Tagged: Contagious crisis
IMF says Spain taking right steps towards stability
BBC News | Friday, 18 June 2010 | 22:24 GMT
Spain is taking the right measures for economic stability, the head of the International Monetary Fund has said. Dominique Strauss-Kahn said he was "confident" Spain’s economy would recover and called on all Spaniards to back the government’s austerity work. He was speaking after a meeting in Madrid with Spanish Prime Minister Jose Luis Rodriguez Zapatero. Mr Zapatero had earlier denied his government was seeking an IMF bailout, but markets have been nervous. Mr Zapatero said on Thursday that Spain’s economy was solid and solvent, and the visit by Dominique Strauss-Kahn was a scheduled one.
‘Determination’
Mr Strauss-Kahn said all the measures being put in place by the Spanish government were "clearly being done for the benefit of the economy". "I am really confident in the medium and long-term prospects for the Spanish economy, providing the efforts that have to be made will be made," he added. He specifically praised continuing efforts to liberalise the Spanish labour market, saying they went in "the right direction". Mr Zapatero said that during the meeting he had conveyed to Mr Strauss-Kahn "the determination of the Spanish government to implement and to make effective every single one of these reforms that we have launched".
Spanish borrowing costs at new high
BBC News | Wednesday, 16 June 2010 | 13:50 GMT
The Spanish government’s cost of borrowing has hit a new record amid renewed concerns over the state of its economy and public finances. The interest rate Spain is being asked to pay by investors is now 2.23 percentage points higher than that being demanded of Germany. This widening gap in the bond market marks a drop in confidence in Spain’s ability to repay its debts. The Spanish cabinet has also approved unpopular changes to labour rules. "It is a necessary labour reform," said Deputy Prime Minister Maria Teresa de la Vega. "One of the most important reforms of the last 20 years."
The changes, which include a cut in the level of severence pay, have prompted a call for a general strike in September. Spain, which is emerging from a two-year long recession, is now pursuing austerity measures. These include a 5% cut to public sector pay in an effort to bring down its borrowing and help restore its credibility among international lenders.
IMF speculation
Its budget deficit is currently running at over 11% of GDP – way above the 3% limit imposed by the EU. This week the Spanish government has also been forced to deny newspaper reports that it is in talks
Hungary Bonds Sink, Forint at 12-Month Low on Default Comments
Bloomberg | June 4, 2010 | 11:45 EDT
Hungarian bonds tumbled, pushing up borrowing costs by the most since October 2008, and the forint and stocks plunged after a government official said speculation of a default “isn’t an exaggeration.” The extra yield investors demand to own Hungary’s debt over U.S. Treasuries rose 149 basis points, or 1.49 percentage point, to 468, according to JPMorgan Chase & Co.’s EMBI Global Index. The BUX Index of equities tumbled as much as 8.4 percent, while the forint fell 1.7 percent to 286.74 per euro at 11:19 a.m. in New York, the weakest level since June 2009. “When people close to the government start talking about a higher risk of default, what do they expect investors to do?” said Timothy Ash, head of emerging-market research at Royal Bank of Scotland Group Plc in London. “You simply cannot talk like this in these markets. Investors will take money off the table, they will not risk it.”
The comments today from Peter Szijjarto, spokesman for Prime Minister Viktor Orban, sparked concern that Europe’s debt crisis is spreading after credit downgrades of Greece, Portugal and Spain. The European Union pledged almost $1 trillion to the bloc’s weakest economies last month after Greece’s widening budget deficit threatened to undermine confidence in the euro. “It’s clear that the economy is in a very grave situation,” Szijjarto said at a press conference in Budapest. “I don’t think it’s an exaggeration at all” to talk about a default, he said.
Budget Gap
Hungary, the first EU nation to receive an international bailout during the credit crisis, has the equivalent of $26.9 billion of debt coming due this year, according to data compiled by Bloomberg. The government’s budget deficit could grow to as high as 7.5 percent of gross domestic product this year, compared with a 3.8
EU struggles to convince markets in euro crisis
Reuters | Fri May 28, 2010 | 8:17pm IST
Three weeks after it agreed a $1 trillion safety net to protect the euro, the European Union is struggling to convince financial markets it has got what it takes to save the currency. Since the safety net was agreed early on May 10 to appease markets worried that Greece’s debt problems could be contagious, countries such as Spain, Italy and Portugal have announced austerity plans to head off any crisis. But new divisions, above all a rift between Germany and nearly all the other 26 member states, have renewed doubts about the EU’s ability to unite behind the painful reforms needed to hold the 16-country euro area together. Concerns are also growing because Belgium is unlikely to have a government in place when it takes over the EU presidency on July 1 and markets are worried the EU’s institutions and leaders are ill-equipped to handle a crisis of this magnitude.
