Prince William County, Virginia. "Along Bull Run near Sudley Church"
Ilargi: It probably hasn't escaped you that we are entering the next phase of this fine crisis of ours. Those equally fine leaders we've elected to represent us and protect our interests are now almost literally stumbling from one emergency meeting into the other. It doesn't look like Greece can hang on much longer as an EU and Eurozone member without some sort of miraculous intervention.
Well, US Finance Secretary Tim Geithner claims to have the powers of miracle, and he personally brought them to a meeting -an emergency one- in Poland on Friday (where many a European wondered whether he spoke for Washington or for Wall Street, no doubt).
Geithner's big plan is for Europe to take its European Financial Stability Fund, which is projected to be €440 billion by the end of this year, though that is by no means certain, and leverage it about ten-fold to some €4.4 trillion. This, as per Geithner, will calm the markets -and presumably restart economic growth, and job creation, and the housing markets-.
Geithner's perspective is a purely religious one. He has no proof that his idea would work, there is no science that underlies or reinforces it, just a belief system. Nevertheless, ideas like his are very popular, and I for one wouldn't bet against them being unleashed upon us all.
Obviously, the ten-fold leveraged expansion of the EFSF is an act of faith: the faith that creating more debt/credit out of thin air will restore the markets' faith in a sound financial system.
Thing is, when you look beyond its immediate impact, the expansion, if it is executed, can only, and of necessity, achieve the opposite of what it's supposed to do. While the markets will be glad to gobble up the cheap funds, they will not have faith in them. They are simply not that stupid. They will know where the money comes from. And there is still a fundamental difference between money made with productive work and money made with mere acts of faith. They're not even the same money, much as they may appear to be.
Just as there are relatively few people who understand that deflation, not inflation, is the biggest and most immediate threat to our economies, there are equally few who have fully mentally processed the notion that debt can't be overcome with more debt, except perhaps in particular situations where a broad set of exceptional conditions is met.
Engagement in war comes to mind. Or the discovery of a truly unparalleled source of very cheap and productive energy (for practical purposes, I'll leave out the earth being hit by an asteroid). But there is no sign of the latter on the horizon, no matter how much faith one may have that it lies just beyond that horizon. That leaves us with the former.
Barring both, there is no way we can borrow our way out of our debts and into prosperity.
It seems apparent that we have indeed entered a new phase of the crisis because our "leaders" are losing their sense of control -hence all the emergency meetings-. And they have no idea what will happen from here on in, no more than we do. That scares everyone, but leaders even more so. It's because they are addicted to control; it's also because they feel they have deeper to fall. And when people get scared, they turn to faith.
In practical terms, if Greece would default in the nearby future, and chances are fast growing that it will, nobody can predict what goes next. The domino effect in banking and sovereign debt is only predictable in that it will occur, not how or to what extent. And what is presented by Geithner, and the IMF's Christine Lagarde, and the World Bank's Robert Zoellick, and Princeton's Paul Krugman, and all these economists posing as scientists, as some sort of sound policy, is nothing but an act of ultimate faith driven by fear. Fear for their particular positions in their particular world. Which in all likelihood is not yours.
They don't know how bad it all will be. They're just afraid it will be very bad for themselves. Their actions are not necessarily driven by reason; they may not even recognize either their faith or their fear. But whatever drives them, they sure as hell and high water don't fit my profile of who I would want to see tackle this crisis, or any other for that matter. Taking the risk of plunging countless people into unspoken misery on account of your religion is not something human history seems to recommend, at least not to me. If the best we’ll be able to say afterward is they at least meant well, we're doing something wrong.
Are there no opposing views? There's a few inside these meetings.
Bundesbank President Jens Weidmann said:"The EFSF’s sole purpose is the financing of states and that’s in order as long as it’s done via the capital market. If it’s done via the central bank it constitutes monetary state financing," (which is forbidden under European Union rules). And German Finance Minister Wolfgang Schäuble: "We don’t think that real economic and social problems can be solved by means of monetary policy. That has never been the European model and it won’t be."
The Dutch and the Finns are also quite outspoken opponents of bottomless European pits. But most of the finance "experts" there are still cut from more or less the same cloth, and in the end adhere to the same faith-based economic models. They may feel fine about letting Greece go under, and Portugal and Ireland, but they will nevertheless pour their voters' money down the nearest drain they can find when it comes to "saving" their own respective banks. Which is of course the exact same thing, even if it feels different to them.
We have no democratic means in place anymore to put those folks into power who would truly try and alleviate the plight of the people. Our democracies are based on voting systems, but votes are of necessity bought and sold if and when money is allowed to enter the political system. And the money that has bought the system says that it must fork over the money of the people. Or else. The faith-based fake science named economics is but a tool used on the ignorant in order to justify this.
I sincerely hope that what Ambrose Evans-Pritchard has labeled "Germany's austerity nihilism" will at least beat some sense into some heads. But I don't have much faith in that.
For our children, it would seem to be best if Greece falls tomorrow, and takes down a lot of countries and banks all over the globe with it. It's the only way we might be able to stop ourselves from spending tomorrow's money today. But the flipside of that, too, I'm afraid, is religious warfare.
NOTE: there are still one or more bored adolescents trying to disrupt our comments section. Don’t worry too much about it; I don't. This too shall pass, we’ll solve it. We all have more important things to get worked up about.
Sliding toward financial crisis
by Stella Dawson - Reuters
Three years after the collapse of Lehman Brothers, the world's financial system is sliding toward another major crisis.
At stake is the global recovery and future shape of Europe. Calls are mounting for financial leaders of the world's biggest economies meeting this week to take bold action, not on the scale of the $1 trillion rescue package of March 2009 but something equally important in policy terms.
The challenge for the Group of 20 talks in Washington on Thursday and Friday is to prevent a sovereign debt crisis centered in Greece from turning into a full-blown banking crisis. Such a crisis could engulf other indebted European countries, lead to messy defaults and plunge the region and world back into economic and financial turmoil.
"We have entered a dangerous new phase of the crisis," said Christine Lagarde, managing director of the International Monetary Fund, last Thursday. "To navigate it, we need strong political will across the world -- leadership over brinkmanship." World Bank President Robert Zoellick a day earlier said: "The time for muddling through is over."
Pieces of a multipronged approach to the crisis have come into focus and should solidify further this week. The political hurdles remain significant but if the parts of the program are endorsed by G20 finance ministers and central bankers, and their governments continue to deliver, investment strategists say turmoil in markets should abate.
Two factors are driving the crisis -- political discord within Europe over how much support to give indebted euro-zone governments that are implementing tough fiscal austerity programs; and vulnerabilities within the region's financial system, especially in France where banks hold 671.6 billion euros of government debt of high-deficit euro-zone countries.
These factors have fed upon each other in a vicious cycle. Talk among top German officials of Greece defaulting or leaving the euro zone has accelerated investor withdrawal of short-term funding to French banks, raising concerns about bank solvency.
To halt the cycle, the following steps are coming together:
• To support growth and ease lending costs, a growing number of central banks worldwide are loosening monetary conditions -- an action likely to win the G20's endorsement for countries where inflationary pressures are in check.
The Federal Reserve will play its part on Wednesday when it is expected to announce a plan to lower longer-term interest rates by shifting the balance of its $2.8 trillion securities portfolio away from short-term debt. How aggressively it does this, and whether it also cuts the interest rate paid to banks on their excess reserves held at the Fed, an idea gaining traction in markets, will signal the Fed's degree of concern over the economic slowdown.
• To address concerns about the ability of governments to service their debt, European finance ministers are considering proposals to leverage their 440 billion-euro European Financial Stability Fund, which should be up and running by month's end. The United States has suggested increasing the EFSF firepower roughly ten-fold to give it the capacity to handle a sovereign bailout the size of Italy or help recapitalize banks.
Treasury Secretary Timothy Geithner got a cool reception from EU finance officials on Friday in Poland where he went to propose the leverage idea and warned of "catastrophic risk" if Europe fails to act more firmly. Some EU ministers rankled at what they saw as a U.S. lecture.
But market participants were confident its practical appeal would eventually win the day. Leveraging the EFSF costs European governments nothing upfront, they duck the political difficulty of raising more funds if a major EU country runs into trouble, it provides funds to recapitalize banks if needed and would earn them market confidence. Semi-annual meetings at the International Monetary Fund and World Bank this week give EU leaders a further chance to discuss its merits.
• On bank liquidity, the European Central Bank's bold action last week to arrange three-month dollar funding for banks has shown ECB capacity to lead -- despite German dissent within its ranks -- and alleviate liquidity problems for European banks.
• On bank solvency, the issue is trickier. Europeans sharply disagree with U.S. officials and the International Monetary Fund that their banks need more capital. The IMF has estimated a 200 billion-euro shortfall, a number that may be revisited in an IMF report this week. If EU officials agree to flexible usage of the EFSF, they could recapitalize the banks quickly.
• On sovereign solvency, governments continue to make progress, albeit slow, in reducing budget deficits. Italy last week adopted a plan for a balanced budget by 2013. In the United States, President Barack Obama on Monday lays out his preferred course for medium-term deficit reduction.
The final ingredient is the political resolve to stick to this package of programs. Eswar Prasad, senior fellow at the Brookings Institution, said the job of the IMF this week is to nudge countries in this direction and highlight serious dangers ahead. "The alternative is political paralysis, which we are seeing in many of these countries and could lead to very substantial risks for the longer term. And that's the big concern," he said.
EU officials seek to dispel fears of credit crunch
by Eva Kuehnen and Leigh Thomas - Reuters
EU officials sought to dispel fears about a bank lending freeze on Saturday, despite a stark warning from senior aides that a "systemic" crisis in sovereign debt now threatened a new credit crunch.
Last week, central banks around the world announced they would work together to offer extra loans in U.S. dollars to banks, a move designed to prevent money markets from freezing up in the wake of Europe's sovereign debt crisis. European banks are struggling to borrow amid growing alarm about the threat of a Greek debt default among U.S. money market funds and other traditional dollar lenders. European bank stocks have tumbled by a third since July.
But on Saturday, EU officials sought to smooth over the difficulties. "The situation ... is not worrisome," Luxembourg's Finance Minister Luc Frieden said on Saturday ahead of a meeting of finance ministers. "All the instruments are in place to make sure the financial system continues to work properly."
Andrea Enria, the head of EU banking watchdog the European Banking Authority, said measures to provide dollar funding to banks had been necessary. "Central banks are doing a lot to provide liquidity," he said. But behind the closed doors of the meeting, attended by German finance minister Wolfgang Schaeuble, a series of bluntly worded reports prepared by officials told a different story.
"While tensions in sovereign debt markets have intensified and bank funding risks have increased over the summer, contagion has spread across markets and countries and the crisis has become systemic," officials wrote in the documents obtained by Reuters. The EU's top finance officials have also urged ministers to reinforce banks' capital while warning that a "systemic" crisis in sovereign debt is hurting banks and risks a new credit crunch, according to the documents.
The reports, which raise concerns make pointed criticism of some countries for failing to help weak banks, highlight a sense of alarm in European capitals about the financial crisis. They also show a growing sense of exasperation at the failure of Spain, Germany and others to deal with flagging banks even after their weaknesses were exposed by recent stress tests.
The documents level harsh criticism at countries including Spain for not doing enough to reinforce its banks following dismal results in stress tests and urges action to bolster the balance sheets of weak banks. Officials highlight the difficulties experienced by European banks in borrowing. "Despite the considerable strengthening of capital positions ... European banks have recently experienced market funding difficulties."
Ministers are also to discuss a tax on financial transactions, such as a levy on trading shares, an idea championed by Germany, France and Austria. The United States, however, does not intend to introduce such a measure, making it difficult for Europe to go it alone for fear that it could push more trading to New York.
"There are very considerable divisions," said Jacek Rostowski, the Polish finance minister who chairs the meeting, commenting on a transaction tax. "It obviously raises a lot of emotions." Germany has said it may pursue a tax solely in the euro zone if countries like Britain refuse to support it but even here, some states such as Italy are skeptical.
Germany Rejects Using ECB Leverage to Increase European Rescue Fund’s Size
by Rainer Buergin and Jonathan Stearns - Bloomberg
Germany’s top two finance officials rejected using the European Central Bank to boost the euro-area rescue fund’s firepower, rebuffing a suggestion by U.S. Treasury Secretary Timothy Geithner.
Inviting Geithner to a euro meeting for the first time, European finance chiefs who wrapped up two days of talks in Wroclaw, Poland, today also said the 18-month debt crisis leaves no room for tax cuts or extra spending to spur an economy on the brink of stagnation.
The German stance risks leaving the euro area without sufficient means to prevent the crisis from engulfing Spain and Italy. Geithner floated a variation of a 2008 policy he developed while at the New York Federal Reserve that would expand the reach of the 440 billion-euro ($607 billion) European Financial Stability Facility using leverage in a partnership with the ECB, said Irish Finance Minister Michael Noonan.
"The EFSF’s sole purpose is the financing of states and that’s in order as long as it’s done via the capital market," Bundesbank President Jens Weidmann told reporters today. "If it’s done via the central bank it constitutes monetary state financing," which is forbidden under European Union rules.
Luxembourg Prime Minister Jean-Claude Juncker, who chairs meetings of euro region finance ministers, said yesterday: "We’re not discussing the increase or the expansion of the EFSF with a non-member of the euro area." Instead, the ministers recommitted to a July 21 decision to empower the fund to buy bonds in the secondary market, offer precautionary credit lines and create a bank-recapitalization facility.
"We don’t think that real economic and social problems can be solved by means of monetary policy," said German Finance Minister Wolfgang Schaeuble, speaking alongside Weidmann after the meeting of EU finance ministers and central bank governors. "That has never been the European model and it won’t be."
Neither German policy maker ruled out leveraging the backstop’s lending capacity, saying the feasibility of the idea depends on how it’s done. It wouldn’t be acceptable to leave the ECB with the risks from such an operation, said Weidmann. Europe projects an image of "ongoing conflict" between national governments and the central bank, hampering efforts to put the economy on a sounder footing, Geithner said yesterday at a banking conference in between euro meetings.
'Big Question Marks'
Europe’s economy will barely grow in the second half of 2011, a casualty of the debt buildup that 256 billion euros in aid for Greece, Ireland and Portugal has failed to extinguish.
Germany’s credit risk on its contribution to the EFSF may reach 465 billion euros, the Ifo Institute said today. The risk has risen from less than 400 billion euros in April, the Munich- based economic institute said in a statement. Weidmann said he would put "big question marks" on proposals to give the EFSF a license to let it operate as a bank that could tap the ECB for its refinancing.
The ECB was in the forefront again this week, joining other major central banks in offering dollar loans to ease a liquidity crunch that had confronted European banks with the highest costs for obtaining the U.S. currency in almost three years. The ECB last month started buying Italian and Spanish government bonds after Europe’s debt crisis pushed their yields to euro-era records. Since starting its bond program on May 10, 2010, the Frankfurt-based central bank had spent 143 billion euros on sovereign bonds through Sept. 9.
Greece’s Papandreou Cancels U.S. Trip Ahead of 'Critical' Week
by Maria Petrakis - Bloomberg
Greek Prime Minister George Papandreou unexpectedly canceled a planned visit to the U.S. at the last minute, saying he needed to remain in the country for a "critical" seven days.
