a harbinger of violent moves in equities and the real economy weeks later.
RBS's credit team said Libor strains were worse than they looked since most banks in Europe were paying much higher spreads, especially in Spain. The "implied" forward spreads were nearer 1.1pc.
The damage has spilt over to corporate bonds, effectively shutting the market for new issues. May will be the worst single month for debt issues since December 1999, with seven deals being cancelled in recent days. Volume has collapsed to $47bn from $183bn in April, according to Bloomberg.
Mr Ash said North Korea's decision to cut all ties with the South and abrogate its non-aggression pact – coming days after Thailand sent tanks into Bangkok to crush the Red Shirts – has played into the chemistry of angst gripping markets, adding it was a reminder that Asia has "political/social stress points". This risk was overlooked during the honeymoon phase of emerging markets when investors were intoxicated by the China story.
Fears that America may slip back into a double-dip recession are returning. Larry Summers, the White House economic tsar, has called for a second stimulus package to keep the recovery on track, warning that the US economy is still in a "very deep valley".
The S&P Case-Shiller index of home prices is declining again as incentives for homebuyers expire and the slow-burn effect of rising delinquencies exacts its toll. Prices fell 3.2pc in the first quarter of this year. "There are signs of some renewed weakening in home prices", said David Blitzer from S&P.
The epicentre of the credit crisis is moving to Spain where the seizure by the central bank of CajaSur over the weekend has torn away the veil on credit damage from Spain's property crash.
Bank stocks fell 6pc in Madrid in early trading on Tuesday on fears that funding will dry up for the cajas – or the savings banks – setting off a broader credit crunch. The cajas hold the lion's share of loans to property companies and developers, estimated at €445bn (£380bn) or 45pc of GDP by Goldman Sachs.
Spanish construction reached 17pc of GDP at the height of the bubble as real interest rates of minus 2pc set by the European Central Bank for German needs played havoc with the Spanish economy. This was almost double the level in the US during the sub-prime booms. The result is an overhang of unsold Spanish properties equal to four years' demand.
Markets have been rattled by reports in the German media that the Greek rescue deal contains two secret clauses. The package will be "immediately and irrevocably cancelled" if it is found to breach the EU Treaty's "no bail-out" clause, either in a ruling by the European court or the constitutional courts of any eurozone state. While such an event is unlikely, it is not impossible. There are two cases already pending at Germany's top court in Karlsruhe, perhaps Europe's most "eurosceptic" tribunal.
The second clause said that if any country finds it cannot raise funding for the rescue at interest rates below the 5pc charge agreed for Greece, it may opt out of the bail-out. BNP Paribas said this would escalate quickly into a systemic crisis if Spain were in such a position, because the other countries cannot carry an ever-rising burden. The bank warned the euro project itself may start to disintegrate rapidly if these rescue provisions are ever seriously put to the test.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7765383/Double-dip-fears-over-worldwide-credit-stress.html
Showing posts with label Europe. Show all posts
Showing posts with label Europe. Show all posts
Thursday 27 May 2010
Monday 24 May 2010
Nouriel Roubini said the bubble would burst and it did. So what next?
Nouriel Roubini said the bubble would burst and it did. So what next?
The dismal science? Don't believe a word of it. If Nouriel Roubini's New Year's Eve invitations were anything to go by, economics is far from the dour affair it once was.
By Jonathan Sibun
Published: 5:51PM BST 23 May 2010
The dismal science? Don't believe a word of it. If Nouriel Roubini's New Year's Eve invitations were anything to go by, economics is far from the dour affair it once was.
By Jonathan Sibun
Published: 5:51PM BST 23 May 2010
Holed up in the Caribbean island of St Bart's, Roubini was forced to choose between two parties. The first hosted by Chelsea owner Roman Abramovich, the second by Colonel Gaddafi's son Hannibal.
While dancing the night away with a Russian oligarch or the son of a Libyan dictator might not be everyone's glass of Cristal, the invitations show just how far the New York university professor has come in the celebrity stakes.
