'Ten days to rescue euro' as leaders call for IMF funds

Europe faces a crucial ten days to save the eurozone, a leading EU monetary chief warned after finance ministers from the currency bloc admitted they may need IMF help to increase the firepower of their bailout fund.

Economic and Monetary Affairs Commissioner Olli Rehn said the EU had little time to conclude its crisis response. 

By Martin Strydom

10:45AM GMT 30 Nov 2011

"We are now entering the critical period of 10 days to complete and conclude the crisis response of the European Union," Economic and Monetary Affairs Commissioner Olli Rehn said on Wednesday as EU finance ministers met in Brussels.

His comments came as Gerard Lyons, chief economist at Standard Chartered, said: "The euro cannot survive in its present format."

"Throughout the year I have stressed that the world economy could suffer a double-dip if it was hit by one of three factors: an external shock, a policy mistake or a loss of confidence. Unfortunately, in recent months, the euro area has been hit by all three. And that is why the euro area will slip back into recession in 2012," he said in his Economic Outlook for November.

He warned that the scale of the downturn will be determined by eurozone leaders' policy actions and the extent to which confidence is hit.

Confidence in Europe remained low in financial markets on Wednesday on disappointed at attempts to increase the firepower of the eurzone bailout fund.

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Italian and Spanish borrowing costs continued to rise and stock markets fell after Wolfgang Schauble, Germany's finance minister, said Europe's "big bazooka" rescue fund is not ready and won't stem the region's debt crisis.

Eurozone finance ministers, who were meeting ahead of the Ecofin summit today, acknowledged the €440bn (£376bn) fund would not win support to leverage it up to €1 trillion. Its capacity would be between €500bn and €700bn instead – a total that is unlikely to be big enough to rescue Spain and Italy.

"The situation in Europe and the world has significantly worsened over the past few weeks. Market stress has intensified," said Christian Noyer, France's central bank governor and a governing council member of the European Central Bank.

On Wednesday, Swedish finance minister Anders Borg renewed pressure on the European Central Bank to help halt the debt crisis.

"We need to keep all options on the table, to my mind price stability is secured in Europe - therefore there is some room also for the central bank to maneouvre on this issue," Mr Borg said as the 27 EU ministers gathered to pick up the thread of overnight eurozone ministerial talks.

He also said IMF contributors had to raise their input.

Belgium's Didier Reynders said finding a solution that would deliver a big enough pot of money to deal with debts that easily dwarf existing bailouts for Greece, Ireland and Portugal would need "the (European) central bank as well as the IMF".

The call for a bigger role for the ECB will lead to a clash with Germany which opposes such a move and last week got France and Italy to agree to stop pressuring the central bank to help.

Christine Lagarde, the head of the IMF, warned in September that its $384bn (£248bn) war chest designed as an emergency bail-out fund is inadequate to deliver the scale of the support required by troubled states.

Members of the IMF have agreed to increase the fund's resources but a senior G20 official in Asia told Reuters on Wednesday that no progress had been made so far.

The United States has insisted that the European Union has enough resources to stem the crisis without outside help.

http://www.telegraph.co.uk/finance/financialcrisis/8925250/Ten-days-to-rescue-euro-as-leaders-call-for-IMF-funds.html

Iceland wins in the end

By Ambrose Evans-Pritchard Economics Last updated: November 28th, 2011

The OECD has come very close to predicting a depression for Europe unless EU leaders conjure up a lender-of-last resort very quickly, and somehow manage to make the world believe that the EFSF bail-out fund really exists.

Even if disaster is avoided, the eurozone growth forecast is dreadful. Italy, Portugal, Greece will all contract through 2012, while Spain, France, Netherlands, and Germany will bounce along the bottom.

Unemployment will reach 18.5pc in Greece, 22.9pc in Spain, 14.1pc in Ireland, 13.8pc in Portugal.

Yet Iceland stands out, with 2.4pc growth and unemployment tumbling to 6.1. Well, well.

Here is the box from the OECD.

