"New Orleans, downtown street"
Ilargi: The latest greatest plan to save Europe, or the Eurozone, or the Euro, whichever sounds better, involves taking the present legal authority and financial clout of the EFSF (European Financial Stability Facility), which due to become the ESM (European Stability Mechanism) in 2013, and expand them greatly, something like this (Reuters' David Lawder and Daniel Flynn quote a "top EU official"):
Europe aims to beef up crisis fund"We need to find a mechanism where we can turn one euro in the EFSF into five, but there is no decision on how we could do that yet" the official said, speaking on condition of anonymity.
Ilargi: You take an X amount of money and then you leverage it by a factor of five and claim it's actually worth 5X. Something like that. And this in a supra-governmental kind of "fund" (whichever of the two) that carries the term "stability" in its name.
If "leveraged stability" is not already considered an oxymoron, it should and will be from now on in. All these people, from Merkel to Geithner to Lagarde, will tell you that this stuff is aimed at "restoring confidence -in the markets-". Like the markets don't understand what happens when €1 becomes €5 at the mere stroke of a keyboard.
Oh, they’ll take it, ain't nobody don't appreciate a free lunch, but it does nothing to restore confidence. Quite the opposite. You can't bribe people into trusting you. The markets know: what the keyboard giveth, the keyboard taketh away.
But we're to understand that today everyone's finally in real panic mode, and that breaks all rules and previous promises and -moral- principles. When Tim Geithner goes so far as to suggest bank runs, it's game on. From the same Reuters piece:
"The threat of cascading default, bank runs, and catastrophic risk must be taken off the table, as otherwise it will undermine all other efforts, both within Europe and globally,"Geithner told the IMF.
Ilargi: Geithner talks about bank runs to overcome the remaining resistance in Europe against the leveraged stability plans. But that resistance is still formidable. Here's the most talked about plan as Philip Aldrick describes it in the Telegraph:
Germany at war over eurozone bail-outUnder the proposal, banks across the continent would be recapitalised with tens of billions of euros, the €440 billion European Financial Stability Facility (EFSF) would be "leveraged up" through the European Central Bank (ECB) to provide €2 trillion of firepower, and Greece would be subjected to a managed default on 50% of its debt but stay in the euro.
Officials hope the move would restore confidence in Spain and Italy and calm nervous bond markets.
Ilargi: And as Aldrick and Jeremy Warner do, again for the Telegraph:
Multi-trillion plan to save the eurozone being preparedGerman and French authorities have begun work on a three-pronged strategy behind the scenes amid escalating fears that the eurozone’s sovereign debt crisis is spiralling out of control. Their aim is to build a "firebreak" around Greece, Portugal and Ireland to prevent the crisis spreading to Italy and Spain, countries considered "too big to bail".
The complex deal would see the EFSF provide a loss-bearing "equity" tranche of any bail-out fund and the ECB the rest in protected "debt". If the EFSF bore the first 20% of any loss, the fund’s warchest would effectively be bolstered to €2 trillion. If the EFSF bore the first 40% of any loss, the fund would be able to deploy €1 trillion.
Using leverage in this way would allow governments substantially to increase the resources available to the EFSF without having to go back to national parliaments for approval, which in a number of eurozone countries would prove highly problematic.
As quid pro quo for an enhanced bail-out, the Germans are understood to be demanding a managed default by Greece but for the country to remain within the eurozone. Under the plan, private sector creditors would bear a loss of as much as 50% – more than double the 21% proposal currently on the table. A new bail-out programme would then be devised for Greece.
Ilargi: By the way, the expansion of the EFSF from $220 billion to $440 billion has yet to be voted on in several Eurozone countries. Not a done deal at all. Let alone any further expansion. And there are more problems. First, Aldrick once more:
Leveraging up the EFSF through the ECB, though, would not be without risk. Germany and France could both lose their AAA credit rating, a top official at Standard & Poor's warned. David Beers, head of S&P's sovereign rating group, said: "There is some recognition in the eurozone that there is no cheap, risk-free leveraging options for the EFSF any more."
Ilargi: Private investors don't like it either, reports AP:
Bank Lobby Rejects Reopening of Greek Rescue DealThe international bank lobbying group that has been leading negotiations on giving debt-ridden Greece easier terms for its bonds on Sunday rejected calls to impose larger losses on private investors.
Forcing private creditors to write down their Greek bond holdings by more than the 21% tentatively agreed to in a July deal would quickly cause a "domino effect" that would see the crisis spread to other parts of Europe, warned Josef Ackermann, the outgoing chairman of the Institute of International Finance.
Such a move would ultimately cost taxpayers much more than just bailing out Greece and erode confidence in the euro, said Ackermann [..]
Under the July deal, Greece is asking banks and other large private investors to swap their existing Greek bonds for ones with longer repayment deadlines, a lower face value or lower interest rates. The IIF says the deal would save Greece some €54 billion by 2014 and €135 billion by 2020.
However, most analysts say that those savings are far too small to make Greece's massive debts — which amount to some 160 percent of economic output — sustainable again. At the same time, there have been growing doubts that investors will agree to swap 90% of their bond holdings, a minimum threshold that Athens set to make the deal worthwhile.
Getting private creditors to agree to the deal comes at a heavy cost for Greece. Apart from temporarily being rated in "selective default" — a first for a eurozone nation — the country has to spend some €42 billion on setting up a collateral fund that would secure the remaining value of the bonds.
If at some point Athens decides that a steeper cut in its debt was necessary, that money would go to the bondholders. "If the July deal goes ahead, Greece would be locked into this perpetually," said Sony Kapoor [..]
Ilargi: Nor does the German Central Bank, according to Der Spiegel:
German Central Bank Opposed to Merkel's Euro CourseThe new Bundesbank president, Jens Weidmann, used to be one of Merkel's closest advisers. Now, he is one of her staunchest critics over the euro rescue. He is strictly opposed to the European Central Bank's policy of buying up bonds from debt-stricken countries -- and is winning a growing number of allies for his cause. [..]
Behind the glass facade of ECB headquarters in Frankfurt, a fierce battle over fundamental beliefs has been smoldering for months. ECB President Jean-Claude Trichet and the majority of his colleagues are willing to rush to the aid of embattled EU finance ministers and to make major purchases of the sovereign bonds of debt-ridden euro-zone countries, such as Greece, Portugal and Italy.
For his part, Weidmann is strictly opposed to these measures. He believes they amount to an unacceptable means of financing states through effectively printing money. In fact, he has come to assume the mantle of the last staunch defender of monetary stability. His views were shared by his predecessor, Axel Weber, and the ECB's former chief economist, Jürgen Stark, both of whom stepped down from their positions because it was getting lonelier and lonelier on their side of the battle.
Weidmann, on the other hand, plans to keep fighting -- and in full public view.
Ilargi: Or the ECB itself, for that matter, writes Marc Jones for Reuters:
ECB fights to avoid role in euro zone rescue fundThe European Central Bank battled to avoid being dragged further into the area of fiscal policy this weekend, as its policymakers stood firm against using the ECB to help supercharge the euro zone's rescue fund. [..]
One of the ideas that has been floated is to give the fund the ability to borrow money from the ECB's currently unlimited lending operations, which it could then use to inject into troubled government bonds or banks.
There was widespread rejection of such a maneuver, however, by key ECB figures and Klaus Regling, head of the fund, known as the European Financial Stability Facility (EFSF). "There are serious concerns about the compatibility with the ECB because it may not be in line with the prohibition of market financing, so I think it is very unlikely that you will see that,"
For the ECB, it is a case of not being dragged further beyond the central bank's core task of keeping inflation in check. The ECB is already deeply uncomfortable about buying government bonds, something it started doing last year, and there are fears its independence is being compromised.
ECB Executive Board member Juergen Stark and former ECB heavyweight Axel Weber also hit out at pushing the central bank beyond its remit. "For monetary policy to remain effective, its responsibilities must remain within clear limits," Stark said in a speech. "Opportunistic manipulations of the monetary policy framework of course damage the foundations on which that framework rests."
Ilargi: It might also very simply not be legal, claims the Wall Street Journal :
Europe Split Threatens Rescue PlanDeutsche Bundesbank's Jens Weidmann [..] said leveraging the bailout fund, specifically by allowing it to borrow from the ECB, would be equivalent to the monetary financing of state budgets, which is forbidden by the EU treaty.
Ilargi: Of course, there are still and always the flat-out deniers, which we insert just for fun. The earth is flat, don't you know? And Jesus walked with the dinosaurs. From Lawder and Flynn at Reuters and Ambrose Evans-Pritchard at the Telegraph, respectively:
Europe aims to beef up crisis fundGreek finance minister Evangelos Venizelos told reporters that Athens was determined not to default. "Greece is determined to honor all its obligations. No Greek paper will ever go uncovered."[..]
Another top ECB official sought to quash growing expectations that Greece will eventually default. ECB Governing Council member Athanasios Orphanides said the idea of a Greek default was "surreal" but warned that it could occur as the result of a "political accident."
Geithner Plan for Europe is last chance to avoid global catastropheChristian Noyer, the Bank of France's governor, denied on Sunday that French officials were mulling a capital injection of up to €15 billion to beef up banks. "There is no plan, and we don't need one. The banks are very solid. None of them is hiding any toxic assets," he said.
Ilargi: But seriously, we need to realize that these plans will lead to one thing only: the further erosion of our economies and societies. French banks, which hold ludicrous amounts of Greek and Italian debt, will be "recapitalized" with leverage, i.e. money that doesn't exist but will in the future still have to be paid back -by our children-.
(Talking about that future, policies like the ones being discussed here should wake up those people who are worried about the natural environment we will leave our children. If these policies are not halted, and very soon, our children will not have the luxury of worrying about the environment. They will have no choice but to preoccupy themselves with bare survival.)
The French banks, and their counterparts in other countries that made equally foolish investment (gambling) decisions, shouldn't be recapitalized. They should be restructured. All losses should be laid out before us into the open, and those institutions that are found to have too much debt and losses should default. That's how you create stability and restore confidence. Not by continuing to hide the losses and throwing more public funds at them.
Greek banks are in trouble because they hold a lot of Greek sovereign debt. French banks are in trouble because they hold a lot of Greek sovereign debt AND of Greek bank debt. Morgan Stanley will certainly soon be in trouble because it is heavily involved in French banks. Other Wall Street banks will be because of their dealings with Morgan Stanley.
The whole system is so tightly interconnected that you would have to bail out everyone's debt. But that is not possible. There's too much of it. That fact is generally recognized. But not publicly. In public, we hear fear-mongering about bank runs, which can, so we are told, be prevented with more of your money. But this is not true. They can be postponed, not prevented. And postponing them comes at a huge and entirely futile cost to our children.
We'll have to bite the bullet. And now's as good a time as any to do it. In fact, it's by far the best time. The longer we delay it, the poorer we will be, because our money is being used on an oxymoron: "Leveraged Stability". There's no such thing. Europe is planning to throw another €2 trillion to the wolves in the bottomless pit.
The markets will rise for a few days on the news. And then reality will set in once again. The reality of too much debt. Only now, that debt will have grown by €2 trillion. Pretty simple, really. And pretty stupid too, to just sit back and let it happen to you.
We're talking about "saving" banks and countries for a limited period of time that have no chance of surviving beyond that time without ever more and ever larger financial injections. We're doing so with money leveraged on nothing but the future earning power of our children. And then we label this "stability", and claim we use it to restore confidence. Some logic.
There are no miracles in Greek tragedies
by Jeff Randall - Telegraph
Lending ever greater sums to a mismanaged and corrupt economy won’t make it solvent
Just before the roof fell in on Kweku Adoboli, the UBS trader whose "miscalculations" cost his bank $2.3 billion, he posted a message on Facebook: "I need a miracle." Keep an eye out for something similar from George Papandreou, Greece’s prime minister, who has been telling us: "Let everyone be certain, Greece will not default, we will not let it default." Nothing short of a supernatural event is now required for that promise to be met – the Greek bubble is about to pop.
There are similarities between Mr Adoboli’s flame-out and Greece’s imminent bankruptcy: failure of regulation, credulity of investors and a desperation to throw good money after bad. The difference, however, is scale. UBS’s losses are shocking but manageable. By contrast, when Greece repudiates all, or even part, of its 370 billion euros of debt, the foundations of the single currency will crack and many bystanders will be hurt.
Financial pain will be accompanied by the political humiliation of European Union leaders and their apologists in the commentariat who boasted that such an outcome was impossible because there was the "necessary will" to prevent it occurring.
The fallacy at the heart of this crisis is that every financial problem has a political solution. If only. Yet the Brussels elite and its co-conspirators at the IMF continue to promise that by "doing all it takes" they will, somehow, defy indefinitely economic gravity. This illusion of political primacy is perpetuated because a confession of impotence would not only undermine the worth of those in power but also expose the euro’s fatal flaw: monetary union without fiscal union is a marriage that weds the prudent to the profligate with no control over the latter’s spending.
Voters who were taught that debt-fuelled consumption was the path to prosperity are now shocked to discover that the racket is bust. Unwilling to accept the agony that comes with retrenchment, they expect those in charge to administer analgesics. In the short run, chary of disappointing the electorate, pusillanimous ministers load up the system with financial morphine. For a while it feels good. Then the patient demands a bigger fix, and another, and another. Eventually the drug providers wake up to a nightmare: the syringe is empty. When costs rise exponentially, even the rich run out of money.
The bail-out of Greece began with a 100-billion-euro package. Very soon a second deal of the same order was required. Now we learn that the 440-billion-euro European Financial Stability Facility may need to be five times bigger to beat back the Debt Beast, which, having gobbled up Greece, is turning its attention to Italy, where Silvio Berlusconi is in a 1.9-trillion-euro hole.