Just three years earlier, Roubini had been the object of derision in the economics community as he prophesied a US housing market crash, financial crisis and partial collapse of the banking sector. Today, as an adviser to governments and central bankers and much feted in the media, he's well aware of the power of being right.
"In my line of business your reputation is based on being right," he says. "The publicity is just noise. Certainly with a global crisis, the dismal scientists are having some prominence, even if most of the economics profession actually failed to predict it."
The 51-year-old, widely known as Dr Doom, is in town to publicise his new book Crisis Economics, a crash course in the financial crisis and what can be done to avoid another.
The book does little to suggest he is uncomfortable with his nickname. Where Roubini is concerned, the great recession has some way to run.
"The crisis is not over; we are just at the next stage. This is where we move from a private to a public debt problem," he says, his speech the mongrel drawl of a man who was born in Turkey to Iranian parents, raised in Israel and Italy and lives in New York. "We socialised part of the private losses by bailing out financial institutions and providing fiscal stimulus to avoid the great recession from turning into a depression. But rising public debt is never a free lunch, eventually you have to pay for it."
As eurozone leaders panic and markets continue to dive, Roubini believes Greece will prove to be just the first of a series of countries standing on the brink.
"We have to start to worry about the solvency of governments. What is happening today in Greece is the tip of the iceberg of rising sovereign debt problems in the eurozone, in the UK, in Japan and in the US. This... is going to be the next issue in the global financial crisis."
It already is. And Roubini claims to have foreseen it as far back as 2006.
"I was writing about the PIGS [Portugal, Italy, Greece and Spain] six to nine months before everyone else, I was worried about the future of the monetary union back in 2006," he says. "At the World Economic Forum I outraged a policy official by suggesting the monetary union might break up."
Roubini has sandwiched a visit to the The Daily Telegraph's offices between a private meeting with Bank of England Governor Mervyn King – "I regularly meet with policy makers. I don't know if it's even worth mentioning" – and a talk at the London School of Economics. I ask him if I can see his LSE speech.
"I haven't written one. I never prepare a speech, I don't even have notes. I usually just speak out of my own thoughts; stream of consciousness."
It's a manner he adopts when we meet. Looking over my shoulder, declining eye contact, he moves seamlessly between what he describes as the economist's usual suspects – "the US, eurozone, Japan, China, emerging markets, inflation, deflation, markets" – as he must when teaching his 400 students in New York.
The prognosis for all the suspects save China and the emerging markets is grim, little wonder given the backdrop of a 3.8pc drop in the FTSE last week and panic among investors spooked by German chancellor Angela Merkel's short-selling ban. The ban has been dismissed as fiddling while Rome, or rather the eurozone, burns.
Roubini believes Greece's problems will see the country forced to restructure its debt and raises the longer term prospect of a breakdown of the union with the potential exits of Greece, Spain and Portugal.
Could it survive such a blow? "Well you could think of a world where there is a eurozone with only a core of really strong economies around Germany," he says. "But the process that would lead to one or more countries leaving the union would be so disruptive that the euro as a major reserve currency would be severely damaged."
Like many economists, Roubini does not talk in absolute predictions. It is all about what could happen in worse case scenarios.
But he argues they are only becoming more likely under current political leadership, the UK's new Conservative-Liberal coalition included. "I am worried about the hung parliament. Whenever you have divided, weak or multi-party governments, budget deficits tend to be higher. It is harder to make the necessary sacrifices."
He dismisses the £6bn of cuts announced by the coalition as "small compared to what is needed", but rejects the idea that the UK is worse off than many of its peers.
"In the US there is a lack of bipartisanship between Democrats and Republicans, in Germany Merkel has just lost the majority in her legislature, in Japan you have a weak and ineffective government, in Greece you have riots and strikes," he says. "The point is that a lot of sacrifices will have to be made in these countries but many of the governments are weak or divided. It is that political strain that markets are worried about. The view is: you can announce anything, we'll see whether you're going to implement it."
This, he explains, is the ultimate challenge facing governments.
"If you're pushing through austerity while there is growth that's one thing, but if you're pushing it through while the recession is deepening, politically that is harder to sell. And the eurozone doesn't just need fiscal consolidation but also structural reform to increase productivity and restore competitiveness," he says.