Iceland's policy of drastic devaluation with capital controls has not proved to be the disaster that so many foretold. Its refusal to accept the full burden of private bank losses has not turned the country into leper-land.

The nation has held its social fabric together. Had Iceland been in the eurozone, it would have been forced to pursue the same reactionary polices of "internal devaluation" and debt deflation being inflicted today on the mass ranks of unemployed across the arc of depression.

Sorry I could not resist posting this. Shame on me.

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100013462/iceland-wins-in-the-end/

Financial Crisis: German push for Greek default risks EMU-wide 'snowball'

Germany is pushing behind the scenes for a "hard" default in Greece with losses of up to 60pc for banks and pension funds, risking a chain-reaction across southern Europe unless credible defences are established first.

German Chancellor Angela Merkel and Greek Prime Minister George Papandreou. Officials in Berlin told The Telegraph it is 'more likely than not' that investors will suffer fresh losses on holdings of Greek debt Photo: AFP

By Ambrose Evans-Pritchard

9:13PM BST 10 Oct 2011

456 Comments

Officials in Berlin told The Telegraph it is "more likely than not" that investors will suffer fresh losses on holdings of Greek debt, beyond the 21pc haircut agreed in July.

The exact level will depend on findings by the EU-IMF "Troika" in Athens.

"A lot has happened since July. Greece has fallen back on its commitments, so we have to assume that the 21pc cut is no longer enough," said one source.

Finance minister Wolfgang Schäuble told the Frankfurter Allgemeine that the original haircuts were "probably" too low, saying banks must have "sufficient capital" to cover greater losses if need be. Estimates near 60pc have been circulating in Berlin.

The shift in German policy has ominous echoes of last year when Chancellor Angela Merkel first called for bondholder haircuts, setting off investor flight from Ireland and a fresh spasm in the EU debt crisis.

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"This could set off a snowball effect," said Andrew Roberts, credit chief at RBS. "The markets will instantly switch attention to Portugal, where two-year yields are already 17pc".

Although Greece's 10-year bonds are trading at a 60pc discount on the open market, European banks do not have to write down losses so long as there is no formal default and the debt is held in their long-term loan book. The danger arises if banks are forced to "crystallize" the damage before raising their capital buffers.

Marchel Alexandrovich from Jefferies Fixed Income said Germany risks opening a "Pandora's Box" by unpicking the Greek deal.

"It would be a complete disaster, a signal that sovereign debt is not safe. Investors would pull their deposits out of Portugal, Ireland, Spain and Italy and set off bank runs across Europe," he said. "The French are against doing this and so is the European Central Bank. They know banks need more time to adjust. We don't think Europe will pull the trigger."

Mrs Merkel and French president Nicolas Sarkozy vowed over the weekend to do "all that is necessary to guarantee bank recapitalisation", promising a package for Greece and the eurozone by the end of the month. The pledge was vague.

"No details of the plans were released, presumably because they haven't actually got any yet. That in itself is astonishing," said Gary Jenkins from Evolution Securities. "Nothing has really changed and we still expect that the most likely outcome will be a comprehensive package – that circles the wagons around the sovereigns and the banks – that will only be agreed at one minute to midnight when the alternative is that the market is about to implode on the Monday morning."

France and Germany have yet to agree on how to beef up the banks, or on the scale of the threat.

Antonio Borges, Europe chief for the International Monetary Fund, said lenders may need up to €200bn to cope with losses.

France wants banks to be able to tap the EU bail-out fund (EFSF) directly if they cannot raise enough capital on the open market. This would avoid any further strain on the French state, already at risk of losing its AAA rating.

Mr Schäuble said the EFSF should be the last resort when all else fails – "Ultima Ratio" – and deployed only under the strictest conditions. He said the fund should not buy the debt of states in difficulty (presumably Italy and Spain) until they implement tough reforms under "tight control", signalling that Germany will not endorse blanket purchases of EMU debt to cap yields.