"As the coming week is particularly critical for the implementation of the July 21 decisions in the euro area and the initiatives which the country must undertake, Prime Minister George A. Papandreou decided to cancel his scheduled visit to the U.S.," according to an e-mailed statement today from his office in Athens. No further details were given.
Greece’s government is rushing to meet demands from international and European Union partners that will allow the release of a sixth tranche of loans to prevent default. The government on Sept. 11 announced a levy on properties to help raise 2 billion euros ($2.8 billion) in a bid to show it’s serious about plugging a swelling budget deficit, key to getting a second financing package agreed by EU leaders on July 21.
An editorial in Kathimerini newspaper published today entitled "Your country needs you", called the U.S. trip "inexplicable" and said a week-long absence wasn’t compatible "with the gravity of the current situation, as Greece stares into the abyss."
EU and the International Monetary Fund inspectors will meet with Finance Minister Evangelos Venizelos to resume and accelerate their review on Sept. 19, the Athens-based ministry said yesterday. Venizelos said today that putting the July 21 accord in place was the priority for the country.
"Our problem is to ensure that we get the sixth payment and each future payment with the best possible terms as we can’t keep having a repeat of the same scenario," Venizelos told reporters in Wroclaw, Poland after a meeting with European counterparts, according to an e-mailed statement today from the Finance Ministry.
Papandreou had planned to meet officials including International Monetary Fund Managing Director Christine Lagarde and U.S. Treasury Secretary Timothy F. Geithner on his trip to New York and Washington. His first meeting was scheduled to have occurred in New York tomorrow morning. Papandreou earlier this week promised a "decisive battle" for budget cuts to persuade European governments and the IMF to release the 8 billion-euro loan installment later this month.
Greece has the cash reserves to cover its needs for October, Deputy Finance Minister Filippos Sachinidis said on Sept. 12 Higher taxes and cuts in wages and pensions in return for a 110 billion-euro May 2010 package of loans from the EU and IMF have weighed on the Papandreou government’s standing with Greeks, with his Pasok party now trailing the main opposition in opinion polls.
EU partners have said the sixth loan, of 8 billion euros, won’t be paid if they aren’t convinced Greece is doing enough to curb a budget gap that soared to 15.4 percent in 2009.
Greece under pressure as finance ministers put brakes on bailout
by Phillip Inman - Guardian
Decision on €8 billion Greek bailout delayed till October, while US secretary of state Geithner urges eurozone leaders to do more
European finance ministers on Friday heaped pressure on the Greek government to accelerate its privatisation programme and implement deeper spending cuts, after they told Athens a crucial €8bn (£6.9bn) bailout payment would be delayed until next month.
Luxembourg prime minister Jean-Claude Juncker, who chaired a meeting of the eurogroup of single currency finance ministers in Poland on Friday, said officials recognised the renewed efforts by Greece to meet its fiscal targets, but a decision on releasing the next tranche of cash would not be taken until October. The move was met with incredulity by Greek officials. They have already warned they will be out of money by mid-October and are reported to be making contingency plans to lay off public sector workers.
US secretary of state Tim Geithner, who flew to Poland on Friday to emphasise Washington's fears of a second financial meltdown, urged eurozone countries to expand their bailout fund to better tackle the debt crisis. He warned the debt crisis posed a "catastrophic risk" to financial markets and added "What is very damaging [in Europe] from the outside is not the divisiveness about the broader debate, about strategy, but about the ongoing conflict … You need … to work together to do what is essential to the resolution of any crisis."
A wider meeting of EU finance ministers, including the chancellor, George Osborne, will take place on Saturday in Wroclaw. They are under pressure to put aside their differences and agree an expanded bailout facility to calm fears of defaults across the continent's southern states.
French bank shares, which have lost more than 50% of their value since July on worries that they could default if Greece goes bust, were under pressure again on Friday while Italy faces a ratings downgrade by Moody's that could spook markets and trigger another round of selloffs. Fears of a broader credit crunch, as banks refuse to lend to each other, has already forced the world's major central banks to promise unlimited amounts of US dollars to European banks unable to access international money markets.
Eurozone policymakers remain deeply divided over their next move, with some German politicians contemplating the breakup of the currency club rather than commit further taxpayer funds.
In a 30-minute meeting with eurozone ministers, Geithner is understood to have pressed for the €440bn European financial stability facility (EFSF) to be scaled up to give greater capacity to combat the problems infecting not just Greece, but also Portugal, Spain, Italy and Ireland. Geithner also said the EU needed to end "loose talk" about a breakup of the euro and work more closely with the European Central Bank (ECB) on solutions. He said: "Governments and central banks have to take out the catastrophic risks from markets … [and avoid] loose talk about dismantling the institutions of the euro."
His comments were leapt on by Austria's finance minister Maria Fekter: "He conveyed dramatically that we need to commit money to avoid bringing the system into difficulty," she said. "I found it peculiar that even though the Americans have significantly worse fundamental data than the eurozone, that they tell us what we should do and when we make a suggestion … that they say no straight away."
She said there had been particular disagreement over suggestions that Europe should commit more money to fighting the crisis. When German finance minister Wolfgang Schäuble explained that would not go down well with taxpayers and that the only way to fund it would be a financial transaction tax, Geithner ruled any such tax out. "In these countries, there is a desire for a transaction tax," Fekter said. "[Geithner] ruled that out."
Inspectors from the ECB, EU and International Monetary Fund (IMF) are currently in Athens and should report back on progress in early October, European commissioner for monetary affairs, Olli Rehn said – meaning that the next disbursement of aid to Greece from its first bailout could be paid by mid-October.
Concerns that statistics from Athens failed to present an accurate picture of its finances were given weight after two members of the government's statistics board resigned and another was quoted as alleging that 2009 deficit data had been artificially inflated in order to ensure bailout funds would be forthcoming.
Suddenly, Over There Is Over Here
by Gretchen Morgenson - New York Times
The debt crisis in Europe has finally, and officially, washed up on American shores. Last week, the mighty Federal Reserve moved to help European banks that have been having trouble finding people who are willing to lend them money.
Some of these banks are growing desperate for dollars. Fearing the worst, investors are pulling back, refusing to roll over the banks’ commercial paper, those short-term i.o.u.’s that are the lifeblood of commerce. Others are refusing to renew certificates of deposit. European banks need this money, in dollars, to extend loans to American companies and to pay their own debts.
Worries over the banks’ exposure to shaky European government debt have unsettled markets over there — shares of big French banks have taken a beating — but it is unclear how much this mess will hurt the economy back here. American stock markets, at least, seem a bit blasé about it all: the Standard & Poor’s 500-stock index rose 5.3 percent last week.
But stock investors have a bad habit of dismissing problems in the credit markets until it is too late. Back in the summer of 2007, the stock market was roaring, despite obvious problems in the mortgage market.
Make no mistake: the troubles of Europe and its debt-weakened banks will imperil the United States. For many, it is no longer a question of whether but when Greece will default on its government debt. How far the sovereign debt crisis might spiral, and its precise ramifications, are unknowable, but some fault lines are evident.
Carl B. Weinberg, chief economist at High Frequency Economics in Valhalla, N.Y., outlined what he sees as the major risks — and they fall into two categories. One is the potential for losses incurred by financial institutions that wrote credit insurance on European government debt and the European banks that own so much of that paper. The other is the likely economic hit as banks in the euro zone curb lending significantly.
A crucial mechanism linking financial players in the United States to the problems in Europe involves credit default swaps, those insurance-like products that did so much damage during the 2008 financial crisis. (Think American International Group.)
Billions of dollars in swaps have been written on sovereign debt, guaranteeing that those who bought the insurance will be paid if Greece or other countries default. As of Sept. 9, some $32 billion in net credit insurance exposure was outstanding on debt of Greece, Portugal, Ireland and Spain, according to Markit, a financial data provider. An additional $23.6 billion has been written on Italy’s debt. Billions more in credit insurance have also been written on European banks, many of which hold huge positions in troubled sovereign obligations.
But since these instruments trade in secret, investors don’t know who would be on the hook — as A.I.G. was in its ill-fated mortgage insurance — should a government default or a bank fail.
"If Greece folds its tent and that takes out a big institution, we don’t know who wrote the swaps," Mr. Weinberg said. "Can they raise the cash to perform on their obligations? Can they take the balance-sheet hits? We have a lot of unknown unknowns."
Even after what we went through with A.I.G., the huge market in credit default swaps remains unregulated and still operates in the shadows. You can thank big banks that trade these instruments — and their lobbyists — for that.
As for the broader economic effects of Europe’s woes, Mr. Weinberg expects credit around the world to become even scarcer. "Outside the U.S., we never really resumed credit growth since 2009," he said. "Another hit now would bring credit down and impose a huge squeeze on small businesses throughout Europe and over here also."
One troubling aspect of the euro zone crisis is just how large the European banks’ sovereign debt holdings are. At many institutions, the positions dwarf what American institutions held in mortgage-related securities, for example, when compared to book values.
Why? Regulators encouraged European banks to hold huge amounts of European government debt by letting them account for these investments as if they posed zero risk. That meant the banks didn’t need to set aside a single euro in capital against those holdings.
Now, according to an analysis by Autonomous Research, 43 large European banks hold debt in troubled sovereigns that is equal to 63 percent of those institutions’ book values.
Adding to the peril is that these banks are funded primarily by short-term investors, like buyers of commercial paper, rather than by depositors, as is more often the case with American banks. This was the same problem faced by Bear Stearns and Lehman Brothers, which collapsed after short-term lenders fled in panic.
Measuring the loans made to European banks against their deposits tells the story. Across Europe, according to Autonomous Research, loans to banks exceed their deposits by 6 percent. Among French banks, loans exceed deposits by 19 percent. In Greece, they swamp deposits by 32 percent. In the United States, by contrast, banks are borrowing less than 90 percent of their deposits, on average.
This is why it is becoming such a problem for European banks that so many short-term lenders are declining to renew when loans come due. Money market funds, traditionally big investors in short-term paper issued by European banks, have been reducing exposures. A recent Fitch Ratings report shows that for the two months ended July 31, the 10 largest United States prime money market funds pared their holdings in European banks by 20.4 percent, in dollar terms. In the same period, the funds cut their exposure to Italian and Spanish banks by 97 percent.
But these money funds, with total assets of $658 billion, held $309 billion in debt obligations issued by European banks. That’s equivalent to 47 percent of these funds’ total assets.
"We’re seeing a lot of the same things in the markets that we saw in the Lehman era," Mr. Weinberg said, referring to that awful episode three years ago. "I can’t tell you specifically and exactly how the fallout from Europe will pass through to us, but I certainly can’t tell you it won’t."
U.S. Economy's Kiss of Debt
by Rolfe Winkler - Wall Street Journal
Why can't the economy grow? It's the debt, stupid.
That is the reminder from the Federal Reserve's quarterly data dump. Added up, household, business and government debt now amounts to some $36.5 trillion, a new nominal record. And that figure excludes the government's unfunded liabilities for Medicare and Social Security.
This debt overhang remains a key problem for the U.S. economy because it limits growth drivers like consumer spending. Consumers who still face big mortgage payments and credit-card bills have less flexibility to increase spending on goods and services, which in turn keeps a lid on job growth.
To be sure, consumers have made progress. Total household debt relative to gross domestic product declined to 66% in the second quarter. That is down from a peak of 76% reached in early 2009, but remains far above the historical average of 37% dating back to 1951.
The federal government has stepped into the breach. Total federal debt outstanding, according to the quarterly report, is now 65% of GDP, a level not seen since the late '40s. The huge amount of debt outstanding also limits the Federal Reserve's flexibility: Any attempt to kick up inflation to drive growth runs the risk of increasing long-term interest rates, which would make refinancing the debt mountain more difficult.
The story isn't new, but the sheer level of debt—and the fact that the Fed can't stimulate new borrowing by pushing rates any lower—is a stark reminder. Nearly three years after the onset of the financial crisis, the long slog of de-leveraging still seems to be in its early stages.
Mayor Bloomberg predicts riots in the streets if economy doesn't create more jobs
by Erin Einhorn and Corky Siemaszko - NY Daily News
Mayor Bloomberg warned Friday there would be riots in the streets if Washington doesn't get serious about generating jobs. "We have a lot of kids graduating college, can't find jobs," Bloomberg said on his weekly WOR radio show. "That's what happened in Cairo. That's what happened in Madrid. You don't want those kinds of riots here."
In Cairo, angry Egyptians took out their frustrations by toppling presidential strongman Hosni Mubarak - and more recently attacking the Israeli embassy. As for Madrid, the most recent street protests were sparked by widespread unhappiness that the Spanish government was spending millions on the visit of Pope Benedict instead of dealing with widespread unemployment.
Bloomberg's unusually alarmist pronouncement came as President Obama has been pressuring reluctant Republicans to pass his proposed job creation plan."The damage to a generation that can't find jobs will go on for many, many years," the normally-measured mayor said.
Bloomberg gave Obama kudos for coming up with a jobs plan. "At least he's got some ideas on the table, whether you like those or not," he said. "Now everybody's got to sit down and say we're actually gonna do something and you have to do something on both the revenue and the expense side."
And everybody's got to share in the pain. "When you start picking and choosing which groups do and do not, that's when it becomes unfair in a lot of people's minds," the mayor said. "But we're all in this together." Obama didn't create this economic mess, it developed "over long periods of time," Bloomberg said.
Obama's approval rating has sunk along with the economy, but the ratings of the Republicans who have stymied his attempts repair the damage are even worse, most polls show. Already, House Speaker John Boehner, an Ohio Republican, has drawn a line on raising taxes on the rich to pay for Obama's proposed $447 billion jobs plan, which aims to help the middle class.
Spectre of credit crunch returns as banks pump money into markets
by James Kirkup - Telegraph
The spectre of a second credit crunch was raised when central banks were forced to intervene to stop the international financial system from freezing up again.
As the head of the International Monetary Fund warned of a new "dangerous phase of the crisis", the Bank of England and other central banks said they would start lending cash to European banks that were struggling to borrow. Such "liquidity-providing operations" were last conducted in 2008 and 2009 at the height of the credit crisis, when banks’ reluctance to lend to one another threatened to cripple the financial system.
The latest developments came on the third anniversary of the collapse of Lehman Bros, the US bank whose demise brought the financial system to the brink of meltdown. The central banks’ fresh intervention, which will run from October until December, was driven by the deepening crisis in the eurozone, which is struggling to cope with the debts of countries including Greece.
George Osborne, the Chancellor, is to admit that Britain is "not immune" to the international crisis, telling The Daily Telegraph Festival of Business that recent events make it all the more important for the Coalition to stick to its deficit-reduction plans.
The eurozone debt crisis has led to growing fears in financial markets about the stability of major European banks, especially those in France. Investors, particularly US money-market funds, are increasingly worried that the European banks are exposed to huge losses on loans they have made in Greece and other indebted eurozone countries.
Assurances from European regulators have not allayed those fears. Moody’s, a credit ratings agency, has downgraded two of France’s biggest banks, Société Générale and Credit Agricole, and issued a downgrade warning to a third, BNP Paribas. The Financial Services Authority, the UK market regulator, called senior executives from British banks to a meeting to discuss the City’s ability to withstand the eurozone crisis.