Germany is the blueprint, Roubini points out, but "it took a decade for them to see the benefits of structural reform and corporate restructuring".
"If Spain and Portugal start today, you'll see the short-term cost without the long-term benefit and they might run out of political time," he says. "That's why I worry about several eurozone members having to restructure their debt, or deciding that the benefits of staying in the monetary union are less than the cost of it."
The prognosis for the UK is, at least, a little less alarming. An independent currency gives it a few more levers to pull – quantitative easing means default is unlikely to be an issue. But that comes with its own challenges.
"Eventually inflation will go up and that erodes the real value of public debt," Roubini says. "In that scenario the value of the pound will fall sharply. It could even become disorderly and that could damage the economy, the financial markets and also the role of the pound as a reserve currency."
Yet another challenge for Government then. Whether the coalition can live up to it remains to be seen. And whether it thinks it has to.
Roubini is adamant that the great recession is not over. But a temporary economic pick-up, which would convince governments that reform is unnecessary, could bring its own problems.
"People asked me why I saw there was a bubble and my question was why others didn't. During the bubble everybody was benefiting and losing a sense of reality," he says. "And now, since there is the beginning of economic recovery – however bumpy that might be – in some sense people are already starting to forget what happened two years ago. Banks are going back to business as usual and bonuses are back to levels that are outrageous by any standards. There is actually a backlash against even moderate reforms that governments are trying to pass."
Reform, Roubini insists, is necessary, recovery or not. "We are still in the middle of this crisis and there is more trouble ahead of us, even if there is a recovery. During the great depression the economy contracted between 1929 and 1933, there was the beginning of a recovery, but then a second recession from 1937 to 1939. If you don't address the issues, you risk having a double-dip recession and one which is at least as severe as the first one."
Roubini has built his reputation on such forecasts. So, given the real reputation builder was forecasting the crisis, has he been one of the few to enjoy the troubled times of the past few years?
"We are witnessing the worst global economic crisis in the last 60 to 70 years and for an economist that offers an opportunity," he says. "So it has been interesting, but the damage financially and economically has been so severe and so many people have suffered. Anybody involved has to bear that in mind."
Perhaps the dismal science was a fair moniker after all.
http://www.telegraph.co.uk/finance/economics/7756684/Nouriel-Roubini-said-said-the-bubble-would-burst-and-it-did.-So-what-next.html
http://www.telegraph.co.uk/finance/economics/7756684/Nouriel-Roubini-said-said-the-bubble-would-burst-and-it-did.-So-what-next.html
Saturday 22 May 2010
A.I.G.’s Derivatives at European Banks Could Expose It to Debt Crisis
May 21, 2010
A.I.G.’s Derivatives at European Banks Could Expose It to Debt Crisis
By MARY WILLIAMS WALSH
The waves of financial trouble rippling across Europe could end up splashing at least one American institution: the taxpayer-owned American International Group.
A.I.G. has sought to unwind its derivatives business, which gave it a big exposure to Europe.
After an outcry over details disclosed last year about how the government’s bailout helped a number of European banks, the company intended to rid itself of the derivatives it sold to those institutions to help them comply with their capital requirements.
But its latest quarterly filing with regulators shows that the insurance behemoth still has significant exposure to those banks. A.I.G. listed the total notional value of these derivatives, credit-default swaps, as $109 billion at the end of March. That means if events in Europe turned sharply against A.I.G., its maximum possible loss on these derivatives would be $109 billion.
No one is suggesting that is likely.
Still, it would be a sore spot if A.I.G. once again had to make good on a European bank’s investment losses, even on a small scale. A spokesman for A.I.G., Mark Herr, declined to name the European banks that bought its swaps to shore up their capital.
A.I.G.’s stock has also fallen in recent days amid uncertainty over whether the continuing European debt crisis could set back an important, $35.5 billion asset sale. A.I.G.’s chief executive, Robert Benmosche, announced in March that the company would sell its big Asian life insurance business to Prudential of Britain, raising money to pay back part of its rescue loans.
