Banking

IMF urges eurozone leaders to ease ‘acute stress’ on euro as Moody’s downgrades 15 of world’s biggest banks and the Italian Prime Minister warns of “apocalyptic consequences” if next week’s summit of EU leaders were to fail…



Powered by Guardian.co.ukThis article titled “IMF piles pressure on Germany to help struggling eurozone banks directly” was written by Julia Kollewe, for guardian.co.uk on Friday 22nd June 2012 07.59 UTC

The head of the International Monetary Fund has piled pressure on Germany by recommending a series of crisis-fighting measures that chancellor Angela Merkel has resisted.

IMF managing director Christine Lagarde warned that the euro is under “acute stress” and urged eurozone leaders to channel aid directly to struggling banks rather than via governments. She also called on the European Central Bank (ECB) to cut interest rates.

Her comments came as Italy’s prime minister, Mario Monti, warned of the apocalyptic consequences if next week’s summit of EU leaders were to fail.

The stark message from Lagarde, delivered to eurozone finance ministers who were meeting in Luxembourg, will increase pressure to come up with a unified approach to tackle problems including Spain’s struggling banks. She urged the 17 eurozone countries to consider jointly issuing debt and helping troubled banks directly. She also suggested relaxing the strict austerity conditions imposed on countries that have received bailouts.

“We are clearly seeing additional tension and acute stress applying to both banks and sovereigns in the euro area,” Lagarde said after the meeting.

“A determined and forceful move towards complete European monetary union should be reaffirmed in order to restore faith,” she said. “At the moment, the viability of the European monetary system is questioned.”

Asked what Germany would think of her suggestions, she smiled and said: “We hope wisdom will prevail.”

At lunchtime, Merkel will meet Monti and the leaders of France and Spain in Rome in an effort to forge a common strategy to save the euro. Some, Merkel included, consider the survival of the single currency essential to preserving the EU itself.

“It will be interesting to be a fly on the wall given that Mr Monti is fast losing support in Italy, due to the speed of his reform programme which is causing mutterings of discontent from all sides,” said Michael Hewson, senior market analyst at CMC Markets UK. “In any case, the German chancellor’s room for manoeuvre is limited, given the questionable legality of any form of debt mutualisation under German law, and voter discontent at home.”

Spain could make a formal request for financial assistance to bail out its teetering banks as soon as Friday. On Thursday, independent auditors concluded that Spanish banks would need up to €62bn (£49.8bn) to protect themselves from financial shocks. That is far below the offer of €100bn of banking aid Spain has received from the EU.

At the start of next week, officials from the IMF, the EU and the ECB will arrive in Athens to begin a review of Greece’s progress in reforming its budget. Some European officials have indicated that the harsh austerity measures that have sent Greece’s economy into a rapid downward spiral could be loosened.

One of Lagarde’s recommendations for Europe was that eurozone leaders should consider issuing bonds or debt “in some form” backed by the governments of all member countries. Berlin opposes the idea because it would put German taxpayers on the hook for foreign debts and increase the country’s cost of borrowing.

In addition, Lagarde said it was necessary to break “the negative feedback loop” that occurs when governments take on more debt to bail out their banks, and she called on Europe’s two emergency bailout funds to shore up shaky banks directly.

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USA 

Spain’s foreign minister, José Manuel García-Margallo, said the EU’s future would be played out in days or perhaps even hours, adding to the EU debt crisis doom and gloom…



Powered by Guardian.co.ukThis article titled “Spain issues dramatic messages of impending eurozone doom” was written by Giles Tremlett in Madrid, for guardian.co.uk on Thursday 14th June 2012 18.56 UTC

A panicky Spanish government issued dramatic messages of impending doom for the eurozone on Thursday as its borrowing costs reached unsustainable levels and foreign minister José Manuel García-Margallo claimed that the EU may need to act within hours.

“The future of the European Union will be played out in the next few days, perhaps in the coming hours,” he said, according to Spanish press reports.