Stock markets jumped after the intervention, with bank shares rising sharply, amid relief that an immediate financial collapse had been averted. The FTSE 100 index of leading British companies closed at 5,337, up 2.1 per cent. Banking shares made the biggest gains: Lloyds Banking Group rose 6.6 per cent, Barclays gained 4.4 per cent and HSBC rose 3.8 per cent. European and American markets also rose sharply.
However, analysts warned that the short-term measure would not change the fundamental problems in the eurozone and elsewhere. "This is about central banks buying time for politicians," said Michael Symonds of Daiwa Capital Markets.
Marc Ostwald, a strategist at Monument Securities, said that the central banks’ decision to "flood" the inter-bank market with money demonstrated the scale of the problem the global financial system faced. He said the intervention implied that current funding pressures and the possibility of a Greek debt default were "threatening to completely destabilise western financial markets".
Investors’ fears are also being exacerbated by growing evidence that major economies are slowing and could slip back into recession. Christine Lagarde, the head of the IMF, said that international leaders must do more to address fears over debt and economic growth. "We are certainly living through a very troubled time at the moment with great economic anxiety," she said. "The economic skies today look troubled, they look turbulent, as global activity slows and downside risks increase. We have entered into a dangerous phase of the crisis." She added: "Without collective, bold action, there is a real risk that the major economies slip back instead of moving forward."
The European Commission warned that growth in the eurozone economies would "come to virtual standstill" later this year. The commission also cut its forecasts for growth in the British economy this year, from 1.7 per cent to 1.1 per cent. Figures this week showed that UK unemployment had climbed above 2.5 million, and the Treasury is expected to cut its growth forecasts later this year.
Martin Weale, a member of the Bank of England’s Monetary Policy Committee, warned that Britain was at growing risk of a double-dip recession. "Looking at what’s happened in the last two months or so, anyone would have to say that it [the risk of recession] is greater than it seemed in July," he said.
Mr Osborne will insist today that the Government will not water down its programme of spending cuts. "Here at home we are not immune to what is going on at our doorstep. America and the eurozone are our two biggest export markets. But I am confident that we can weather this storm," he will say. "Our plan was designed for both good times and tough times. If we abandoned it now there would be a collapse in that confidence and a surge in interest rates."
The Treasury is working on a package of reforms to spur growth, and Nick Clegg, the Deputy Prime Minister, has said that a "gear change" in such work is required. But privately, ministers concede that the Government’s scope for action is limited and are looking to the Bank to provide fresh stimulus for the economy with a new round of quantitative easing.
European finance ministers ignore US Treasury Secretary Tim Geithner's warning of 'catastrophic risk' over debt crisis
by Louise Armitstead - Telegraph
European leaders ignored a dressing down from US Treasury Secretary Tim Geithner over the "catastrophic risk" of not taking decisive action to tackle the sovereign debt crisis by choosing to delay until October a decision on the Greek bail-out.
Mr Geithner, who had made an unprecedented trip to Poland to speed up resolution plans, was the first American to attend a meeting of European finance ministers. He said: "Politicians and central banks need to take out the catastrophic risk to markets...they have to definitively remove the threat of…cascading defaults [and avoid] loose talk about dismantling the institutions of the euro."
Later he told reporters: "What is very damaging from the outside is to see not just the divisiveness [in Europe] in the broader debate about strategy, but the ongoing conflict between the governments and the central bank. You need both to work together to do what is essential for the resolution of any crisis."
Separately, the Institute for International Finance, which a represents 440 of the world's largest banks, said it had formed a plan whereby the BRIC emerging economies – Brazil, Russia, India and China – could help boost a bond buy-back programme to reduce Greek debt. The proposals, which will be discussed at a meeting alongside the International Monetary Fund (IMF) next week, is designed to double existing international proposals for a €20bn bond buy-back.
In Poland, Mr Geithner's tone grated with some of the European delegates. The US Treasury Secretary, whose presence was the clearest indication yet of Washington's concerns over the debt crisis, said: "One of the starkest ways to emphasise the importance of Europe getting on top of this is that you don't want the future of Europe to rest in the hands of those who provide financing to the IMF."
Didier Reynders, the Belgian finance minister, told Reuters: "I'd like to hear how the US will reduce its deficits ... and its debts." Mr Geithner urged the finance ministers to increase the size of the €440bn (£385bn) European Financial Stability Facility (EFSF) via a complex plan involving backing by the European Central Bank (ECB). Jean-Claude Juncker, the chairman of the Eurogroup, added: "We are not discussing the expansion or increase of the EFSF with a non-member of the euro area."
Wolfgang Schaeuble, the German finance minister, argued that expanding the EFSF would put too much of a burden on taxpayers. Austria's delegate, Maria Fekter, said that Mr Schaeuble had called for the US to participate in the bail-out fund too, which Mr Geithner "ruled out emphatically".
The American's warnings were sidelined by the Europeans, who said they would wait until October to decide whether to release an €8bn tranche of bail-out money to Greece. The move will mean the next set of talks are once again held against a deadline of Greece running out of money. Athens has said its reserves to pay wages and pensions will run out in October.
Leaders need to break a deadlock over Finland's demands for collateral in return for the bail-out. They also want to see Athens implement tough austerity measures, including a two-year property tax announced last week. Evangelos Venizelos, the Greek finance minister, vowed to meet the targets. "All Greeks must understand that if tough decisions are not taken and applied now, what will happen is truly dramatic," he said.
The delegates said they hoped to use the rest of the meeting to agree a new set of laws that will sanction states that break budget rules. In London the FTSE 100 rose 0.6pc to 5,368.41 points. Germany's DAX climbed 1.2pc, and in France the CAC slid 0.5pc.
Meanwhile, Italy’s credit rating remains under review for a possible downgrade for the first time in almost two decades by Moody’s Investors Service, amid concern that economic growth will remain too weak to reduce the region’s second-largest debt.
Europe Rules Out Stimulus, Shuns Geithner’s Plea
by James G. Neuger and Rebecca Christie - Bloomberg
European finance ministers ruled out efforts to spur the faltering economy and showed no signs of taking up a proposal by U.S. Treasury Secretary Timothy Geithner to increase the firepower of the debt crisis rescue fund. Inviting Geithner to a euro meeting for the first time, the European finance chiefs said the 18-month debt crisis leaves no room for tax cuts or extra spending to spur an economy on the brink of stagnation.
"We have slightly different views from time to time with our U.S. colleagues when it comes to fiscal stimulus packages," Luxembourg Prime Minister Jean-Claude Juncker told reporters today after chairing the meeting in Wroclaw, Poland. "We don’t see any room for maneuver in the euro area which could allow us to launch new fiscal stimulus packages. That will not be possible."
Europe’s economy will barely grow in the second half of 2011, a casualty of the debt buildup that 256 billion euros ($353 billion) in aid for Greece, Ireland and Portugal has failed to extinguish. Geithner made little headway with a call for Europe to boost the capacity of the 440 billion-euro rescue fund, known as the European Financial Stability Facility, by enabling it to tap the European Central Bank.
Juncker said there was no discussion of expanding the fund today -- at least not while the American guest was in the room. "We are not discussing the increase or the expansion of the EFSF with a non-member of the euro area," he said. German Finance Minister Wolfgang Schaeuble spoke of a "very intensive but friendly discussion" and Austrian Finance Minister Maria Fekter found it "peculiar" to be lectured by the U.S., a country with higher aggregate debt than the euro area.
Instead, the ministers recommitted to a July 21 decision to empower the fund to buy bonds in the primary and secondary market, offer precautionary credit lines and create a bank- recapitalization facility. The target for completing national approvals of the new powers slipped to mid-October. Geithner preached the lessons of the emergency banking support provided by the Treasury and Federal Reserve in reaction to the collapse of Lehman Brothers Holdings Inc., mixing it with criticism of Europe’s crisis management coordination.
Europe projects an image of "ongoing conflict" between national governments and the central bank, hampering efforts to put the economy on a sounder footing, Geithner said at a banking conference in between euro meetings. "Your financial challenges in Europe are eminently in your capacity to manage financially, you just have to choose to do it," he said.
Echoes of that appeal came from ECB President Jean-Claude Trichet, six weeks from the end of an eight-year term as the overseer of euro interest rates. "Our permanent message is of course to be ahead of the curve," Trichet told reporters. "All that I heard goes in this direction. But the problems are not words, the problems are deeds."
The ECB was in the forefront again yesterday, joining other major central banks in offering dollar loans to ease a liquidity crunch that had confronted European banks with the highest costs for obtaining the U.S. currency in almost three years. Finance chiefs stuck by the view that commercial banks have enough capital to ride out the turbulence that has driven the bonds of Greece, the epicenter of the crisis, to less than half their nominal value.
Trichet hailed an accord between governments and the European Parliament that will tighten the euro area’s economic management and make it easier to impose sanctions on countries that overstep the budget-deficit limit of 3 percent of gross domestic product. The new rules, to take effect by Jan. 1, mark a "substantial improvement," Trichet said.
The debt overhang is taking its toll on the wider economy, the European Commission said yesterday. It cut its growth forecast to 0.2 percent for the third quarter and 0.1 percent in the fourth, down from projections of 0.4 percent for both periods.
"Recovery is stalling in the second half of the year, but we do not forecast a return to recession," European Union Economic and Monetary Commissioner Olli Rehn said. "Uncertainty and stress in financial markets is now having negative ramifications in the real economy and is hampering our growth prospects."
Greece is now looking to the ministers’ next meeting, on Oct. 3, for a decision on the release of an 8 billion-euro loan installment. The loan would be disbursed by mid-October, enabling the government to pay its bills through the end of the year. The fate of future Greek loans remains tied up by a demand by Finland, one of Europe’s six AAA rated countries, that it receive collateral, potentially in the form of real estate or shares in nationalized Greek banks.
While a final agreement eluded them, the ministers agreed on the principle that collateral must carry a cost, with the goal of limiting its use to Finland. "There is unity that collateral, first of all, must be open to all and, second, must cost something," Austria’s Fekter said.
Europe Can't Swap Its Banking Problem
by Thorold Barker - Wall Street Journal
It's the pattern investors have grown used to since the rolling financial crisis began in 2008. The market zeroes in on a point of weakness, policy makers finally apply a band aid, financial apocalypse is averted and the bears retreat before moving on to the next target.
This time the trouble was European banks' access to dollar funding. Most importantly, the duration of available market funding was getting shorter. So the world's leading central banks agreed to extend existing swap lines with the Federal Reserve to allow the banks to access three-month dollar funding, rather than just the seven-day funding available before.
The positive spin: It neutralizes a key investor concern over liquidity. And the move includes a feel-good factor, because central banks are finally seen to be acting in concert after a series of recent unilateral moves by, say, the Swiss to curb their rising currency or the European Central Bank to stem the rise in Italian bond yields.
If this really is the start of greater international cooperation, as some seemed to hope, it is an important development. But investors risk reading too much into it. After all, the overall structure of the deal is not new. And it is fairly painless for the Fed. A central bank that does a swap for dollars with the Fed takes the currency risk as well of the credit risk of lending to its own banks.
Thursday's move buys time and soothes funding markets. But European bank credit-default swaps remain way above their 2009 highs. That's a reminder that the real challenge facing the financial system—a solution to the sovereign-debt crisis—remains as elusive as ever.
Central banks do not take this kind of action unless something is up
by Alistair Osborne - Telegraph
Well, bang goes the theory that third anniversaries are generally quiet affairs. You know — nice meal out but no need for a big do. Not if you’re a central banker, apparently.
Three years to the day since Lehman Brothers went under, taking the global economy with it, the Bank of England and its counterparts in America, Europe, Japan and Switzerland went and put on a proper show. Their promise to lend truckloads of dollars to any bank finding itself a bit short of the greenback may have calmed the febrile markets – for one day at least. But that sort of pre-emptive action can’t help but give you the jitters.
Central banks don’t do that sort of thing unless something is up; and something is most certainly up. In the eurozone, an unfolding Greek tragedy is careering towards its final, brutal act. And, in our joined-up, global economy that spells trouble everywhere, with the odds shortening by the day on a return to recession.
So, are the central banks signalling Credit Crunch Mk?2 and a rerun of all those hilarious jokes (What’s the difference between an investment banker and a large pizza? A pizza can feed a family of four)? Well, yes and no. They could be signalling something worse.
Just like three years ago, the central banks are addressing liquidity problems. This time, how to fill a dollar funding gap in Europe’s banks. Many are struggling to borrow the dollars they need for the international business transactions generally conducted in the US currency. The reason? US funds are so freaked out at the goings-on in the eurozone that they’re refusing to lend to European banks on fears they won’t get their money back.
Look at the risks, for example, of lending to France’s banks, which hold €50 billion (£44billion) of Greek debt – the largest exposure of Europe’s lenders to ouzoland’s crackpot economy. That rather explains why French bank shares have taken such a pasting lately — until the central banks showed up yesterday.
There’s a difference too, this time around. The central bankers have learnt one lesson. Back in 2008, they waited for Lehman to collapse before they turned on the financial gushers. At least this time they’ve acted before liquidity dries up and the whole global banking system gums up.
Even so, it’s hard to see their intervention as offering anything but short-term respite. That’s because the real problem in the eurozone is not banking liquidity, but sovereign solvency. Greece is bust in all but name. And right now, Europe’s warring factions have neither the war-chest nor the political will to solve the problem.
Germany, the strong man of Europe, holds in its hands not just the fate of Greece but the euro project. But for Chancellor Angela Merkel every course of action looks too painful. Meanwhile, there’s no agreement on expanding the €440?billion bail-out fund to the €2?trillion, say, required to convince the markets that the eurozone really is determined to keep its flagging show on the road.
Leather is the traditional gift on third anniversaries. Where, though, are the belt and braces when you need them?
Advice on Debt? Europe Suggests U.S. Can Keep It
by Stephen Castle and Louise Story - New York Times
The United States has long been considered a financial adviser to the rest of the world. But these days, American officials come carrying baggage.
Financial officials from the United States, once called "the committee to save the world" after the Asian crisis in the 1990s, now find themselves uttering apologies for the harm caused to the world by the 2008 financial crisis and coating their advice to European nations with the knowing nod of the battle-hardened.
The change in tone was on display here on Friday when Treasury Secretary Timothy F. Geithner made an unusual appearance at a meeting of euro zone finance ministries. Mr. Geithner had been invited to offer some advice on fixing Europe’s sovereign debt and banking problems. European leaders, who have been slow to react to the root causes of the problem, emerged from the meeting dismissive of Mr. Geithner’s ideas and, in some cases, even of the idea that the United States was in a position to give out such pointers.
"I found it peculiar that, even though the Americans have significantly worse fundamental data than the euro zone, that they tell us what we should do," Maria Fekter, the finance minister of Austria, said after the meeting Friday morning. "I had expected that, when he tells us how he sees the world, that he would listen to what we have to say."
Such criticism was echoed by other attendees of the meeting, including the finance minister of Belgium, Didier Reynders, who said Mr. Geithner should listen rather than talk. Jean-Claude Juncker, president of the finance minister group, said European officials did not care to have detailed discussions about expanding their bailout fund "with a nonmember of the euro area."
American officials are aware that they need to tread carefully when advising others, especially now, and they have avoided offering specific plans or proposals. Instead, they point to recent programs in the United States simply as case studies. On Friday, Mr. Geithner, among other recommendations, encouraged the European leaders to add more firepower to their bailout funds, and described how the United States used leverage in 2008 to help bolster the markets.