The transaction needs the approval of 75 percent of Prudential’s shareholders.
Shares of A.I.G. fell seven consecutive trading days to close at $34.81 on Thursday. That was a drop of 23 percent since May 11. The shares recovered slightly on Friday, closing at $35.96.
A.I.G.’s swaps work something like bond insurance. The European banks that bought them could keep riskier assets on their books without running afoul of their capital requirements, because the insurer promised to make the banks whole if the assets soured. The contracts call for A.I.G.’s financial products unit to pay in cases of bankruptcy, payment shortfalls or asset write-downs.
A.I.G. is also required to post collateral to the European banks under certain circumstances, but the company said it could not forecast how much.
It was the collateral provisions of a separate portfolio of credit-default swaps that caused A.I.G.’s near collapse in September 2008. Those swaps were tied to complex assets whose values were hard to track.
The European bank assets now in question consist mostly of pooled corporate loans and residential mortgages. A.I.G. has said they are easier to evaluate and therefore less risky.
A.I.G. had hoped these swaps would become obsolete at the end of 2009, when European banking was to have completed its adoption of a detailed new set of capital adequacy rules, known as Basel II. Since A.I.G.’s swaps were designed to help banks comply with the more simplistic previous regime, the insurer thought they would serve no useful purpose after the changeover and could be terminated without incident.
But international bank regulators have yet to fully adopt Basel II. A.I.G.’s first-quarter report said “it remains to be seen” which capital adequacy rules would be used in different parts of Europe. Mr. Herr said A.I.G. could not comment beyond the information already filed with regulators. In its first-quarter report, the insurer said the banks were holding the loans and mortgages in blind pools, making it hard to know how they would weather Europe’s storm. Some pools have fallen below investment grade.
A.I.G. said the pools of loans and mortgages were not generally concentrated in any industry or country. They have an expected average maturity, over all, of a little less than two years. The company said it was getting regular reports on the blind pools and losses so far had been modest.
http://www.nytimes.com/2010/05/22/business/22aig.html?ref=business
A.I.G.’s Derivatives at European Banks Could Expose It to Debt Crisis
By MARY WILLIAMS WALSH
The waves of financial trouble rippling across Europe could end up splashing at least one American institution: the taxpayer-owned American International Group.
A.I.G. has sought to unwind its derivatives business, which gave it a big exposure to Europe.
After an outcry over details disclosed last year about how the government’s bailout helped a number of European banks, the company intended to rid itself of the derivatives it sold to those institutions to help them comply with their capital requirements.
But its latest quarterly filing with regulators shows that the insurance behemoth still has significant exposure to those banks. A.I.G. listed the total notional value of these derivatives, credit-default swaps, as $109 billion at the end of March. That means if events in Europe turned sharply against A.I.G., its maximum possible loss on these derivatives would be $109 billion.
No one is suggesting that is likely.
Still, it would be a sore spot if A.I.G. once again had to make good on a European bank’s investment losses, even on a small scale. A spokesman for A.I.G., Mark Herr, declined to name the European banks that bought its swaps to shore up their capital.
A.I.G.’s stock has also fallen in recent days amid uncertainty over whether the continuing European debt crisis could set back an important, $35.5 billion asset sale. A.I.G.’s chief executive, Robert Benmosche, announced in March that the company would sell its big Asian life insurance business to Prudential of Britain, raising money to pay back part of its rescue loans.
The transaction needs the approval of 75 percent of Prudential’s shareholders.
Shares of A.I.G. fell seven consecutive trading days to close at $34.81 on Thursday. That was a drop of 23 percent since May 11. The shares recovered slightly on Friday, closing at $35.96.
A.I.G.’s swaps work something like bond insurance. The European banks that bought them could keep riskier assets on their books without running afoul of their capital requirements, because the insurer promised to make the banks whole if the assets soured. The contracts call for A.I.G.’s financial products unit to pay in cases of bankruptcy, payment shortfalls or asset write-downs.
A.I.G. is also required to post collateral to the European banks under certain circumstances, but the company said it could not forecast how much.