“We are at a crossroads today. Either we take determined and joint action for Europe’s economic and political revival or we face economic stagnation and political irrelevance,” EU Economic and Monetary Affairs Commissioner Olli Rehn said this week. It would be easy to assume such apocalyptic visions would reassure markets that the EU has grasped the gravity of the situation. But a decline in the value of the euro and falls on stock markets this month suggest otherwise. A ban imposed by Germany last week on certain financial transactions to quell the market “speculators” it blames for the euro’s problems has caused particular alarm. Berlin compounded the problem by saying this week it would extend to other transactions its ban on some naked short-selling — the sale of financial instruments without first borrowing the security or ensuring it can be borrowed. Economic analysts say markets have seen this move as a sign that Germany, Europe’s biggest economy, may still think the markets are to blame for the crisis, rather than structural problems and imbalances between the EU states’ economies.
World and emerging stocks hit 8 and half month low on banking, Korea
Reuters | Tue May 25, 2010 | 2:10pm IST
World and emerging stocks slid to their lowest since Sept 2009 and the euro and oil fell on Tuesday on worries over the euro zone banking sector and concerns over tensions on the Korean peninsula. The central bank takeover of a small Spanish lender at the weekend reminded investors that the world is only just recovering from a banking crisis, following weeks of anxiety over how to stop a debt crisis begun in Greece from deepening. The bailout was likely just the first of several rescues of small lenders but analysts in Spain underline these have long been planned and are part of efforts to rationalise the sector rather than a threat to the stability of its financial system. Markets, however, remain in generally nervous form. "Spanish banking fears certainly exacerbate contagion risks," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ.
Across the globe, North Korean leader Kim Jong-il has told his military the country may have to go to war if the South attacks, with angry rhetoric on both sides having stepped up in recent weeks. Global stocks as measured by MSCI fell 1.6 percent to their lowest since early Sept 2009, while the more volatile emerging index dropped more than 3 percent to 8-/2 month lows. The pan-European FTSEurofirst 300 index of top shares also fell close to 3 percent to its lowest since Sept. Holidays in many European countries on Monday delayed the sharp sell-off into Tuesday’s trade. The euro lost nearly 1 percent against the dollar to $1.2230 and sterling, the currency of another highly-indebted European country, fell 1 percent against the dollar to $1.4278.
Euro Breakup Talk Increases as Germany Loses Proxy
Bloomberg | May 14, 2010 | 11:47 EDT
Romano Prodi recalls how he persuaded Germany to allow debt-swamped Italy into the euro: support our membership and we’ll buy your milk, he said. When Prodi toured Germany’s agricultural heartland after becoming Italian leader in 1996, he pitched “a big milk pipeline from Bavaria,” pointing to a three-year, 40 percent plunge in the Italian lira that was hurting dairy sales. “To have Italy outside the euro, a huge quantity of exports from Germany would have been endangered,” Prodi, now 70, said. Germany got the message, allowing entry rules to be bent to create a 16-nation market for its exporters. Now, German taxpayers are footing the bill for that permissiveness as Europe bails out divergent economies lashed to a single currency with little control over national taxes and spending.
The consequences are an 860 billion-euro ($1 trillion) bill for a debt binge led by Greece, sagging confidence in the European Central Bank’s independence and mounting speculation that a currency designed to last forever might break apart. “You have the great problem of a potential disintegration of the euro,” former Federal Reserve Chairman Paul Volcker, 82, said yesterday in London. “The essential element of discipline in economic policy and in fiscal policy that was hoped for” has “so far not been rewarded in some countries.” German-led northern Europe, with its zeal for budget discipline, is attempting to fix the mistakes made by the euro’s founding fathers in the 1990s. It is squaring off against the governments of the south over who will control the euro and the ECB; whether the currency will be used to promote growth or squelch inflation, and ultimately, whether some countries should be disbarred from the monetary union.
European Club
What was conceived as a club for Europe’s strongest economies was expanded for political reasons, leaving the currency union with minimal powers to police deficit spending and no safety net for dealing with countries, like Greece, that veer toward default. “There was no discussion of that at all, of a crisis
Germany backs euro package as markets sober up
Reuters | Tue May 11, 2010 | 4:15pm IST
Germany’s cabinet approved the biggest national contribution to a $1 trillion emergency rescue package intended to stabilise the euro as global markets sobered up after Monday’s euphoria. Relief at the European Union’s bold move to restore investor confidence gave way on Tuesday to doubts about whether weaker euro zone economies can meet their part of the bargain and deliver drastic debt cuts, driving the euro and stocks lower. The 16-nation single currency, which surged above $1.30 early on Monday, slipped below $1.27 as traders weighed debt worries and a perceived blow to the European Central Bank’s independence in its weekend policy reversal to start buying euro zone government bonds. The emergency plan — the biggest since G20 leaders threw money at the global economy following the collapse of Lehman Brothers in 2008 — wowed markets with its sheer size and sparked a spectacular rally in world stocks and the euro.