As my Daily Telegraph colleague Peter Oborne explains in his report for the Centre for Policy Studies, Guilty Men, Greece’s calamity and the unravelling of the euro zone are hugely embarrassing for the soi-disant intellectuals who urged the United Kingdom to abandon sterling for the euro. I still marvel at a paper, Why Britain Should Join The Euro, written in 2002 by Richard Layard (London School of Economics), Willem Buiter (Citigroup), Christopher Huhne (Energy Secretary), Will Hutton (ubiquitous Left-wing commentator), Peter Kenen (Princeton University) and Adair Turner (former director-general of the CBI).
It asserts: "Opponents of the euro have forecast disasters which have in fact never happened and which always looked most unlikely… Euro-sceptics constantly underestimated the competence of Europeans and their ability to organise things properly." What, like allowing Greece to fiddle its entry form?
Euro-fanatics are not alone in being routed by the debacle in Athens. Those who denounced opponents of budgetary incontinence are also squirming. Warnings that excessive debt would drown countries awash with borrowings were dismissed by progressives as cave-man economics. Who are the Neanderthals now?
At the risk of giving Johann Hari, the disgraced plagiarist, more space than he deserves, here’s his analysis: "Debt isn’t the problem. Debt is part of the cure. The facts suggest [we] need to spend more, not less, to get the economy back to life – and pay back the debt in the good times, when we will be able to afford it."
While Mr Hari is attending truth awareness classes, perhaps he should ask for some lessons in economic history. Between 2003-2007, the UK was, apparently, enjoying a boom. These were the "good times". So how much debt did the state repay in that period? Answer: nothing. In fact Gordon Brown borrowed, on average, £32 billion pounds a year, clocking up £160 billion of debt at a time when tax revenues should have been tucked away as a shield against future storms.
The lesson of Greece is that lending ever greater sums to a mismanaged and corrupt economy does not make it solvent. It defers the day of reckoning, but delivers no salvation. To escape from debt, a sovereign borrower has four options. It can spend less than it earns and use the surplus to diminish obligations. Greece has little hope of that. It can sell assets. The trouble is, Greece’s 50-billion-euro privatisation programme knocks only a small hole in its commitments and is way behind schedule.
It can inflate away its debt, but the European Central Bank, the guardian of the euro’s integrity, will not permit Greece to do so. Finally it can bilk its creditors and start again. It’s a financial solution to a financial crisis – and that’s what Greece will do. Because, as Kweku Adoboli discovered, miracles are hard to find.
Trader on the BBC says Eurozone Market will crash
Europe thinks the unthinkable to solve crisis
by Peter Spiegel - FT
The window for resolving the eurozone’s sovereign debt crisis is closing more quickly than policymakers anticipated. Choices on Greece and the future of the euro that were once considered a long way off now must be settled within weeks.
Eurozone governments, many facing growing public disquiet, must now address three overlapping policy discussions for stepping up their response to the crisis. Once-unthinkable proposals for fiscal union and shared responsibility for sovereign debt are now being hurriedly readied for ministerial discussion.
Senior European officials hope that by the time of a summit of European Union leaders in October, they will have: put in place powers for the eurozone’s €440bn rescue fund; agreed on the need to expand the fund’s firepower; and presented plans for further economic integration. But policymakers still have to work out countless disagreements that could doom the process.
1. A rescue fund with extra tools
The most immediate task facing European leaders has been on the front burner for more than two months: getting all 17 eurozone parliaments to approve the overhaul of the European financial stability facility, the bloc’s rescue fund.
Once resisted by Germany and the Netherlands, among others, they are now seen as essential to dealing with the two things that most threaten the survival of the eurozone: a meltdown of the banking system, perhaps starting in France, and a run on Italian and Spanish bonds.
Under the overhaul, the EFSF would be able to inject capital into banks and purchase bonds of distressed governments on the open market, lowering borrowing costs and giving capitals more time to implement reforms.
The politics of the overhaul have begun to get tricky. Although six parliaments have approved the measures, Finland – the most ornery of the eurozone’s six triple A rated members – is to vote on Wednesday, and passage is not assured.
All eyes then turn to Thursday’s vote in Germany, where Angela Merkel, the chancellor, has the support of opposition parties but faces a revolt from within her own coalition. "If any triple As step out, I think it’s a dead deal," said one senior EU diplomat.
Then there is Slovakia, where political opposition is strongest. "There’s a huge impatience in the bigger member states and they’re really, really upping the pressure," said Sony Kapoor, head of Re-Define, an economic consultancy that has worked with eurozone governments. If Slovakia fails to approve the deal, it may not be fatal but is likely to increase calls from other sceptical nations looking for opt-outs.
Mujtaba Rahman, Europe analyst for the Eurasia Group, said the biggest risk now was that EFSF powers would be diluted in the national parliaments in legislative horse-trading, drastically reducing their effectiveness. Already, the German Bundestag has insisted having approval rights over EFSF actions. There has been a renewed push by some eurozone officials, particularly within Germany, to re-examine a larger-scale "haircut" for Greek bondholders once the new EFSF powers are in place next month.
Many officials in Brussels and at the European Central Bank have resisted such moves, but some in Berlin believe the new EFSF powers will enable leaders to "ringfence" Greece and protect other struggling countries and European banks. "That’s what the moderates in Germany would like to see," joked a senior European official. But such support for a quick and hard default is limited and most officials believe it is unlikely.
2. Boosting the rescue fund’s firepower
For the EFSF to perform effectively its new duties, eurozone leaders have finally acknowledged that the fund – originally set up as a temporary facility to deal with small peripheral economies – is no longer big enough for its new tasks. Bail-outs for Ireland, Portugal and Greece have reduced usable EFSF guarantees to about €250bn ($336bn). Many contributing countries are now unable to increase their commitments for political reasons or because they could jeopardise their own credit ratings.
Instead, leaders are debating at least five different proposals on how to make EFSF money go further, mostly by leveraging the available remaining cash. One proposal is for the EFSF to guarantee losses of up to 20 per cent on sovereign bonds, for example of Spain and Italy, rather than buying the bonds outright. Such insurance would increase the value of EFSF support by five times and avoid upfront payments. Another variant would speed up by a year the creation of the EFSF’s replacement, the permanent European stability mechanism, which was originally to come into place in mid-2013.
Mr Kapoor says they fall along a spectrum, from relying on the EFSF alone to find ways to increase firepower to looking to the ECB to do most of the heavy lifting.
Unlike the EFSF, which is funded through guarantees, a large portion of ESM funding will come from paid-in capital from member states, money that could then be more easily leveraged in the financial markets.
Proposals that rely more on the ECB include turning the EFSF into a bank and allowing it to borrow money from the ECB, a nearly unlimited reserve. The plan has been criticised by the Bundesbank, however. Another version would keep the ECB purchasing sovereign debt as it now does but have the EFSF guarantee the bond purchases, moving potential losses to the fund rather than the ECB.
A broader restructuring of Greek debt is not likely until one of the new leveraging proposals is in place, and officials are divided over how long it could take. Eurozone finance ministers are likely to discuss proposals next week, and EU leaders could set out principles at their October summit. But getting the new plans in place could require another round of parliamentary approvals, which could push off their implementation – and plans for a restructuring of Greek debt – for months.
3. Closer economic integration and moves towards fiscal union
Eurozone leaders will also start debating wider-ranging reforms to establish more centralised EU authority over national economies. Herman Van Rompuy, the European Council president, will outline proposals at the October summit, including ideas for an EU finance minister and new bonds collectively backed by all 17 eurozone countries.
Instead, much recent debate has focused on whether a new round of treaty changes would be needed to implement the reforms. Opinion is highly divided, with several countries, including the UK, concerned that a wide-ranging debate on new EU treaties could lead to acrimonious fights within each member state that could destabilise the union. "Treaty change at this stage would be very dangerous," said one senior EU diplomat.
Some officials have argued that the eurozone already has authority to make big changes under the just-implemented Lisbon treaty, which gives the eurozone the authority to "strengthen the co-ordination and surveillance of their budgetary discipline". But European Commission lawyers are dubious, and officials said Germany was pressing hard for new treaties to enshrine tough rules that would prevent profligate members from undermining the currency.
Although collectively backed "eurobonds" are expected to be included in the debate, several officials noted that any move to pool risk would implicitly rely on Germany’s strong economy and credit rating – in return giving Berlin unparalleled authority to push for tough new treaty rules in exchange.
Geithner Tells Europe to 'Get On With It' After Global Chiding Over Crisis
by Ian Katz - Bloomberg
U.S. Treasury Secretary Timothy F. Geithner predicted that European governments will step up their response to their region’s debt crisis after a chiding from counterparts around the world.
"They heard from everybody around the world" in Washington meetings last week, Geithner said on ABC’s "World News With Diane Sawyer" program. Europe’s crisis is "starting to hurt growth everywhere, in countries as far away as China, Brazil and India, Korea. And they heard the same message from us they heard from everybody else, which is it’s time to move."
Geithner’s remarks maintain pressure on Europe ahead of finance minister and central bank gatherings next week and a decision on whether to disburse a loan Greece may need to avoid default. Speculation that rescue efforts will be strengthened spurred a rally in stocks even after Dutch and Finnish officials said they won’t boost commitments to a euro-area bailout fund.
Europe has "some time, but not very much time," Geithner said in the interview late yesterday. "If you listen carefully to what they said this weekend, not just to us in private, but what they said publicly, they’re foreshadowing now the escalation that’s going to come. And we’d like them to get on with it."
The MSCI Asia Pacific index of stocks gained 2.9 percent as of 11:48 a.m. Tokyo time, after national benchmark indexes rallied yesterday in all 18 western European markets except Greece and Norway. Futures contracts on the U.S. Standard & Poor’s 500 Index advanced 0.3 percent. The euro headed for a third session of gains, up 0.2 percent at $1.3554.
Europe’s Pledge
Euro-region finance chiefs committed at a gathering of the Group of 20 in Washington Sept. 22 to boost the flexibility of their rescue fund and "maximize its impact" by the time of the next G-20 conclave. Euro-area finance ministers meet Oct. 3. European Central Bank officials have indicated they will consider expanding liquidity provisions when they meet Oct. 6.
Geithner set the tone at the annual meeting of the International Monetary Fund and World Bank by warning that failure to combat the Greek-led turmoil threatened "cascading default, bank runs and catastrophic risk." That gathering followed the G-20 session.
People’s Bank of China Governor Zhou Xiaochuan said at the talks that the euro-area crisis "needs to be resolved promptly." Japan’s Finance Minister Jun Azumi said many G-20 members urged Europeans to implement a July plan to expand powers of the European Financial Stability Facility.
Japan Aid
Azumi told reporters in Tokyo today that Japan may weigh expanding its support to Europe through a regional bond fund if nations implement their pledged fiscal measures.
European leaders "recognized the need to escalate," Geithner said in the ABC interview. "They’re going to have to put a much more powerful financial framework behind this. I really believe that you’re going to see them do that, but we wanted to make sure they do it as quickly as they can and as definitively as they can."
German Chancellor Angela Merkel said Sept. 25 that euro- region leaders must erect a firewall around Greece to avert a cascade of market attacks on other European states and said expanding the powers of the region’s rescue fund, known as the EFSF, was necessary to avoid contagion.
The challenge of debt sustainability in Europe is in part a consequence of the 1999 inception of the euro as a single currency, the U.S. Treasury chief signaled.
Euro’s Legacy
European governments took advantage of the lower interest rates "that came with monetary union, and they borrowed a lot. And they spent too much. And the governments got very big. Benefits got very generous," he said.
Turning to the U.S., Geithner said "there’s a very good chance" Congress will approve President Barack Obama’s $447 billion jobs proposal. The plan, incorporating payroll-tax cuts and a $105 billion infrastructure program, is designed to help pull down the nation’s 9.1 percent unemployment rate. Geithner was in Louisville, Kentucky, yesterday to meet with leaders from businesses including Ford Motor Co. to discuss the jobs proposal and to tour operations of package-delivery company United Parcel Service Inc.
The European crisis "hurts us not just because it means that growth around the world will be slower and we’ll export less, but it hurts people very directly and very quickly when stock prices fall and the value of their pensions fall," Geithner said on ABC. "It makes people more tentative. And that’s why it’s so important to us that they move."
Germany at war over eurozone bail-out
by Philip Aldrick - Telegraph
European officials have confirmed that discussions are afoot to boost the eurozone bail-out fund's firepower as part of a grand plan to contain the region's sovereign debt crisis in Greece.
Confirmation of the talks, however, sparked outrage in Germany, where opposition politicians threatened to derail the plans by voting against a key amendment to the bail-out fund this Thursday. The head of Germany's constitutional court also piled on the pressure by warning the government not to circumvent the law "by the back door".
Despite the wrangling in Germany, markets across Europe staggered back to life on hopes that the crisis could be contained and the recovery restored. In the UK, the FTSE 100 rose 0.4pc to 5,089.37 after £78bn was wiped off shares last week. In France, the CAC 40 rose 1.75pc, and Germany's DAX recovered almost 4pc.
Policymakers in Europe are working on a three-pronged plan to ringfence the euro crisis around Greece.
Under the proposal, banks across the continent would be recapitalised with tens of billions of euros, the €440bn European Financial Stability Facility (EFSF) would be "leveraged up" through the European Central Bank (ECB) to provide €2 trillion of firepower, and Greece would be subjected to a managed default on 50pc of its debt but stay in the euro. Officials hope the move would restore confidence in Spain and Italy and calm nervous bond markets.
The developments follow mounting international pressure on Europe's leaders to fix their problems. President Barack Obama said last night that Europe's debt crisis "is scaring the world". On Monday, EU economic affairs commissioner Olli Rehn, confirmed that the euro bloc is "thinking about giving the EFSF greater leverage, to give it greater strength".
German ministers also hinted at plans to leverage the EFSF, but stressed the fund itself would not be increased. Chancellor Angela Merkel said the euro needed a firewall around Greece to stop the attacks on other European states. Finance minister Wolfgang Schaeuble insisted the EFSF needed to be more "efficient", adding: "We are giving it the tools so it can work if necessary. Then we will use it effectively but we do not have the intention of boosting its volume."