It was the collateral provisions of a separate portfolio of credit-default swaps that caused A.I.G.’s near collapse in September 2008. Those swaps were tied to complex assets whose values were hard to track.
The European bank assets now in question consist mostly of pooled corporate loans and residential mortgages. A.I.G. has said they are easier to evaluate and therefore less risky.
A.I.G. had hoped these swaps would become obsolete at the end of 2009, when European banking was to have completed its adoption of a detailed new set of capital adequacy rules, known as Basel II. Since A.I.G.’s swaps were designed to help banks comply with the more simplistic previous regime, the insurer thought they would serve no useful purpose after the changeover and could be terminated without incident.
But international bank regulators have yet to fully adopt Basel II. A.I.G.’s first-quarter report said “it remains to be seen” which capital adequacy rules would be used in different parts of Europe. Mr. Herr said A.I.G. could not comment beyond the information already filed with regulators. In its first-quarter report, the insurer said the banks were holding the loans and mortgages in blind pools, making it hard to know how they would weather Europe’s storm. Some pools have fallen below investment grade.
A.I.G. said the pools of loans and mortgages were not generally concentrated in any industry or country. They have an expected average maturity, over all, of a little less than two years. The company said it was getting regular reports on the blind pools and losses so far had been modest.
http://www.nytimes.com/2010/05/22/business/22aig.html?ref=business
Friday 21 May 2010
Whatever Germany does, the euro as we know it is dead
"Money can't buy you friends, but it does get you a better class of enemy" – Spike Milligan
For Angela Merkel, leader of the eurozone's richest country, a queue is forming of high-quality adversaries. As she tips German Geld und Gut into the furnace of a rescue package for the euro, while going it alone in a misguided ban on market "manipulators", the brass-neck Chancellor has infuriated domestic voters, angered her EU partners (in particular the French) and invited the so-called wolf pack of global traders to do its worst.
In one respect, Mrs Merkel is right: "The euro is in danger… if the euro fails, then Europe fails." What she has not yet admitted publicly is that the main cause of the single currency's peril appears beyond her control and therefore her impetuous response to its crisis of confidence is doomed to fail.
The euro has many flaws, but its weakest link is Greece, whose fundamental problem is that for years it spent too much, earned too little and plugged the gap by borrowing in order to enjoy a rich man's lifestyle. It flouted EU rules on the limits to budget deficits; its national accounts were a moussaka of minced statistics, topped with a cheesy sauce of jiggery-pokery.
By any legitimate measure, Greece was unworthy of eurozone membership. That it achieved card-carrying status was down to the sleight-of-hand skills of its Brussels fixers and the acquiescence of central bank bean-counters. Now we know the truth, jet-hosing it with yet more debt makes no sense. Another dose of funny money will delay but not extinguish the need for austerity.
This is why the euro, in its current form, is finished. The game is up for a monetary union that was meant to bolt together work-and-save citizens in northern Europe with the party animals of Club Med. No amount of pit props from Berlin can save the euro Mk I from collapsing under the weight of its structural dysfunctionality. You cannot run indefinitely a single currency with one interest rate for 16 economies, when there are such huge fiscal disparities.
What was once deemed unthinkable is now, I believe, inevitable: withdrawal from the eurozone of one or more of its member countries. At the bottom end, Greece and Portugal are favourites to be forced out through weakness. At the top end, proposals are already being floated in the Frankfurt press for a new "hard currency" zone, led by Germany, Austria and the Benelux countries. Either way, rich and poor are heading in opposite directions.
When asked on Sky if, in five years' time, the euro will have the same make-up as it does today, Jeremy Stretch, a currency analyst at Rabobank, the Dutch financial services giant, told me: "I think it's pretty unlikely." The euro was a boom-time construct. In the biggest bust for 80 years, it is falling apart.
Telegraph loyalists with long memories will be shocked by none of this. In 1996, Sir Martin Jacomb, then chairman of the Prudential, set out with great prescience in two pieces for The Sunday Telegraph why a European single currency, without full political integration, would end in disaster. His prognosis of the ailments that might afflict the eurozone's sickliest constituents reads as if it was penned to sum up today's turmoil.