The foreign minister, who was speaking as Spain’s long-term borrowing costs hit an unsustainable 7%, warned that other European countries would suffer dreadfully if they let Spain fall. ”If the Titanic sinks, it takes everyone with it, even those travelling in first class,” he said, in a warning clearly aimed at Germany and other eurozone countries.

The interest rate on the country’s benchmark 10-year bonds briefly hit 7% on Thursday, its highest level since the country joined the euro in 1999, after the ratings agency Moody’s downgraded Spain’s sovereign debt to just one grade above ”junk” status.

Moody’s said the downgrade was due to the offer from eurozone leaders of up to €100bn (£81bn) to Spain to prop up its failing banking sector adding considerably to the government’s debt burden.

García-Margallo’s comments contrasted with those of finance minister Luis de Guindos, who called for calm during an inevitably volatile period while Europe prepares to make key decisions on its future and waits to see how Greece votes on Sunday.

“It is not a situation that can be maintained over time … and I am convinced that we will continue to take more measures in the coming days and weeks to help bring it down,” De Guindos told reporters, referring to Spain’s borrowing costs, after senior cabinet members had met prime minister Mariano Rajoy.

Government sources said that the EU president Herman von Rompuy was set to meet Rajoy, Germany’s Angela Merkel, Italy’s Mario Monti and Frrance’s François Hollande in a five-way meeting during the G20 meeting in Mexico on Monday.

Barack Obama, who has been pressuring eurozone countries to act quickly in order to sort out the debt crisis, was also expected to meet the five leaders in Mexico. David Cameron may also join the meeting.

The EU competition commissioner, Joaquín Almunia, was expected to get a chilly reception in Madrid on Friday when he flies in to meet Rajoy to discuss the bailout of the country’s banks.

Rajoy’s conservative People’s party (PP) has called for Almunia, a Spanish socialist, to resign after he warned that some Spanish banks may have to be liquidated.

“Rajoy is head of the People’s party but, most importantly, he is the prime minister and in that role he will not be asking for Almunia’s resignation,” a government source said.

Almunia will be in charge of the EU inspectors who oversee the restructuring of the Spanish banking sector. The budget minister Cristóbal Montoro has called them the “men in black”.

Spain will next week be able to say how much of the €100bn its banks really need. Rajoy has said he will wait for the results of two independent valuations of Spanish bank assets before deciding on a final sum.

Those reports are due by 21 June, but Reuters reported that officials in Madrid already knew the contents of the reports and that Rajoy would have the figures with him when he travelled to Mexico.

The final figure was likely to be between €60bn and €70bn, according to Reuters, though officials in Madrid refused to confirm the amount.

Officials said that Spain wanted the banking loans to be delivered as soon as possible. “”No one is more interested than us in there being absolute clarity in our banking sector, and as soon as possible,” a government source said.

Madrid is pinning its hopes of avoiding a wider bailout of the country on an EU summit to be held at the end of this month.

“The government is seeking a declaration of the irreversibility of the single currency and of its willingness both to defend that and to create the necessary mechanisms,” a government source said.

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Eurogroup finance ministers have agreed to lend Spain up to 100Bn bailout for its troubled banks. The fourth-largest economy in the eurozone now joins Greece, Ireland and Portugal in bowing to need for aid to survive European debt crisis…



Powered by Guardian.co.ukThis article titled “Spain to get bank bailout that may run up to €100bn” was written by Giles Tremlett in Madrid, for The Observer on Saturday 9th June 2012 19.24 UTC

Spain has given up the battle to rescue its ailing banks alone and accepted a European bailout of up to €100bn to join Greece, Ireland and Portugal in requesting outside aid to survive Europe’s debt crisis.

European leaders hope a bailout will prevent a wider deterioration of the eurozone’s fourth largest economy, which is paying punishing interest rates on borrowed money and is key to the survival of the single currency.