The Treasury department said in a statement Friday that "Secretary Geithner encouraged his European counterparts to act decisively and to speak with one voice." And a Treasury official said the department did not feel Mr. Geithner was rebuffed, because he did not have a specific agenda.
In the past, countries with financial problems have not always received the United States’ advice with open arms, at least until they needed financial support. Europe, analysts say, may never need outside support if its political leaders can find a way to use the wealth of nations like Germany to shore up more debt-troubled countries like Italy.
Still, it is hard to argue that the United States is not in a far weaker place to be doling out advice than it was in past crises, especially after the gridlock in August over raising the debt limit.
"We’re in a very different world environment right now," said Ian Bremmer, president of Eurasia Group, a political consulting firm. "The United States has diminished credibility — it can’t simply tell Europe what to do. And it lacks the political will or means to throw a lot of cash at European troubles, even though they could become American problems very quickly."
It was unusual for Mr. Geithner to attend an internal meeting of the 17 financial ministers from European Union countries that use the euro. The meeting was held on the first of two days of talks in Poland, and so far European finance ministers are no closer to overcoming the hurdles holding up the plan they developed for Greece back in July.
Mr. Geithner did not offer up a fully developed plan or urge one particular action. According to an American official who was not authorized to comment publicly, the Treasury secretary urged Europe to send a strong message to the market by putting up a large enough sum of money to support its debt-ridden nations and banks. He suggested that could be done through the use of borrowed money, as the United States did in some programs in 2008. One program, known as TALF, was meant to revive lending in the consumer and small-business markets.
"If you show the market that you have what it takes to stand behind your banks and stand behind your sovereigns, it will cost less in the end," said Lael Brainard, under secretary for international affairs at the Treasury.
Some Europeans have expressed ideas similar to Mr. Geithner’s for a broader rescue plan. Still, the United States faces a different sort of audience when giving ideas to Europe than it does when facing officials in developing economies.
"In the 1990s, there were lots of countries that would say, that’s working in the United States, how can we copy that?" said Gary Gensler, who worked at the Treasury in the 1990s and now leads the Commodity Futures Trading Commission. "We’re still very much the leader in financial regulations and in the financial markets, but the 2008 crisis showed we failed. Our financial regulatory system failed and Wall Street failed."
Some policy makers say the United States might even be wise to turn to China as a partner in persuasion. "Maybe this should be a joint effort," said Sheila C. Bair, a senior advisor at the Pew Charitable Trusts, who was the chairwoman of the Federal Deposit Insurance Corporation until this summer.
She said it would be helpful for China and the United States to give European leaders the same message. But, she said, referring to the United States’ financial crisis in 2008, "we certainly don’t have clean hands in all this."
Countries with financial problems do not want outside advice until they need outside money, said Jeffrey Shafer, who was the under secretary for international issues at the Treasury in the 1990s. "There are different stages in this process, and Europe right now is kind of in a halfway house," he said. "The reality is that you get more influence when you are providing support."
It would be difficult for the Obama administration to persuade Congress to give loans to Europe, analysts say, but there are other options. The Federal Reserve can open its discount window to European banks or, as it has already done, it can use foreign exchange lines. The Treasury could also lend out money from a facility that helps with exchange-rate problems. Or the United States could promote additional aid from the International Monetary Fund.
Even if the United States offered more aid, it is unclear if Europe would want it. Edwin M. Truman, a senior fellow at the Peterson Institute who has worked with Mr. Geithner, said the United States had questions to answer, too. "It’s not just a question of being the scolding school teacher," he said. "Geithner will also have to give a convincing story that we’re dealing with our problems."
EU ministers see need for stronger bank sector
by Julien Toyer and Ilona Wissenbach - Reuters
EU finance ministers agreed on Saturday that European banks must be strengthened in the follow-up to July stress tests as a report said a "systemic" crisis in sovereign debt now threatened a new credit crunch.
"We reached the conclusion that we need to make our financial system more robust," Spanish Economy Minister Elena Salgado told reporters after a meeting of EU finance ministers in the south-western Polish city of Wroclaw. "There is a consensus that it would be good for our financial institutions to strengthen their capital to comply with Basel III requirements and to face any eventuality of the moment," she said.
However, the agreement does not mean European banks are likely to get large, additional capital injections from public coffers -- it is more an acknowledgement of the results of the European bank stress tests in July. The tests showed a financing gap for banks of only 6 billion euros ($8 billion) -- a sum many investors believe could be much higher if the debt crisis worsens.
European banks are therefore struggling to borrow amid growing alarm among U.S. money market funds, and other traditional dollar lenders, about the effect of a feared Greek debt default on European banks' books.
Persistent jitters over French banks' exposure to Italy and Greece hammered the shares of BNP Paribas and Credit Agricole. On Wednesday, Moody's Investors Service downgraded Credit Agricole and Societe Generale, citing increased concerns about their funding and liquidity profiles in light of worsening refinancing conditions. It left the ratings of the biggest French bank BNP on review for downgrade.
"From our perspective, we see a clear need for bank recapitalisation," Swedish Finance minister Anders Borg told reporters on leaving the meeting of finance ministers. "I think the IMF has spelled it out very clearly. The EU banking system needs better backstops and that's basically a matter of capital," he said.
Higher Capital Needed To Calm Market Doubts
A document prepared for the ministers' meeting said banks should raise their capital. Guidelines for the stress tests stipulate banks should announce measures to boost capital, if needed, within 3 months of the results and carry out the increase, preferably financed by private investors, within 6 months.
"Despite the increased resilience of European banks and the limited remaining refinancing needs for the rest of 2011, in view of a compelling market pressure for an increase in banking capital benchmarks and with the aim of dispelling any doubts on the intrinsic stability of most banks, a further reinforcement of bank resources is advisable at this juncture," it said. "This is important for banks that have failed the stress test, but also for those that have passed the test but with capital level close to the relevant threshold, and particularly with sizeable exposures to sovereigns under stress," it said.
Central banks around the world announced on Thursday they would work together to offer extra loans in U.S. dollars to banks, a move designed to prevent money markets from freezing up in the wake of Europe's sovereign debt crisis. "We noted the fact that unlimited liquidity windows are opened," Salgado said. "(But) they're short term and this situation is not optimal," she said.
Some ministers sought to play down the banks' troubles. "The overall situation of European banks is stable," said the head of the euro zone finance ministers' group, Jean-Claude Juncker. "All the instruments are in place to make sure the financial system continues to work properly," Luxembourg's Finance Minister Luc Frieden said.
The report for the meeting showed the sector could be facing a credit crunch. It said there could be "a dangerous negative loop between the financial and the real sectors (of the economy), whereby funding problems and increasing risk aversion of banks may lead to disruptive deleveraging by banks, thereby generating a credit crunch, in some Member States, with consequences for the economic recovery and the credit quality of banking assets."
"The risk of a vicious circle between sovereign debt, bank funding and negative growth developments is therefore apparent now, at a time where the margin for maneuver is considerably more limited than in 2008-2009," the document said.
EUDivided Over Financial Transaction Tax
Ministers also discussed a tax on financial transactions, such as a levy on trading shares, an idea championed by Germany, France and Austria, but the idea does not have broad support. "There is no common position on a financial transaction tax in Europe. We have only started the debate on that and there is no decision," Internal Market Commissioner Michel Barnier said.
The United States does not want to implement such a tax, making it difficult for Europe to go it alone for fear that it could push more trading to New York. Germany has said it may pursue a tax solely in the euro zone if countries like Britain refuse to support it but even here, some states such as Italy are skeptical.
Europe digs ever deeper debt hole
by Roddy Thomson - AFP
Europe is digging an ever-deeper hole as it vows to resolve the eurozone crisis, experts said Sunday as Greece prepares for a pivotal week of international debt diplomacy. Plagued by "parochialism, pettiness and procrastination," according to Sony Kapoor, head of the Re-define think tank, "kill the messenger seems to be the new strategy," he told AFP en route to New York and a frantic week at International Monetary Fund, World Bank and G20 gatherings.
"The otherwise fractious European Union leaders have united in their criticism of the markets, the IMF and now (US Treasury Secretary) Tim Geithner for being honest about the scale of problems facing the eurozone," Kapoor said. "This does not bode well for the ability of EU leaders to respond to the big and urgent challenge posed by the unsustainable borrowing costs facing Italy," said the eurozone's third economy.
European Central Bank chief Jean-Claude Trichet was more upbeat of the 17-nation eurozone's debt situation, insisting that "taken as a whole, it is probably better than other major advanced economies."
The United States is in a far worse position, both in terms of its annual deficit and its runaway national debts. Facing demands from guest Geithner to up funding for eurozone rescue packages, Germany insisted that Washington would have to drop its opposition to a wished-for tax on financial transactions -- although that suggestion drew short shrift.
Trichet's remark was seen as a pointed rebuttal to implied criticism by Geithner, who warned during talks with EU counterparts in Wroclaw, Poland that "governments and central banks need to take out the catastrophic risk to markets." In an eloquent put-down, Trichet said he didn't quite understand precisely, a tack echoed by former French foreign minister Michel Barnier who quipped that the EU could perhaps invite China's finance minister next time out.
The European Union adopted its defiant stand towards Geithner after delaying a decision on when to release blocked bailout loans for Greece.
Boston University's Vivien Schmidt, a longstanding expert on EU affairs, wondered whether ministers were "leaving time for commercial lenders to offload some more of their toxic holdings to the European Central Bank." "They are simply "hoping that the BRICS -- and in particular China -- will come to the rescue of the PIIGS," she said.
The former groups Brazil, Russia, India, China and South Africa among the most promising global economies of the 21st century. The latter refers to Portugal, Italy, Ireland, Greece and Spain, but as ever, says Schmidt, the solution lies closer to home. The analysts agreed that mutualised guarantees for eurozone bonds would send a powerful signal to markets. Merkel herself, though, "has categorically ruled that out, and the French have gone along," Kapoor added. "So until Merkel reverses her position, there can be no movement on that front either."
'Rogue trader' losses engulf UBS
by Rowena Mason, Louise Armitstead and Harry Wilson - Telegraph
It was mid-1998 when UBS assured the world that it had "taken note of weak spots" that allowed a group of traders to run up $625m (£396m) in losses in its derivatives trading arm.
In an impassioned defence of its management, the Swiss bank insisted that the losses were largely the fault of four men, including department head Rami Goldstein, who were sacked the year before. It was not the culture or risk control of the bank as a whole to blame, it argued, but simply non-criminal "misconduct by individuals".
Thirteen years later, the suspected loss from a "rogue trader" is three times as large – $2bn (£1.3bn) – and the alleged fault has again been laid at the door of an employee. Kweku Adoboli, a junior who rose through the ranks from the back office to trading floor, has, in this case, been charged with fraud and false accounting over three years.
It has now emerged that Adoboli, a Nottingham University graduate and pupil of a Quaker school in Yorkshire, was the one to alert the bank to his losses before his arrest at home in the early hours of Thursday. Since then, Adoboli has only been seen wiping away a tear during his court hearing and smiling nervously as he left the same court-room, as a shocked banking sector struggles to understand how UBS could find itself in such a position again.
A friend was quoted yesterday as saying that Adoboli was "very loyal" to UBS which he joined straight from university. Clambering up the ranks to become a trader after a number of senior figures left the bank, he appears to have been well liked in an atmosphere punctuated with shouts across the office as deals were done. Adoboli's father, a former United Nations official, speaking from his home in Ghana, yesterday urged the world to reserve judgement until the full facts are known, calling his son a "man of integrity", who must have made a mistake.
There is certainly a sense that this time around, the Swiss bank will not be able to get away so lightly with trying to heap responsibility for alleged losses on to the shoulders of a single trader. After all, between the derivatives losses of 1997 and this week's rogue trading incident, UBS has booked no fewer than three other major losses on risky market bets. The failure of hedge fund Long Term Capital Management caused a SFr1bn loss in 1998, its internal hedge fund Dillon Read Capital saw a $150m loss on derivatives in 2007 and investments in the sub-prime mortgage crisis racked up losses of $37bn.
As the investigations at UBS begin again, The Sunday Telegraph can reveal new details about how that pressure is now growing on both the chief executive, Oswald Grubel, and Maureen Miskovic, the chief risk officer. Grubel himself was brought to UBS in 2009 to "stop the rot" after the financial crisis.
For Myret Zaki, the author of a best-selling book on UBS and an editor at Swiss financial magazine, Bilan, the fact that UBS is back at the heart of another scandal is all too predictable. In fact, she sees UBS as "a never-ending story repeating itself".
"I'm not surprised at all about this," she says. "After Oswald Grubel came to the top of UBS in February 2009, he completely followed Marcel Ospel [a former chairman]. From March 2009, he kept advocating an increase in risk-taking. When you have a CEO talking like that, you are not in a climate where you feel restricted, as a trader. He was on the side of continuing to make money on the markets, even though wealth management was employing 30pc fewer staff for double the profitability."
Ms Zaki, who is due to publish an article on a management shake-up at UBS this Wednesday, does not think the Swiss bank will keep Mr Grubel on the board for much longer. "The board of directors is looking for a successor and hasn't found one yet," she says, citing sources close to the board. "They are having discussions and he will be replaced in one or two months. He will step down when they find a replacement. There had already been discussions about him leaving but the question is who will replace him. There are not that many candidates."
Ms Zaki believes there is also hope for possible reform in the bank's new chairman. "Axel Weber, the coming chairman, is an extremely conservative manager known for extreme risk aversion. It might be he will have a different view from Grubel and back away from risk."
Yesterday, the first public move against Grubel appeared to come from the bank's honorary chairman Nikolaus Senn, who told Swiss television he doubts the chief executive can stay now it seems likely UBS will make a loss for the quarter.
Whether or not the board itself has appetite for reform, impetus may well come from investors, who are piling on pressure for a deep review – and perhaps even the head of Mr Grubel too.
Top institutional investors in UBS have told The Sunday Telegraph they want a "full and detailed" explanation of the alleged fraud, coming on top of previous hefty losses.
One City fund manager said: "Given all the assurances over the new risk management systems, we need to know how the checks and balances failed. We need more than reassurances, we need a full review." Another top 20 investor in UBS was more blunt about his feelings towards the chief executive. "Grubel was brought in because of his strong risk management credentials. His position is surely untenable."
UK and Swiss regulators will no doubt be crawling all over UBS for signs of what may have allowed the problem to develop. At the same time, the trading industry as a whole, particularly derivatives desks, will not be able to escape greater scrutiny, particularly given the UK's recent Vickers report recommending the separation of retail and investment bank functions.
This latest case of alleged rogue trading happened in the bank's exchange traded funds (ETFs) business – placing the so-called Delta One industry under the spotlight. By coincidence, or telling parallel, Societe Generale's famous rogue trader Jerome Kerviel, who ran up €4.9bn (£4.3bn) of losses by 2008, also worked in Delta One and had also come up through the back office.
ETFs first emerged in the 1990s as a way to track global indices without having to buy the individual stocks. They have grown in popularity because they are fast to buy and cheap, but have also become more controversial.
Terry Smith, chief executive of stockbroker Tullet Prebon, has been a vocal critic, warning the situation has become "worse than I thought". The reasons behind this are long and complex, but his conclusion is simple: "The risks that are being incurred in running, constructing, trading and holding them are not sufficiently understood. After the UBS incident I think this should be regarded as indisputable."
