France remains steadfast in its opposition to a restructuring of Greece’s debt under any terms, the government’s spokesman said on Wednesday, showing a divergence of opinion with Berlin.
German Finance Minister Wolfgang Schaeuble raised the prospect of a restructuring, saying in a letter to EU partners this week that private bondholders should bear some of the burden of a debt relief deal, preferably via a bond swap and a rescheduling.
Niall Ferguson, a history professor at Harvard University and a Bloomberg Television contributing editor, discusses the European sovereign-debt crisis. Ferguson speaks with Erik Schatzker on Bloomberg Television’s “InsideTrack.”
Derek Halpenny at Bank of Tokyo-Mitsubishi UFJ said probably the most worrying development for the euro was the surge in Italian government bond yields in response to S&P’s move.
He said: “Italy has the largest government bond market in the eurozone and continued rising yields there over the coming weeks would have a very destabilising impact on the eurozone debt markets.
“With the authorities still seemingly divided over how to proceed with the debt crisis there remains considerable short-term risks for the euro.”
Keeping debt under control, Merkel said in a speech at an event held by her party, the conservative Christian Democratic Union, in the western German town of Meschede, isn’t the only priority. “It is also important that people in countries like Greece, Spain and Portugal are not able to retire earlier than in Germany — that everyone exerts themselves more or less equally. That is important.”
She added: “We can’t have a common currency where some get lots of vacation time and others very little. That won’t work in the long term.”
There are indeed significant differences between retirement ages in the two countries. Greece announced reforms to its pension system in early 2010 aimed at reducing early retirement and raising the average age of retirement to 63. Incentives to keep workers in the labor market beyond 65 have likewise been adopted. Germany voted in 2007 to raise the retirement age from 65 to 67 over the next several years.
Richard McGuire, a bond strategist at Rabobank in London, said there was a risk of a “domino effect” through the financial system reminiscent of the aftermath of Lehman if the crisis was mishandled.
He said: “The implications of a Greek default are nightmarishly complicated and would affect Britain through a number of channels.
“It is only when Greece defaults and the rug is pulled from under this complex web of cross-border relationships that we see where the risk really lies.”
Portugal’s admission that it will probably need a financial bailout raises a question that will shape the outcome of the euro zone’s debt crisis: Is Spain next?
The cost of saving Spain, a €1.1 trillion ($1.56 trillion) economy, would dwarf previous bailouts and could test the financial strength of Europe as a whole.
But if Spain can continue to repair investors’ trust, as in recent weeks, then Europe stands a chance of containing the debt crisis to three countries, Greece, Ireland and Portugal, whose combined economies are half the size of Spain’s.
The longer this dual crisis drags on, the more radical, and improbable, any solutions would have to be. In my view, the crisis is insoluble without a Europeanisation of the banking sector, common labour and product market rules that prevent inflation stickiness in southern Europe, and a minimal fiscal union with a single European bond. This is not a complete list.
Europe’s political establishment is of the opinion that such a radical response is unwarranted and politically infeasible. The first assessment is wrong. As the world comes out of its Christmas stupor, it discovers the second may well be right.
Brussels has called for sweeping powers for regulators to seize failing EU banks, sack board members, and impose haircuts on senior bank debt, aiming to ensure that taxpayers are never again held hostage by high finance.
A better known real estate debacle is a sprawling development in Seseña, south of Madrid, one of Spain’s “ghost towns.” It sits in a desert surrounded by empty lots. Twelve whole blocks of brick apartment buildings, about 2,000 apartments, are empty; the rest, only partly occupied. Most of the ground floor commercial space is bricked up.
The boom and bust of Spain’s property sector is astonishing. Over a decade, land prices rose about 500 percent and developers built hundreds of thousands of units ”” about 800,000 in 2007 alone. Developments sprang up on the outskirts of cities ready to welcome many of the four million immigrants who had settled in Spain, many employed in construction.
At the same time, coastal villages were transformed into major residential areas for vacationing Spaniards and retired, sun-seeking northern Europeans. At its peak, the construction sector accounted for 12 percent of Spain’s gross domestic product, double the level in Britain or France.
But almost overnight, the market disappeared….
Europe’s leaders endorsed plans for a new fund to rescue indebted euro-zone countries, and proposed treaty changes to make that possible, but failed to resolve deepening disagreements over whether more radical action is needed to quell a debt crisis that has raged on the region’s fringe for more than a year.
