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."

RELATED LINKS

• SocGen CEO Dismisses Rumors, Says France Is Not US
• France Is More Serious About Debt Than US: S&P
• France Aims for More Deficit Cuts as Rating Eyed

© 2011 CNBC.com

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

Debt Levels Alone Don’t Tell the Whole Story

By FLOYD NORRIS

Published: September 23, 2011

AS the world’s central bankers and finance ministers gather in Washington this weekend for the annual meetings of the International Monetary Fund and World Bank, government debt is at the top of the agenda. Some governments can no longer borrow money and others can do so only at relatively high interest rates. Reducing budget deficits has become a prime goal for nearly all countries.

Multimedia

Graphic

Why Some European Government Debt Seemed Deceptively Small

But looking only at government debt totals can provide a misleading picture of a country’s fiscal situation, as can be seen from the accompanying tables showing both government and private sector debt as a percentage of gross domestic product for eight members of the euro zone. The eight include the largest countries and those that have run into severe problems.

In 2007, before the credit crisis hit, an analysis of government debt would have shown that Ireland was by far the most fiscally conservative of the countries. Its net government debt — a figure that deducts government financial assets like gold and foreign exchange reserves from the money owed by the government — stood at just 11 percent of G.D.P.

By contrast, Germany appeared to be in the middle of the pack and Italy was among the most indebted of the group.

Yet Ireland was slated to become one of the first casualties of the credit crisis, and is now among the most heavily indebted. Germany is doing just fine. Italian debt has risen only slowly. The I.M.F. forecasts that Ireland’s debt-to-G.D.P. ratio will be greater than that of Italy by 2013.

It turned out that what mattered most in Ireland was private sector debt. As the charts show, debts of households and nonfinancial corporations then amounted to 241 percent of G.D.P., the highest of any country in the group.

“In Ireland, as in Spain, the government paid down debt while private sector grew,” said Rebecca Wilder, an economist and money manager whose blog at the Roubini Global Economics Web site highlighted the figures this week. She was referring to trends in the early 2000s, before the crisis hit.

Much of the Irish debt had been run up in connection with a real estate boom that turned to bust, destroying the balance sheets of banks. The government rescued the banks, and wound up broke. Spain has done better, but it, too, has been badly hurt by the results of a real estate bust.

The story was completely different in the Netherlands, which in 2007 ranked just behind Ireland in apparent fiscal responsibility. It also had high private sector debt, but most of those debts have not gone bad.

The differences highlight the fact that debt numbers alone tell little. For a country, the ability of the economy to generate growth and profit, and thus tax revenue, is more important. For the private sector, it matters greatly what the debt was used to finance. If it created valuable assets that will bring in future income, it may be good. Even if the borrowed money went to support consumption, it may still be fine if the borrowers have ample income to repay the debt.

That is one reason many euro zone countries are struggling even with harsh programs to slash government spending. With unemployment high and growth low — or nonexistent — it is not easy to find the money to reduce debts. And debt-to-G.D.P. ratios will rise when economies shrink, even if the government is not borrowing more money.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

http://www.nytimes.com/2011/09/24/business/debt-numbers-alone-tell-little-about-fiscal-stability.html?_r=1&ref=business

Short-selling: did it work the last time?

There are already doubts in the City about whether the latest short-selling ban imposed by European financial market regulators will stop banking shares falling.

By Ben Harrington, M&A Correspondent

12:58PM BST 12 Aug 2011

3 Comments

Back in September 2008, European countries - including Britain - introduced a short-selling ban as Lehman Brothers, the US investment bank, fell into administration.

The fall of Lehman triggered a wave of heavy selling of financial stocks because investors feared that other banking behemoths might also be allowed to fail by national governments.

As a result, several countries introduced short selling bans on bank shares, including the UK’s Financial Service Authority (FSA).

At the time, Hector Sants, head of of the FSA, said: “While we still regard short-selling as a legitimate investment technique in normal market conditions, the current extreme circumstances have given rise to disorderly markets”.