Like the esoteric instruments that ran up losses on sub-prime mortgages, the worry is that a bank's compliance managers do not properly understand the risks that traders are taking.
In another parallel with the financial crisis, experts and insiders warn the amount of risky unauthorised trading is difficult to quantify and often not brought to the public eye unless losses are huge enough to be announced.
According to one senior trader at a London bank: "People are fired every year for having stuff on their book that they shouldn't. All the banks tend to know what has happened and why someone has left, but it doesn't get publicised. It's usually only a couple of million bucks." This senior trader believes that the culture of a trading room may also play a part in encouraging such activity. The drive to make money is intense and many traders talk of a bullying atmosphere for under-performing colleagues
"Trading floors are pretty rough and ready places," he says. "I remember we had one guy that people thought looked like someone from The Adams Family. Quite often in the afternoon you'd hear the tune from the Adams Family been played over the loop [internal sound system]. People have the piss taken for anything, names or looks."
Ex-back-office staff – the non-trading employees – who make the leap to trader can be taunted with slang terms like "jub", for junior jobsworth. Going from the tedium of monitoring computer systems to handling real trades is often considered a golden ticket. But it can take years for "jubs" to be considered on a par with senior colleagues, all the while facing high pressure to generate profits and justify their place in the team.
This is why banks must be so careful about picking the right personalities as traders, according to Lawrence Galitz, whose company, ACF Consultants, trains new recruits at banks with simulation platforms. "It's looking at people with not only the right technical ability but the right psychology," he says. "We find people with very strong egos may not be the best to be traders."
Even so, he says, people with rogue tendencies can be hard to spot. For example, Kerviel, was not playing the markets for personal gain. "It may be that people want to do well and be thought of highly within the bank," he says, Dr Galitz, who also trains back-office monitoring staff, says the biggest red flags are irregular trading patterns and profits that seem to come out of nowhere. Another bad sign is big trades that are quickly reversed. "One of the things in Kerviel's case was he was booking trades, which should have been flagged, then apparently reversing them with fictitious trades, so they weren't picked up."
One advantage for Kerviel was his back-office experience, meaning he had deep knowledge of how traders are monitored and therefore how to circumvent the systems. He also alleged in a book last year that the kind of trading he did was widespread and tolerated by his seniors. Why UBS did not manage to spot a $2bn trading loss and how the alleged fraud was carried out is still unclear. However, as Richard Abbey, senior managing director of financial investigations at Kroll, points out, it can be difficult for banks that have recently suffered cut-backs to go the extra mile on supervising traders.
"It's no coincidence that after downsizing and lay-offs these type of losses are more common," he says. "There may not be enough people to physically control checks and balances. It may be institutions are too reliant on computer controls and they are the easiest to bypass. It can also be a case of how far do people want to probe their star traders. People don't want to upset the guys who are making the money."
Anton Kreil, the former Goldman Sachs trader and star of the BBC's Million Dollar Traders, says the drain of talented traders away from banking has also increased the risk of rogues. "Since the downturn began the best traders have left the City or gone to work for hedge funds," says Mr Kreil, who runs the Institute of Trading and Portfolio Management to train new traders. "When you have less talented traders who make less money, the risk of a rogue trader causing a massive loss increases."
Some experts believe that being tougher and more transparent about minor instances of unauthorised trading might be a good way of preventing the big losses. Kaley Crossthwaite, head of forensics at BDO, says: "I think it's possible it could be a more widespread problem and it would be interesting for banks to report on this, even small losses or gains. Banks do have their own internal investigations teams, partly because for reputational reasons they don't want external people, even consultants, to know the extent of investigations. Sometimes external investigators ask questions that lead to a re-writing of the rules."
It's too early to know how far reverberations will be felt across the industry, or whether the UBS incident will be dismissed as another "one-off" occurrence. But many in the City suspect that banks are still easily able to downplay the amount of excessive – and unauthorised – risks taken by their traders.. "It's a bit like the banking crisis," Ms Crossthwaite believes. "When things are going well, you just don't go there and investigate."
German banks at risk if debt crisis widens
A widening of the euro zone debt crisis beyond a Greek government default would pose an incalculable risk for Germany's banks, a top German regulator said in an interview. "A Greek government default cannot be seen in isolation," Raimund Roeseler, head of banking supervision at German financial watchdog Bafin, told Reuters.
Germany's banks are robust and better capitalized than they were two years ago but the potential for a chain reaction following a Greek government default would take the sector into unknown territory, Roesler said. "We are worried particularly about the possible knock-on effect, which we cannot reliably calculate. Every figure you can name is just a guess," he said.
German banks have less than 10 billion euros ($14 billion) of exposure to Greek government bonds in total, with Deutsche Bank at around 1.2 billion euros and Commerzbank at 2.2 billion. But a Greek default could hurt banks in other countries and potentially drag down German lenders in their wake, a prospect that keeps Bafin on high alert.
"We take a reading of the liquidity situation of all important banks every day. We've tightened our surveillance and are in intensive talks with banks about their exposures and also the way they view the money market situation," Roeseler said.
German lenders are less vulnerable than their counterparts in France and Italy, banking observers say. "German banks are in a comfortable situation because no one in the market doubts the German AAA-rating," Roeseler said. Refinancing is also no problem for German lenders, despite a broad-based pullback from Europe by U.S. money market funds.
"Some U.S. investors got out of Europe without taking into consideration the different situations in individual countries, but we've seen that German banks have been able to sufficiently cover their dollar refinancing needs," he said.
Roeseler said he saw no near-term panacea to calm financial market jitters. "In the medium term, we've got to slow the markets down. I'm particularly concerned that the derivatives markets have decoupled themselves from the real economy," Roeseler said.
In the run-up to the implementation of tighter risk-capital rules for banks, known as Basel III, Bafin is taking an ever-closer look at the systems banks have in place to assess risk. "We are using powers to influence business models that we did not have before the crisis," Roeseler said.
The European Union wants the Basel III rules to apply to all 8,400 banks in the bloc, a view that has angered small savings and cooperative banks, who decry the extra regulatory burden. "It is true that big banks are the focus of Basel but we need a level playing field," he said, adding that the needs of small banks would be taken into account when developing technical standards. The new Basel rules have evoked opposition in U.S. banking circles, notably from JP Morgan's chief executive earlier this month.
Roeseler, who is one of Germany's representatives on the Basel Committee of banking regulators, said he expected the United States to apply the rules that it helped to negotiate. Regulators are also working to develop a list of global banks that would disrupt the financial system should they fail. These big banks will face more stringent capital requirements.
"The price of systemic relevance is not just 1 to 2.5 percent more capital, but rather a much more intense supervision than now. We will be more closely man-marking these players," Roeseler said. Regulators are still seeking rules for winding down big banks that do fail, but one point is certain: "All investors, including creditors, will be called upon ahead of taxpayers."
Contingent-capital or "CoCo" bonds would not meet international standards for hard equity capital and the market for these bonds was unlikely to develop significantly, he added. Following the European bank stress tests in July this year, the European Banking Authority is discussing if and how to handle publishing the results of next year's exercise. "The raft of detail in the latest published results did not exactly serve to calm markets," Roeseler said.
EU finance ministers break no new ground on debt crisis
by Jan Strupczewski and Gareth Jones - Reuters
EU finance ministers broke no new ground in dealing with the euro zone debt crisis in discussions over the weekend, instead absorbing some ideas and rejecting others and taking stock of progress on agreed steps.
Ministers and central bank governors from the 17 countries using the euro and the broader 27-nation European Union met on Friday and Saturday in the Polish city of Wroclaw to discuss Europe's slowing economic growth and progress in beefing up euro zone defences against the sovereign debt crisis.
In an unprecedented visit to the informal talks of top EU financial officials, U.S. Treasury Secretary Timothy Geithner made an appearance in Wroclaw on Friday to urge Germany to provide more fiscal stimulus to the slackening euro zone.
But Geithner's call for action by those who can afford it was rejected because the euro zone believes that market trust in the sustainability of its public finances, and therefore consolidation, is more important than spending on growth. "Fiscal consolidation remains a top priority for the euro area," said Luxembourg's Jean-Claude Juncker, chairman of euro zone finance ministers.
Greece: Default Talk "Ridiculous"
Greece's finance minister on Saturday dismissed talk that the debt-strapped country was headed for default, while saying Prime Minister George Papandreou cancelled a trip to the United States because tough decisions had to be made imminently.
"The comments and analyses about an imminent default or bankruptcy are not only irresponsible but also ridiculous," Finance Minister Evangelos Venizelos said in a statement. "Every weekend Greece ... is subject to this organised attack by speculators in international markets," he added.
Venizelos said Papandreou decided to return to Athens not because of an economic emergency but because the government had to take tough decisions as talks resume with its international lenders before a next bailout tranche is released. Greece has been falling behind with agreed fiscal and structural reforms that have been set as a condition for continued support for Athens by international lenders.
U.S. Lecturing Not Welcome
Several euro zone ministers in Wroclaw seemed peeved that the United States, itself burdened with a large budget gap and debt, was lecturing Europe on what should be done. "He (Geithner) conveyed dramatically that we need to commit money to avoid bringing the system into difficulty," Austrian Finance Minister Maria Fekter told reporters after the meeting. "I found it peculiar that even though the Americans have significantly worse fundamental data than the euro zone, they tell us what we should do."
Geithner also pointed out that euro zone finance ministers could boost the firepower of their bailout fund, the 440 billion euro European Financial Stability Facility, through leveraging. This could ease market concerns that the euro zone does not have enough money to help Spain and Italy if needed. The idea was not discussed at the meeting with Geithner, but it will be studied by the European Commission as it offers a way to boost EFSF intervention power without more taxpayer money, according to euro zone officials.
Yet German central bank Governor Jens Weidmann expressed reservations about the idea of EFSF leveraging on Saturday. "It depends on how leverage is done. If it is done so that in the end the euro system is at risk, then that does not fulfil the requirements," he said.
"If it is done in a way that EFSF should get a banking licence, then it has to be clarified whether the EFSF is actually doing banking business. I would set a big question mark on that," he said, echoing comments by euro zone sources that the leveraging idea might encounter numerous legal challenges.
Leveraging would mean that the EFSF could guarantee to cover potential losses of the European Central Bank on purchases of bonds of distressed euro zone sovereigns, boosting the fund's intervention potential even fivefold, officials said. "It has not been rejected and it has not been endorsed -- it is being discussed," a senior euro zone official said. "But the priority is the implementation of the current EFSF reform."
The euro zone agreed on July 21 to grant the EFSF powers to intervene on bond markets, give precautionary credit to governments and recapitalise banks. But the changes have to be ratified by euro zone countries. The head of the EFSF, Klaus Regling, said he expected the new powers would be in place by mid-October. Euro zone officials expressed confidence that Greece, which relies on the euro zone and the International Monetary Fund for emergency financing support, would get the next tranche of aid, if it meets EU/IMF conditions, by Oct. 14.
"Technical Solution" For Greece?
Euro zone leaders promised Greece on July 21 a new emergency loan package worth 109 billion euros. But the payout of the money depends on finding a solution for Finland's demands to get collateral from Greece for more loan guarantees from Helsinki. "A technical solution is within reach," French Finance Minister Francois Baroin told reporters. Euro zone sources said however, that a deal is likely only in early October because of its complexity.
EU finance ministers also agreed on Saturday that European banks must be strengthened in the follow-up to July stress tests, as a report said a "systemic" crisis in sovereign debt now threatened a new credit crunch. "We reached the conclusion that we need to make our financial system more robust," Spanish Economy Minister Elena Salgado told reporters.
The agreement does not mean European banks are likely to get large, additional capital injections from public coffers -- it is just an acknowledgement of the results of the European bank stress tests in July. The tests showed a financing gap for banks of only 6 billion euros -- a sum many investors believe could be much higher if the debt crisis worsens, and which is to be primarily covered by private capital.
ECB boss Jean-Claude Trichet delivers rebuke to US
by Angela Monaghan and Matthew Day - Telegraph
In a sign of heightened tensions between Europe and the US, the president of the European Central Bank defended the eurozone's financial position arguing it was better than other "major advanced economies".
Jean-Claude Trichet made the comments a day after Timothy Geithner, the US Treasury Secretary, joined EU ministers at a meeting in Wroclaw, Poland, and urged the eurozone to act quickly and decisively to resolve the region's sovereign debt crisis.
"If I take the European Union as a whole, or the euro area as a whole, you have a situation that is quite encouraging if you compare [it] with other major advanced economies," Mr Trichet said. "We will probably post at the end of the year a deficit of public finance around 4.5pc of gross domestic product, when in other major advanced economies it is in the order of magnitude of 10pc."
Mr Trichet suggested the eurozone as a whole had handled its public finances better than some advanced economies, re-iterating that problems were restricted to individual countries. "It is at the level of individual countries that there have been, in our opinion, mistakes made, individually, which are being corrected, and also absence of sufficient surveillance. The correction is operating now and I have to say that we encourage all of them to go along this line," he said.
His comments came at the close of the two-day meeting in Poland, where Mr Geithner urged eurozone ministers to increase the size of a €440bn (£384bn) rescue fund already in place, according to European officials. However, in a move which is likely to frustrate the US, European ministers said they would wait until October to decide whether to release the next tranche of bail-out money to Greece.
There were further divisions at the meeting as finance ministers failed to agree on a proposed financial transaction tax to curb excessive risk-taking among financial institutions. Countries including Germany and Belgium are in favour of an EU-wide tax, while Britain's Chancellor George Osborne has so far resisted the idea. Wolfgang Schäuble, Germany's finance minister, said that while an EU levy was preferable, "if needs be, it is my conviction that it should only be in the eurozone."
Mr Osborne has made it clear that he would only be in favour of such a tax if it was introduced around the world, for fear that Britain would lose business to other financial centres were it not implemented on a global level. However, according to European officials, Mr Geithner is adamant the US would not back the tax. The Belgian finance minister, Didier Reynders, said that it would be better to introduce a financial transaction tax on a global level, "but if it's impossible, we will do it maybe in the EU and, if that's impossible, maybe the eurozone".
Michel Barnier, EU internal markets commissioner, acknowledged there was "no consensus" among finance ministers but added that the Commission would press ahead with the issue and make a formal proposal "in a few weeks". The meeting in Poland closed early yesterday as ministers sought to avoid an anti-austerity protest by unions at a nearby stadium.
Grave fears remain over the eurozone sovereign debt crisis, and in particular the threat of a potential Greek default spreading to other countries such as Italy and Spain. Economists at Capital Economics said Greece may default on its debt "within months or perhaps even weeks", adding that the risks of the eurozone falling back into recession had "increased dramatically".
Wall Street Protest Begins, With Demonstrators Blocked
by Colin Moynihan - New York Times
For months the protesters had planned to descend on Wall Street on a Saturday and occupy parts of it as an expression of anger over a financial system that they say favors the rich and powerful at the expense of ordinary citizens. As it turned out, the demonstrators found much of their target off limits on Saturday as the city shut down sections of Wall Street near the New York Stock Exchange and Federal Hall well before their arrival.
By 10 a.m., metal barricades manned by police officers ringed the blocks of Wall Street between Broadway and William Street to the east. (In a statement, Paul J. Browne, the Police Department’s chief spokesman said, "A protest area was established on Broad Street at Exchange Street, next to the stock exchange, but protesters elected not to use it.")
