Article first published as European Debt Crisis Deepens, Spreads to More Countries on Blogcritics.
Ireland bailout worth 85 billion Euros could not convince the markets that the crisis would not spread to other indebted Eurozone countries. On Tuesday, debt costs of Portugal, Spain and Belgium have touched life time high levels in euro’s 12-year history. Late on Tuesday ratings agency placed Portugal on credit watch over its huge debts, signalling the next country to ask for joint aid from the EU and IMF would be Portugal as per BBC News.
Portugal’s central bank warned about the risks being faced by its banks. Failure of the Portugal government in consolidating public finances may lead to Portugal banks to face intolerable risks, the central bank warns. France already came forward saying it will support to help Portugal and Spain if such a need arises. Financial officials in France and Germany accused investors for acting irrationally on the threat of financial contagion.
The yield on Spain’s 10-year bonds reached to 5.7% on Tuesday, a record difference of 3.05% compared with Germany’s 10-year bond. Bond spread for Italy’s 10-year bond was at 2.1 percent over Germany’s bonds and Irish bond yield stood at 9.53% while Portuguese bond yield stood at 7.05% for 10-year bonds. However, the yields for governments bonds of these countries are reportedly lowered on Wednesday on speculation that the European Central Bank would take extra measures to save Euro from falling, Reuters reported.
As Ireland’s borrowing costs have been pushed to record highs, it is in talks with EU officials to claim bailout from European Financial Stability Fund (EFSF). The EFSF was agreed upon by the EU and the IMF in June as a safety net to help prevent indebted Eurozone countries from slipping into debt crisis, in response to Greece crisis.
Under the EFSF the 16 states of the Eurozone will provide 440 billion euros, in emergency loans to rescue crisis hit countries. The EFSF also constitutes 60 billion Euros from all 27 EU countries and 250 billion euros from the IMF, totaling to about 750 billion euros or one trillion dollars.
Greece was the first country to receive emergency loan from the combined package of the EU and the IMF in June 2010. Now Ireland is on the verge of knocking EMSF’s door. Reuters quoted two unnamed official sources from EU authorities that Ireland was in talks with EU officials to discuss aid mechanism. But, the aid may be announced only in the first week of December.
Ireland is said to be well funded until the first half of the next year, so the aid will not be associated with haircuts like in the case of Greece.
However, Ireland denies that it is in talks with the EU, confirmed by the EU commissioner Jean Claude Trichet. The IMF managing director said he was not approached for aid to Ireland and added Ireland can manage its finances. Ireland was once the highest growth country among the Eurozone countries during first ten years since the Eurozone formation. Now it has budget deficit equal to 32% of its GDP, the highest among EU countries. It is more than ten times to the limit imposed by the Eurozone monetary system, i.e. 3 percent of GDP.
BBC News | 3 October 2010 | 11:56 GMT
Chinese Premier Wen Jiabao says his country will continue to support both the euro and European government bonds. "I have made clear that China supports a stable euro," he said. He also promised not to cut China’s investment in European bonds, despite the recent crisis, which has weakened the value of many such bonds.
Mr Wen is visiting Greece, the worst hit of the 27-nation European Union. He has promised to buy Greek government bonds the next time they went on sale. China has said it needs to diversify its foreign currency holdings and has bought Spanish government bonds. Later in the week, the Chinese leader will attend an EU-China, where the subject of the yuan is almost certain to come up.
China is accused of keeping its currency artificially low against other world currencies, particularly the dollar- which makes Chinese goods cheaper on world markets and non-Chinese goods more expensive within the country. That argument is hottest in the US, where the House of Representatives has backed legislation that in theory paves the way for trade sanctions on China.