European regulators followed suit.

RELATED ARTICLES

• Rally sees FTSE and Dow finish a roller coaster week higher 
  12 Aug 2011
• Jeremy Warner: ban is self-defeating 
  12 Aug 2011
• France bans short-selling as markets bounce back 
  11 Aug 2011
• France's banks face the guillotine 
  11 Aug 2011

However, the ban failed to stop the decline in financial company share prices in the medium term, as the excellent Reuters graph above shows.

This morning, David Buik, markets analyst at BGC Partners, said banning short selling was "a crass idea”.

He added: “I have heard of a few bone-headed and crass initiatives in my time, but I think Spain’s, Belgium’s, Italy’s and France’s decision to ban ‘short-selling’ temporarily takes the biscuit. Have European politicians learnt nothing from 2008?”

Andrew Shrimpton of financial advisory firm Kinetic Partners, said: “The banning by France, Italy, Belgium and Spain of the short-selling of financial stocks ... will only reduce price volatility for a few days at best."

Mr Shrimpton added: "As demonstrated in 2008, when similar bans were in place, volatility increases after a day or so because liquidity in the stocks is significantly reduced. This measure will reduce the ability for banks to raise capital and increase the risk of a full blown recession in the countries that have adopted the ban.”

http://www.telegraph.co.uk/finance/financialcrisis/8697681/Short-selling-did-it-work-the-last-time.html

Stockmarket crisis: Q&A

As markets lose billions of pounds in value this week, Harry Wallop explains how the crisis came about and what it all means.

By Harry Wallop, Retail Editor

7:47AM BST 06 Aug 2011

Q. Why have stockmarkets fallen so heavily this week?

A. Markets falls when there are more sellers than buyers. Investors around the world have become increasingly nervous about where to put their money, amid fears of the global economy entering a fresh recession and the entire Eurozone area collapsing because of mounting Government debts in Italy and Spain. As a result many investors – both private and the institutions who invest our pension funds – have started to sell.

Q. So how serious is the risk of another global recession?

A. Ironically, many British companies, especially engineering firms, have reported stellar financial results this week, announcing to the London Stock Exchange that they have never enjoyed such good business on the back of a resurgence in global travel and trade.

America reported a better-than-expected improvement in unemployment on Friday.

But there are some signs that China, whose booming middle classes have helped keep global consumption above water, is starting to slightly slow down. And many economies such as Italy, America and Britain are barely moving forward. Families here, and around the world, reacted quite sensibly to the financial crisis of 2008 and started to pay off their own household debts and save a little bit of money.

While this was very sensible for individual families, it was disastrous for the economy – it meant people stopped spending, causing problems for the high street.


Q. And the Eurozone? Why is it in such poor shape?

A. It's all to do with debt. Governments in Europe have just too much debt and there is a real concern they cannot pay back their creditors.

Much of this problem has come about from the financial crisis of 2008, when governments around the world propped up the banking system – also saddled with too much debt – by transferring many of problematic loans from the private sector to the public sector. In Britain, this manifested itself in the taxpayer buying majority stakes in Lloyds Banking Group and RBS.

Many governments also reacted by pumping taxpayers' money into the economy. While this staved off a global depression, it merely delayed problems rather than solving them.

Last year, Ireland had to be given an emergency loan, so too Greece. Earlier this year Portugal and then Greece again had to be bailed out.

Now the spotlight has turned to Spain and Italy. Quite simply these countries are not earning enough – from tax receipts – to pay off its debts. And the two countries' debts together are an eye-watering £2 trillion.

Italy's debt stands at about 120 per cent of gross domestic product (GDP) – or in other words, a fifth more than the country's annual economic output – and is one of the highest in the world.

Q. Can't the European Central Bank step in?

A. In theory, yes, it could. But its special backup body, the European Financial Stability Facility has just €440bn (£382bn) of firepower, not enough to cover Italy and Spain's debts of £1 trillion, and though this figure is meant to increase not all countries have signed it off.