He ruled out any attempt to leverage the EFSF beyond €440bn by letting it act as a bank: "That would be to monetise European state debt. That is not acceptable."

The apparent German veto on any expansion of the EFSF leaves it unclear how Europe's debt crisis can be contained if the region tips into a double-dip recession, which would play havoc with debt dynamics. City analysts say the fund needs €2 trillion to restore confidence.

"We think Europe is going to struggle to escape market pessimism until we see the emergence of a lender-of-last resort, whether a much larger commitment from the ECB to buy bonds [ideally QE] or a significantly revamped EFSF," said Graham Secker from Morgan Stanley.

Whether the EFSF can safely be increased is unclear. Yield spreads between German Bunds and 10-year EFSF debt have widened from 66 to 112 basis points since early July. If yields creep much higher, the fund itself may become a problem.

Critics say Germany is making a policy blunder by treating the crisis as a Greek morality tale, losing sight of EMU's deeper structural woes. Portugal is as vulnerable as Greece, with higher levels of combined private and public debt and an equally large trade deficit. Spain is still in the early phase of its housing bust. Italy has lost 40pc in unit labour competitiveness against Germany since 1995.

Pulling the plug on Greece risks bringing a much bigger crisis to a head all too quickly.

http://www.telegraph.co.uk/finance/financialcrisis/8819195/German-push-for-Greek-default-risks-EMU-wide-snowball.html

The great financial crisis facing US and Europe will be with us for a long time

Dr M warns of long financial crisis

By Shannon Teoh October 08, 2011

KUALA LUMPUR, Oct 8 — Tun Dr Mahathir Mohamad warned the ongoing global economic crisis will continue long into the future as the West continues spending in a “state of denial.”

The former prime minister said in his blog yesterday that Western countries continue “believing that they can somehow continue to remain rich. They are unable to behave like poor people.”

On the same day Datuk Seri Najib Razak tabled a budget that aims to rein in the deficit to 4.7 per cent, Dr Mahathir (picture) said the West “will not recover because they are still in a state of denial.

“They still believe they are rich, as rich as before they plunged into the crisis. They must keep up the big power wealthy country image even if their people have no jobs, riot and protest.

“The great financial crisis will be with us for a long time. Even when it is resolved the aftermath will see slow recovery for the giants of the West,” he wrote.

“How nice it would be if our pocket is picked, we are allowed to print some money to replace what is lost,” he said, mocking the United States’ quantitative easing measures which has seen its federal reserve print US$3 trillion (RM9.5 billion) since the start of the financial crisis in 2008.

“Now Britain is following in the footsteps of elder brother,” he added, referring to the United Kingdom’s recent move to print £75 billion (RM370 billion) to help distressed banks.

The debt crises in Europe and the US have caused the global economy to wobble in recent months and is likely to stunt Malaysia’s export-driven economy in the near future.

Analysts said yesterday that Najib’s prediction of a 5 to 6 per cent growth for 2012 is “too high” which may in turn see Putrajaya fail to meet its deficit forecast.

The prime minister tabled a budget yesterday which saw cash handouts, more money for civil servants, schools and a fund for “high-impact development” projects to put cash in the pockets of voters ahead of a general election expected soon.

http://www.themalaysianinsider.com/malaysia/article/dr-m-warns-of-long-financial-crisis/

Europe bids to prop up banks

Europe bids to prop up banks


AFP
2011-10-07

The European Central Bank has announced new measures to provide cash-strapped banks with liquidity as US President Barack Obama stressed Europe must act quickly on its ongoing debt crisis.

Markets cheered the news the ECB would beef up "non-standard" action to help out lenders as the European Commission called for "co-ordinated action" to recapitalise banks and Germany said it should be done without delay.

European equity markets were up more than three per cent as hopes grew that political leaders were finally getting to grips with the crisis.

While ECB chief Jean-Claude Trichet stopped short of cutting rates at the last meeting of his eight-year term, he said the bank would continue to assist lenders although he also urged them to bolster their balance sheets.