Bloomberg | Aug 12, 2010 | 1:22 PM GMT+0530
Prime Minister Jose Luis Rodriguez Zapatero may face a second front in his battle to contain Spain’s fiscal crisis as borrowing costs for the country’s regional governments climb. Catalonia, which accounts for a fifth of Spanish gross domestic product, has been shut out of public bond markets since March and the extra yield it pays over national government debt has almost tripled this year. Galicia, in the northwest, has asked to freeze payments of debt it owes the central government and the Madrid region postponed a bond sale last month. Spain’s regions, which borrowed at similar rates to the central government before the global credit crisis started in 2007, are key players in Zapatero’s drive to get his budget in order and push down the country’s borrowing costs. They control around twice as much spending as the state, employ more than half of all public workers and piled on debt during the recession. “If investors focused more on the problems in the regions, they would be less optimistic on Spain’s central government debt, and see that the rally in July was a bit overdone,” said Olaf Penninga, who helps manage 140 billion euros ($182 billion) at Rotterdam-based Robeco Group, and sold Spanish bonds last year.
The yield on 10-year Spanish government bonds has dropped 79 basis points to 4.09 percent since June 16, according to Bloomberg generic prices. The extra return investors demand to hold the debt rather than German equivalents was at 165 basis points today, down from a euro-era high of 221 points two months ago. The region, which attracts more tourists than any other in Spain, paid 300 basis points more than three-month Euribor for 1 billion euros of four-year bank loans last month, a spokesman said. Fomento de Construcciones & Contratas SA, Spain’s fourth- largest builder, said on Aug. 2 it agreed to pay a 260-basis point spread to extend 1.1 billion euros of loans until 2014. While government records on Aug. 9 show that Catalonia sold 1 billion euros of five-year debt via savings bank La Caixa in June, it hasn’t issued a benchmark-sized bond in public markets since March. “Debt markets closed” as Greece’s fiscal crisis spread through the euro region in the second quarter, said spokesman Adam Sedo last month. At 5.5 percent, the yield on Catalan 10-year bonds is on a par with Peru. Continue reading
Reuters | Sun Jul 25, 2010 | 8:12pm IST
EU tests of banks’ ability to withstand financial shocks, criticised as too easy after only 7 out of 91 failed, face their own stress test in the markets on Monday with early signs pointing to a more positive response. European Union policymakers and regulators voiced relief at Friday’s results but some market analysts and many media commentators derided an exercise in which all listed banks passed as lacking in credibility. "I see nothing stressful about this test. It’s like sending the banks away for a weekend of R&R," said Stephen Pope, chief global equity strategist at brokers Cantor Fitzgerald. There was scepticism about EU regulators’ conclusion that banks need only a total of 3.5 billion euros ($4.5 billion) in extra capital. Market expectations had ranged from 30 to 100 billion euros, although many European banks have already raised capital during the financial crisis.
Only five small Spanish banks, Germany’s state-rescued Hypo Real Estate and Greece’s Atebank failed outright. More than a dozen others scraped through with just over the required 6 percent of Tier 1 capital in the most stressful scenario and are likely to come under market scrutiny. However, the wealth of data disclosed by banks representing 65 percent of assets, and the commitment of banks, regulators and governments to follow-up action may well outweigh doubts about the stringency of the tests. In a first market reaction in New York late on Friday, the cost of insuring the debt of large European banks fell further and the euro rose against the dollar despite worries about the tests’ credibility. Better-than-expected economic data and business confidence surveys suggesting the euro zone will avoid a double-dip recession despite fiscal austerity measures are also helping revive investor confidence in Europe.
Given the haggling among EU governments and regulators about the stress tests right up to the last moment, the degree of transparency was greater than had been expected a few weeks ago. Sources familiar with the discussions said Germany fought hard behind closed doors to limit the extent of disclosure. In the end, most banks — except Deutsche — issued a detailed breakdown of their exposure to the sovereign debt of EU countries, enabling investors to run their own risk simulations to gauge counterparty’s solidity. "We have all the sovereign exposure data, and we can go ahead and do our own tests," said Nial O’Connor, a banking analyst at Credit Suisse. That should help reopen the interbank lending market, which partially froze at the height of the euro zone debt crisis in May and has remained tight due to fears that banks have been hiding big exposures.
It also responds to one of the major criticisms of the exercise — that the scenario assumed a "haircut" on sovereign debt of countries such as Greece held in banks’ trading books, but not on a longer-term basis in their banking books. The EU authorities were chastised for refusing to test the impact of a default by Greece. But European Central Bank governing council member Christian Noyer said euro zone states "have put several hundreds of billions of euros on the table with the support of the IMF to make this hypothesis completely excluded".