“The Spanish government states its intention to request European financing for the recapitalisation of banks that need it,” the country’s finance minister, Luis de Guindos, said after an emergency video conference with fellow eurozone ministers.

It remained unclear, however, exactly how much of the €100bn Spain would need, with De Guindos saying it preferred to wait for two independent reports on its banking system before making a formal request. These reports would be ready within weeks or days, according to De Guindos, who implied that the final sum would be lower than €100bn. “The €100bn sum is a maximum figure,” he stressed. “It includes a considerable margin of security.”

Eurozone policymakers had been eager to shore up Spain’s position before 17 June elections in Greece that could push Athens closer to a eurozone exit and unleash contagion. Various estimates have put the outside capital needed by Spanish banks at between €40bn and €100bn. “The loan amount must cover estimated capital requirements with an additional safety margin,” the eurozone ministers said.

Mariano Rajoy, Spain’s conservative prime minister, left explanations of the dramatic request for outside help to De Guindos, who told Spaniards that this was a simple loan rather than a bailout. The prime minister will travel to Poland on Sunday to watch Spain play Italy in Euro 2012 as his government tries to project an image of business as usual. Spain’s acceptance of aid for its banks is an embarrassment for Rajoy, who said recently that the banking sector would not need a bailout.

There was confusion about conditions of the bailout. De Guindos claimed these required Spain to take measures in the finance sector but did not involve austerity.

Eurozone finance ministers, however, warned they would closely monitor Spain’s ability to stick to deficit targets and structural reforms. There were reports of heated arguments over the conditions, with several countries initially wanting Spain to be placed under far stricter controls.

The IMF said it would limit itself to helping monitor banking reform. The money will be funnelled through Spain’s existing bailout fund, called the Frob, and will add to the country’s modest but quickly growing national debt with the government “retaining the full responsibility”.

A bailout focused on its banks will ensure Spain can still borrow money on the markets to cover government spending. That makes the bailout very different from those of Greece, Portugal and Ireland. An IMF report estimated Spain needs at least €40bn for its banks to cover toxic real estate assets left over from a burst housing bubble.

Washington, which is worried the eurozone crisis could drag the US economy down in an election year, welcomed the measures. “These are important for the health of Spain’s economy and as concrete steps on the path to financial union, which is vital to the resilience of the euro area,” treasury secretary Timothy Geithner said.

Analysts said financial markets may also be calmed by the announcement.

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Pressure on the ECB to ease increases as series of surveys show the eurozone economy shrinking and Spain admits for first time it needs help to recapitalize banks…

 


Powered by Guardian.co.ukThis article titled “ECB under growing pressure to stimulate eurozone economy” was written by Graeme Wearden and Ian Traynor, for The Guardian on Tuesday 5th June 2012 19.42 UTC

 

The European Central Bank will come under renewed pressure on Wednesday to take new steps to stimulate Europe’s flatlining economy as economic surveys show that the eurozone is shrinking.

On another tough day for the eurozone, data from Markit showed that the output of Europe’s private economy shrank at its fastest rate in nearly three years in May. Retail spending across the eurozone also fell much faster than forecast, with sales down by 1% in April compared with March, and 2.5% lower year-on-year. German industrial orders dropped by 1.9% in April, driven by a slump in overseas business.

The news came as Spain admitted for the first time that it needs outside help to recapitalise its banks, but continued to resist seeking a formal bailout.

Economists said the dire data indicated that eurozone GDP will fall by as much as 0.5% in the current quarter, after stagnating in the first three months of 2012.

“Companies report business activity to have been hit by heightened political and economic uncertainty, which has exacerbated already weak demand both in the euro area and further afield,” said Chris Williamson of Markit.

Spain and Italy, the two countries battling to retain the confidence of the financial markets, saw the largest drops in private sector output as their austerity programmes continued to bite.

Jeremy Cook, chief economist at World First, said: “PMIs this morning from Europe confirmed what has become very evident of late; that the situation in Europe will get a lot worse before it gets better.”