Yet stock and bond markets turned cautious when they reopened for business in Asia and Europe on Tuesday, with investors concerned that the plan was not a long-term solution to problems plaguing the 11-year old single currency area. EU Economic and Monetary Affairs Commissioner Olli Rehn raised pressure on Italy, which has the euro zone’s highest debt after Greece as a proportion of national output, and France, which has a heavy structural budget deficit, to do more quickly to improve their public finances. Wasting no time after having been accused for months of procrastination, German Chancellor Angela Merkel secured cabinet backing for a share of 123 billion euros in loan guarantees, which could be exceeded by up to 20 percent if parliament’s budget committee approves, government sources said.
5 Myths about the European debt crisis
Washington Post | Carmen M. Reinhart and Vincent R. Reinhart | Sunday, May 9, 2010
Just when the American economy appeared to be on the mend, a new crisis is stressing global financial markets. Greece’s difficulty in financing its bloated budget deficit — and the prospect that its debt troubles will spread throughout Europe and beyond — is dominating the news. The euro has shed 12 percent of its value this year, and U.S. stock markets have shuddered in response, with the Dow declining almost 6 percent in the past week alone. The authorities have stepped in, with the European Union and the International Monetary Fund putting together a $141 billion rescue plan that compels Athens to swallow some tough austerity measures. Will it work? Or will the problems spread? To answer those questions, it helps to first tackle the myths that have emerged surrounding this latest financial crisis:
1. This is a new type of crisis.
It’s easy to imagine that this is a thoroughly 21st-century financial calamity, wrought by modern financial products and a hyper-connected global economy. But in fact, governments have borrowed to live beyond their means — and have had trouble paying their debts — for about as long as there have been governments. From the 14th through the 19th centuries, monarchies routinely resorted to debasing their currencies, expropriating private property and defaulting on their debts. And their failure to honor their obligations usually produced severe economic hardship for their populations. More recently, countries have often defaulted on their debts or been forced to restructure their payments. Some have done it multiple times; for the past 180 years, Greece has been in default about half the time. As recently as 2001, the government of Argentina ran into funding difficulties. Repeated attempts at fiscal austerity triggered widespread riots. In the end, despite IMF assistance, the authorities could not stanch the fiscal bleeding, and Argentina defaulted on $132 billion of debt obligations, sending its economy into freefall.
EU works on mechanism to stop Greek crisis spreading
Reuters | Sat May 8, 2010 | 10:00pm IST
European Union officials were working out the details of a financial support mechanism on Saturday to prevent Greece’s debt turmoil spreading to Portugal and Spain, ready for approval by EU finance ministers on Sunday. The leaders of the 16 countries that use the single currency said on Friday after talks with the European Central Bank and the executive European Commission that they would take whatever steps were needed to protect the stability of the euro area. Both Italian Prime Minister Silvio Berlusconi and French President Nicolas Sarkozy cancelled trips to Moscow to mark the anniversary of the end of World War Two in order to continue consultations over the crisis, though German Chancellor Angela Merkel said she would still go. Financial markets have been pounding euro zone countries with high deficits or debts as well as low economic growth, threatening to force Portugal, Spain and Ireland into a position where, like Greece, they would need to seek financial aid. The euro zone leaders, who have been accused of heightening market uncertainty with a lack of action, agreed to accelerate budget cuts and ensure deficit targets are met this year. But they also decided, under pressure from the markets, to ask all 27 EU countries to agree a financial mechanism to ring-fence the Greek crisis before markets open on Monday.