"A country which does not handle its public finances prudently will find its long-term borrowing costs adjusted accordingly," Sir Martin predicted. "Although theory says that default is unlikely, nevertheless, a country that spends too much public money, and allows its wage costs to become uncompetitive, will experience rising unemployment and falling economic activity. The social costs may become impossible to bear."
Welcome to the headaches of George Papandreou. The bond markets called his country's bluff. Greece is skint, but its unions don't want to admit it. There is insufficient political will to tackle incompetence and corruption, never mind unaffordable state spending. But, locked into the euro, Greece cannot devalue its way out of trouble, so it relies on the kindness of strangers.
Dishing out German largesse to profligate Athens, with little expectation of a reasonable return, is a sure way for Mrs Merkel to join Gordon Brown as a political has-been. Fully aware of the revulsion felt by Mercedes and BMW employees at the prospect of their taxes being used to pay for a Hellenic car crash, she has resorted to creating a bogeyman – The Speculator.
By announcing a ban on the activities of short-sellers (those who bet to profit from falling prices in financial markets), she is hoping her decoy will avert German attention from the small print of Berlin's support for Greece, which talks of developing processes for "an orderly state insolvency". This sounds ominously like a softening-up process for a form of default.
Greece's severe difficulties were home-made. The euro has come under pressure not from dark forces of speculation but respectable investors, many of them traditional pension funds, which, quite correctly, worked out that when the crunch came, the Brussels elite would sanction an abandonment of its no bail-out rule and cough up for a messy fudge.
In 1990, the late Lord Ridley, when still a government minister, caused a storm by telling The Spectator that Europe's planned monetary union was "a German racket designed to take over the whole of Europe". One knew what he was getting at, but it has not turned out that way.
Protecting the euro has become a project via which profligate states dip their fingers in Berlin's till. Germany is taking on nasty obligations without gaining ownership of the assets. Germany's version of The Sun, Bild Zeitung, feeds its readers a regular diet of stories about the way ordinary Germans are being taken for mugs. Trust has turned to suspicion. Next stop is divorce.
As for the United Kingdom, we must be grateful that those frightfully clever Europhiles, such as Lord Mandelson and Kenneth Clarke, did not get their way. Had they been able to scrap the pound and embrace the euro this country would be even closer to ruin. Without a flexible currency, the colossal deficit clocked up by Mr Brown would have crushed us completely. We have little to thank him for, but it would be churlish to deny that his decision to reject Tony Blair's blandishments in favour of the euro was a life-saver.
Sterling's devaluation has not been pretty, but it is helping to keep our exports competitive while the coalition Government begins rebuilding the nation's finances. Siren voices from across the Channel, calling for closer integration between Britain and the rest of the EU, can be confidently rejected. As for joining the euro, I find it impossible to imagine any circumstances under which it would be in the UK's interest to do so.
Thursday 20 May 2010
Poor US jobs data knocks Wall Street, reignites global stock market sell-off
Poor US jobs data knocks Wall Street, reignites global stock market sell-off
The world stock market sell-off got a second wind on Thursday afternoon after disappointing US jobs data compounded investors' already bleak view of the world economy
The world stock market sell-off got a second wind on Thursday afternoon after disappointing US jobs data compounded investors' already bleak view of the world economy
European markets gave up early rises after the Dow Jones opened down 2.1pc following a jump in US jobless claims to 471,000. Photo: Getty
European markets gave up early rises after the Dow Jones opened down 2.1pc following a jump in US jobless claims to 471,000. Economists were expecting them to fall to 440,000.
The poor news on the US economy added to jitters about a tightening of financial regulation, pushing London's FTSE 100 down 2pc. Germany's DAX skidded 2.3pc, France's CAC 2.8pc and Spain's Ibex 1.7pc. Earlier, Asian markets fell for a second day with the Nikkei sliding 1.5pc and Australia's ASX 1.6pc.
Gilt yields on 10-year bonds fell further in the US, Germany and UK in a flight to safety.