Leveraging up the EFSF through the ECB, though, would not be without risk. Germany and France could both lose their AAA credit rating, a top official at Standard & Poor's warned. David Beers, head of S&P's sovereign rating group, said: "There is some recognition in the eurozone that there is no cheap, risk-free leveraging options for the EFSF any more."
On Thursday, the German parliament is expected to vote through reforms to the EFSF agreed on July 21 to make it more flexible. However, the latest revelations have redoubled opposition efforts. Social Democrat Carsten Schneider said the government should come clean on its "real intentions" and that "the parliament and public are having the wool pulled over their eyes".
His fears appeared to be confirmed by François Baroin, France's finance minister, who said last week that the reforms would allow the EFSF to conduct joint operations with the ECB. Heaping more pressure on Chancellor Merkel, Andreas Vosskuhle, president of the German constitutional court, warned against further transfer of powers to Brussels. "If anyone wants to go beyond these boundaries, which may be politically justified, then Germany needs a new constitution. For that to occur, there must be a referendum," he said.
Separately, Spain today called a snap election for November 20. The government is seeking a mandate to push through unpopular reforms, with both parties committed to cuts. Greece also denied talk of an orderly default.
Hugh Hendry On The Critical Debate About The Eurozone Crisis
by Courtney Comstock - Business Insider
Hedge fund manager Hugh Hendry, whose prediction of the crisis in the Eurozone was spot on, says we're at a rare moment in economic history."The problem is greater than the ability of the politicians to respond," he says in a radio debate on BBC's Bottom Line.
"There is no policy prescription that they can offer that will redeem the situation. The redemption will come through the citizens of Greece and elsewhere throwing the politicians out and rejecting the European ideal."
Hendry's view on what the solution should be (a Greek default that doesn't protect the creditors) is quite different than Evan Davis' - the BBC host - and Brent Hobermann's of mydeco.com, another guest on the show. Theirs also happens to be the opinion which we heard resounding at the Bretton Woods conference in DC, which is that something BIG needs to happen.
Everyone agrees that the big question right now is: is this Eurocrisis one of those in which leaders should implement incremental solutions until... (some later point)? OR is it one in which we need a big action?
We're seeing an increasing divide in how economists and politicians, and how private money managers answer the question.
Tim Geithner, Hobermann and Davis, and Larry Summers, for example, say that the Eurocrisis can only be solved by a big action proposed by a big leader.
That process of being open to contemplate that big action, and take that big risk, is essential, says Davis.
Hobermann agrees.
He says, "Hugh doesn't like the word emergency or crisis but I think that's the only catalyst which will make people [act] - because most of the time, people are thinking just about their own political survival, not necessarily about the UN, but if you link the two inextricably in an emergency situation, then they have to think in that bigger picture and not just about votes next week."
Summers said something similar at Bretton Woods. "One of the most difficult problems during a crisis is finding the language that generates concern and action, but that won’t trigger despair," said Summers on Friday.
Hendry has other ideas about a solution. He says, "Bankruptcy is a solution [because] creditors who extended that debt [to Greece] - that was a folly. All this firefighting is trying to protect the creditors, as opposed to the oppressed person."
Hendry's view is that Greece should default and leave the Euro. "Greece needs a real exchange rate," he says. "If you go on a drachma and [a beer in Greece is] .50p, there's a stimulus that's not open to them today [cheaper money]."
Hendry says the UK is in depression - not recession - and it will take years to get back to where we were in 2006 and 2007. It's been 5 years since the financial crisis, and it might take another.
That Hendry's opinion differs from that of economists is not surprising. Economists and politicians will point the finger frequently at hedge fund managers and "speculators" now. Hendry believes their anger is rooted in the inability of a policy prescription to solve the Eurozone crisis.
He's been right about the Euro crisis in the past. However there is strong pressure coming from Geithner and other leaders for the ECB and/or another European entity to take control via a decisive action.
So it seems like the question right now is, is it possible for a leader to step forward to announce and implement the solution, in a time when politicians, because of party politics, have questionable authority?
(Also interesting: Hendry is no longer the CEO of Eclectica. He's the CIO, and his CEO has banned him from media. Terrible news!)
Geithner Plan for Europe is last chance to avoid global catastrophe
by Ambrose Evans-Pritchard - Telegraph
Europe, the G20, and the global authorities have one last chance to contain the EMU debt crisis with a nuclear solution or abdicate responsibility and watch as the world slides into depression, endangering the benign but fragile order that has taken shape over the last three decades.
The threat of cascading default, bank runs, and catastrophic risk must be taken off the table," said US Treasury Secretary Tim Geithner over the weekend. "Sovereign and banking stresses in Europe are the most serious risk now confronting the world economy. Decisions cannot wait until the crisis gets more severe."
Euroland's dysfunctional arrangements are no longer a local affair. As the European Central Bank's Jean-Claude Trichet said in Washington, EMU is at the epicentre of a global sovereign debt crisis that risks engulfing all, and is more intractable than 2008 because governments themselves are now crippled.
China, India, Brazil and the world's rising powers will not escape lightly this time if leaders let events spiral out of control. European banks have lent $3.4 trillion to emerging markets (BIS data), or three quarters of external loans to these countries.
The International Monetary Fund warned last week that emerging markets face the risk of "sharp reversals" or even a "sudden stop" if there is further spill-over from Europe. This comes at a time when Asia and parts of Latin America are already in the topping phase of a credit boom, one of epic proportions in China where loans have doubled to almost 200pc of GDP over the last five years.
Warning signs have been flashing red for the last three weeks. Shares of China's top property developer Greentown have crashed by a third this month. The currencies of Indonesia, Brazil, Korea, South Africa, and Hungary have all buckled, and central banks have begun intervening to stop the slide. "A continued flight from risk raises the growing possibility of investor capitulation in emerging markets," said Neil Mellor from BNY Mellon.
The reserve powers would be well advised to pull out all the stops to save Europe and its banking system. Together they hold $10 trillion in foreign bonds. If they agreed to rotate just 4pc of these holdings ($400bn) into Spanish, Italian, and Belgian debt over the next two years, they could offer a soothing balm. None has yet risen to the challenge. It is `sauve qui peut', with no evidence of G20 leadership in sight.
Once again, the US has had to take charge. The multi-trillion package now taking shape for Euroland was largely concocted in Washington, in cahoots with the European Commission, and is being imposed on Germany by the full force of American diplomacy. It is an ugly and twisted set of proposals, devised to accomodate Berlin's refusal to accept fiscal union, Eurobonds, and an EU treasury. But at least it is big.
The EU's €440bn bail-out fund (EFSF) will be "leveraged" from €440bn to €2 trillion to cope with Italy and Spain. The fund will assume an "equity" stake of 20pc or so in holdings of EMU debt, supported by loans of 80pc from the European Central Bank.
Commercial banks that cannot raise money from Mid-East wealth funds will be seized by the state, partly or fully, or be recapitalized by the EFSF. This should leave them strong enough to absorb a 50pc default imposed on Greece, and potential knock-on defaults in Portugal and Ireland.
Or at least, that is the idea. We will see how the Bundestag reacts this week. It has not even voted on the July deal to boost the powers of the EFSF, itself a furiously contested plan that may provoke a 30-strong rebellion within Chancellor Angela Merkel's own coalition. German lawmakers now learn that implicit liabilities may be five times as big.
"We should not think of leveraging a public pot of funds as a free lunch," said Ireland's central bank governor Patrick Honohan. Indeed not. The details of this financial engineering have a familiar ring to those who remember the `CDOs' and other instruments of structured disguise before the subprime debacle. The bill comes due.
We will see too whether France is willing to swallow national pride and confront its own financial elite. Christian Noyer, the Bank of France's governor, denied on Sunday that French officials were mulling a capital injection of up to €15bn to beef up banks. "There is no plan, and we don't need one. The banks are very solid. None of them is hiding any toxic assets," he said.
What is the point of uttering such rubbish? The markets know this is untrue, and so does the IMF. It is an almost surreal refusal to recognize that investors are - for good reasons - terrified about French bank exposure to Italian sovereign debt. Mr Noyer encapsulates the mixture of stubborness and amour propre now threatening the world with disaster, and which is so like the French reflex as everything collapsed in mid-1931. Funny how they never change.
Even if the €2 trillion "Geithner Plan" does get off the ground, it can do no more than buy time - not to be sneezed at, for sure. The root of the euro crisis is a 30pc intra-EMU currency misalignment between North and South. That structural flaw cannot be solved with debt guarantees or bank rescues.
Nor can this gap in competitiveness be bridged by austerity alone, by pushing Club Med deeper into debt-deflation and perma-slump. Such a strategy must slowly eat away at Italian and Spanish society, undercutting the whole purpose of the EU Project. It would ultimately risk trapping them in a debt spiral aswell, leading to collosal losses for Germany in the end.
The Geithner Plan must be accompanied a monetary blitz, since the fiscal card is largely exhausted and Germany refuses to lower its savings rate to rebalance the EMU system. The only plausible option is for the ECB to let rip with unsterilized bond purchases on a mass scale, with a treaty change in the bank's mandate to target jobs and growth.
This would weaken the euro, giving a lifeline to southern manufacturers competing with China. It would engineer an inflationary mini-boom in Germany, forcing up relative German costs within EMU. That would be the beginning of a solution, albeit a bad one.
Sorry Deutschland. History has conspired against you, again. You must sign away €2 trillion, and debauch your central bank, and accept 5pc inflation, or be blamed for Götterdämmerung. It is not fair but that is what monetary union always meant. Didn't they tell you?
ECB fights to avoid role in euro zone rescue fund
by Marc Jones - Reuters
The European Central Bank battled to avoid being dragged further into the area of fiscal policy this weekend, as its policymakers stood firm against using the ECB to help supercharge the euro zone's rescue fund. The 17-country euro zone wants to convince financial markets that its bailout fund is big enough to handle any future debt troubles, but without having to tap resistant governments for yet more taxpayer money.
Over the last few weeks, the plans have been gathering momentum. One of the ideas that has been floated is to give the fund the ability to borrow money from the ECB's currently unlimited lending operations, which it could then use to inject into troubled government bonds or banks.
There was widespread rejection of such a maneuver, however, by key ECB figures and Klaus Regling, head of the fund, known as the European Financial Stability Facility (EFSF). "There are serious concerns about the compatibility with the ECB because it may not be in line with the prohibition of market financing, so I think it is very unlikely that you will see that," Regling told a panel discussion organized by the Euro50 group.
For the ECB, it is a case of not being dragged further beyond the central bank's core task of keeping inflation in check. The ECB is already deeply uncomfortable about buying government bonds, something it started doing last year, and there are fears its independence is being compromised.
"I think the whole idea of leveraging the EFSF is one of a variety of financial engineering innovations that have been put forward. Some of them are better than others, I'll leave it at that," Ireland's ECB Governing Council member Patrick Honohan told Reuters, when asked whether the ECB could be involved in bolstering the EFSF. "I think there are many other opportunities and possibilities that are maybe higher on the list (than using the ECB)," he said.
ECB Executive Board member Juergen Stark and former ECB heavyweight Axel Weber also hit out at pushing the central bank beyond its remit. "For monetary policy to remain effective, its responsibilities must remain within clear limits," Stark said in a speech. "Opportunistic manipulations of the monetary policy framework of course damage the foundations on which that framework rests."
Liquidity Deluge
Stark's comments came just hours after U.S. Treasury Secretary Timothy Geithner bluntly told European governments to eliminate the threat of a catastrophic financial crisis by teaming up with the ECB to boost the bailout capacity.
The International Monetary Fund also applied pressure, saying it would support interest rate cuts. Antonio Borges, head of the fund's European department, urged the ECB to continue to buy bonds once the EFSF gets the power to do so, saying the ECB was the only player with the ability to scare market speculators. Financial markets now expect the ECB to cut rates by 50 basis points back to a record low of 1 percent next month.
ECB President Jean-Claude Trichet warned at the IMF meeting that the euro zone was at the epicenter of a much bigger sovereign debt crisis and that risks to the stability of the financial system had risen considerably. Policymakers also indicated the ECB was ready to firehose another round of ultra-long liquidity into the banking system to subdue funding fears, a further move back in the direction of full crisis mode.
Debates at the meeting saw bankers recommending three- or even five-year funding operations, although ECB members suggested one-year operations were the likely first step. "One of the instruments we had was, in the context of full allotment of policy, to have one-year tenders," Austria's Ewald Nowotny said. "I think it might be advisable to think about reintroducing this approach. We could discuss a reintroduction."
Double-Dip?
Rate-cut expectations were also given a further boost by gloomy comments about the economy and the first signs the bank now fears the euro zone could fall back into recession. "It is more likely now that the second half of 2011 will be less positive than expected and the key question is whether the current slowdown in the global economy is largely a transitory phenomenon ... Could it lead to a double-dip or is it just a soft patch? This is the issue we will have to monitor," said Stark, who oversees the economics department.
Nowotny said growth forecasts could well be cut , while Weber warned he expected a further escalation of the debt troubles. "I fear very much the situation is going to deteriorate further before it improves," Weber said during a question-and-answer session.
"We all understand that there needs to be further action because what has been decided so far has not convinced the markets ... Ultimately I believe that if markets become much worse than they are now we will see drastic action (by policymakers to resolve the crisis)," he said.
For IMF, Debt Crisis Fears Spread Beyond US and Europe
by Jeff Cox - CNBC.com
Lost in much of the rancor and hand-wringing over the debt crisis in the European Union and the US is that it's not just those two regions that will be affected.
Instead, another financial pandemic, similar to or worse than the 2008 calamity, would infect multiple parts of the world, and particularly those emerging economies that are being counted on as the main drivers in the global growth engine. That contagion problem, as much as anything, is what keeps global policy makers awake at night.
World Bank President Robert B. Zoellick warned of "the looming danger that failure to take decisive action in Europe and the United States may shake the entire global economy, throwing developing countries off track...The numbers emerging out of developing countries over the past month, even the past week, are shaking and shaky."