European countries are split as to whether they should pump more money or not. This sense of indecision from politicians is not helped by the fact many are on holiday this week.

Q. Why does it matter if Italy or Spain defaults?

A. Because the people who hold Spain or Italy's debts are indirectly millions of ordinary consumers around the world. That's because Governments raise money by selling bonds – in essence IOUs. These are bought by banks and institutional investors, on behalf of ordinary pension funds, on the understanding the government will pay an annual interest payment and return the full amount of the loan when the bond "matures", either after a few months or a few years.

If a Government defaults, it can't pay its bondholders. That's you and me.

http://www.telegraph.co.uk/finance/financialcrisis/8684246/Stockmarket-crisis-QandA.html

EU paints bleak picture for PIGs

May 14, 2011

The European Union has warned the debt loads of Greece, Ireland and Portugal will be much bigger than previously forecast, adding to fears that international bailouts are failing to solve the region’s crisis.

However, the bloc’s biannual economic forecasts paints a more optimistic picture of the economy of Spain - commonly seen as the next-weakest state in the euro zone - which supports the currency union’s hope that the debt crisis won’t draw in any other countries.

For the three countries that have already received or are about to get international help, debt is expected to remain a problem for some time.

Advertisement: Story continues below

The higher debt forecasts, combined with larger budget deficits and weak growth, boost the complaints of many economist that the bailouts are taking too hard a toll on economic activity and are not solving the debt problem.

Although Greece on Friday reported economic growth in the first quarter, its longer-term prospects remain grim, experts say.

Greece’s debt will reach 157.7 per cent of economic output this year and jump to 166.1 per cent in 2012, the European Commission, the EU’s executive, said in its forecast. That’s up from 150.2 per cent and 156 per cent respectively it predicted last autumn.

While expected, the significantly worse forecasts will likely spice up discussions among euro-zone governments on whether Greece will need a second bailout, after it was already granted  110 billion euros in rescue loans a year ago.

It will also add to calls from many economists that the country needs to restructure its debts - forcing private creditors like banks and investment funds to accept lower or lower repayments on the bonds they hold.

The situation does not look much better in Ireland, the second country to get bailed out last year. Ireland’s debt is expected to hit 112 per cent of gross domestic product this year before rising to 117.9 per cent in 2012.

That’s up from earlier forecasts of 107 per cent and 114.3 per cent. Its economy is predicted to grow a meagerly 0.6 per cent this year, while it will likely run a deficit of 10.5 per cent, up from 10.3 per cent forecast in the autumn.

The most severe revisions were made for Portugal, which at the time of the last forecast was still hoping to avoid a bailout.

However, after last year’s deficit turned out much bigger than expected and the government was defeated over austerity measures, Lisbon asked for help last month and finance ministers are expected to sign off on a  78 billion euro rescue package for the country on Monday.

Portugal’s debt will likely stand at 101.7 per cent of GDP in 2011 and increase to 107.4 per cent next year, the Commission said. That’s up from 88.8 per cent and 92.4 per cent previously.

The Portuguese economy will likely contract 4 per cent over the next two year, in line with what international exports examining the country’s books to prepare the bailout predicted last week. The deficits projections are also based on the targets set out in Portugal’s bailout program, 5.9 per cent this year and 4.5 per cent in 2012.

The bleak forecasts for the euro zone’s three weakest countries contrast with strong economic growth in the currency union’s large countries such as Germany and France, where GDP growth was revised up.

Even for Spain, the country that most economists say would seriously test the eurozone’s capacity to help its struggling members, there was some good news in Friday’s forecasts. Its debt load will reach 68.1 per cent this year and grow to 71 per  cent in 2012. That’s better than the 69.7 per cents and 73 per cent predicted last autumn.

AP

Read more: http://www.smh.com.au/business/world-business/eu-paints-bleak-picture-for-pigs-20110514-1emz8.html#ixzz1MTERkRVB