The bleak outlook in the eurozone will weigh on traders in London, as they return to their desks after the four-day break to mark the Queen’s diamond jubilee. All eyes will be on the City to see how shares respond. There was little prospect of a rally on Tuesday night with the futures market predicting a 18-point fall on the FTSE 100, partly due to a number of stocks going ‘ex-dividend’.

The ECB general council will announce its decision on monetary policy at lunchtime after its monthly meeting in Frankfurt. It will also release its latest economic projections for this year and 2013, which are likely to paint a more downbeat picture.

Despite the mounting evidence that the European economy is in trouble, a majority of economists believe the ECB will vote to leave interest rates unchanged at 1% this month. The ECB has repeatedly argued that national governments must make the fiscal reforms needed to calm the crisis. But rates are still expected to fall soon.

“We doubt that the ECB will cut interest rates as soon as their June policy meeting on Wednesday – although it is not inconceivable given the Eurozone’s heightened economic and sovereign debt problems – but we do now think it is highly likely that the ECB will cut interest rates to 0.75% in the third quarter,” said Howard Archer of IHS Global Insight.

Christine Lagarde, head of the International Monetary Fund, added to the pressure on the ECB by saying it has room to cut rates.

With Spanish bond yields close to the “danger zone”, and Italy not far behind, the ECB is also facing calls to start buying both country’s debt in the bond markets again.

European stock markets experienced a mixed day on Tuesday. France’s CAC index ended 1% higher, but Germany’s DAX closed down 8 points at 5969, and the main Athens index fell more than 5% to a fresh 22-year low.

European markets will remain highly nervous until the deadlock over Spain’s banking crisis is resolved. Madrid’s government continues to resist pressure to seek a bailout, but many analysts believe its resolve must crack.

Germany’s governing Christian Democrats, and the opposition Social Democrats, are both adamant that EU rules cannot be bent for Spain. Volker Kauder, the CDU’s parliamentary leader in Berlin, said financial aid for Spain must be requested by the government itself.

Frank-Walter Steinmeier, former German foreign minister and current SPD parliamentary leader, took a stronger line, saying there was a risk that Spain could run out of time. “I see a risk that Spain will be too late in deciding to seek protection from the euro rescue umbrella,” Steinmeier said.

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Calls for ‘banking union’ to save euro after Paris and Brussels support Spain’s plea for EU rescue of its beleaguered banks



Powered by Guardian.co.ukThis article titled “Germany weighs up federal Europe plan to end debt crisis” was written by Ian Traynor in Brussels and Giles Tremlett in Madrid, for The Guardian on Monday 4th June 2012 21.09 UTC

Europe’s leaders appear to be edging towards an ambitious and controversial new blueprint for a federalised eurozone after Paris and Brussels threw their weight behind Spain’s pleas for an EU rescue of its beleaguered banks.

At the start of three weeks likely to be crucial to the survival of the euro, the new French government and the European commission voiced strong backing for a new eurozone “banking union” to save the single currency.

The plan could see vast national debt and banking liabilities pooled – and then backed by the financial strength of Germany – in return for eurozone governments surrendering sovereignty over their budgets and fiscal policies to a central eurozone authority.

Spain’s banking crisis, together with extreme volatility in Greece ahead of the rerun general election on 17 June and the French parliamentary poll on the same day, are compounding the febrile atmosphere and worrying the markets.

A “gang of four” – the European council president, the commission chief, the president of the European Central Bank and the head of the eurogroup of 17 finance ministers – has been charged with drafting the proposals for a deeper eurozone fiscal union, to be presented to an EU summit at the end of the month.

“You can’t demand eurobonds but not be prepared for the next step in European integration,” Germany’s chancellor, Angela Merkel, said at the weekend. “We won’t be able to create a successful currency like that and no one outside will lend us money any more.”