European tensions over a unilateral German ban on the shorting of government bonds and some financials stocks on Tuesday evening continued to reverberate across financial markets.
The euro, which came off fresh four-year lows around $1.21 on Wednesday after a massive €9.5bn intervention by the Swiss central bank, remained volatile.
The currency spiked above $1.24 in early trade on speculation of a possible co-ordinated intervention from central banks, and talk that Greece may be about to leave the eurozone. This rally was short lived and it was trading around $1.2340 just before 3pm.
Angela Merkel, the German Chancellor who yesterday caused a stir by warning that the euro was in danger, today said she would campaign for a tax on financial markets at the G20 summit in Canada.
In a wide-ranging speech on financial regulation, she stressed the importance of tightening the fiscal rules governing the euro area, the breech of which has contributed to the current crisis.
"If you have a currency like the euro ... then you need stricter rules than other governments that just decide for their own currency," she said.
"We need to tighten up the Stability and Growth Pact," she insisted, ahead of a meeting of EU finance ministers and the EU president Herman van Rompuy to discuss the pact Friday in Brussels.
She also called for a European version of the rating agencies which have been accused of exacerbating the crisis.
"I would be in favour of introducing a European rating agency which would act as a competitor to other rating agencies on a level playing field," she said.
Earlier in the day investors were tempted back into the market following yesterday's steep falls. Bank shares were in demand and by 11.30am Britain's FTSE 100 was up 0.3pc, Germany's DAX had dipped 0.3pc and France's CAC-40 has gained 0.04pc.
But market watchers were wary. "The day will be a roller coaster, no doubt," said David Keeble, an analyst at Credit Agricole. "The German short ban has emphasised that Europe is not unified and this is at a juncture when it really, really needs to be."
Christine Lagarde, French Economy Minister, told RTL radio that the German decision "should have been taken in concert" with other European nations and was in itself "open to debate".
The crisis in Europe is being driven by debt and public deficit levels which have soared way above EU rules as governments increased spending to get their economies through the worst recession in decades.
French President Nicolas Sarkozy added to worries wheh he said France's constitution should be altered to compel new governments to sign up to a timetable to balance their budgets. He also said he wanted to freeze public spending for three years.
Greek authorities deployed hundreds of extra police in Athens for the fourth general strike in four months which caused widespread disruption. During Greece's last general strike on May 5, three workers — including a pregnant woman — died while trapped in a bank that rioters set ablaze.
Public anger has grown in Greece against deep pension and salary cuts, as well as steep tax hikes, imposed in an attempt to pull Greece out of an unprecedented debt crisis.
The measures were needed for Greece to receive a €110bn (£95bn) three-year rescue loan package from other EU countries and the International Monetary Fund that staved off bankruptcy.
Spain also braced for street protests by public service workers against a tough government austerity plan aimed at reining in the public deficit amid fears of a Greek-style debt crisis.
The country's main unions has called for demonstrations in front of government buildings throughout the country at the same time as the government is set to approve the belt-tightening plan later Thursday.
http://www.telegraph.co.uk/finance/markets/7745696/Poor-US-jobs-data-knocks-Wall-Street-reignites-global-stock-market-sell-off.html
http://www.telegraph.co.uk/finance/markets/7745696/Poor-US-jobs-data-knocks-Wall-Street-reignites-global-stock-market-sell-off.html
Behind the drama in Europe lies a global crisis
Behind the drama in Europe lies a global crisis
The euro is under threat – along with our entire free-market system, warns Edmund Conway.
The euro is under threat – along with our entire free-market system, warns Edmund Conway.
Angela Merkel, the German Chancellor, followed the unilateral German shorting ban with a warning that the euro was in danger, urging the EU speed up supervision of financial markets.Photo: Getty
It is now accepted, even by Angela Merkel, that as Europe battles its financial crisis, the very fate of the euro is at stake. Her belated discovery of this home truth is welcome, but she does not go far enough. The real concern is that the crisis bubbling on the other side of the Channel represents a make-or-break moment for globalisation.