Spain, which spearheaded the drive for transparency, tested a larger part of its banking system and disclosed more data than any other country, hoping to clear away lingering market suspicion of its smaller banks’ solvency. However economist Nicolas Veron of the Bruegel think-tank said Madrid had underplayed the recapitalisation needs of the cajas, regional savings banks, although its bank resolution fund (FROBE) is well on the way to meeting those needs. "The Spanish wanted to be seen as the most transparent and deserve praise for the catalyst role they played, but in the end they clearly understated what the cajas need," he said in a telephone interview. Veron said follow-up actions by governments and regulators should include pressing weaker banks to recapitalise, if necessary with state help and facilitating cross-border takeovers of weaker banks.
Even before the results were published, National Bank of Greece, Slovenia’s NLB and Civica in Spain announced plans to raise capital. Italy said it would reopen an offer of government-backed bonds to support its banks, although none failed. Monte dei Paschi di Siena squeaked through with 6.2 percent of Tier 1 capital under the most stressful scenario, and UBI Banca with 6.8 percent. Veron said the success of the exercise would depend partly on whether European regulators adopt a more cooperative approach after the stress tests than they did before them. "If this is the start of a beautiful friendship among EU supervisors, then that’s not the same as if the united front crumbles next week and they start criticising each other again," he said.
Reuters | Sat Jul 24, 2010 | 11:31am IST
Valuations on Europe’s banking sector may look cheap on paper but don’t expect U.S.-based portfolio managers to scoop them up even after stress tests showed a vast majority have sufficient capital. The results of Friday’s assessment, criticized for not being tough enough, found that just seven out of 91 European banks would need to bolster their balance sheets by a total of 3.5 billion euros ($4.5 billion) to withstand another recession. "To us the bank stress test results came out as a non-event. When you look at the results they didn’t look very stressful," said Scott Snyder, portfolio manager of the ICON Advisers Europe fund. The method of the stress test has drawn scrutiny particularly because of the way the tests treated European government debt. Even so, U.S. investors had already shown distaste for the European banking sector as data reveal the massive net selling that has occurred over the last two years.
U.S. mutual funds cut their holdings of publicly traded European banks identified in the tests to just $12.1 billion from $29.8 billion, a whopping 59.2 percent decline in the last two years through May, according to Lipper, a Thomson Reuters company. The bulk of the sell-off was between 2008 and 2009. However even after the U.S. government conducted its own stress tests in May of last year — widely believed to have put a floor underneath U.S. financial shares — holdings in Europe’s banks continued to decline. "It stands to reason the most visible banks in Europe are the most scorned, perhaps because we know more about them. The holdings of ING, Bank of Ireland, Commerzbank, and Royal Bank of Scotland used to account for $4.4 billion in account assets. Now they are less than $800 million," said Jeff Tjornehoj, U.S. and Canada research manager at Lipper. By comparison, U.S. bank shares, as measured by Standard & Poor’s financial index, have risen 13.57 percent since the U.S. government announced its stress test results on May 7, 2009, through Thursday.
Bloomberg | Jul 23, 2010
Standard & Poor’s said it may cut Hungary’s credit rating to junk after the collapse of talks with the International Monetary Fund and European Union. Moody’s Investors Service said it may also lower the country’s grade. The IMF and EU on July 17 suspended talks with the government without endorsing Prime Minister Viktor Orban’s plans to control the budget deficit. The creditors provided Hungary with a 20 billion-euro ($25.9 billion) rescue package in 2008, which had served to reassure investors. “We believe that without an EU/IMF program to anchor policy, Hungary is likely to face higher and more volatile funding costs, which in our view could weigh on financial sector balance sheets, the public finances, and economic growth,” S&P said today in a statement. A rating downgrade would raise the cost of borrowing for Hungary at a time when the country is struggling to repair investor confidence after ruling party officials in June compared the country’s economy with Greece. S&P rates Hungary BBB-, its lowest investment grade. The Moody’s rating is two steps higher at Baa1. S&P will lower Hungary’s rating if in the coming year it concludes “government policies are unlikely to result in a meaningful decline in public debt,” it said in the statement.