Preventing the disease from spreading, then, will be a large focus of the various organizations — the World Bank, International Monetary Fund and G-20 — which will be hashing out the problem ahead of the early November G-20 conference in Cannes.
"We shouldn't be under any illusions. We are in this together," IMF Managing Director Christine Lagarde said. "Resolving the crisis in the advanced economies is a major priority because it affects everybody — not just the advanced economies but the rest of the economies."
Stemming the flow of the crisis — which centers for now on Greece's sovereign debt obligations, but could cascade quickly in case of a default — is paramount among IMF priorities.
Global leaders were taking great pains at the World Bank/IMF conference this weekend to dispel speculation and rumors about Greece defaulting and leaving the EU, and instead focused on what steps were being taken to resolve the problems.
"Greece is and will always be a euro area member state," Greece Finance Minister Evangelos Venizelos said in a statement. "At a moment that Greeks are subjected to new and very important new sacrifices, we regain of our lost credibility, we answer back to the negative stereotypes about Greece that have been floating around internationally over an extended period of time. "
Lagarde, too, fired back, saying the various negotiations and discussions yielded not only a framework going forward but also broad agreement that the organizations take action to stop the crisis from spreading. "We are halfway through and it's a question of pushing hard to get to the other side," she said in one of her more optimistic statements, which countered her rather grim opening remarks Friday.
Whereas on Friday she spoke of how "the mood outside is grim," the following day she referred to "a shared sense of common purpose" from officials gathered for the steering committee meeting. "There was no denial, there was no fingerpointing. It was about recognition and it was about support," Lagarde said. "Today we agree to act decisively to attack the danger confronting the global economy. There was dialogue and there was a clear response from the membership."
Earlier, billionaire investor and liberal activist George Soros predicted the euro zone crisis would be worse than the 2008 financial crisis heralded by the collapse of Wall Street banking titan Lehman Brothers. Soros said the crisis was especially pernicious because of the impact it would have on emerging economies that provide an increasing level of financing for the developed world.
IMF Chairman Tharman Shanmugaratnam said the organization is acutely aware of the global risks and is prepared. "The IMF is ready and it will deliver on any type of resources necessary and available to all its members," he said. "It's not just a euro-focused issue at the moment. There are other countries affected. It's a global occurrence."
Europe Split Threatens Rescue Plan
by Sudeep Reddy, Bob Davis And Geoffrey T. Smith - Wall Street Journal
Critical differences between European leaders threatened to stymie efforts to combat the euro zone's debt woes, despite mounting international pressure to contain a broadening crisis.
After a weekend of tense meetings among world finance officials here, euro-zone leaders were weighing options to maximize the size of their bailout fund by borrowing against it. The move could provide trillions of dollars of firepower to rescue governments and banks—-but only if all 17 euro-zone legislatures approve a two-month-old agreement to broaden the bailout fund.
Highly public opposition from Germany, the largest and most powerful euro-zone economy, could block the plan. Policy makers are "focused on their own internal restraints, so that we don't have the outcome that we need," Antonio Borges, head of the International Monetary Fund's Europe department, said Sunday. While key players were understandably acting in self-interest, he said, it was generating "disastrous" collective results.
A deep sense of anxiety hung over the IMF's annual meeting. Three years ago, finance officials gathered after the failure of Lehman Brothers sent the global economy spiraling into its deepest downturn since the 1930s. This year, the risk of Europe bringing down the financial system topped everyone's minds.
The latest turmoil is "more serious than the crisis of 2008," said billionaire investor George Soros. Three years ago the institutions necessary to fight the crisis were in place, he said, but today European leaders need a continental Treasury Department and instead are working with "an embryo" in the form of a €440 billion ($594 billion) rescue fund.
The fear on everyone's minds after the market turmoil of the past week: Would investors outpace European politics and start a cascading global financial crisis? Rampant rumors about an imminent Greek default, despite denials from Greece and others, threatened to do just that. Some European leaders acknowledged they are behind the curve in formulating a decisive response. "Time is strategic, and there's little of it left," said Italy's finance minister, Giulio Tremonti. "We've wasted too much of it."
Throughout the weekend, officials involved in the European response hinted at their options to respond with new force. Leveraging the bailout fund by borrowing against it could enable it to cover investors' first losses. That money could be used to buy debt on the market or inject capital into banks.
Officials are also discussing how to use the European Central Bank's balance sheet—with trillions of dollars of lending capacity—to protect the euro zone further by buying more debt or backing debt. Some of the options could be used to help prevent a Greek default, or even attempt to insulate the rest of the euro zone from a Greek default by pushing capital into European banks and building a firewall around larger vulnerable euro-zone nations like Spain and Italy.
But warnings from the German finance minister, Wolfgang Schäuble, suggested serious obstacles remain. "We won't come to grips with economies deleveraging by having governments and central banks throwing—literally—even more money at the problem," he told the IMF meetings. He told reporters that the bailout fund can only work within the legal framework of the European Union's treaty, and more specifically, within the agreement governing the bailout fund. Neither of those allows the facility to be leveraged, he said.
Deutsche Bundesbank's Jens Weidmann also said leveraging the bailout fund, specifically by allowing it to borrow from the ECB, would be equivalent to the monetary financing of state budgets, which is forbidden by the EU treaty. Other Europeans and leaders outside the euro zone maintained hope that they could finesse the problem by devising a format that Germany and the ECB could support.
European policy makers throughout the meetings consistently articulated their intent to boost the fund's firepower, a senior U.S. official said, but they are likely to be cautious about discussing details of their plans until they can secure approval from national parliaments for an expanded rescue fund.
U.S. officials, who have urged euro-zone leaders to leverage their bailout fund, continued to press for action. Treasury Secretary Timothy Geithner said on Saturday, "The threat of cascading default, bank runs, and catastrophic risk must be taken off the table, as otherwise it will undermine all other efforts, both within Europe and globally."
The days leading up to the meeting carried some hope that big emerging-market countries—which depend on Europe as a key customer for their exports—could be part of a common solution to the European crisis. Several of their leaders indicated they could help down the road, but said that first Europe would need to take action.
Chinese leaders made clear they didn't see China as having an elevated role in Europe, despite the country's $3.2 trillion in foreign reserves. "We can't just go save someone," said Gao Xiqing, president of China Investment Corp., the country's huge sovereign-wealth fund, at a panel discussion Saturday. "We're not saviors. We have to save ourselves," he said.
China, often in the crosshairs at the meetings for its foreign-exchange policies, was seen as a potential engine of growth and investment. "Many economies with external surpluses, notably China, can support domestic demand by reducing the pace of fiscal consolidation," said an IMF report issued to its members over the weekend.
Zhou Xiaochuan, China's central bank governor, said it was unrealistic to think China could boost growth much more than the 9% pace it is running now. "Some people may have an irrational hope that the higher the growth the better," he said at a Saturday news conference. Annual growth of between 8% and 10% was a "reasonable expectation," he said. He said Chinese outward investment was growing, but cautioned against unrealistic expectations. When it comes to overseas markets, "many Chinese investors and entrepreneurs are in the learning stage," he said.
£1.75 trillion deal to save the euro
by Patrick Hennessy - Telegraph
British taxpayers risk being caught up in a £1.75trillion deal aimed at saving the euro by allowing Greece to default on its massive debts.
The three-pronged deal would set up a massive fund to create a "firewall" around the most indebted eurozone countries, allow for an "orderly" Greek default on at least some of its liabilities, and bail out European banks most at risk from debt. German and French officials came up with the strategy which aims to end the eurozone's sovereign debt crisis before it spirals completely out of control, plunging the world back into recession.
The likely deal came ahead of a major new setback for the British economy - with BAe Systems, Britain's biggest manufacturer, poised to cut 3,000 jobs. Whitehall officials believe the job losses could be announced as early as this week and are likely to affect the company's military aircraft division in Warton, Lancashire, and Brough, Yorkshire.
The eurozone deal, being brokered by the G20 group of nations, would seek to "ring fence" the crisis around Greece, Portugal and Ireland - preventing it from spreading to major EU economies such as Italy and Spain. It would involve the bailing out those European banks - mostly French - most at risk from their massive lendings to tottering economies.
Greece, crucially, would be able to default on at least some of its more than £300billion debts but remain inside the eurozone. The Greek government's private creditors would bear most of the increased costs. At this stage, a new bail-out programme would be devised for Greece - with cash coming at least in part from the International Monetary Fund, in which Britain holds a 4.5 per cent stake.
This could mean British taxpayers paying out more than the £1billion they are already slated to have to contribute under the terms of the first Greek bailout fund. Britain is not a member of the European Financial Stability Fund (EFSF) - which was set up last year to "preserve financial stability of Europe's monetary union" by providing temporary financial assistance to eurozone countries in difficulty.
Most of the money in the new rescue package would come from the EFSF - limiting Britain's involvement. The fund is currently valued at £350billion, but would need much more cash pumped into it from its members states. Britain's banks, moreover, are not among the most exposed to Greek debt.
The deal would also use cash to buy up the government bonds issued by Italy and Spain - which are currently going unsold and adding to the peril surrounding the eurozone's third and fourth largest economies. In total it would amount to euro 2 trillion - £1.75 trillion.
Any agreement, according to experts, would be similar to the proposal made to eurozone nations by Tim Geithner, the US Treasury Secretary, earlier this month. Germany - the key player in the eurozone - initially rejected the suggestion but is understood to have been sparked into action on a variation of the plan by the recent turmoil on world financial markets.
Last night George Osborne, the Chancellor, attempted to play down suggestions of an imminent deal. He said: "No-one here has put forward a plan for that. Greece has got a programme and needs to implement it." Last week, Mr Osborne warned the eurozone it has six weeks to fix the crisis or risk world economic meltdown. He said the situation must be brought under control by November's G20 summit in Cannes, France and added: "Time is running out."
David Cameron, in a speech in Canada last week, criticised eurozone leaders for failing to come up with a solution to the crisis and added that the global economy was close to "staring down the barrel". It was the Prime Minister's gravest warning yet about the economic outlook. He told European leaders to stop "kicking the can down the road".
Christine Lagarde, the managing director of the International Monetary Fund, has said: "There are dark clouds over Europe and there is huge uncertainty in the US. And with that we could risk a collapse in global demand. "Let's remove the clouds and remove the uncertainty. Easier said than done, and it requires clearly a collective action."
Europe aims to beef up crisis fund
by David Lawder and Daniel Flynn - Reuters
Europe is working on ways to boost the firepower of its bailout fund, a top European official said as the United States, China and other countries turned up pressure on the euro zone to contain its debt crisis.
Signs are growing that Europe is readying new measures to prevent fallout from Greece's near-bankruptcy from spreading to other euro zone countries, threatening the region's banks and hurting the world economy. The European official said on Saturday the euro zone countries cannot boost the size of the 440 billion-euro fund, known as the EFSF, because Germany would not agree to such an increase.
"We need to find a mechanism where we can turn one euro in the EFSF into five, but there is no decision on how we could do that yet" the official said, speaking on condition of anonymity.
The United States and other countries have urged Europe to leverage up the European Financial Stability Facility, possibly by using funds from the European Central Bank.
In a statement, the International Monetary Fund's steering committee said the euro zone would do whatever was necessary to resolve the single currency bloc's sovereign debt crisis. U.S. Treasury chief Timothy Geithner, in his most explicit warnings to date, said the ECB should take a more central role in fighting the crisis.
"The threat of cascading default, bank runs, and catastrophic risk must be taken off the table, as otherwise it will undermine all other efforts, both within Europe and globally," Geithner told the IMF.
Financial markets have been wracked by fears the Greek debt crisis could overwhelm other euro zone countries and banks. Investors took some comfort on Friday from signs of new resolve by European officials to bolster their defenses after nearly two years of what many see as half-hearted action.
Many policymakers now talk openly of possible Greek default and the need for Europe to move much more aggressively to cope with it. "Decisions as to how to conclusively address the region's problems cannot wait until the crisis gets more severe," Geithner said.
His warning was echoed by China's central bank governor Zhou Xiaochuan, who urged quick action to bring greater financial stability to the European region. "The sovereign debt crisis in the euro area needs to be resolved promptly to stabilize market confidence, and forceful and credible fiscal consolidation measures are needed in relevant economies to alleviate sovereign debt stress," Zhou told the IMF.
The semi-annual gathering of the IMF and World Bank is dominated by worry about the risk that Europe now poses to the rest of the world. A default by Greece could cause a domino effect in other highly indebted euro zone countries, officials fear, putting at risk Europe's banking system given the size of holdings of debt issued by weak European nations. Canada's central bank governor, Mark Carney, told Canadian radio that the euro area's bailout fund should be more than doubled to "the neighborhood of a trillion euros."
Greek finance minister Evangelos Venizelos told reporters that Athens was determined not to default. "Greece is determined to honor all its obligations. No Greek paper will ever go uncovered."
Geithner wants more cooperation among European policymakers -- who set their own tax and fiscal policy -- and their central bank that is mandated to focus on keeping inflation low. "European governments should work alongside the ECB to demonstrate an unequivocal commitment to ensure sovereigns with sound fiscal policies have affordable financing, and to ensure that European banks have recourse to adequate capital and funding to win the full confidence of their depositors and creditors," Geithner said.
The United States has been pushing for a heightened role for the ECB. Washington has pointed to the way the Treasury and the Federal Reserve cooperated during the 2007-2009 financial crisis which threatened to engulf the U.S. banking system.
One option could be for the ECB to commit large amounts of funding, with the European Financial Stability Facility, Europe's temporary bailout fund, putting forward money to cover potential losses.
In another sign of Europe considering new measures to tackle the crisis, a senior lawmaker from German Chancellor Angela Merkel's conservatives said the euro zone's permanent rescue mechanism should be introduced sooner than mid-2013 to beef up private creditors' response to the Greek debt crisis.