If that sounds rather exotic, consider two apparently separate events from the past couple of days. The first features George Osborne. While things have gone pretty well back home for the new Chancellor, he is already having trouble in Europe, where the Commission has been fighting not only to de-claw the hedge fund industry – against British wishes – but also to impose new rules on its member states.
The Commission's latest idea is that every European finance minister (including Osborne) should be compelled to send his Budget plans to Brussels for approval before announcing them to his own MPs and citizens. The rationale is that if there is to be a central bail-out fund for stricken European nations, there should be someone in the middle making sure no one misbehaves. Osborne, understandably, was having none of it, using his inaugural European summit to insist that when it came to a country's budget, "the national parliament must be absolutely paramount".
The second event took place a few thousand miles away in Washington, where the US Senate voted 94:0 to prevent the International Monetary Fund from using its cash to help countries that are inextricably trapped in a debt spiral. Though barely reported on this side of the Atlantic, this vote could have enormous consequences – such as preventing the fund from providing its share of the grand European bail-out package announced with such fanfare last week, which amounts to a third of the trillion-dollar total.
Though superficially unconnected, the two events share a similar theme: for the first time in many years, the technocrats who run our economies are realising that the main barrier to resolving a crisis and reinstating business-as-usual is not so much our ability to afford it, but our populations' willingness to pay.
As long as things were going well, economies were growing rapidly, and affluence was increasing, it was easy for politicians to pretend that when it came to economics, national borders didn't much matter any more. But now the chips are down, nationalism is back.
The rule of thumb here is as follows: of the three aims we have been striving towards in recent history – democracy, national sovereignty and global free trade – you cannot have any more than two at any one time.
- Want to run your country as an independent state, open to the whims and volatility of the free markets? The voters will punish you at the ballot box.
- Insist that your nation has full control of its own affairs? Then you have to jettison any plans to play a full part in the global economy.
- Want democracy and globalisation? Then you have to suborn your sovereignty.
This is what Professor Dani Rodrik of Harvard University calls the "policy trilemma", and it is what lay behind the breakdown of the last era of globalisation, which coincided with the Industrial Revolution. Under the British Empire, free trade flourished, reinforced by the gold standard (in some senses a precursor to the euro) and the Royal Navy.
However, this only came about because most politicians were able to ignore their citizens' protectionist impulses. The first decades of the 20th century brought not only the First World War but also a mass electorate; when Churchill tried to revive the gold standard in the 1920s, at the cost of deflation and depression in the UK, the public revolted. Churchill called the blunder his "worst ever mistake".
Scarred by the beggar-thy-neighbour policies of the 1930s, John Maynard Keynes could only contemplate a "globalisation-lite" as he rebuilt the world's economic structure after the Second World War. But the Bretton Woods system, which intentionally suppressed the free market through capital controls, lasted only so long. Liberalisation went into overdrive with the fall of the Berlin Wall and the opening-up of China. Yet the resulting system is actually something of a patchwork. Europe exemplifies the problem: the continent is a hodge-podge of nations trying to disguise itself as a completely liberalised market. Unfortunately, its people have different ideas: the Germans are furious about the Greek bail-out; the British insist on remaining on the sidelines.
Perhaps recognising the danger of alienating her voters, Mrs Merkel has now taken what might be a first step towards curtailing economic globalisation, by banning the short-selling of German banks. Some worry that a return to capital controls is the next step in the European effort to prevent meltdown. Others suspect that the European Central Bank has already intervened in the markets to prop up the euro.
Quite what the real plan is remains to be seen. Most likely, there isn't one – yet. But unless they intend to embrace totalitarianism, Europe's members will eventually have to abandon either their national sovereignty or globalisation itself. Given the continent's size, and our reliance on it as our largest trading partner, this is not a drama we can afford to ignore.
http://www.telegraph.co.uk/finance/comment/edmundconway/7742164/Behind-the-drama-in-Europe-lies-a-global-crisis.html
http://www.telegraph.co.uk/finance/comment/edmundconway/7742164/Behind-the-drama-in-Europe-lies-a-global-crisis.html
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