"WORST CRISIS"
"The euro zone is going through the worst crisis since its creation," Sarkozy said after Friday’s euro zone summit in Brussels. "The leaders have decided to put in place a European intervention mechanism to preserve the stability of the euro zone. The decisions taken will have immediate application, from the point that financial markets open on Monday morning." "If the domino effect begins, no economy is safe," Finnish Prime Minister Matti Vanhanen told the Finnish broadcaster YLE on Saturday. Euro zone sources said late on Friday that the mechanism could be funded by bonds issued by the European Commission with guarantees from euro zone states. No details have been disclosed so far, but the sources said EU law provided a legal basis for such a mechanism. The treaty governing the EU says that if a member of the 27-nation bloc is in
Finnish PM: no economy safe if crisis not contained
Reuters | Sat May 8, 2010 | 4:39am EDT
The euro zone is facing its worst crisis and, if the crisis sparked by Greece is not solved, there is a risk of a new recession, Finnish Prime Minister Matti Vanhanen said on Saturday. "If the domino effect begins, no economy is safe," Vanhanen told national Finnish broadcaster YLE in an interview. "No one has a model from history for how the euro zone or the EU should act now. We are doing this with our best knowledge and consideration." But Vanhanen said efforts now under way would ensure the common currency will not collapse. "Actions are being taken in such a way that there is no fear of this," he said.
Euro zone leaders agreed on Friday that they would have special measures ready before financial markets open on Monday to prevent financial turmoil in Greece spreading to other countries such as Spain and Portugal. The leaders of the 16 countries that use the single currency said after talks with the European Central Bank and the executive European Commission that they were ready to take whatever steps were needed to protect the stability of the euro area. "Surely not it is not in the interest of markets that this situation should drift into chaos," Vanhanen said.
Eurozone leaders approve Greece aid package
BBC NEWS | 2010/05/08 | 01:04:15 GMT
Leaders of the 16 EU member states that use the euro have approved an 110bn euro ($145bn; £95bn) loan to Greece to prevent its debt crisis from spreading. European Commission President Jose Manuel Barroso said the eurozone would do whatever it took to safeguard Greece’s financial stability. In return for the three-year loan, Athens must cut public spending. The euro’s value has fallen because of fears that countries such as Spain and Portugal could suffer similar problems. The eurozone leaders also announced proposals for a European Stabilisation Mechanism to preserve financial stability.
‘Serious situation’
At a meeting in Brussels on Friday, the eurozone leaders gave their approval to the EU-International Monetary Fund rescue package for Greece, and committed to "accelerate" plans to reduce deficits. They also agreed to tighten EU budget rules, put in place more effective sanctions for breaking debt guidelines, and monitor deficits and competitiveness. All institutions, including the European Central Bank, would use the "full range of means available to ensure the stability of the euro area", they said in a statement. "We will defend the euro whatever it takes. We have several instruments at our disposal and we will use them," Mr Barroso told a news conference afterwards. He declined to give any details of the plans, which will be presented to the finance ministers of all 27 EU member states at a meeting on Sunday, but said it would be done under "existing financial possibilities" in the budget.
Stocks Slide as Market Rout Triggers Trading-Systems Concern
Bloomberg | May 7, 2010 | 11:40 EDT
Global stocks and the bonds of debt- laden nations tumbled after Europe’s debt crisis spurred a market rout yesterday that undermined confidence in financial trading mechanisms. Oil slid 2.4 percent to lead commodities lower. The Standard & Poor’s 500 Index fell as much as 3 percent before paring losses to 1.3 percent as of 11:39 a.m. in New York, leaving it little changed for the year. The MSCI World Index sank 2.2 percent and the Stoxx Europe 600 Index plunged 3.9 percent to the lowest since November. Greece led a drop in bonds of deficit-stricken European nations, with the 10-year yield premium demanded to own the securities instead of benchmark German bunds rising to a record of more than 9 percentage points.
Regulators are reviewing a plunge that briefly wiped out more than $1 trillion in market value yesterday as the Dow Jones Industrial Average slid almost 1,000 points before paring losses. Concern over the trading mechanisms that caused the volatility overshadowed the biggest growth in U.S. jobs in four years. Equities today pared earlier losses amid speculation the European Central Bank will announce measures to stem the region’s debt crisis. “The market is manic,” said Philip Orlando, the New York- based chief equity market strategist at Federated Investors, which manages about $400 billion. “The ECB needs to step in here and do something. If that really becomes true, we start to rally and focus on the terrific jobs report we had this morning. They could have solved this six months ago. There’s still a lot of concern about contagion. Investors are scared to death.”
Europe Concern
Stocks have been pummeled the last two weeks amid concern European leaders won’t do enough to keep the most indebted nations from defaulting after a 110 billion-euro ($140 billion) rescue package for Greece failed to halt a rise in government borrowing costs. The Stoxx 600 has tumbled 12 percent from its high for the year last
German parliament to vote on Greece bail-out funding
BBC NEWS | 2010/05/07 | 07:20:15 GMT
Germany’s parliament is to decide on whether to approve a multi-billion euro bail-out plan for debt-ridden Greece. The lower house, the Bundestag, is set to debate the legislation for two hours before voting. The upper house, the Bundesrat, will vote afterwards. Assuming both houses back the bill, as expected, President Horst Koehler will then sign it into law. Concerns about Greece’s economic crisis have spread fear of contagion in global markets, prompting an Asian slump. Japan’s Nikkei index shed 3.2% while Australia’s main index lost 1.6%, amid investor fears that Greece’s debt crisis could halt the global economic recovery. Those losses followed heavy falls on US markets, where the Dow Jones index slumped 9% at one point before bouncing back to end Thursday down 3.2%.