Organizers, promoters and supporters called the day, which had been widely discussed on Twitter and other social media sites, simply September 17. Some referred to it as the United States Day of Rage, an apparent reference to a series of disruptive protests against the Vietnam War held in Chicago in 1969. The idea, according to some organizers, was to camp out for weeks or even months to replicate the kind, if not the scale, of protests that erupted earlier this year in places as varied as Egypt, Spain and Israel.
Bill Steyert, 68, who lives in Forest Hills, Queens, stood near the barricades at Wall Street and Broadway and shouted, "Shut down Wall Street, 12 noon, you’re all invited," as tourists gazed quizzically at him. Talking to a reporter, he elaborated, "You need a scorecard to keep track of all the things that corporations have done that are bad for this country."
Nearby, Micah Chamberlain, 23, a line cook from Columbus, Ohio, held up a sign reading "End the Oligarchy" and said he had hitchhiked to New York. "There are millions of people in this county without jobs," he said. "And 1 percent of the people have 99 percent of the money." Throughout the afternoon hundreds of demonstrators gathered in parks and plazas in Lower Manhattan. They held teach-ins, engaged in discussion and debate and waved signs with messages like "Democracy Not Corporatization" or "Revoke Corporate Personhood."
Organizers said the rally was meant to be diverse, and not all of the participants were on the left. Followers of the right-wing figure Lyndon LaRouche formed a choir near Bowling Green and sang "The Star Spangled Banner" and "The Battle Hymn of the Republic." Nearby, anarchists carried sleeping bags and tents. At one point in the early afternoon, dozens of protesters marched around the famous bronze bull on lower Broadway. Among them was Dave Woessner, 31, a student at Harvard Divinity School. "When you idealize financial markets as salvific you embrace the idea that profit is all that matters," he said.
A few minutes later about 15 people briefly sat down on a sidewalk on Broadway, leaning against a metal barricade that blocked access to Wall Street. For a moment things grew tense as officers converged and a police chief shoved a newspaper photographer from behind. After a police lieutenant used a megaphone to tell those sitting on the sidewalk that they were subject to arrest the protesters got up and marched south.
Mr. Browne said no permits had been sought for the demonstration but plans for it "were well known publicly." Mr. Browne said two people in bandanna masks were taken into custody for trying to enter a building at Broadway and Liberty Street that houses Bank of America offices. A third person fled. As a chilly darkness descended, a few hundred people realized one of the day’s objectives by setting foot onto Wall Street after a quick march through winding streets, trailed by police scooters.
At William Street, they were blocked from proceeding toward the stock exchange, and the march ended in front of a Greek Revival building housing Cipriani Wall Street. Patrons on a second-floor balcony peered down. As some of the patrons laughed and raised drinks, the protesters responded by pointing at them and chanting "pay your share
Trichet Knocks Back Irish Senior Bank Bond Talk-Irish Times
by Padraic Halpin - Reuters
European Central Bank President Jean-Claude Trichet warned Ireland against imposing losses on senior debt at Anglo Irish Bank on Saturday, advice it is obliged to heed , Finance Minister Michael Noonan was quoted as saying.
Noonan had requested time with the ECB chief on the side-lines of a meeting of EU finance ministers and officials this weekend to try and change his mind about allowing Dublin to hit unguaranteed senior bondholders at the failed lender.
The pair met for 30 minutes on Saturday, according to the Irish Times newspaper who quoted Noonan as saying he was presented with "fairly good arguments" against any coercive measures to impose losses on such investors. "I said it was outstanding business, and he said the situation in effect in terms of that had disimproved for two reasons," the newspaper quoted Noonan as saying on its website.
"First of all that private sector involvement in Greece had a very quick knock on effect into Italy and Spain and private sector involvement didn't seem to be the way forward if you were trying to encourage the markets," the minister said.
"Secondly, he said Ireland had done particularly well over the summer. He mentioned the narrowing of bond spreads and he said that he felt that anything to do with burden sharing might knock to the confidence of the market and the spreads would go back out again and that we might lose the ground we had gained."
Noonan added that it was not for him to close the senior bond question, but that he was obliged to observe advice from people such as Trichet, the Irish Times said. "I'll put it to you this way, the amount of money outstanding in unguaranteed senior bonds in Anglo is just about 3 billion euro. If you did some kind of voluntary burden sharing you might gain 100 million, which seems to me that one wouldn't risk guarantee for that level of money," he said.
"One wouldn't risk reputation for that. Anything coercive, the European authorities are dead set against it. So we'll reflect on it." Noonan surprisingly revived the newly elected government's campaign pledge to go after senior bondholders at Anglo Irish and fellow defunct lender Irish Nationwide Building Society in July in an attempt to win some goodwill among voters ahead of his first austerity budget in December.
Ireland has pumped over 60 billion euros into its ailing banks over the past three years, about half of it going into scandal-ridden Anglo and Irish Nationwide which are being wound down over the next ten years. Ireland's Minister of State for European Affairs told Reuters on Friday that the government would keep trying to persuade the ECB to let it impose losses on senior debt at Anglo even if Trichet refused to give it the green light.
Obama to Propose Tougher Tax Regime for Wealthy
by Damian Paletta And Carol E. Lee - Wall Street Journal
The White House on Monday plans to launch an effort to prevent millionaires from paying lower tax rates than middle-class Americans as part of its package of ideas to reduce the federal deficit, two people familiar with the plan said.
The White House will likely try to use the plan, which aides call the "Buffett Rule" after billionaire Warren Buffett, to create a populist frame for the debate over deficit reduction that is likely to again consume Washington for the next few months. Democrats have pushed the White House in recent weeks to assert itself in the debt-ceiling talks in an effort to steal momentum away from Republicans.
The idea, which has been raised before by Democrats, is likely to be a non-starter with Republicans who had consistently opposed raising tax revenue as a way to tackle America's debt. The move is also evidence of how the work of the Congressional supercommittee, which is charged with devising a plan to cut the deficit, has become inextricably linked with the 2012 election season.
Few details about how such a plan would work could be learned, including whether there would be a new tax bracket at this elevated level. The White House is likely to urge congressional negotiators to use the concept as part of their talks, but isn't expected to go into great detail about how the new tax rule might work, people familiar with the plan said.
The general goal would be to prevent people earning more than a million dollars to pay taxes at a lower effective rate than people who earn under $250,000. That's often the case because investment income, or capital gains, is taxed at a lower rate than regular wages. nThe plan will come as part of the White House's recommendations to a joint congressional panel that is charged with reducing the deficit by at least $1.2 trillion.
President Barack Obama is expected to call for a steeper reduction in the deficit. To reach that goal, Mr. Obama is expected to call for $300 billion in savings from changes to Medicare and Medicaid, a person familiar with the proposal said. He won't, though, call for changes to Social Security as a way of reducing the deficit. On taxes, he'll call for lower, flatter tax rates, while also pushing for some tax increases. The White House has already proposed limits on the amount of tax deductions wealthy Americans can claim, and administration officials want tax rates to increase for families making more than $250,000 a year.
Recent White House plans have outlined between $1 trillion and $1.2 trillion in new taxes over 10 years. It's not clear how much money the new millionaire proposal would raise. Top Obama administration officials have said any deficit-reduction efforts should be "balanced," Washington code for including tax increases as well as spending cuts, and say Republican proposals wouldn't require the wealthy to make major sacrifices.
Speaker of the House John Boehner (R., Ohio) said last week that tax increases were "off the table." Republicans have successfully beat back multiple previous efforts by the administration to raise tax rates. Republicans instead have called for an overhaul of the tax code that lowers rates while limiting some deductions as a way to spur job growth.
News of the new approach was first reported Saturday evening by the New York Times.
On Aug. 14, Mr. Buffett penned an op-ed in the New York Times titled "Stop Coddling the Rich," in which he described what he viewed as a tax code that has come to favor the wealthy. He said he paid federal taxes on 17.4% of his taxable income last year, a lower rate than any of the 20 other people in his office. He often remarks that he pays a lower tax rate than his secretary. Messrs. Obama and Buffett spoke in late August during the president's vacation in Martha's Vineyard.
The White House could try to use the "Buffett Rule" in the same way they used the "Volcker Rule" in 2010. The Volcker Rule, named after former Federal Reserve Chairman Paul Volcker, called for limiting how large banks trade using their own money, rather than that of their clients. The White House proposed it late in the process of overhauling Wall Street rules.
Even though the Volcker Rule is a bit arcane, it successfully ignited a populist firestorm that helped push the financial regulation bill into law. It put large banks and many of their supporters on the defensive, and they spent weeks trying to water down the language instead of trying to kill the bill outright. When the White House proposed the Volcker Rule in 2010, it initially didn't provide specifics on how the plan would work. The administration is expected to follow a similar model with the Buffett Rule.
Targeting millionaires is a tactical move by the White House and comes after hard lessons learned by Democrats in 2010. Last year, the White House pushed to allow tax cuts enacted during the Bush administration to expire for families earning more than $250,000 a year. Even though Democrats controlled the House and the Senate last year, the White House's effort faltered because it couldn't win enough support. Some Democrats instead said the White House should have pushed for allowing people who earn more than $1 million a year to have their tax rates increased.
The political dynamics have changed markedly since last year, though, with Republicans in control of the House of Representatives and Democrats holding a narrow majority in the Senate. Monday's proposal will be at least the fourth different plan by the White House in the last seven months to reduce the deficit. It comes after a February budget proposal, an April speech at George Washington University that called for roughly $4 trillion in reductions over 12 years, and the debt-ceiling negotiations with Republicans in July that broke down over taxes.
Gordon Brown fears euro crisis worse than Lehman as 1930s beckon
by Ambrose Evans-Pritchard - Telegraph
Gordon Brown has warned that Europe's fast-escalating crisis is now more dangerous than the Lehman Brothers disaster three years ago, threatening to tip the West into a 1930s-style slump unless global leaders work together to take dramatic action.
"The euro can't survive in its present form and will have to be reformed drastically," he told a mostly-Chinese audience at the World Economic Forum in Dalian. The former Prime Minister said EMU's malaise is at root a banking crisis, not a debt crisis. "The European banks as a whole are grossly under-capitalised: they have liabilities far in excess of American banks. We have now got the inter-play with sovereign debt because we socialised the liabilities," he said.
"It has morphed into a sovereign debt crisis, and is more serious than 2008 because governments then could intervene to sort of out banks. Now both banks and governments have problems," he said. "You cannot begin to solve this unless you realise that it is a banking problem and a growth problem, as well as being a fiscal problem. You have to take co-ordinated action in all three areas," Mr Brown said, echoing the views of the International Monetary Fund.
He added that the €440bn (£385bn) European Financial Stability Facility (EFSF) bail-out fund will need "substantially more resources" to cope, with an expanded role for the IMF to shore up the whole EMU system. "People do not believe that Greece can pull through without a default," he said.
Mr Brown called for a revival of the "global growth pact" agreed at the G20's London Summit in March 2009, combining stimulus from America, Europe and Asia to create a multiplier effect that breaks the vicious cycle. "China must be persuaded to increase consumption," he said, touching on the core issue of East-West trade imbalances that lie behind the global crisis. China's consumption has actually fallen from 48pc in the late 1990s to 36pc of GDP, reflecting a deeply distorted economy.
The suggestion met a caustic response from Singapore's former foreign minister George Yeo Yong-Boon, sitting next to him. "China is not going to consume to save the world. It will act in its own enlightened self-interest," he said. Chinese premier Wen Jiabao said earlier this week that his country will shift from export-led growth to greater internal demand under its new five-year plan, but this is unlikely to be fast enough to satisfy the rest of the world.
Mr Yeo said talk of global architecture is an attempt by Western countries to wriggle out of hard choices and "pass on their pain" to somebody else. The "Old Cathedral" of global affairs – built on American power – is crumbling and should not be rebuilt. "China and India are going to grow whatever happens to the global system. The world will muddle along as it has for much of history," he said.
Mr Yeo called for a bout of "creative destruction" in the West, warning of "very painful" times as American and European workers learn to compete toe-to-toe with educated Asians willing to put in longer hours for much lower pay. This may test political systems to breaking point. "If Greece leaves the euro, it is more likely the eurozone can be saved, and it would have an illuminating effect on politics in Europe," he said, echoing a widespread view among Asia's policy elite.
Mr Brown said the momentum from the G20 accord in 2009 had been squandered, degenerating into currency squabbles and misplaced obsession with fiscal austerity. Citing Winston Churchill's aphorism, he said leaders had been "resolved to be irresolute, adamant for drift, solid for fluidity, and all-powerful for impotence." "Unless there is global co-ordination, I foresee 10 years of low growth in Europe and America, with very high levels on unemployment, that will lead in the end to greater protectionism. This is exactly like the 1930s."
Mr Brown said Europe's austerity drive reflects same misguided views that prevailed during the Great Depression when Keynesian proposals were dismissed as "inflation, extravagance, and bankruptcy". "You can impose all the fiscal contraction in the world, and yet more austerity, and that will drive the economy further into recession. Greece's economy will contract 5pc this year, and we're not seeing recovery in Spain, Portugal, Italy and Ireland," he said.
"The Europeans can hold hundreds of meetings but if they are not prepared to face up to the problem they are dealing with, they are not going to get the right answer." Mr Brown admitted that he was hardly a pin-up politician for stimulus and global action, having lost last year's election on such a manifesto, saying: "People preferred a more parochial solution, seeing debt as the bigger problem. But I have been proved right."
Albert Edwards and the killer wave
by Neil Hume - FT
Not sure what to make of this.
Über bear Albert Edwards has abandoned his empirical approach for (shock horror) the mystical world of technical analysis.
Behold the killer wave.
For those of you not familiar with the Coppock indicator here’s a quick primer, via the authoritative source that is Wikipedia:Coppock, the founder of Trendex Research in San Antonio, Texas, was an economist. He had been asked by the Episcopal Church to identify buying opportunities for long-term investors. He thought market downturns were like bereavements and required a period of mourning. He asked the church bishops how long that normally took for people, their answer was 11 to 14 months and so he used those periods in his calculation.
A buy signal is generated when the indicator is below zero and turns upwards from a trough. No sell signals are generated (that not being its design). The indicator is trend-following, and based on averages, so by its nature it doesn’t pick a market bottom, but rather shows when a rally has become established.
And Edwards says it a reason to be afraid, very afraid.For those looking for a reason or a technical signal that the cyclical bull market has ended and that we are firmly back in the icy grip of the structural bear market, we would highlight the analysis of Dominic Picarda of the Investors Chronicle and the FT. He identified the S&P as having just made a ?killer wave?. He has identified eight killer waves in the S&P 500 over the last 83 years. All have been followed by substantial losses. The average fall following a killer wave has been 40 per cent over 20 months.
Here’s why for all you rune watchers.As Dominic Picarda explains in his article, a killer wave is formed as follows. The Coppock indicator gives an initial sell signal (which it did last summer). However, the indicator subsequently turns up once more, without first having registered a reading of below zero. This happened in April 2011. The killer wave is then completed once a further sell-signal occurs, forming a sort of “double-top” pattern in the Coppock indicator (for Dominic?s article click here for a little video explaining the signal click here ? you might have to click more than once)
OK. Here’s Edwards on more familiar ground:Gavyn Davis, in another well-argued article, highlights that the IMF has shown conclusively that G4 monetary easing has in the past transferred itself almost completely to the emerging economies, whether or not their own economic circumstances warranted it (link). EM foreign exchange intervention is the key mechanism for this transmission.