The ECB "urges banks to do all that is necessary to reinforce balance sheets (and governments) ... need to take decisive and front-loaded action to bolster public confidence in the sustainability of government finances", said Trichet.

The Bank of England also took bold steps to reinvigorate the sluggish British economy, reinstituting its quantitative easing (QE) policy - whereby it pumps cash directly into the system to boost activity.

The BoE voted in favour of increasing its QE policy by STG75 billion ($A120 billion) to STG275 billion over a four-month period while keeping its main interest rate at a record-low 0.50 per cent.

Earlier, European Commission president Jose Manuel Barroso said: "We are now proposing to the member states to have a co-ordinated action to recapitalise banks and get rid of toxic assets they may have."

Speaking to Euronews TV, Barroso urged action to clear up what he termed a "real mess" in the eurozone.

While Europeans scrambled to reassure investors that the continent's banks were safe, Obama reiterated his warning that a failure to tackle the crisis in Europe would quickly spread.

"Our economy really needs a jolt right now. The problems Europe is having today could have a very real effect on our economy at a time when it's already fragile," Obama told a White House news conference.

Europeans "have got to act fast", he said.

"We have got a G20 meeting coming up in November. My strong hope is that by the time of that G20 meeting, that they have a very clear concrete plan of action that is sufficient to the task."

In Berlin, Chancellor Angela Merkel insisted banks should be recapitalised without delay, if needed.

"I think there would be a very clear need (to recapitalise) because this is money that is safely invested ... I don't think we should hesitate," Merkel said.

There would be "far greater damage" if banks needed to be rescued by governments, she said. "But the first step is for banks to recapitalise themselves."

As if to emphasise the urgency of the task facing Europe, the NYSE Euronext stock exchange suspended trading in the shares of the under-fire Franco-Belgian bank, Dexia, at the request of the Belgian market regulator as the French and Belgian governments put together a rescue package for the lender.

The European Banking Authority is readying an audit of the strength of the continent's main banks, assuming they would have to take large losses from their holdings of bonds issued by weak eurozone member states, especially Greece.

Speculation is growing that private investors will have to write off more of Greece's debt than previously thought, perhaps as much as 50 per cent.

But in some positive news for Greece, eurozone chief Jean-Claude Juncker said that an international group of auditors assessing the state of Greek reforms would likely give the green light for its next slice of aid.

"The troika (the International Monetary Fund, the European Central Bank and the European Union) will probably present the report on October 24," said Juncker, who heads the group of eurozone finance ministers.

"I think the troika will make a positive decision," he added.

Greece says it needs the next tranche of aid, worth some eight billion euros, to pay its bills, but eurozone finance ministers delayed action on the bailout at a meeting Monday in Luxembourg.

Richard Carter

After Selling Stocks, 'Wait for Capitulation': Strategist

By: Patrick Allen

Published: Thursday, 11 Aug 2011 

CNBC EMEA Head of News

Having gotten out of stocks in April this year, one strategist is warning investors not to increase exposure to them until "the real selling capitulation takes place," and gold and the Swiss Franc begin to decline.

“We think that the markets are overreacting in terms of economic slowdown,” Bruno Verstraete, the CEO of Nautilus Invest in Zurich told CNBC on Thursday. “The biggest fire is still Europe. It would only be logical to see more triple-A downgrades.”

“The European storm will only stop when Germany is willing to accept a higher yield and lower rating. Euro bonds will be the sole savior,” said Verstraete.

The big question is whether the current market volatility and selloff is a sign of a meltdown for the system, but Verstraete believes the Chinese could come to the rescue.

“Is there a risk for a system meltdown? Yes, but rather limited as it is a universal problem and so far China has not really helped out its customers a lot," he said.

Given the currency reserves they have at hand, their firepower is a multiple of that of the European Central Bank, Verstraete said.

Having watched events in Europe and the debt ceiling talks in Washington, Verstraete believes much of the current uncertainty has been manufactured by the politicians.

“They all say it is time to act," he said. "The market does…only faster."