Pierre Moscovici, the new French finance minister, said eurozone bailout funds should be used to inject cash into collapsing banks. Such direct payments are impossible under existing rules. Moscovici added that France wants the summit to set up a eurozone banking union, which would take on responsibility for propping up failing banks and guarantee depositors’ savings across the 17 countries.

The commission and France are piling pressure on Germany to line up behind the proposal, which Merkel would need to take to her parliament for agreement. Renewed focus on Merkel came as she endured some of the strongest criticism yet seen during the 30-month crisis for the way she has handled the euro turbulence.

Joschka Fischer, the former German foreign minister, warned that his country was at risk of destroying itself and Europe for the third time in a century, and gave Merkel just a few months to change course and save the currency. In an article published on Monday, he wrote: “Germany destroyed itself – and the European order – twice in the 20th century. It would be both tragic and ironic if a restored Germany, by peaceful means and with the best of intentions, brought about the ruin of the European order a third time.”

At a meeting in Berlin on Monday night, José Manuel Barroso, the European commission president, was expected to press Merkel on the issue of bank rescues, which has turned critical because of Spain’s banking emergency.

Spain’s prime minister, Mariano Rajoy, is reluctant to request a full-scale EU bailout because it would come with draconian and humiliating terms. He has the support of Olli Rehn, the European commissioner for monetary affairs. “It is important to consider this alternative of direct bank recapitalisation,” said Rehn, “to break the link between the sovereigns and the banks.”

Under existing rules for the bailout fund, money may go only to governments that can request a state rescue and then use the cash to shore up their distressed banks. The vast bulk of the Irish bailout has gone directly to the country’s ailing banks.

On his debut visit to Brussels, Moscovici called for a change in those rules: “We are in favour of this banking union,” he said. “It’s a fundamental issue for which proposals are on the table.”

Spain’s most senior banker, Emilio Botin, boss of Santander, called on Europe’s rescue funds to help out. He said four of Spain’s banks needed €40bn (£32bn) of new capital “and that will be enough”. Botin’s figures reportedly include €19bn that the Spanish government has already pledged to pump into stricken lender Bankia – cash that Spain does not have.

Botin’s assessment is at odds with banking analysts, who estimate that Spain’s banks need up to €100bn. Santander, which operates a ringfenced banking business in the UK, is not among those judged to need fresh capital. However, it is likely that if new direct bank support were approved for Spain, Ireland and Portugal might request similar treatment.

In a speech in Italy at the weekend, the financier George Soros warned that Merkel had no more than three months to fix the euro, but outlined the prospect of a grim new eurozone controlled by Berlin.

“The likelihood is that the euro will survive because a breakup would be devastating not only for the periphery but also for Germany,” he said. “Germany is likely to do what is necessary to preserve the euro – but nothing more.

“That would result in a eurozone dominated by Germany in which the divergence between the creditor and debtor countries would continue to widen and the periphery would turn into permanently depressed areas in need of constant transfer of payments … it would be a German empire with the periphery as the hinterland.”

The proposals being drafted for the summit are certain to feature calls for a form of eurobond whereby Germany and other smaller creditor countries guarantee the debts of the struggling member states.

The blueprint, not yet finalised, has been played down by the European commission. “There is no masterplan,” said a spokeswoman, Pia Ahrenkilde-Hansen. The notion was also rubbished in Berlin on Monday – but not ruled out. “We are talking about several years and certainly not a solution that we are thinking about in the current problematic situation,” said Merkel’s spokesman.

In return for yielding to the pressure to pay to save the euro, Berlin will insist on major steps towards a eurozone federation or political union with budgetary, fiscal, and scrutiny powers vested in Brussels and in the European Court of Justice, meaning vast transfers of sovereignty from member states.

The Portuguese government said three of its leading banks would receive capital injections of €5.8bn, using funds provided under the country’s €78bn state bailout.

The banks included Portugal’s largest, Millennium, as well as BPI and state-owned Caixa Geral de Depositos. Only one of the country’s major banks, Banco Espirito Santo, is surviving without state funding.

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