But in a reminder of how sensitive some European officials are to the ECB taking a more active role in the crisis, a board member of Germany's central bank, the Bundesbank, suggested the time was coming for the ECB to stop buying government bonds. "I think the time is coming for this to stop," said Joachim Nagel, adding that the ECB's bond buying was only supposed to be a temporary measure until the euro zone's bailout fund is beefed up with powers to buy bonds and lend to governments.
Another top ECB official sought to quash growing expectations that Greece will eventually default. ECB Governing Council member Athanasios Orphanides said the idea of a Greek default was "surreal" but warned that it could occur as the result of a "political accident."
Greece is in tense talks with the IMF and European authorities to secure a new 8 billion-euro installment of its rescue package. In return, Athens has pledged deep austerity measures but negotiators are frustrated at what they say is Greece's slow reform pace. October's loan payment, however, is still widely expected to be made. The next installment is due in December.
Germany, as the strongest economy in Europe, plays a central role in any effort to curb a debt crisis but public opinion there has turned against further big bailouts for fellow euro zone countries. Finance Minister Wolfgang Schaeuble said on Saturday he will meet Venizelos, while in Washington for the IMF meetings. "We are permanently in contact and talk a lot," Schaeuble said, a day after Merkel said a Greek default was not an option for her.
"The damage would be impossible to predict," Merkel warned members of her political party in Germany. Greece's Venizelos was quoted by two newspapers on Friday as saying an orderly default with a 50 percent haircut for bondholders was one way to resolve the heavily indebted euro zone nation's cash crunch.
Geithner sounds alarm on Europe
by Ben Rooney - CNNMoney
U.S. Treasury Secretary Tim Geithner warned Saturday that the sovereign debt and banking crisis in Europe represents "the most serious risk now confronting the world economy." In an official statement to the International Monetary Fund, Geithner also discussed the need to both support the U.S. economy in the short term and take steps to lower the nation's long-term deficits.
But his strongest comments were directed at Europe, where the specter of a default by the Greek government has upset financial markets around the world. The nation's long-standing debt problems are threatening to spill over into the European banking system, with possible repercussions for the fragile U.S. economy. While he praised the actions European leaders have taken so far, Geithner said more needs to be done to create a "firewall against further contagion."
"The threat of cascading default, bank runs, and catastrophic risk must be taken off the table, as otherwise it will undermine all other efforts, both within Europe and globally," the Treasury chief said. "Decisions as to how to conclusively address the region's problems cannot wait until the crisis gets more severe."
Geithner also reiterated his argument that President Obama's recently proposed $447 billion plan to boost hiring and employment could create one million jobs "at a critical moment in the recovery." At the same time, Geithner reaffirmed the administration's commitment to reduce deficits by more than $3 trillion over 10 years by cutting spending and reforming the nation's tax code.
Geithner's comments came as global finance ministers and central bankers gathered in Washington for the annual meeting of the IMF and the World bank. The meeting takes place against a backdrop of economic gloom and deep anxiety over the sovereign debt and banking crisis in Europe.
Christine Lagarde, the newly appointed managing director of the IMF, noted the grim mood in her opening remarks earlier Friday. "All across the world, people worry more and more about their futures and their children's futures," she said. "They are looking to us for solutions."
Lagarde urged policymakers in developed nations to take urgent and coordinated action to address what she called a "crisis of confidence" in the global economy. The U.S. government must act now to reduce long-term deficits while being careful not to hurt the nation's fragile economy by cutting spending too aggressively, she said.
In Europe, Lagarde said countries with unsustainable debts and dim economic prospects must follow through on commitments to reduce deficits and boost growth. At the same time, she called on stronger European economies to "do whatever it takes" to support the weaker members of the European Union.
On Thursday, finance ministers from the Group of 20 major economic powers issued a statement saying that they remain "committed to a strong and coordinated international response to address the renewed challenges facing the global economy." However, the statement was seen as a disappointment by many investors and commentators who argue that being committed to action and actually taking action are two different things.
Multi-trillion plan to save the eurozone being prepared
by Philip Aldrick and Jeremy Warner - Telegraph
European officials are working on a grand plan to restore confidence in the single currency area that would involve a massive bank recapitalisation, giving the bail-out fund several trillion euros of firepower, and a possible Greek default.
German and French authorities have begun work on a three-pronged strategy behind the scenes amid escalating fears that the eurozone’s sovereign debt crisis is spiralling out of control. Their aim is to build a "firebreak" around Greece, Portugal and Ireland to prevent the crisis spreading to Italy and Spain, countries considered "too big to bail".
According to sources, progress has been made at the G20 meeting in Washington, where global leaders piled pressure on the eurozone to fix its problems before plunging the world back into recession. In a G20 communique issued on Friday, the world’s leading economies set themselves a six-week deadline to resolve the crisis – to unveil a solution by the G20 summit in Cannes on November 4.
Sources said the plan would have to be released as a whole, as the elements would not work in isolation.
First, Europe’s banks would have to be recapitalised with many tens of billions of euros to reassure markets that a Greek or Portuguese default would not precipitate a systemic financial crisis. The recapitalisation plan would go much further than the €2.5bn (£2.2bn) required by regulators following the European bank stress tests in July and crucially would include the under-pressure French lenders.
Officials are confident that some banks could raise the funds privately, but if they are unable they would either be recapitalised by the state or by the European Financial Stability Facility (EFSF) – the eurozone’s €440bn bail-out scheme.
The second leg of the plan is to bolster the EFSF. Economists have estimated it would need about €2 trillion of firepower to meet Italy and Spain’s financing needs in the event that the two countries were shut out of the markets. Officials are working on a way to leverage the EFSF through the European Central Bank to reach the target.
The complex deal would see the EFSF provide a loss-bearing "equity" tranche of any bail-out fund and the ECB the rest in protected "debt". If the EFSF bore the first 20% of any loss, the fund’s warchest would effectively be bolstered to €2 trillion. If the EFSF bore the first 40% of any loss, the fund would be able to deploy €1 trillion.
Using leverage in this way would allow governments substantially to increase the resources available to the EFSF without having to go back to national parliaments for approval, which in a number of eurozone countries would prove highly problematic.
The arrangement is similar to the proposal made by US Treasury Secretary Tim Geithner to the eurozone at the September 16 EcoFin meeting in Poland. Gathering turmoil in financial markets has convinced Germany to begin work of some kind of variant of the US plan, despite having initially rejected the notion as unworkable as threatening to compromise ECB independence.
The proposal would be hugely sensitive in Germany as its parliament has yet to ratify the July 21 agreement to allow the EFSF to inject capital into banks and buy the sovereign debt of countries not under a European Union and International Monetary Fund restructuring programme. The vote is due on September 29.
As quid pro quo for an enhanced bail-out, the Germans are understood to be demanding a managed default by Greece but for the country to remain within the eurozone. Under the plan, private sector creditors would bear a loss of as much as 50pc – more than double the 21pc proposal currently on the table. A new bail-out programme would then be devised for Greece.
Officials would hope the plan would stem the panic in the markets and stop bond vigilantes targeting Italy and Spain, which European and IMF figures believe should not be in any immediate distress but are in need of longer-term structural reform.
Delegates at the IMF meeting in Washington claimed that there had been "a visible shift in pace and mood" to address sovereign debt problems, particularly in the eurozone. But George Osborne, the Chancellor, said today: "No one here has put forward a plan for that. Greece has got a programme and needs to implement it."
German Central Bank Opposed to Merkel's Euro Course
by Peter Müller, Christian Reiermann, Michael Sauga, Christoph Schult and Anne Seith - Spiegel
The new Bundesbank president, Jens Weidmann, used to be one of Merkel's closest advisers. Now, he is one of her staunchest critics over the euro rescue. He is strictly opposed to the European Central Bank's policy of buying up bonds from debt-stricken countries -- and is winning a growing number of allies for his cause.
Jens Weidmann knew what would happen, but he had to make the joke anyway. He owed it to himself and to his new position as head of the Bundesbank, Germany's central bank. "Did you leave so much space between us on purpose?" he asked German Finance Minister Wolfgang Schäuble with a cheeky grin. Indeed, the podium that had been set up for their joint press conference on Friday in Washington really did have generous dimensions, leaving enough space for two or three people between them.
Schäuble examined the distance between them. Then he answered, with a pained smile: "We did that because of your independence."
One of Merkel's Fiercest Adversaries
Germany is marveling at a breathtaking shake-up of political roles. For five years, Weidmann served as an economic adviser to Chancellor Angela Merkel. During that period, he was loyal to her, even seeming too keen at times. But now, in his new role as president of the Bundesbank, he has become one of her fiercest adversaries.
Weidmann has criticized decisions related to the euro bailout as "inconsistent" and "highly risky." He has called on politicians in Berlin to change their course, and he has been advocating "the Bundesbank's principles regarding stability." All of those things put him at odds with top officials at the European Central Bank (ECB).
Behind the glass facade of ECB headquarters in Frankfurt, a fierce battle over fundamental beliefs has been smoldering for months. ECB President Jean-Claude Trichet and the majority of his colleagues are willing to rush to the aid of embattled EU finance ministers and to make major purchases of the sovereign bonds of debt-ridden euro-zone countries, such as Greece, Portugal and Italy.
For his part, Weidmann is strictly opposed to these measures. He believes they amount to an unacceptable means of financing states through effectively printing money. In fact, he has come to assume the mantle of the last staunch defender of monetary stability. His views were shared by his predecessor, Axel Weber, and the ECB's former chief economist, Jürgen Stark, both of whom stepped down from their positions because it was getting lonelier and lonelier on their side of the battle.
Weidmann, on the other hand, plans to keep fighting -- and in full public view. He gives speeches and interviews, like the one he gave to SPIEGEL last week. He riled Europe's finance ministers at their most recent summit in the Polish city of Wroclaw. And he has been having serious talks with the members of the budget committee of the Bundestag, the German parliament. Indeed, in an unprecedented campaign, Weidmann is trying to rally a majority of ECB council members to re-adopt the monetary-policy principles that Germany has traditionally championed.
'I Hope Weidmann Succeeds'
Having a Bundesbank president as the leader of the opposition on monetary policies is something that has seldom happened before in the subtle and sophisticated world of central bankers, who like to cloak even their fundamental decisions in opaque hints and insinuations.
Indeed, the game that Weidmann has started is a risky one. If he gets his way, the ECB could emerge from its worst-ever crisis even stronger than before. If he fails, the Bundesbank's positions on monetary policies might be buried for good. "I hope Weidmann succeeds," says Thomas Meyer, the chief economist at Deutsche Bank, Germany's largest bank. "But I wouldn't bet on it."
Ironically, one of the things threatening Weidmann's chances of success is his popularity among Germans, who have gotten plenty of exposure to the young Bundesbank chief in recent days. He has become the new star of the euro crisis.
On Sept. 13, for example, Weidmann swept into a packed hall in Cologne's elegant Hotel Barceló to deliver a speech at the invitation of the ASU, an association of family-owned businesses in Germany. Dozens of executives from companies based all over Germany sat on chairs with gilded frames while ASU President Lutz Goebel, the head of a motor company in Krefeld, set the tone for the event. Goebel complained that some of the teetering countries in the euro zone had "no business model" and that Germany's government was constantly throwing "good money after bad."
Weidmann's voice also grew louder as he approached the key passages in his 23-page speech. The balance sheet of the ECB is "burdened with significant risks" because it has purchased sovereign bonds, he said, adding that he would advocate against any expansion of this policy "under any circumstances." In his closing, he stressed that "with or without others fighting by my side, this stance will remain." The speech was received with thunderous applause.
The Stereotype of a Technocrat
Weidmann is playing a role he does not necessarily look cut out for. With his Ph.D. in economics and neatly parted hair, he seems like the stereotype of the cool-headed technocrat. In his steep rise from being a division head at the Bundesbank to a senior civil servant in the Chancellery, he knew not to force himself and his opinions into the spotlight.
These days, Weidmann is the most influential critic of Merkel's bailout strategy. This change has led the chancellor to follow her former aide's campaign at a cool distance. Merkel has nothing against the fact that Weidmann's new job makes him the champion of the Bundesbank's traditional positions. But that doesn't mean she's going to support him. On the contrary, sources close to Merkel say that, at their most recent summit, European leaders expressly approved the ECB measures that she backs and Weidmann opposes.
This forces Weidmann to rely on finding allies on the ECB council who will back his position. Doing so isn't completely out of the question, however, as the most recent purchases of sovereign bonds have triggered growing unease among some people in the ECB.
In early August, after having already purchased the sovereign bonds of Greece, Portugal and Ireland, the ECB decided to also buy Italian ones for the first time. The measures were meant to help Italy scare off speculators and to apply lasting pressure to keep interest rates on Italian debt low.
Since then, the monetary watchdogs have come to fear that they are throwing their money into a bottomless pit. Indeed, despite having already purchased over €150 billion ($200 billion) in sovereign bonds, there is no success on the horizon. Every time Trichet's securities traders stop buying, the interest rates start going back up. In this way, what was originally envisioned as emergency assistance has turned into long-term subsidization.
No Impact on the Market
Even the expanded European Financial Stability Fund (EFSF), whose new powers are expected to be ready to use by the middle of next month -- assuming that all the euro-zone parliaments ratify the reforms by then -- won't change things much. In short, the amounts of money that would be needed to help Italy would simply be too big for it.
"If the EFSF purchased €50 billion worth of Italian sovereign bonds, it would exhaust a good deal of its free resources without achieving anything on the markets," say Michael Heise, chief economist at the German insurance giant Allianz. This has led many central bankers to fear that European leaders will soon put pressure on the ECB to take renewed action.
US Treasury Secretary Timothy Geithner has already done just that. At the recent summit in Poland with his European counterparts, Geithner called for a banking license to be issued to the newly expanded bailout fund. The suggestion was also discussed at the meeting of the International Monetary Fund (IMF) and the World Bank held last week in Washington. Even Finance Minister Schäuble said he would think about the idea.