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© 2011 CNBC.com

http://www.cnbc.com/id/44070567/After_Selling_Stocks_Wait_for_Capitulation_Strategist

Soros: Three steps to resolving the eurozone crisis

Written by Geroge Soros
Tuesday, 16 August 2011 09:49


A comprehensive solution to the euro crisis must have three major components:
- reform and recapitalisation of the banking system; 
- a eurobond regime; and 
- an exit mechanism.

First, the banking system. The European Union’s Maastricht treaty was designed to deal only with imbalances in the public sector; but excesses in the banking sector have been far worse. The euro’s introduction led to housing booms in countries such as Spain and Ireland. Eurozone banks became among the world’s most over-leveraged, and they remain in need of protection from counterparty risks.

The first step was taken by authorising the European financial stability facility to rescue banks. Now banks’ equity capital levels need to be greatly increased. If an agency is to guarantee banks’ solvency, it must oversee them too. A powerful European banking agency could end the incestuous relationship between banks and regulators, while interfering much less with nations’ sovereignty than dictating their fiscal policies.

Second, Europe needs eurobonds. The introduction of the euro was supposed to reinforce convergence; in fact it created divergences, with widely differing levels of indebtedness and competitiveness. If heavily indebted countries have to pay heavy risk premiums, their debt becomes unsustainable. That is now happening. The solution is obvious: deficit countries must be allowed to refinance their debt on the same terms as surplus countries.

This is best accomplished through eurobonds, which would be jointly guaranteed by all the member states. While the principle is clear, the details will require a lot of work. Which agency would be in charge of issuing, and what rules would it follow? Presumably the eurobonds would be under eurozone finance ministers’ control. The board would constitute the fiscal counterpart of the European Central Bank; it would also be the European counterpart of the International Monetary Fund.

Debate will therefore revolve around voting rights. The ECB operates on the principle of one vote per country; the IMF assigns rights according to capital contributions. Which should prevail? The former could give carte blanche to debtors to run up deficits; the latter might perpetuate a two-speed Europe. Compromise will be necessary.

Because the fate of Europe depends on Germany, and because eurobonds will put Germany’s credit standing at risk, any compromise must put Germany in the driver’s seat. Sadly, Germany has unsound ideas about macroeconomic policy, and it wants Europe to follow its example. But what works for Germany cannot work for the rest of Europe: no country can run a chronic trade surplus without others running deficits. Germany must agree to rules by which others can also abide.

These rules must provide for a gradual reduction in indebtedness. They must also allow countries with high unemployment, such as Spain, to run budget deficits. Rules involving targets for cyclically adjusted deficits can accomplish both goals. Importantly, they must remain open to review and improvement.

Bruegel, the Brussels-based think-tank, has proposed that eurobonds constitute 60 per cent of eurozone members’ outstanding external debt. But given the high risk premiums prevailing in Europe, this percentage is too low for a level playing field. In my view, new issues should be entirely in eurobonds, up to a limit set by the board. The higher the volume of eurobonds a country seeks to issue, the more severe the conditions the board would impose. The board should be able to impose its will, because denying the right to issue additional eurobonds ought to be a powerful deterrent.

This leads directly to the third unsolved problem: what happens if a country is unwilling or unable to keep within agreed conditions? Inability to issue eurobonds could then result in a disorderly default or devaluation. In the absence of an exit mechanism, this could be catastrophic. A deterrent that is too dangerous to invoke lacks credibility.

Greece constitutes a cautionary example, and much depends on how its crisis plays out. It might be possible to devise an orderly exit for a small country like Greece that would not be applicable to a large one like Italy. In the absence of an orderly exit, the regime would have to carry sanctions from which there is no escape – something like a European finance ministry that has political as well as financial legitimacy. That could emerge only from a profound rethinking of the euro that is so badly needed (particularly in Germany).