Inevitably, the monetary effort to maintain a dollar peg ebbs and flows with the strength of the dollar (see chart below). Hence when the dollar is weak the monetary pump is at full stretch and conversely in periods of dollar strength (as in H2 08) that monetary pump is effectively switched off. Back in H2 08, the monetary consequence of the dollar?s strength massively caught out those who thought EM and commodities could de-couple. And if, as many believe, the dollar has once again broken upwards, EM and commodities are set to slide again.
You have been warned. US dollar strength will drain liquidity from emerging markets.
Revolt over risks of elite class of bankers
by John Gapper - FT
We don’t know what exactly was done by Kweku Adoboli, the man accused of being a "rogue trader" at UBS, but the bare facts of his life are significant in themselves. A 31-year-old Ghanaian, who went to school and university in the UK, worked in the City of London on an international equity derivatives trading desk for a Swiss bank.
That career would have been highly improbable three decades ago but Mr Adoboli was born shortly after the 1979 election of Margaret Thatcher, who first abolished exchange controls and then deregulated the City, allowing it fully to regain its role as a global financial centre. His life and career are products of the three-decade-long rise of cross-border finance in London and New York.
Mr Adoboli’s arrest may signal the high-water mark of that era. It came as Europe struggled to prevent the Greek crisis from bringing down French banks and forcing a break-up of the euro. Germans are unhappy at the idea that their country should further support Mediterranean countries with far higher debt burdens by backing the issue of eurozone sovereign bonds.
In the UK, a commission headed by Sir John Vickers recommended that the UK "ringfence" the retail operations of high street banks such as Barclays to protect domestic deposits from being put at risk by an international crisis similar to that of 2007 and 2008. It wants UK savers to be shielded from the banking "casino" in the City.
Meanwhile, Jamie Dimon, the head of JPMorgan Chase, told the Financial Times that the committee of international banking regulators that meets in Basel (one of UBS’s home cities) was being "anti-American" by imposing higher capital standards for banks such as his that are "too big to fail". The US should, he insisted, be prepared to withdraw from Basel to protect its sovereign interests.
The common thread of this week’s events is that national depositors and taxpayers are revolting against the idea that they should bear the risks of international finance and permit an elite class of global bankers such as Mr Adoboli – or the feckless citizens of other countries – to take the rewards. As they draw back, global financial regulation is creaking at the seams.
In some ways, this is a shame. It is the financial equivalent of the trade protectionism that erupted after the 1929 crash, when the US and other countries raised tariffs. But it is not surprising. Investment bankers in the City and on Wall Street have done little to earn back favour after the recent bail-outs.
Banks traditionally do their best to match their assets and their liabilities – to ensure the money they borrow from depositors and markets matches the loans it used to fund. When there is a mismatch – the two are in different currencies or at another interest rate, for example – trouble often follows.
An enormous mismatch of assets and liabilities has lain at the heart of international finance for the past several decades. Retail and private bank deposits in the US, UK, Germany, Switzerland and France have been used to support the expansion by banks such as UBS, Barclays, Société Générale, Deutsche Bank and JPMorgan into global markets.
This had benefits for global trade and commerce, which have grown hugely in that period. It has made it easier for US and European companies to attract investors from other countries. Companies such as Apple and Nike have been able to finance and assemble global supply chains, creating jobs in Asia and lowering their prices.
But the useful functions of global markets have been accompanied by a vast increase in risk-taking and a bonus culture that most outsiders find abhorrent. For every hedge fund manager who has made billions in this era, there are millions of depositors for whom the benefits are far smaller and less tangible. They regard all traders as rogues.
The euro was emblematic – a cross-border project supported by the political elite and by businesses about which many ordinary Europeans had doubts because they could not see what use it was to them. But they tolerated it as long as it appeared to work, just as the growth of global investment banking was regarded as irrelevant to most people’s day-to-day lives.
This period of recent history is ending with a bang. The fact that the $2bn hole attributed to Mr Adoboli has opened up in the balance sheet of UBS – an institution that has repeatedly suffered massive losses in its international banking operations – is a sign of how little has changed there.
Oswald Grübel, the respected former head of Credit Suisse brought in to clean up UBS after it lost billions in the 2008 crisis, imposed new risk controls and told his traders not to lose money. Yet despite all the safeguards, the Delta One trading desk where Mr Adoboli worked, it seems did precisely that.
UBS will withstand the loss by itself but Swiss taxpayers are sick of being lenders of last resort to their international banks, and German taxpayers are tired of being asked to finance Greek debts. They do not see why they should assume the liability for someone else’s lossmaking assets and outsized rewards.
The Vickers report on UK banking is, I believe, not only sensible but also the only politically viable option in a world where international finance has exhausted most people’s patience. If taxpayers are going to be forced to support their banks in future financial crises, it will need to be only the ones from which they gain tangible benefits.
Mr Dimon believes it is unfair that his capital burden is rising sharply as global regulators try to ensure that such institutions do not need to be bailed-out again. He may have a point on details but, on the bigger principle, his time is up.
Can China escape as world's debt crisis reaches Act III?
by Ambrose Evans-Pritchard - Telegraph
When America became the first casualty of the global credit bubble in 2007, Europe's political elites thought it had nothing to do with them.
Even after Lehman and AIG collapsed a year later -- and Europe's economy crashed into slump -- it remained an article of faith in Berlin, Paris, and Rome that this was just fall-out from the Anglo-Saxon casino. Few understood that the 'China Effect' had engendered credit bubbles everywhere, and that Europe's variant was even more pernicious because euro-banks were more leveraged, with much greater liabilities, and the structure of EMU concentrated the damage on weaker states with no policy defence against sovereign collapse.
US Treasury Secretary Tim Geithner must have felt a twinge of Schadenfreude as he exhorted EU finance ministers in Poland to rescue their banks or face "catastrophe". The Germans and Austrians barked back at him, of course, but at least debate is joined. Europe cannot blame America any longer, and if the US really were to slash spending right now -- as Germany's finance minister seems to want, like the disastrous Bruning, circa 1931 -- EMU would be in even deeper trouble.
In my view, Germany's austerity nihilism will precipitate a dramatic policy shift by the US over coming months. The risk -- or solution -- is that Washington will write off Europe as irretrievably hopeless and re-order the global landscape. The US will not let free-riders exploit is its precious stimulus forever. It may seek to form a global growth bloc, open only to stimulators. And woe betide Germany. But that is a column for another day.
By the "China Effect", I mean the Asian trade tsunami that flooded Western markets and deflated the price of everything from shoes and clothes, to washing machines and solar panels. This seduced Western central banks into running uber-loose monetary policies for twenty years, and disguised the build-up of dangerous asset bubbles. It was coupled with Asia's "Savings Glut", as Ben Bernanke calls it. The rising powers accumulated $10 trillion of reserves, either because they were holding down currencies to gain trade share, or because their economic and social structure was geared towards mercantilism and excess output.
China's consumption rate has fallen to 36pc of GDP from 48pc in the late 1990s. Academic libraries are bursting with PhD papers trying to explain why. Some posit the welfare theory, arguing that aging citizens must save for a future with almost no pension or health provision; others that China has frantically leveraged an infrastructure and manufacturing boom to buy time and contain the wrath of 200m migrant workers.
Whatever the mix: there is simply too much global investment, and too little consumption. The system is out of joint. It does not feel like the 1930s because we are richer in the West, with a better safety net, and emergency stimulus has so far cushioned the effects, but Bertil Ohlin, John Maynard Keynes, and Irving Fisher would find it unnervingly familiar.
The Savings Glut flooded global bond markets, especially the EMU markets as central banks rotated into euros. Hence the collapse in yields during the long bubble. Pension funds were forced to search for better return in ever riskier countries and assets to match their liablities. This is why Greece was able to borrow for ten years at 26 basis points over Bunds, and Spain at four points of spread at the end of the boom, and why Italy's €1.8 trillion public debt did not seem to be a problem. It hid all sins.
Capital was hanging from the lowest branches, almost free for all. America took it, Britain took it, Iceland took it (a lot), and Euroland took it. Yet China itself must ultimately be a victim of this warped structure as well, and that is where we are in late 2011. Act III of the global denouement is unfolding. The world will have to lance the debt boils of Asia as well before clearing the way for another cycle of global growth.
The facts are simple. China dodged the Great Contraction of 2008-2009 by unleashing credit on a massive scale. Zhu Min, the IMF's deupty chief and a former Chinese official, said loans had jumped from 100% of GDP before the crisis to around 200% today -- if you include off-books financing from letters of credits, trusts, and such like. To put this in perspective, a study by Fitch Ratings found that credit in America rose by just 42% of GDP in the five-year period before the housing bubble popped. It rose by 45% of GDP in Japan from before the Nikkei cracked in 1990, and 47% before the Korean crisis in 1998.
Home construction is running at 10pc of GDP, about the same as Spain in the`burbuja' of late 2006, and much higher than in either Korea or Japan at any point during their catch-up Tiger phases. "China's banking system is the largest, fastest-growing, but most thinly capitalized among emerging markets. Such a rapid run-up in leverage is a sign that the incremental return on credit has declined," said Fitch. The economic boost from each extra yuan of credit collapsed from 0.75pc to 0.18pc during the crisis and has yet to recover.
My impression from China's "Summer Davos" in Dalian is that Beijing's elite is less deluded about the risks than Europe's leaders were for so long. "The whole world needs to lower its expectations from China," said Lee Kaifu, the country's software mogul. "There is an even bigger threat than a global double-dip, and that is a prolonged recession with no growth and very limited policies to fight it. We are already in it."
Cheng Siwei, head of Beijing's International Finance Forum and a former vice-president of the Communist party's Standing Comittee, said China is entering a "very tough period" as growth runs into the inflation buffers, paralysing the central bank. "The inflation rate and the growth rate are conflicting with each other: it is very troubling," he said. China faces the sort of the incipient stagflation that hit the West in the 1970s.
Matters have reached the point that even a light tap on the brakes by China's central bank -- through credit curbs (deposit rates are still minus 3pc in real terms) -- is already threatening a hard-landing. Dr Cheng said local authorities had built up $1.7 trillion in debt, mostly using arms-length finance vehicles. This is coming back to haunt. "The tightening policy is creating a lot of difficulties and causing defaults. This is our version of subprime in the US, and the government is taking this very seriously," he said.
Whether the housing market will also set off a chain of defaults is the great question dividing analysts. "Decidely bubbly," is the IMF's politically-correct view. Its own data shows that price to incomes ratios range from 16 to 22 in the Eastern cities of Shenzen, Shanghai, Beijing, and Tianjin, multiples of the worst extremes in the very tame US boom. Caixin Magazine reports that Guangzhou R&F Properties is slashing prices by 20pc, and other big developers may soon follow.
China has not abolished economic gravity. Its policy of yuan suppression against the dollar and euro has been impossible to sterilize, leading to an imported credit bubble of epic proportions. Its export-led strategy has left it with a deformed economy that relies on perma-demand from exhausted debtors in America and Europe.
As China premier Wen Jiabao said in Dalian, "China's development is not yet balanced, coordinated and sustainable." The next five-year plan is a breakneck switch towards a domestic growth. Bravo, but awfully late.
China is acutely vulnerable to the second leg of depression in the West -- should that occur -- and cannot conjure a second rabbit out of the hat. This will not stop the rise of China as the great force of 21st Century, any more than America's jolting upset in 1930 stopped US ascendancy.
Yet economic history has taught us two iron-clad rules. There is no escape from credit hangovers, and surplus trading powers suffer just as much as deficit states -- if not more --once Kondratieff slumps turn really serious.
China risks hard landing as global woes spread
by Ambrose Evans-Pritchard - Telegraph
China's carefully-managed soft landing is turning harder by the day, threatening to deflate the torrid credit bubble of the past three years. "There is a large potential risk," said Zhu Min, the deputy managing director of the International Monetary Fund and a former Chinese official. Mr Zhu said China had doubled the loan ratio from below 100pc of GDP before the Lehman crisis to roughly 200pc today.
The danger is that this excess could start to unwind just as the West goes into a sharp downturn, and possibly a double-dip recession. China and emerging Asia are fundamentally in weaker shape this time, having used up their "fiscal cushions", leaving them with little leeway to cope with a fresh global shock. Their monetary policies are already loose. "We're at a key moment. They need to make sure their economies don't slow down too fast," he said at the World Economic Forum in Dalian.
China's electricity use – closely watched as the economy's true pulse – was almost flat over the summer. Export orders fell 3.3pc in August, with the PMI index down to a 28-month low. Inventories have jumped.
The M2 money supply has dropped from its normal growth rate of 18pc to 20pc to nearer 12pc over the past three months (annualised). "A hard landing is already in progress," said Diana Choyleva from Lombard Street Research.
Beijing has actively sought to cool overheating, alarmed by inflation above 6pc and price-to-income ratios for property in the rich coastal cities nearing wild extremes of 20. But it does not want the economy to jerk violently from boom to bust.
The historic pattern of global crises is that the region emerging strongest is often prey to its own crisis three years' later or so, usually because it was able to respond with a blast of credit that stored up problems for the future. Japan brushed off the 1987 crash, only to succumb in 1990: the US dodged the Asian crisis in 1998, only to face the dotcom collapse in 2001.
Fitch Ratings said it may downgrade China if the banks get into trouble, requiring another bail-out from Beijing. The agency said in July that credit growth was still running at a 38% increase this year, if you include off-books financing such as letters of credit, trust loans and loans from Hong Kong banks. "Leverage is higher than meets the eye. China's banking system is the largest, fastest-growing, but most thinly capitalised among emerging markets," said the report's author, Charlene Chu.
Some 55pc of all new lending now comes from outside the banking system, three times the level in 2006. "That China's economy is slowing while financing is still so abundant illustrates how dependent growth remains on loose funding," she said. The economic return on each extra yuan of credit collapsed from 0.75% to 0.18% during the credit spree after Lehman. It has yet to recover fully.
Mrs Chu said China's credit boom does not match Iceland – which saw credit to GDP rise from 130pc to 440pc over five years – but is significantly worse than the jump in the US before the sub-prime crisis, or even in Japan before the Nikkei bubble burst. "Such a rapid run-up in leverage is a sign that the incremental return on credit has declined, meaning that borrowers' ability to repay is not keeping pace," said Fitch. The agency fears that non-performing loans could rise from 2% of GDP last year to up to 30%.
China's central bank has belatedly begun to tackle off-books lending, on top of interest rate rises and a relentless increase in the reserve ratio to 21.5pc. It's now targeting the methods used to circumvent monetary controls, according to the authoritative Caixin Magazine. The regulators aim to choke off $150bn in credit over the next six months.
Yet as the government tightens the screw, it risks knocking away the rickety props beneath China's local governments, which have built up $1.7 trillion of liabilities in a patronage spree. The localities depend on land sales for 40pc of their income. "If we have a hard landing, the government is not going to be able to pay salaries," said Wang Jianlin, Dalian's biggest property developer.
What is clear is that if Europe and America fall back into recession, China will not be able to buttress the global economy a second time.