If this model were actually implemented, the EFSF could purchase significantly larger amounts of state debt and deposit them at the ECB as collateral in return for fresh money with which it could, in turn, purchase additional sovereign bonds.
Nightmarish Idea
But what Geithner and the Obama administration view as a particularly elegant solution to the euro crisis is a nightmarish idea to stability champions like Weidmann. Last week, he warned the German parliament's budget committee that "state financing through monetary policy" would become a permanent fixture if the solution were adopted.
Weidmann's low opinion of the most recent suggestions is also shared by Luc Frieden, the finance minister of Luxembourg. In his view, the planned changes to the EFSF bailout fund are intended precisely to free the ECB from the necessity of having "to purchase sovereign bonds itself."
What's more, many economists don't view Italy as a candidate for a default at all. The country enjoys a strong industrial base, boasts tens of thousands of healthy companies and has comparatively little foreign debt. Indeed, most government debt is owned by the Italians themselves. And even the level of debt could easily change if Prime Minister Silvio Berlusconi would for once make a serious attempt to collect unpaid taxes.
But, instead, the conservative politician finds it more convenient to tap European institutions, as Italian Finance Minister Giulio Tremonti recently put it in a blunt comment. He also figures that Italy wouldn't have to introduce any more austerity measures if euro bonds already existed on a large scale.
Losing Patience
It's no surprise that Europe's central bankers are gradually losing patience. They no longer want to play the role of cleaning up after incompetent European politicians, and they're looking for an opportunity to demonstrate their independence.
This has only increased Weidmann's chances of recruiting supporters for his campaign. Last Tuesday, he already met with potential comrades-in-arms in Eltville, a small wine town near Frankfurt. The list of invitees included everyone on the ECB council who had ever given a hint of being open-minded toward the German position. Joining them were also Yves Mersch, Klaas Knot and Ewald Nowotny, the respective heads of the central banks of Luxembourg, the Netherlands and Austria.
One other Weidmann ally couldn't make it to the meeting because he was sitting on a Lufthansa flight heading from Frankfurt to Washington for an IMF meeting. Jörg Asmussen currently works in Berlin as a senior official in the German Finance Ministry. But, come 2012, he will head to Frankfurt to assume the position of Jürgen Stark, who announced his resignation as the ECB's chief economist in early September.
Though Asmussen has yet to make any public statements, he has made it clear to his confidants that he will number among Weidmann's allies. He detests the kind of mixing of monetary and fiscal policies that have come to characterize the attempts to save the euro.
Looking for Congratulations
But as long as Trichet remains at the ECB's helm, little will change in terms of its public stance. During a five-minute outburst at a Sept. 8 press conference, Trichet made it clear how much the German opposition had gotten on his nerves. "We have delivered price stability ... impeccably, impeccably," he angrily said. "I would like very much to hear the congratulations for an institution which has delivered price stability in Germany over 13 years."
But, ironically, instead of thanking him, the Germans even want to drag him to court on account of his bank's controversial purchases of the sovereign bonds of debt-ridden euro countries. Markus Kerber, a Berlin-based constitutional lawyer and financial expert, has filed a complaint at the General Court of the European Union in Luxembourg, hoping it will declare the purchases invalid and put a permanent halt to them.
In Kerber's view, by purchasing sovereign bonds, the ECB has violated a number of articles of the Treaty on the Functioning of the European Union, including articles 123 and 125, which deal with economic policy. In his complaint, Kerber says that "both the implementation of the program for the securities markets and the suspension of the credit quality threshold when determining whether the sovereign bonds of Greece, Ireland and Portugal were eligible to be treated as collateral by the central bank" violated the prohibition against purchasing government securities.
Preparing for the New Constellation
Still, it's going to take more than a court decision to settle this conflict. That will primarily be the job of Mario Draghi, the Bank of Italy governor who will succeed Trichet as ECB president in November. At that point, he will have to prove just how independent he is -- particularly when it comes to the government back home in Italy.
Weidmann and Asmussen have already started preparing themselves for the new constellation. They took a break from the IMF-World Bank meeting in Washington to meet at the bar of the Ritz-Carlton hotel with a professor they had both studied under in Bonn: Axel Weber, Weidmann's predecessor as Bundesbank president.
Portugal 'moving quickly' to fix economy: PM
by Reuters
Portugal, going through a deep recession, is moving "quickly and resolutely" to fix its shaky finances and reform its economy, Prime Minister Pedro Passos Coelho told the United Nations on Saturday.
Lisbon is enacting tough austerity measures to meet the terms of a 78 billion euro ($105 billion) bailout from the European Union and International Monetary Fund. Portugal was the third euro zone member to receive rescue funds after Greece and Ireland.
"As widely recognized, we are moving quickly and resolutely to consolidate our public accounts and to implement structural reforms to modernize our economy and promote economic growth and employment," Passos Coelho told the U.N. General Assembly. "We view the crisis as an opportunity to adapt our economic model and to strengthen the Portuguese economy."
Portugal's recession is expected to last through next year and unemployment is at its highest levels since the 1980s as the government raises taxes and cuts spending to meet budget deficit targets. The government has to cut the deficit to 5.9 percent of gross domestic product this year from 9.1 percent in 2010.
Worried Greeks Fear Collapse of Middle Class Welfare State
by Rachel Donadio - New York Times
Sitting in the modest living room of the home she shares with her parents, husband and two teenage children, Stella Firigou fretted about how the family would cope with the uncertainties of an economy crashing all around them. But she was adamant about one thing: she would not pay a new property tax that was the centerpiece of a new austerity package announced this month by the Greek government.
"I’m not going to pay it," Ms. Firigou, 50, said matter-of-factly, as she lighted a cigarette and checked her ringing cellphone to avoid calls from her bank about late payments on a loan. "I can’t afford to pay it. They can take me to jail."
While banks and European leaders hold abstract talks in foreign capitals about the impact of a potential Greek default on the euro and the world economy, something frighteningly concrete is under way in Greece: the dismantling of a middle-class welfare state in real time — with nothing to replace it.
Since 2010, the government has raised taxes and slashed pensions and state salaries across the board, in an effort to rein in the bloated public sector that today employs one in five Greeks. Last week, the government announced it would put 30,000 workers on reduced pay as a precursor to possible termination and would cut pensions again for nearly half a million public-sector retirees.
A clerk in her local town hall, Ms. Firigou, like all public-sector workers, took a precipitous pay cut last year — in her case to less than $1,300 a month from $2,000 a month — as the government slashed wages to meet the terms of its foreign lenders. Her husband, who sells used car parts, has seen his commissions drop. Her mother’s pension was cut to about $800 a month from around $920.
Like many families here, the Firigous cushion the impact of such cuts and the rising cost of living with property acquired in the past. Her grandfather built the two-story apartment house in this Athens suburb, Psychiko, where the six now live, starting in the 1930s and finishing it after the Second World War. And so the new tax, probably in excess of $2,000 per year for the Firigous, stings particularly hard. "The house is the only thing we have left," she said.
There is a lot for Greeks to swallow. Beyond the public-sector wage cuts, in recent months the government has also imposed a "solidarity tax" ranging from 1 to 4 percent of income on all workers and an additional tax on self-employed workers, who make up the bulk of the economy. It has also raised its value-added tax on many goods and services, including food, to 23 percent from 13 percent.
The economy is flagging, and it is not uncommon for even private-sector workers to see pay cuts of 30 percent or more, sometimes in exchange for a reduction in working hours.
The so-called troika of foreign lenders — the European Central Bank, the European Commission and the International Monetary Fund — is increasingly playing hardball with the Greek government, insisting it meet its deficit-reduction goals before it decides whether to release the next installment of $11 billion that Greece needs to meet expenses starting in mid-October.
Many Greeks fear a vicious circle: a death spiral of more austerity measures, further economic contraction and correspondingly lower tax revenues, making it that much harder to make a dent in the debt, pushing the country toward default in spite of the austerity. Unions have called general strikes for Oct. 5 and Oct. 19, and tensions are building.
Economists say the measures are necessary to bring down debt and modernize Greece’s economy. But the cuts have come far faster than the modernization, and the social fabric is starting to fray — if not tear. The unemployment rate, already at 16 percent, and emigration are increasing; the birth rate is dropping; and the rate of suicide is rising. The education minister recently apologized that public schools lack textbooks, and the country’s morale is flagging.
"The government is increasingly at war with the citizens," said Jens Bastian, an economist at the Hellenic Foundation for European and Foreign Policy in Athens. "It is taking decisions whose consequences are not only squeezing the middle class, but threatening its very existence."
Some private-sector workers say they have not been paid in months. "It’s illogical and unfair," Aphrodite Korogiannaki, 38, a speech pathologist at a center for intellectually disabled youth, said of the property tax as she participated in a peaceful demonstration in Athens last week. "If I haven’t been paid for two months, how can I pay?"
A growing number of Greeks are asking that question, and increasingly their anger is focusing on the proposed property tax, the one that Mrs. Firigou insists she cannot pay.
The government has said it expects to raise $2.7 billion through the tax, which would affect an estimated 5.5 million homeowners. (There is no precise number for Greek homeowners since the country still lacks a comprehensive land register.) According to the Hellenic Property Federation, an association representing Greece’s homeowners, the tax would cost an average family between $1,200 and $2,000 extra per year.
Last week, the Socialist prime minister, George Papandreou, implored Greeks to accept the measures. "There is no other path. The other path is bankruptcy, which would have heavy repercussions for every household, for every Greek citizen," he said. "We know it will be difficult, but now is the time for the most decisive battle of all."
The tax would be levied through electricity bills, another source of frustration here. A failure to pay would result in the power being shut off, but the powerful union that represents the workers of the public power company has said it will refuse to cooperate, jeopardizing its implementation. A growing chorus of members of Mr. Papandreou’s Socialist Party is opposed to the tax, and a vote on the measure scheduled to be held in Parliament this week is widely expected to be close.
Critics say the country has failed to adequately crack down on tax evasion among the wealthiest segments of society — and failed to carry out more focused cuts because it is reluctant to take on some public-sector unions that protect a small, powerful cadre of workers who have deep ties to the governing Socialist Party. "I don’t think they know what to do," Nikos Panoutsopoulos, 38, an archaeologist who works at the Culture Ministry, said as he participated in a demonstration in Athens last week. "Instead of fighting" the electric company union, or the train company union, he added, "they just cut salaries horizontally."
Some of the short-term unemployed will still be expected to pay the new property tax. Faced with that prospect, a woman who gave her name only as Antonia as she waited in an unemployment center in downtown Athens burst into tears, a day after losing her job as a cleaner for the Ministry of Education. "My husband is a construction worker, he has hardly had any work this month now due to the collapse of the construction market," she said. "My son is 20 years old and also unemployed."
Such stories are common in Greece today. Yet even as the country bleeds, it is not meeting the deficit-reduction targets set as terms for its bailout. According to data released by the Finance Ministry on Thursday, net revenues were $4.7 billion off target and expenses $1.35 billion higher than projected in the first seven months of 2011.
Back in her living room, Ms. Firigou said she had not seen it coming. "No one warned us," she said. "I have no hope, not for myself, not for my children, and I am only 50." But she said some things still make her laugh. "I can’t get it into my mind that my life is such a mess," she said. "It’s a joke."
Banks Splinter on Europe Debt Crisis
by Christine Harper, Dawn Kopecki and Simon Kennedy - Bloomberg
Wall Street leaders, urging coordinated action from world governments to solve the European sovereign-debt crisis, struggled themselves during four days of meetings in Washington to agree on what’s needed to end it.
The chiefs of firms including JPMorgan Chase, Goldman Sachs Group, Deutsche Bank and Societe Generale met for three hours at the National Archives on Sept. 23. They differed on which government and private solutions may restore confidence in European debt and banks, and on some elements of regulation, said two participants who spoke on condition of anonymity because the meeting wasn’t public.
"It was a big group there, they’re going to differ about stuff; there’s a lot of tension in the air because of the world we live in," Morgan Stanley Chief Executive Officer James Gorman, 53, said as he left the event, which coincided with weekend meetings of the International Monetary Fund and Institute of International Finance. "There’s no one solution. It’s going to be 25 different things."
Bank-stock indexes in Europe and the U.S. have dropped more than 30 percent this year and borrowing costs for European lenders have climbed amid concern that Greece and other European countries may default. The level of disagreement between bankers and government officials who gathered for the annual IMF meeting was matched only by their shared sense that the stakes have rarely been higher.
'More Gravity'
"There’s not been a prior meeting at which matters have had more gravity and at which I’ve been more concerned about the future of the global economy," said Lawrence Summers, a former U.S. Treasury secretary and White House economic adviser, who said it was his 20th annual IMF meeting.
Asian stocks fell today amid concern the European debt crisis may weaken economic growth. The MSCI Asia Pacific Index slid 1.2 percent to 110.38 at 11 a.m. in Tokyo, set for its lowest close since June 2010.
Discussion of European governments’ options, including how to use their 440 billion-euro ($596 billion) rescue fund, dominated the policy meetings. Most European parliaments, including Germany’s, still haven’t voted on a July 21 plan to endow the fund with more powers, including the ability to buy bonds and inject money into banks.
Geithner’s Plea
U.S. Treasury Secretary Timothy F. Geithner urged governments to unite with the European Central Bank to increase the firepower of the fund, known as the European Financial Stability Facility.
Failure to act carries the "threat of cascading default, bank runs and catastrophic risk," Geithner said in a Sept. 24 statement to the IMF, his strongest public lobbying yet. Bank of Canada Governor Mark Carney said 1 trillion euros may be needed and U.K. Chancellor of the Exchequer George Osborne set a Nov. 3-4 Group of 20 summit as the deadline for a solution.
European policy makers indicated they may use leverage, or borrowed money, to increase the spending strength of the EFSF. Klaus Regling, its CEO, and German Finance Minister Wolfgang Schaeuble downplayed speculation that the fund might borrow from the European Central Bank or provide insurance on loans provided by the ECB directly to the private sector.