The BBC’s Caroline Hepker in New York says there are rumours that the drop may have been caused by an erroneous "fat finger" trade at a Wall Street bank. London and France’s benchmark indexes opened sharply lower on Friday. The pound also fell sharply against the dollar and the euro as results poured in from the UK general election, falling three cents, or 2%, against the dollar, to $1.4639. With the majority of results counted, projections showed that no party was on course for an overall majority, raising concerns that a weak government might not be able to implement policies quickly to reduce the UK’s high budget deficit.
Unable to act?
On Thursday, Greek MPs approved drastic spending cuts in exchange for an international financial rescue plan, amid violent protests in Athens. German Chancellor Angela Merkel has defended her country’s plan to provide 22.4bn euros ($28.6bn) in aid to Greece, saying the EU is at stake. She has warned that if the 27 member
Greece to back austerity, anxious markets eye ECB
Reuters | Thu May 6, 2010 | 4:58pm IST
The Greek parliament was set to adopt a harsh austerity plan on Thursday in the face of violent unrest, as markets looked to the European Central Bank to prevent debt crisis engulfing the euro zone. The euro and world stocks fell for a third straight day as investors fled risk amid growing signs that Athens’ woes are spreading to other weak euro economies, testing whether European governments are willing to extend a bailout devised for Greece alone. The cost of insuring Portuguese and Spanish debt as well as Greek debt against default leapt to new peaks before a closely watched auction of 5-year Spanish bonds. Yields jumped for the auction but there was no shortage of demand. European policymakers’ attempts to talk down the risk of contagion and scare off "speculators" had little impact on traders unimpressed by the EU’s slow and disjointed response to the unfolding crisis. "There’s no let-up in concerns that the euro zone debt crisis could continue to worsen and as a result equity markets across the globe remain under pressure," said Ben Potter, analyst at IG Markets.
All eyes were on ECB President Jean-Claude Trichet to signal what the world’s second most powerful central bank can do to pull the euro zone out of a vicious cycle of soaring borrowing costs, dwindling growth prospects and sovereign debt downgrades. Trichet will face questions on whether the ECB may reverse its policy and buy euro zone government bonds or try other measures to keep credit markets open to Portugal and Spain at affordable rates while Greece receives EU/IMF emergency loans. European Council President Herman van Rompuy, who will chair a special euro zone summit on the crisis on Friday evening, was the latest top EU official to try to erect a verbal firewall, saying the situation of Portugal or Spain had nothing to do with Greece’s problems. "What I now see are totally irrational movements on the markets set off by unsubstantiated rumours, for instance yesterday with Spain, but also as regards Portugal," he said.
Greece crisis: ‘Contagion risk’ for UK & Europe banks
BBC News | Thursday, 6 May 2010 | 11:04 GMT
Banks in the UK and Europe risk their credit ratings being damaged because of "contagion" from Greece’s debt crisis, a ratings agency has warned. Moody’s said banking systems faced "very real, common threats" if doubts were raised about their governments’ abilities to pay debts. It referred specifically to UK, Irish, Italian, Portuguese and Spanish banking systems. Some banks have revealed their exposure to Greece. These include 5bn euros ($6.4bn; £4.2bn) at BNP Paribas. Shares in Asia and Europe have fallen on worries over the Greek debt crisis and whether problems would spread. Japan’s Nikkei index shed 3.3% after markets reopened following a three-day holiday.
Euro focus
The UK’s public finances are forecast to be in a worse state than any other major European country, including Greece, by the end of this year, the European Commission has said. The report said the UK government was expected to borrow the equivalent of 12% of GDP. However, the UK’s debt levels are considerably lower than those of Greece – and analysts say there is no immediate prospect of the UK’s triple-A credit rating being threatened. The European Central Bank meets later amid growing concerns over the economies of Greece and Portugal. It is under pressure to signal how it plans to shore up the euro, which hit a fresh 13-month low against the dollar in Asian trading.
"The focus stays on the euro as the contagion trade persists," said analysts at JP Morgan. They added that Thursday’s ECB meeting had "grown immensely in importance as the redeployment of some form of credit crisis tools seems increasingly possible". The ECB is expected to keep interest rates on hold at 1%. However,
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