China 'faces subprime credit bubble crisis'
by Ambrose Evans-Pritchard - Telegraph
Monetary tightening in China threatens to pop the $1.7 trillion (£1.07 trillion) credit bubble in local government finance and expose the country's simmering "subprime" crisis, according to the Communist Party's economic guru.
Cheng Siwei, head of Beijing's International Finance Forum and a former deputy speaker of the People's Congress, said interest rate rises and credit curbs to cool overheating were inflicting real pain on thousands of companies used by local party bosses to fund the construction boom.
"The tightening policy is creating a lot of difficulties for local governments trying to repay debt, and is causing defaults," he told a meeting at the World Economic Forum in Dalian. "Our version of subprime in the US is lending to local authorities and the government is taking this very seriously." "Everybody assumes that they will be bailed out by the central government if they default, but I disagree with this. It means that the people will ultimately pay the bill for it all, at a cost to the broader welfare." "Those who are not highly indebted are forced to help those who are," he said, echoing the debate over moral hazard that has divided opinion in the West since the banking rescues.
Local governments have created more than 6,000 arms-length companies to circumvent restrictions on bond issuance, creating a huge patronage machine for party bosses that has largely escaped central control. The audit office said the loans have reached $1.7 trillion (£1 trillion). While some of the money has been used to finance much-needed investments in water systems and roads, a large part has fuelled unbridled construction with a dubious rate of return.
The local governments depend on land sales for 40pc of their revenue so the process has become incestuous and self-feeding. Such reliance on property sales revenues has greatly aggravated the post-bubble crisis in Ireland.
Mr Cheng said China is entering a "very tough period" as growth runs into the inflation buffers, threatening the sort of incipient stagflation seen in the West in the 1970s and leaving the central bank with an unpleasant choice. "The inflation rate and the growth rate are conflicting with each other: it is very troubling," he said, describing what is known to economists as the Phillips Curve dilemma.
Companies Shun Investment, Hoard Cash
by Ben Casselman and Justin Lahart - Wall Street Journal
Corporations have a higher share of cash on their balance sheets than at any time in nearly half a century, as businesses build up buffers rather than invest in new plants or hiring. Nonfinancial companies held more than $2 trillion in cash and other liquid assets at the end of June, the Federal Reserve reported Friday, up more than $88 billion from the end of March. Cash accounted for 7.1% of all company assets, everything from buildings to bonds, the highest level since 1963.
That has some critics pressing companies to put more money into investments and hiring. But the cash could provide an important cushion for U.S. companies if European banking woes trigger a global financial crisis. "Having a good buffer of cash on hand does to some extent insulate the corporate sector from a cutoff in lending," said Barclays Capital economist Dean Maki.
The Federal Reserve figures don't include the substantial amount of cash held at many U.S. companies' foreign subsidiaries, which would be subject to taxation if the companies repatriated it. A recent J.P. Morgan analysis of public companies that disclose their foreign cash holdings found that they held on to half of the cash they amassed overseas. Eleven companies, including Apple Inc., Microsoft Corp. and Cisco Systems Inc., held foreign cash balances of $10 billion or more.
The high level of cash held overseas has prompted calls to allow companies to bring the money back to the U.S. tax-free. Studies of similar policies in the past have generally shown a limited effect on hiring. But Jeff Agosta, chief financial officer of Devon Energy Corp., said that whatever companies use the money for—such as investments, dividend payments or stock buybacks—the U.S. would benefit by having the funds come home. "That's money that's going to be put into productive use in the United States," Mr. Agosta said.
Companies' growing cash cushions could also help them weather a domestic slowdown. In a separate report Friday, a survey of consumer confidence showed that Americans remain gloomy about the economy. Preliminary results from the University of Michigan's monthly consumer-sentiment index rose slightly from August, when confidence hit its lowest level since the depths of the recession. But a gauge of consumers' expectations for the months ahead fell to its lowest point since 1980.
Lackluster consumer sentiment doesn't always translate into less spending. But consumers have reason to be cautious. The Fed's data, known as the "flow of funds" report, showed that U.S. households' net worth fell to $58.5 trillion in the second quarter, down $149 billion from the first quarter. Given declining home values and the drop in the stock market since the end of the second quarter, that figure is probably lower now.
Household net worth—the value of houses, stocks and other investments, minus debts—peaked at $65.9 trillion in 2007. It had risen for three consecutive quarters. Household assets fell by $153 billion as home prices continued to fall. Household debt also declined, at an annual rate of 0.6%, as Americans continued to pay off obligations and in some cases walked away from mortgages taken on during the housing boom.
The reduction of debt could place the economy onto firmer footing in the long run. In the short term, however, the effect of consumers paying off debts and companies hoarding cash is less spending, investing and hiring.
Economists call this problem the "paradox of thrift," when individuals and businesses need to save more to prepare for a downturn, but everyone doing so at the same time makes a downturn more likely. "For one household or business to save money is a good thing," said Dana Saporta, an economist with Credit Suisse in New York. "For everyone to be doing this at the same time could serve to slow economic growth."
Ms. Saporta said that for businesses, in particular, the memory of the 2008 financial crisis remains fresh. When Lehman Brothers collapsed, companies that counted on being able to borrow money for routine operations suddenly found themselves locked out of financial markets and scrambling for cash. "The value of having cash became apparent during the crisis, painfully so for those who were caught unprepared, and I don't think corporate America will forget that lesson anytime soon," Ms. Saporta said.
Alan Miller hasn't forgotten. Mr. Miller, chief financial officer of Frequency Electronics Inc., a maker of precision timing instruments for satellites and other applications, said he has been under pressure from investors to use some of the company's $22.7 million cash holdings to reinstate the dividend that was suspended during the 2008 crisis. So far, the company has resisted. "We felt that it was more important to retain the cash at this point in time with the continuing uncertainties in the marketplace," Mr. Miller said.
That fear is complicating efforts by the Federal Reserve to spark economic activity. The Fed's traditional approach is to lower interest rates, which makes it easier for companies to borrow money to hire workers or invest in their businesses. But with interest rates at historically low levels, companies are postponing spending not because of borrowing costs but out of fear of another financial crisis.
"The idea that these guys are going to spend this money is crazy until all this settles down," said Bill Smith, chief executive of Smith Asset Management, a New York-based investment firm. "Corporate America is much more conservative now than it's ever been," Mr. Smith said. "Only time will tell if that's a prudent thing."
Roche Keeps Drugs From Strapped Greek Hospitals
by Jeanne Whalen - Wall Street Journal
Swiss drug giant Roche Holding AG has stopped delivering its drugs for cancer and other diseases to some state-funded hospitals in Greece that haven't paid their bills, and may take similar steps elsewhere, a stark example of how the European debt crisis that has jolted global financial markets is having a direct effect on consumers.
In Greece, Roche is boosting deliveries to pharmacies, which have paid their bills more reliably, Chief Executive Severin Schwan said in an interview on Friday. Patients at some hospitals now must take their prescriptions to a local pharmacy, and, in the case of intravenous or injected cancer drugs, bring them back to the hospital to be administered, he said.
Mr. Schwan said patients haven't been deprived of their medication as a result of the new measures, which he said Roche may need to adopt in Spain, as well. Some state-funded hospitals in Portugal and Italy have also fallen far behind on payments, he said. There are hospitals "who haven't paid their bills in three or four years," Mr. Schwan said. "There comes a point where the business is not sustainable anymore."
Europe's efforts to prevent a Greek default have become politically fraught as economically stronger nations face popular resistance to additional contributions. Many are proceeding with budget cutting plans despite weakening economies. On Friday, U.S. Treasury Secretary Timothy Geithner urged the continent to increase the size of a bailout fund.
Roche isn't the first pharmaceutical company to stop supplies to some Greek buyers. Denmark's Novo Nordisk S/A last year stopped shipping certain brands of insulin after Greece said it would cut the prices by more than a quarter. The cutoff lasted a few weeks, until Greece agreed to less onerous price reductions. Novo Nordisk continued shipping low-cost generic insulin throughout, but it was sharply criticized by diabetes groups and others for halting supplies of the more expensive products.
And companies in other industries are also worried. VeriFone Systems Inc., which sells payment-processing systems, said that so far customers have been paying on time. But CEO Doug Bergeron said the company is monitoring clients closely, and if conditions worsen, it will require buyers to obtain letters of credit before making purchases.
Greek hospitals have large debts to many drug companies, according to the Hellenic Association of Pharmaceutical Companies, or SFEE. As of June 30 this year, Greek's state-financed hospitals had paid for just 37% of the €1.9 billion ($2.62 billion) worth of drugs delivered by SFEE member companies in the 18 months to June, 2011, the organization said in a recent report.
Greece's health-care system is ailing in part because of budget cuts the country has instituted to try to bring order to its weak finances and stave off a default on its debt. Additionally, critics of the health-care system say it is bogged down in waste. The country's health ministry couldn't be reached to comment on Friday.
Europeans have been reluctant to offer additional assistance to a country they view as spending far beyond its means. Finland, for example, has insisted that Greece put up collateral in exchange for further rescue aid.
Early this year, Greece tried to clear some of its pharmaceutical debts by giving companies government bonds. "We didn't have a choice. Everybody got government bonds. The question was, you got nothing or you got government bonds," Mr. Schwan said, adding that Roche sold the bonds immediately. He said he isn't aware of any Greek patient complaints about Roche's decision to cut off certain hospitals, but that he can imagine hospital administrators "didn't like it." A representative of the Greek Cancer Society said no one was available to comment Friday.
Roche started cutting off certain Greek hospitals this year, Mr. Schwan said. A Roche spokeswoman declined to name the hospitals involved, but said the company began warning them last summer, in an effort to give them as much time as possible to make their payments.Greek hospitals and pharmacies generally pay Roche directly for drugs, and then seek reimbursement from the taxpayer-funded health-care system, she said. Pharmacies are perhaps more prompt in paying Roche because they are privately owned and run for a profit, giving them better cash flow to cover their bills, she said.
Mr. Schwan said state-funded hospitals, which are nonprofit, "had this habit of not paying the pharma industry." Some have become better at paying since Roche has cut them off, because they realize their reputation with patients is at stake, he said. Should Greece's financial situation deteriorate further, Roche could "have even more troubles to collect," he said.
Who Killed Private Pensions?
by Ellen E. Schultz - Wall Street Journal
How Companies Helped Hasten the End of Retirement Plans and Benefits
Gary Skarka had a rewarding middle-management career at AT&T, along with some of the best retirement benefits in the country. But instead of enjoying a comfortable retirement, he is working as a security guard. "I know I will have to work at menial jobs until I die," he says.
Mr. Skarka's financial predicament isn't the result of investment losses or runaway spending. He is among millions of Americans who encountered an unexpected risk to their retirement: their employer.
Over the past two decades, companies have cut pensions, slashed retiree health coverage and killed other benefits. Many have reduced their contributions to 401(k)s as well.
Companies say they are the victims of a "perfect storm" of unforeseen forces: an aging work force, market turmoil, adverse interest rates. Certainly, these all contributed to the retirement crisis. But employers have played a big and hidden role in the death spiral of pensions and retiree benefits as well.
Workers with a significant portion of their net worth tied up in employer-sponsored retirement plans should be aware of the hidden risks they face. Here are some to watch out for:
Tapping Pension Plans
Just over a decade ago, pension plans had a quarter of a trillion dollars in surplus assets. Today, they are collectively underfunded by about 20%. Market losses and historically low interest rates erased a lot of this, but much of the damage was self-inflicted.
Verizon Communications' predecessor Bell Atlantic, in a typical move, used more than $3 billion of its pension assets to finance retirement incentives for thousands of managers. Similar moves enabled companies to shed hundreds of thousands of older employees without dipping into corporate cash. Employers also began using pension-plan assets to pay health benefits they promised retirees.
These types of moves helped drain Verizon's pension surplus, so when the market cratered in 2008, there was no surplus left to cushion the blow. The plan, whose surplus peaked in the late 1990s, is now $3.4 billion in the hole. A Verizon spokesman says the amount of pension assets used to make incentive payments is "immaterial."
Another issue: In the swirl of mergers and acquisitions in the 1990s and 2000s, many companies "monetized"—that is, sold—billions of dollars worth of pension assets. A common technique was to sell a unit and transfer workers and retirees to the buyer, along with more pension money than necessary to cover the benefits owed them. The buyer might pay 70 cents on the dollar for the surplus, leaving the seller with a less well-funded plan—but also with a lot of cash they wouldn't otherwise have received.
What to watch for: In annual reports, companies usually disclose their use of pension assets for severance-type pay and the amounts they transfer from pension plans to pay retiree medical benefits. But it can be virtually impossible to determine whether pension money changed hands in M&A deals.
Cutting benefits provided employers with an additional windfall: income. Because the benefits are recorded as debts on a company's books, reducing the debt generates paper gains, which are added to operating income right along with income from selling hardware or trucks.
Thanks to these accounting rules, which all companies adopted in the late 1980s, retiree plans have become cookie jars of potential earnings enhancements: Essentially every dollar owed to current and future retirees—for pensions, health care, dental, death benefits or disability—is a potential dollar of income to a company.
What to watch for: Employers can raise or lower their retiree obligations by billions simply by changing key assumptions, such as "discount rates" and "estimated returns." If your employer announces it is cutting pension or retiree health benefits because costs are "spiraling," ask whether the company merely changed the assumptions in the plan to justify the cuts.
With so many ways to tap pension surpluses, companies had an incentive to cut pension benefits even when their plans were overfunded. Many companies, including AT&T, converted their pensions to so-called cash-balance plans, which slowed the growth of benefits for older workers and, in many cases, froze them altogether for a period of years.
Mr. Skarka, 64, who left the company in 2003, says his pension would have been $50,000 a year, but is only $18,000 because of the pension changes. His $1,500 monthly pension was further reduced by $500 a month to pay for his share of retiree health benefits, leaving the South Thomaston, Maine, resident a monthly pension of just $1,000. While unable to comment on an individual case, an AT&T spokesman said, "We continue to provide great benefits—including market-competitive health, pension and savings plans—to our 1.2 million employees, retirees and their dependents."
Lump-sum payouts are another way companies can cut pension costs. Such payments don't only entice older workers to leave but may be worth less than the actual value of the pension benefit. They also shift all the investment, interest rate and longevity risk to the retirees.
What to watch for: If you are offered a lump sum, ask the employer to show you how the payout stacks up against a monthly pension in retirement. You might have to hire an actuary to do this.
Financing Executive Pay
Employers' ability to generate profits by cutting retiree benefits coincided with the trend of tying executive pay to performance. Intentionally or not, top officers who greenlighted massive retiree cuts were indirectly boosting their own compensation. As their pay grew, executives deferred more of it. Supplemental executive pensions, which are based on pay, also ballooned. These executive liabilities account for much of the "spiraling" pension costs many companies complain about.
Many companies—especially large banks in the past few years—have taken out billions of dollars of life insurance on their employees. The policies function as tax-sheltered investment pools that can be used to offset the cost of executive benefits. The companies also collect tax-free death benefits when employees, former employees and retirees die.
What to watch for: Your employer—and former employers—don't have to tell you if they bought a policy on your life before 2006. If your employer has taken out insurance on you in recent years, it must get your consent, but doesn't have to say how much the policy is for. It is up to you whether you want to be a human resource to finance executive pay.
Adapted from "Retirement Heist: How Companies Plunder and Profit from the Nest Eggs of American Workers," by Ellen E. Schultz.