Finance officials this week will also discuss accelerating the establishment of a permanent rescue to July 2012, a year earlier than planned, according to a document prepared for the meetings and obtained by Bloomberg News. ECB Governing Council members Ewald Nowotny and Luc Coene said in interviews in Washington that the bank may step up its own response next week.
Bankers Mingle
The Institute of International Finance, an organization of more than 400 financial companies worldwide, holds its annual meetings in parallel with the IMF’s. In normal times, the private-sector bankers use the weekend to mingle with one another, and with government ministers and central bankers, trying to win business and get policy insight.
In some ways, this time was no different as bankers hunkered down in hotels around Washington for meetings with government clients and executives of other banks. JPMorgan and Citigroup Inc., both based in New York, held cocktail parties. Even UBS AG feted guests with champagne and dance music on Sept. 24, the same day CEO Oswald Gruebel, 67, resigned following the bank’s announcement that it lost $2.3 billion on what it said were "unauthorized" trades.
Compares With 1930s
Yet in private discussions, bankers said the environment was exceptional. A senior European banker said he sees policy makers’ decisions as being as momentous as those in the 1930s. A senior U.S. bank executive said he’s more worried than he was at any point during the financial crisis of 2008 and 2009.
About 1,000 people attended a Sept. 24 IIF dinner, which featured a tribute to ECB President Jean-Claude Trichet, who’s stepping down Oct. 31 and will be succeeded by Mario Draghi, the governor of Italy’s central bank.
Guests dined on beef tenderloin stuffed with red chard, dates and pine nuts, and truffled potato crepes. They heard speeches about Trichet’s career and accomplishments from IIF Chairman Josef Ackermann, who’s also CEO of Frankfurt-based Deutsche Bank, as well as former Federal Reserve Chairman Paul Volcker and Carney, the Bank of Canada governor.
The ECB’s policies in recent years, such as buying bonds issued by weaker European nations and providing cash loans in return for banks’ bond holdings, have helped provide support for both governments and lenders. The policies also have stirred discontent as two German members of the ECB’s governing council resigned this year amid signs of growing disagreement about the central bank’s efforts.
ECB Easing
IIF Chief Economist Philip Suttle told conference attendees on Sept. 24 that solving the European crisis will require the ECB to reduce interest rates to boost growth. "You need the ECB to ease significantly, and that probably means the euro needs to come down," Suttle said.
Schaeuble, the German finance minister, addressed the same room hours later with a contrasting message: "We won’t come to grips with economies deleveraging by having governments and central banks throwing -- literally -- even more money at the problem," he said.
At a panel discussion yesterday titled "Systemic Stability and Global Financial Firms," bank executives including Goldman Sachs President Gary D. Cohn and Barclays Plc CEO Robert E. Diamond, 60, discussed risk management and regulation without addressing the European crisis directly.
Restore Confidence
After the discussion, Cohn was asked what he thinks European leaders must do to restore investor confidence. "The market needs to hear that they understand the depth and breadth of the problem," said Cohn, 51. "They just need to convey to them that what they’re doing is big enough and powerful enough to get the market’s attention."
Modeling a European rescue after the U.S. Treasury Department’s Troubled Asset Relief Program, which started injecting capital into banks in 2008, "would be a good solution," he said.
Frederic Janbon, global head of fixed income at Paris-based BNP Paribas SA, said he hopes policy makers stick with implementing the plan agreed to on July 21. "Before we go to what we do after, we start by doing what we promised before," he said in an interview. Deutsche Bank’s Ackermann urged European nations to approve the 440 billion-euro rescue fund and to implement a bailout plan for Greece that are part of an agreement reached on July 21.
'Seal the Deal'
"Our strong advice is to move on and seal the deal which was agreed on in Brussels at the end of July," Ackermann, 63, said during a press conference yesterday. "To re-open that debate would not be productive and definitely not stabilize the turbulent situation we’re in.
JPMorgan Chief Economist Bruce Kasman, speaking a day earlier, said the July 21 bailout plan for Greece isn’t going to be enough to contain the crisis. "Greece is insolvent and the European Monetary Union, the European Union as a whole, needs to deal with that," Kasman said at a Sept. 24 panel discussion hosted by the IIF. "It hasn’t yet come to terms with that."
At the private gathering of bank CEOs on Sept. 23, which was the first joint meeting of the IIF and the Financial Services Forum, the executives spent part of the session getting Carney’s views on the regulatory outlook. JPMorgan CEO Jamie Dimon, 55, criticized regulators’ plans to require the biggest banks to hold extra capital and got into a dispute with Carney, said three people with knowledge of the encounter.
Joseph Evangelisti, a spokesman for JPMorgan, and Jeremy Harrison, a spokesman for the Bank of Canada, declined to comment on what was said at the meeting. "More generally, we have been engaged in constructive dialogue with a range of stakeholders, both domestic and international, as we move forward through this financial-sector reform process," Harrison said in an e-mailed statement.
Christine Lagarde: IMF may need billions in extra funding
by Louise Armitstead and Jonathan Russell - Telegraph
Christine Lagarde has signalled that the International Monetary Fund (IMF) may have to tap its members – including Britain – for billions of pounds of extra funding to stem the European debt crisis. The head of the IMF has warned that its $384bn (£248bn) war chest designed as an emergency bail-out fund is inadequate to deliver the scale of the support required by troubled states.
In a document distributed to the IMF steering committee at the weekend, Ms Lagarde said: "The fund's credibility, and hence effectiveness, rests on its perceived capacity to cope with worst-casescenarios. Our lending capacity of almost $400bn looks comfortable today, but pales in comparison with the potential financing needs of vulnerable countries and crisis bystanders."
The suggestion came after European officials revealed they were working on a radical plan to boost their own bail-out fund, the European Financial Stability Facility (EFSF), from €440bn (£384bn) to around €3 trillion. The plan to increase the EFSF firepower is the crucial part of a three-pronged strategy being designed by German and French authorities to stop the eurozone's debt crisis spiralling out of control. It also includes a large-scale recapitalisation of European banks and a plan for an "orderly" Greek default.
Although Britain is not involved in the large-scale eurozone bail-out projects, it is liable for 4.5pc of IMF funding. The plan, which would aim to build a "firebreak" around the indebted eurozone countries, emerged at the IMF annual meeting in Washington where global leaders united to demand urgent action from European politicians.
Despite the developments, traders warned that the failure of politicians to agree a solid rescue plan would result in more turbulence on global stock markets. One trader said: "The expansion to the EFSF would be good, although it's still not the eurobonds that the market has really been wanting to see. And, most significantly, it's still only an idea, not a deal." In a G20 communique issued on Friday, leaders set a six-week deadline to resolve the crisis – to unveil a solution by the G20 summit in Cannes on November 4.
However, already the plans to recapitalise European banks have been criticised in France – which has the biggest exposure to Greek debt. The governor of the Bank of France, Christian Noyer, told reporters yesterday he didn't "see any sign" that French banks were in trouble and that he believed there was "no need" for a recapitalisation.
But international pressure on European politicians has intensified. Timothy Geithner, the US Treasury Secretary who proposed an increase to the EFSF at the Ecofin meeting on September 16, said that the sovereign debt pressures and banking strains in Europe were "the most serious risk now confronting the world economy". Larry Summers, Barack Obama's former chief economic adviser who was attending his 20th IMF meeting, said: "I have not been at a prior meeting at which matters have had more gravity."
Demands for action were also made by emerging market leaders. Brazil's finance minister, Guido Mantega, said European policymakers had a responsibility "to ensure that their actions stop contagion beyond the euro periphery". The governor of the Chinese central bank, Zhou Xiaochuan, said that "the sovereign debt crisis in the euro area needs to be resolved promptly to stabilise market confidence".
With Greece facing a debt deadline at the beginning of October, the first priority is to release an €8bn tranche of bail-out money. Ms Lagarde said that the priority of international authorities this week must be "implementation, implementation, implementation" of the bail-out agreement of July 21.
'Barrier' Around Greece Needed: Merkel
by Tony Czuczka - Bloomberg
German Chancellor Angela Merkel said euro-region leaders must erect a firewall around Greece to avert a cascade of market attacks on other European states that would risk breaking up the currency area.
Expanding the powers of the region’s rescue fund, the European Financial Stability Facility, as agreed by European leaders in July is necessary to avoid Greece’s problems from spilling over to other countries, Merkel said late yesterday on ARD television. The fund’s permanent successor, due to take effect in mid-2013, is needed "so we can in fact let a state go insolvent" if it can’t pay its bills.
"We have to be in a position to react," Merkel said. "We have to be able to put up a barrier." Even so, "I don’t rule out at all that at some point we will have the question whether one can do an insolvency of states just like with banks." She made no mention of setting up the permanent fund before 2013.
Merkel, as the head of Europe’s biggest economy, is at the center of calls by the U.S. and other governments to do more to stop the European sovereign debt crisis as it pounds global financial markets. The situation is "serious" and "there are no easy solutions," Merkel said in the hour-long interview. She also indicated that she’s being treated for high blood pressure.
'A Bit Earlier'
Policy makers can make the EFSF more "efficient" by leveraging it without involving the European Central Bank, Finance Minister Wolfgang Schaeuble said over the weekend. He also raised the prospect of bringing in the permanent backstop before 2013. Senior finance officials are preparing to examine the cost advantages of accelerating the start of the fund by a year to 2012, according to a document prepared for meetings this week obtained by Bloomberg News.
"Maybe we can manage it a bit earlier" than 2013, Schaeuble told reporters in Washington on Sept. 24 after the annual meeting of the International Monetary Fund. The current facility is a "preliminary solution and we want a permanent solution as quickly as possible." Its successor, known as the European Stability Mechanism, will have a "quite different lasting, stabilizing, confidence-creating function" and Germany "would not oppose" bringing it forward, he said.
With global stocks entering their first bear market in two years last week, European policy makers were met with pressure at the weekend from foreign counterparts at the IMF meeting to do more to stop the contagion seeping from Greece.
'Can’t Force It'
Merkel rejected Greece leaving the euro area, saying that "we can’t force it, but I don’t believe in that in any case" because it would send a signal to financial markets that attacks on euro-area sovereigns can succeed.
"Maybe Greece leaves, the next country leaves and then the next country after that," she said. "They would speculate against all the countries." A small group of euro countries would be left at the end, deprived of the euro’s advantage as the currency appreciates, she said.
Merkel suggested that Greece may be able to get the next tranche of bailout aid, after a team of officials from the IMF, the ECB and the European Commission assess the Greek government’s progress in meeting deficit-reduction and other targets. Merkel is due to host Greek Prime Minister George Papandreou for talks in Berlin on Sept. 27, two days before German lawmakers vote on the enhanced rescue fund.
It’s the "troika’s" job to make the ruling on progress made by Greece, she said. "Were they to come back one day and say Greece can’t make it, then we would have to rethink," Merkel said. "But they aren’t doing that so far."
EFSF Vote
Merkel said she’ll win legislative approval of the expanded EFSF powers on Sept. 29 on the strength of her governing majority without depending on opposition support. "I want a majority of my own and I’m confident I will get it," she said. "I’m also going to lobby for it one more time this week."
For all the turmoil, Germans can have confidence in the euro. "We need the euro," she said. "The euro is good for us. That is why we need to improve on what has gone wrong in the past." Changing European treaties to make it easier to enforce budget discipline is one solution, she said. "We have to work toward treaty change."
Bank of France chief dismisses talk of €15 billion recapitalisation
by Jill Treanor - Guardian.
Christian Noyer insists French banks can withstand eurozone crisis but German banker warns of risk from bankruptcies
France rejected speculation that it was preparing to put up to €15bn (£13bn) into its banking sector despite fears about the impact of losses from Greek debt might have on some of the country's banks – and others across the eurozone.
Christian Noyer, head of the Bank of France, insisted the country's banks were strong enough to withstand the problems in Greece despite anxiety in the markets about French banks' ability to cope with the pressures in the eurozone. The shares of France's biggest banks have lost 50% of their value in just three months and endure daily volatility amid rumour and counter-rumour about their financial health.
But while France was confident that its banks were strong, a senior German banker painted a different picture of the industry, warning that banks around the world needed to be ready to take losses on their exposures. "I don't think that banks will get around further charges regarding Greece," Andreas Schmitz, head of the German banking association BdB, told Reuters in Washington.
The meetings of the G20 finance ministers and the International Monetary Fund in Washington at the weekend sparked speculation that banks in France, and elsewhere in Europe, would receive fresh injections of capital. The focus has been on the 16 banks that received borderline results from their European Banking Authority stress tests in the summer but other banks are also the subject of rumours.
The French newspaper Le Journal du Dimanche fuelled expectations by reporting that French officials were ready to put up to €15bn in a special contingency plan if recapitalisation was needed. But Noyer was adamant this was not necessary. "They are very solid," he said. "They have a solid capital base comparable to other European banks and they are profitable … none of them is hiding any toxic assets".
Despite his protestations – and those of the bosses of BNP Paribas and Société Générale – markets are gripped by speculation that the banks will seek fresh funds. BNP Paribas has been linked with Qatar but denied any talks and avoided a downgrade by ratings agencies after announcing plans to cut the value of its balance sheet. SocGen insists its exposure to Greece is manageable.
While the French banks have become of the major focus of the markets' concern about the impact of a default by Greece on its debt pile, other banks are not immune. Schmitz, who is also the head of the Düsseldorf-based private bank HSBC Trinkaushaus, said: "German banks could cope with an isolated insolvency of Greece. Such a scenario would not endanger their survival. But if a wave of bankruptcies sweeps through Europe, the situation looks different; many banks would get into trouble – and not just in Europe."
This is one of the reasons why there is talk of the authorities trying to put a firewall around Greece. Banks are already expected to take a loss of 21% on their holdings of Greek debt – as agreed under the terms of the bailout – but after speculation this weekend, the loss is expected to rise to at least 50%.