Hungary’s currency fell 1.1 percent to 286.83 per euro as of 3:15 p.m. in Budapest. The forint has dropped 8.1 percent in the past three months, making it the worst performer among more than 170 currencies tracked by Bloomberg. The cost of insuring Hungary’s government debt against default rose 14.5 basis points to 343, according to data provider CMA. “Running a higher budget deficit while losing your biggest potential supplier of capital isn’t a good mix,” said Kieran Curtis, who manages $2 billion in emerging market debt at Aviva Investors in London. “The market isn’t going to finance a higher budget deficit without an IMF agreement.” Hungary’s government said credit rating companies “don’t understand” that fiscal responsibility needn’t come at the expense of independent economic policy. “We’re going to continue a disciplined fiscal policy, which doesn’t equal the usual austerity policy that affects families and businesses,” the Economy Ministry said in an e- mailed response to questions from Bloomberg News.
Reuters | Sun Jul 18, 2010 | 8:53am IST
A drop in consumer confidence in Europe amid worries about the region’s debt crisis is holding back a recovery in global consumer sentiment and weighing on the broader economic outlook, a survey showed on Sunday. Sentiment in euro zone states Spain, France and Italy fell between the first and second quarters as European countries drew up austerity measures to tackle debt amid fears of contagion from Greece’s debt crisis, the survey by the New York-based Nielsen Company showed. Global consumer confidence as a result was virtually unchanged in the second quarter from the previous three months despite rising optimism in Asia and Latin America as well as a slight uptick among consumers in the United States. "While the global economy is in better shape than it was nine months ago, the ongoing European debt crisis is a major setback to the global economic recovery anticipated this year," said Venkatesh Bala, chief economist at the Cambridge Group, a unit of the Nielsen Group.
A recovery in consumer spending in the United States would depend on job creation. "In the United States consumers are still focused on repairing their household balance sheets with 45 percent allotting any remaining income (after essential living expenses) to savings and paying off debt," said James Russo, vice president at The Nielsen Company. "Until the labour market shows continuous improvement, consumer spending will not be sustainable." The survey was taken between May 10 and 26, covering 27,000 consumers in 48 countries. The survey, based on consumers’ confidence in the job market, status of their personal finances and readiness to spend, did not include debt-stricken Greece or Portugal.
Reuters | Wed Jul 14, 2010 | 9:09pm IST
Efforts to clinch a deal on the way banks, insurers and markets in the European Union are supervised failed on Wednesday and talks will resume in late August or early September. The talks on creating pan-European authorities to prevent any repetition of the financial crisis are deadlocked because of differences between EU governments and the European Parliament over how much power the new supervisors will have. "We are getting closer to the finish line but there is still some way to go. A dynamic and balanced deal is now in reach," EU Internal Market Commissioner Michel Barnier said in a statement to Reuters. A European Parliament source said: "Talks have not led to an agreement this morning. Negotiations have now been postponed until the end of August, early September."
Despite the delay, the parliament could still vote on the supervision package in September and the new institutions could still become operational next year as planned. Some European diplomats had hoped a deal would be reached this week after EU finance ministers agreed on Tuesday to offer concessions to the parliament, which is pushing for a more centralised approach to supervising the financial sector. But although differences were narrowed at talks on Wednesday, the parliament’s negotiators decided the offer was not sufficient. "The feeling is that the Council (EU governments) still should move one or two steps in the direction of the parliament," said an official from the executive European Commission, which is trying to broker a compromise.
Reuters | Tue Jul 13, 2010 | 2:48pm IST
Here is a timeline of events in the euro zone debt crisis in reverse chronological order:
July 13 – Moody’s cuts Portugal’s debt rating by two notches to A1 citing rising debt and weak growth prospects, and says the country may need more austerity measures in its 2011 budget.
July 8 – Greece’s main private and public sector unions strike for 24 hours to protest against sweeping pension reform. Greek lawmakers vote in favour of the pension reform.