Financial markets might not offer the respite necessary to put the new arrangements in place. Under continued market pressure, the European Council might have to find a stopgap arrangement to avoid a calamity. It could authorise the ECB to lend to governments that cannot borrow until a eurobond regime is introduced. But only one thing is certain: these three problems must be resolved if the euro is to be a viable currency.

EU 'haircut' plans rattle bondholders

Investors face large potential losses on eurozone debt under German plans likely to win backing from EU leaders on Friday – risking a boycott of Greek, Irish, and Portuguese bonds.

By Ambrose Evans-Pritchard, and Bruno Waterfield in Brussels
Published: 7:37PM BST 28 Oct 2010

32 Comments

Front row left to right, European Commission President Jose Manuel Barroso, French President Nicolas Sarkozy, and Lithuania's President Dalia Grybauskaite. Back row left to right, Portugal's Prime Minister Jose Socrates and German Chancellor Angela Merkel at the EU summit in Brussels Photo: AP

Germany has agreed to give the EU's €440bn (£383bn) bail-out fund permanent status rather than letting it expire in 2013 as planned, but only as part of a "Crisis Resolution Mechanism" that forces bondholders to share losses from any future bail-outs. The fund must be anchored in EU law through changes to the Treaties in order to head off legal challenges at Germany's constitutional court.

A draft proposal from Berlin – now serving as a working text for the European Commission – calls for "orderly insolvency" by eurozone countries in trouble. Details are sketchy but this "Chapter 11" for sovereign states would include an extension of debt maturities, a "holiday" on interest payments for as long as needed to let debtors recover, and a suspension of bondholder rights. The blueprint is akin to debt-restucturing schemes used by the International Monetary Fund.

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Under a Finnish proposal, there are likely to be "Collective Action Clauses" in all new bond issues to prevent minority bondholders blocking a default deal.

European President Herman van Rompuy will be tasked to draw up a blueprint for the crisis mechanism. There may also be a Sovereign Debt Restructuring Mechanism (SDRM).

Berlin is determined to avoid a repeat of the €110bn bailout for Greece when banks were shielded from losses, leaving eurozone taxpayers facing the full cost.

Silvio Peruzzo, Europe economist at RBS, said talk of "haircuts" for bondholder at this delicate juncture could backfire. "The debt crisis in the eurozone periphery has not been sorted out. These countries need markets to keep buying the bonds, but investors are going to stay away if you open the door to private sector pain," he said.

It is unclear whether the latest bond jitters in Greece, Ireland, and Portugal is linked to growing awareness of the German plans. Each country has its own troubles. Yields on Ireland's 10-year bonds briefly rose to a post-EMU high above 7pc on Thursday, partly due to a stand-off between Dublin and angry funds facing losses on the junior debt of Anglo Irish Bank.

However, EU officials fear that the proposals could make it harder for high-debt states to tap debt markets, risking a self-fulfilling crisis.

Germany is likely to win backing in principle at Friday's EU summit in Brussels since it has already struck a deal with France, and Britain has dropped its opposition to treaty changes.

Brussels believes it is possible to invoke Article 48.6, which allows changes to the Lisbon Treaty without the political trauma of referenda or full ratification in all 27 states. This "simplified revision" can be used to cover matters in Part III of the Treaty, but the EU risks a political backlash if it tries to push through such a controversial plan by these means. Viviane Reding, the EU justice commissioner, said it was "suicidal" to tinker with the treaties so soon after the Lisbon storm.

German Chancellor Angela Merkel is also demanding EU powers to strip countries of their voting rights if they breach eurozone rules, but this has been dismissed by Brussels as "totally unacceptable" and will be blocked by other states.

The summit was intended to endorse plans by an EU taskforce for a beefed-up Stability Pact, but as so often at EU meetings France and Germany have run away with the agenda.

The German proposals have a logic since they let struggling states claw their way out crisis by reducing debt. Greece's rescue risks failure because it will leave the country with public debt of 150pc of GDP, near the point of no return

http://www.telegraph.co.uk/finance/economics/8094324/EU-haircut-plans-rattle-bondholders.html