Only ECB has power to 'scare' global stock markets, warns IMF
by Larry Elliott - Guardian
Brussels has until November's G20 summit to work out how best to turn the €440 billion bailout fund into €2 trillion war chest
The International Monetary Fund has warned that the immense firepower of the European Central Bank (ECB) would be needed to "scare" the financial markets and prevent an intensification of the turmoil threatening to send the global economy back into recession. With investors poised to give their verdict on the weekend talks in Washington of finance ministers and central bank governors, European policymakers insisted that fresh moves to boost the fighting fund to support struggling eurozone members were in the offing.
Brussels has a deadline of the Cannes G20 summit in early November to flesh out its proposals but is waiting for a key vote in the German parliament this week on the expansion of the European Financial Stability Facility (EFSF) before deciding how best to turn the €440bn (£380bn) pot of capital into a €2tn war chest.
"We need to find a mechanism where we can turn one euro in the EFSF into five, but there is no decision on how we could do that yet," one senior European official said. Some European countries, including Germany, are sceptical about using the ECB to provide the leverage but the International Monetary Fund (IMF) insisted there was no alternative.
Antonio Borges, head of the IMF's European division, said: "It is very important that we see a combination of the ECB and the EFSF. Anyone who thinks that the EFSF will be a miraculous solution to the problem is making a very big mistake. "The ECB is the only agent which can really scare the markets."
Privately, many officials at the IMF and in its 187 member governments accept the inevitability of a Greek default and now see the priority as preventing the two much bigger economies of Italy and Spain being dragged down.
Greece's finance minister, Evangelos Venizelos, said Greece would not default before talks with the IMF about the next €8bn instalment of its rescue package due next month. Sources in Washington said Greece would get the money in the hope that Europe would buy itself enough time to piece together a convincing anti-contagion strategy. The likeliest time of a Greek default is thought to be in late 2011 or early 2012.
On Sunday night, German chancellor Angela Merkel said she would not rule out letting a eurozone country default on its debts once the currency union has its permanent rescue fund, the European stability mechanism (ESM), in place.
In an hour-long interview with ARD television, Merkel underlined the importance of an expanded mechanism to prevent future crises spilling over into other nations. She said that once the ESM is in place, "I don't exclude that we at some point … that one could do the insolvency of a state just as of banks." The ESM is currently slated to start in 2013. The chancellor also said a permanent structure would allow other European partners to set up a "barrier" around Greece to prevent a domino effect on other nations.
Prices of shares and commodities plunged last week as dealers took fright at Europe's intensifying debt crisis and signs of a marked slowdown in the world economy. The managing director of the IMF, Christine Lagarde, said the world was in a "very dangerous place" while the president of the World Bank, Robert Zoellick, said there was a risk of the contagion spreading to emerging economies, which have been performing more strongly than the rich western nations. "The numbers emerging out of developing countries over the past month are shaking and shaky," Zoellick said.
European policymakers in Washington responded to pressure from the US, Britain and emerging country members of the G20 group. Brazil's finance minister, Alexandre Tombini, said his country's experience showed the need to act with "overwhelming force", while Tim Geithner, the US treasury secretary, said: "Decisions as to how to conclusively address the region's problems cannot wait until the crisis gets more severe."
Justine Greening, economic secretary to the Treasury, said Britain had been urging Europe to get to grips with the crisis for several weeks. "I think we've had some positive steps taken this weekend towards the eurozone being able to do that in terms of both recapitalising the banks in Europe that are under stress but also [by] putting in place a bailout fund that is big enough to give confidence to the markets," she said.
Olli Rehn, Europe's commissioner for economic and financial affairs, said the eurozone needed to do more. "We need to build a bridge and I think this bridge will be developed on the basis of the current reform of the EFSF and as one part of that next stage we are contemplating the possibility of leveraging the EFSF resources to have more firepower and thus have a stronger financial firewall to support our member states doing the right thing."
One option to increase the potency of the EFSF currently under discussion would be for the ECB to commit large amounts of funding, with the capital in the EFSF used to cover potential losses. German finance minister, Wolfgang Schäuble, said he was open to the idea of leveraging Europe's rescue fund but said that did not necessarily mean the ECB should provide the extra firepower.
Mohamed el-Erian, co-chief investment officer of the giant bond fund Pimco, said: "It is encouraging that … European officials are signalling a better appreciation of the depth and potential consequences of the crisis. "Now they need to translate this into decisive actions underpinned by a common vision of what they want the eurozone to look like in five years' time."
Almost from the moment the €440m EFSF was created it was deemed too small. Hence all the talk now about how to enlarge the bailout fund to convince the markets that Europe has the firepower to contain the crisis. But the problem is that the countries that need to contribute to the EFSF either cannot afford to put in more cash or lack the political support. So ideas are now being conjured up to make it bigger without putting up more money – to turn one euro into five, as one EU source put it.
Analysts at Credit Suisse say one idea would be to turn the EFSF into a bank to enable it to use bonds it has bought from troubled countries in exchange for fresh funds at the ECB. Credit Suisse acknowledges this might look like a "story of a leveraged hedge fund" and would mean that countries such as France contributing to the EFSF might find their AAA rating under threat. They think a better idea would be to enlarge the EFSF and lend a third of the funds to governments to buy bonds, a third to recapitalise the banks and the rest to create an EFSF bank.
Bank Lobby Rejects Reopening of Greek Rescue Deal
by AP
The international bank lobbying group that has been leading negotiations on giving debt-ridden Greece easier terms for its bonds on Sunday rejected calls to impose larger losses on private investors.
Forcing private creditors to write down their Greek bond holdings by more than the 21 percent tentatively agreed to in a July deal would quickly cause a "domino effect" that would see the crisis spread to other parts of Europe, warned Josef Ackermann, the outgoing chairman of the Institute of International Finance.
Such a move would ultimately cost taxpayers much more than just bailing out Greece and erode confidence in the euro, said Ackermann, who is also the CEO of Germany's Deutsche Bank, a major lender to Greece.
Germany and other rich eurozone nations have been pushing for a re-negotiation of the July deal, arguing that the economic situation in Greece has significantly deteriorated since then and may require a steeper cut in the country's debt load.
However, Ackermann quickly rejected that push, saying that the agreement was fair and already placed a heavy burden on banks at a time of major market turmoil. "If we now start reopening this Pandora's box we will lose a lot of time and I'm not sure people would be willing to participate," Ackermann told a news conference on the sidelines of the annual meeting of the International Monetary Fund.
Under the July deal, Greece is asking banks and other large private investors to swap their existing Greek bonds for ones with longer repayment deadlines, a lower face value or lower interest rates. The IIF says the deal would save Greece some €54 billion by 2014 and €135 billion by 2020.
However, most analysts say that those savings are far too small to make Greece's massive debts — which amount to some 160 percent of economic output — sustainable again. At the same time, there have been growing doubts that investors will agree to swap 90 percent of their bond holdings, a minimum threshold that Athens set to make the deal worthwhile.
Getting private creditors to agree to the deal comes at a heavy cost for Greece. Apart from temporarily being rated in "selective default" — a first for a eurozone nation — the country has to spend some €42 billion on setting up a collateral fund that would secure the remaining value of the bonds.
If at some point Athens decides that a steeper cut in its debt was necessary, that money would go to the bondholders. "If the July deal goes ahead, Greece would be locked into this perpetually," said Sony Kapoor, managing director of Re-Define, a Brussels-based economic think tank.
Greece has been relying on €110 billion in rescue loans from other eurozone countries and the International Monetary Fund since May 2010. In July, when it became clear that Athens needed more help, eurozone leaders agreed on a second, €109 billion bailout, although several aspects of that deal still need to be finalized.
To make the second aid package acceptable for their taxpayers, several rich countries led by Germany pushed for banks and big insurance companies to share some of the pain of bailing out Greece — despite opposition from the European Union and the European Central Bank, the central bank for the 17 nations that use the euro as a common currency.
But since July, the eurozone's debt crisis has significantly worsened, partly because investors now fear that they may also face losses on bonds from already bailed-out Portugal and Ireland as well as struggling Italy and Spain. The Greek economy is now set to shrink 5.3 percent this year, up from a June estimate of a 3.8 percent decline, followed by a further contraction in 2012.
The Greek tragedy: no money, no hope
by Paul Mason - BBC
Despairing middle classes could be the biggest threat to Greece's future
Dmitris Andreou made the last sale out of his small estate agents business in June. His wife Mary, makes her living preparing high-school students for English exams. But her living has dried up. Their savings are exhausted, their disposable income has dropped by about 50 per cent in two years, and they are angry.
"Some days we only buy the basics and a few days lately we were not able to buy even those. We have to count our cents to decide between buying bread, milk or butter," says Mary. "Some days are better, but some are difficult. We don't buy clothes any more. People don't go out. There is simply no money around out there."
In their neat apartment in an Athens suburb, surrounded by family heirlooms and lace tablecloths, they are a world apart from the anarchist demonstrators who snatch the headlines whenever opposition to the EU-imposed austerity measures is discussed.
But what's happening in living rooms like theirs presents the bigger danger to the future of Greece. People are switching off: from politics, from the mass media, from social life. "We would like to see the politicians executed," says Maria, not smiling as she delivers the joke. "Most people are saying this: politicians deserve capital punishment – at the Greek equivalent of Traitors' Gate. It would be a nice time for politicians to be heroes, to stand up and defend the people. But they're not."
"We can't watch the television news any more," says Dmitris, shaking his head. "If you watch it, with the constant uncertainty, it can make your psychology very low. It's like a nightmare we can't wake up from. Perhaps it's fortunate that we've had to cancel our cable TV subscription. I don't trust the media any more: I get all my news from the internet."
Across Europe, governments are reining in public spending to prevent the markets' confidence in their finances ebbing. Ireland and Portugal have made sweeping cuts; Italy and Spain are under intense pressure to perform better. But it is the 11 million Greeks who are feeling it most acutely as their government struggles to head off default - or worse.
If Greek public sector workers at all levels have been hit by pay and pension cuts, for the middle class – people like the Andreous, both of whom are self-employed – it is tax that is the problem. Tax rises, a property downturn and the collapse of business income has halved their spending power, and that's before the next round of austerity measures, due to be voted on in parliament on Tuesday, begin.
It is this sudden collapse of middle class lifestyles that makes the Greek situation so volatile. In Britain and the USA, public spending hawks have argued: reduce the size the state and the private sector will grow. In Greece the debt crisis – which has spiralled out of control in 2011 – means that cutting public sector jobs and services is not enough. The pensions, savings and incomes of the middle-class are being raided too.
As a result Greek politicians have started to worry about something called "anomie" – a pervasive listlessness, low-level social conflict and the erosion of bonds between the country's citizens and the state.
You can read it in the figures: suicides have soared by 40 per cent in a year. Thefts and break-ins almost doubled between 2007 and 2009. Hostility to migrants – their arrival ignored during the good times after entry into the EU and the euro – has become widespread and unconcealed.
At the doors of small charities, queues of single men – ranging from Iraqis to Somalis to Nepalese – form in the early morning to receive free food or medical treatment. Now, to their intense anger, some Greeks are being forced to join these queues: 39 per cent of the country's under 24s are unemployed.
And there is more austerity to come. With total Greek debt headed for 189 per cent of the country's GDP - the equivalent of almost two years' entire economic output - the EU pushed the government and parliament into agreeing a second austerity package on June 29, in return for the promise of a new €159bn bailout. That was supposed to be the circuit breaker, and its passage was marked by burning barricades in the smart, historic Plaka district of central Athens, manned by shopkeepers and restaurateurs alongside the anarchists.
But that deal has fallen apart. Greece needs to raise a further €2bn just to meet this year's deficit target, which it will do through an emergency property tax, collected through people's electricity bills. When the energy workers said they would refuse to issue the bills, the crisis escalated.
Phone calls, emergency cabinet meetings, walkouts by IMF negotiators – the familiar choreography of a Greek bailout tranche by now – produced a third austerity package. The Andreous now face an extra property tax of between €500 and €1,000 a year until 2014, and a further income tax hike.
After the deal in June the protests had been muted. With general strikes called for this week they will escalate, but Greek commentators are no longer focused on the organised protests: it's the disorganised and random events that worry them.
Antonis Papayiannidis, who publishes Economic Monthly, warns: "In an almost detached way people have just watched the catastrophe happening to them. They were very displeased but they did not erupt. They became withdrawn and they are still withdrawn. But it could erupt very quickly, because the feeling of helplessness is very intense right now - in a way that makes the petrol bombs and barricades of June look pathetic."
The economics of the crisis are brutally simple: Greece has been bailed out twice and cannot be saved again. Either the third round of shock measures announced last week locks the EU into the long-term bailout payments already agreed, or Greece defaults. Any default would sink the country's own banks – their debt was downgraded on Friday, and 12 per cent of their deposits have been withdrawn over the past year.
Greek default would rip through the French banking system– SocGen and Credit Agricole were downgraded this month over their exposure to Greek debt. It would leave Spain and Italy totally dependent on a lifeline from the European Central Bank. And it would then pose the question everybody wants to avoid: can Greece stay in the euro?
For the Andreous, it is hard to see how things get better in the short-term. They face four more years of austerity, their savings are gone, and the chances of a university education for their daughters Phaedra, 16, and Ira, 12, are evaporating.
Right now though, they have more pressing problems. At the two girls' secondary school, the autumn term has started without textbooks. The pupils have been handed CDs instead. "It feels like we're in a post-war situation," says Mary. "There's no optimism; we don't know what happens next. We just try to survive."
Over the past six months I've stood in the middle of Athenian crowds so furious that they will withstand tear gas and endure near-lethal stampedes to make their point. What's been obvious, each time, is the ordinariness of the people involved – bank clerks, interior designers, even a concert pianist once, their faces painted with alkaline liquid against the sting of the gas.
But it is this seething anger of those who have never been on a demo that is really frightening - because we have no model for what happens if the middle class of a developed country simply switches off from politics and gives up hope. Not since the 1930s, anyway.
Why We Know We're Right
About the Dollar
by Harry Dent
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