July 7 – Germany agrees on a four-year, 80 billion euro ($100 billion) austerity plan, committing the country to cutting its budget deficit and shoring up Chancellor Angela Merkel’s centre-right coalition.
— Europe lists 91 banks taking part in financial stress tests, which are expected to provide more detail about problematic assets, including bonds issued by peripheral euro zone countries and loan exposures to troubled pockets.
June 30 – A strike by Spanish underground rail workers causes more traffic chaos in Madrid as unions threaten further stoppages over austerity measures.
June 29 – About 10,000 people take part in marches across Athens during a nationwide strike against austerity measures.
— Greece starts to debate overhaul of pensions to raise women’s retirement age from 60 to match men at 65 and demand more years at work to qualify for a pension. Greece’s debt reached 133 percent of GDP in 2010.
June 25 – The CGIL, Italy’s biggest union with 6 million members, holds rallies in Rome, Milan and other cities to force the government to redraft a 25-billion-euro austerity package.
Gloom over the future of the euro zone is starting to lift after months of crisis, with policy makers sounding increasingly confident that the worst is over. There are still plenty of risks. Economic growth is fragile, governments must keep the political will to impose austerity steps for years to come, and small banks in the hardest-hit countries remain unable to borrow in the markets, making them dependent on the European Central Bank for funds. But in the past several days financial markets have reacted positively to details of planned stress tests on European banks, while sales of Spanish and Portuguese government debt have seen strong demand. European bank shares have rallied almost 10 percent and the euro hit a seven-week high versus the dollar.
“This has been the most difficult six months in the history of the European Union,” European Commission President Jose Manuel Barroso said this week. “There has been a stress test on the EU and on our ability to work together.” But he made clear that he believed Europe had come through that test, and his political rivals in the European Parliament, the European Socialists, for once appeared to agree with him. “The speculative attack against the euro has been slowed down. The speculators are seeing the EU is protecting its currency,” Socialist leader Martin Schulz told the assembly.
A major factor worrying markets in the first half of this year was the difficulty which euro zone states had in agreeing on how to stave off debt defaults by countries on the southern periphery of the region. The political and ideological differences between governments have not all been resolved. But most aspects of an emergency mechanism to handle the crisis are now in place, and the EU has at least started efforts to address the long-term causes of its debt crisis. A 110 billion euro ($140 billion) bailout of Greece, agreed in early May, is buying time for Athens to reform its finances. The launch of a European Financial Stability Facility, which could borrow up to 440 billion euros to help struggling countries, has been delayed by the resistance of tiny Slovakia, but strong diplomatic efforts seem likely to overcome that obstacle this month. Continue reading
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.
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".
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.
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
BBC News | Tuesday, 8 June 2010 | 03:27 GMT
Spanish public sector workers are holding a strike in protest against an average 5% cut in pay that comes into effect this month. The cuts are part of a government austerity package aimed at reducing the country’s budget deficit, swollen by almost two years of recession. The protests come amid a European debt crisis that began in Greece. Earlier, the European Union said talks aimed at bringing member states’ finances under control had progressed. European finance ministers also started setting up the $1tn (£690bn) financial package agreed last month to defend the European single currency and stop the debt crisis in Greece from spreading.
Testing public mood
Tuesday’s strikes have been called by Spain’s biggest trade unions. More than 2.5 million Spaniards work in the public sector, and the trade unions hope hundreds of thousands will join this strike – from hospitals and schools, fire stations and local government, the BBC’s Sarah Rainsford reports from Madrid. With a budget deficit currently running over 11%, the government is under pressure from the EU to slash spending. In May, Spanish Prime Minister Jose Luis Rodriguez Zapatero announced a 5% cut in public sector pay, starting this month. Salaries will be frozen in 2011. There were also big cuts in public investment and development aid. Some pensions were frozen. The cuts are part of a 15bn euro (£12bn, $18bn) package of austerity measures also meant to reassure the financial markets that Spain will meet its debts. But the trade unions are angry that public sector workers are being penalised. They accuse the Socialist party of reneging on previous promises, and taking desperate measures now – after insisting for months that Spain would be relatively unaffected by the economic crisis.
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.
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