Meeting in Brussels for the final 2010 summit, European Union leaders agreed to replace the region’s emergency rescue fund, which ends in 2013, with a permanent crisis-finance program.
But the crisis gripping the weaker governments of the euro zone showed no signs of abating. On Thursday, Spain was forced to offer significantly higher interest rates at a debt auction Thursday than it paid just a month ago. Bond markets fell across Europe.
China is seizing on Europe’s debt problems to expand its influence on the continent with large-scale investments and purchases of government bonds issued by highly-indebted states. The strategy could push Europe into the same financial dependency on China that is posing a dilemma for the US.
Portugal’s cavalry staged a magnificent parade to welcome Chinese President and Party General Secretary Hu Jintao, 67. Suddenly, one of the horses reared up and threw its rider to the ground. The state guest from China waited motionless until the end of the ceremony before he went to the fallen cavalryman, embraced him, and asked if he was all right.
There was symbolic value to Hu’s caring gesture in early November in Lisbon: China’s foremost party organ, the People’s Daily, wrote enthusiastically that this was the “Best moment for the world to see a true China in flesh and blood.”
European Union finance ministers agreed late Sunday on more than just an €85 billion bailout for Ireland. They also turned the currency union into a de-facto debt union by choosing to turn May’s €750 billion rescue fund into a permanent feature of the euro zone. What’s more, they promised that no sovereign creditor would face a haircut on their debt holdings until 2013, and that’s at the very earliest….
….here is what the EU has done: In the name of combating speculation against the debt of euro-zone members, the EU has now insured all those speculators against loss for three years at least. Meanwhile, in creating a permanent crisis-management mechanism, the EU has succeeded only in making permanent crisis more likely.
Credit default swaps (CDS) measuring risk on German, French and Dutch bonds have surged over recent days, rising significantly above the levels of non-EMU states in Scandinavia.
“Germany cannot keep paying for bail-outs without going bankrupt itself,” said Professor Wilhelm Hankel, of Frankfurt University. “This is frightening people. You cannot find a bank safe deposit box in Germany because every single one has already been taken and stuffed with gold and silver. It is like an underground Switzerland within our borders. People have terrible memories of 1948 and 1923 when they lost their savings.”
The refrain was picked up this week by German finance minister Wolfgang Schäuble. “We’re not swimming in money, we’re drowning in debts,” he told the Bundestag.
There will be sovereign defaults in the eurozone, with a default by Greece now inevitable. Ultimately the thing that underpins any country’s debts is its ability to raise enough tax to service and eventually repay them. Greece cannot hope to do that. Ireland will be pushed to do so but probably can. I would, however, worry about the long-term credit-worthiness of Portugal, Spain and Italy.
So then you have to ask whether a default of a eurozone state breaks up the eurozone. I don’t think we know the answer to that yet. We do know that the Germans, who hold the cards, will do absolutely everything they can to stop such a default, even if they have to grit their teeth as they do so. My instinct is that a country defaulting would not of itself lead to that country leaving the euro, but if its costs and prices were totally out of line, that probably would be the least painful way of extracting itself. If that is right in the short-term, things will be patched up and the euro will come through this downturn intact. But the next downturn, in five or 10 years’ time? Surely not.
Austria threatened to block its share of the next transfer of aid funds to Greece unless the government meets deficit-cutting goals agreed upon six months ago with the European Union and International Monetary Fund.
Austrian Finance Minister Josef Proell said in Vienna that he lacked assurances from Greece to commit to the payment. He toned down his remarks later, telling journalists in Brussels that Austria was prepared to meet its pledge to Greece and that Greece was “on a good path.”
“We are getting indications that the Greeks can’t stick to their plan in a sufficient manner, in particular on the revenue side,” Proell said according to a government e-mail that confirmed remarks made after a Cabinet meeting today. “The data we have at the moment doesn’t give any reason to approve the December tranche from the Austrian point of view.”
“It seems difficult for Ireland to avoid tapping the fund unless they have new rabbits to pull out their hat,” said Julian Callow, chief European economist at Barclays Capital in London.
It is very likely Ireland will seek support from the 750- billion-euro ($1 trillion) fund, Reuters reported, citing euro- zone sources it didn’t name. The Finance Ministry in Dublin denied talks were under way. Amelia Torres, a spokeswoman for the EU’s Economic and Monetary Affairs Commissioner Olli Rehn, called the report “pure speculation.”
Ireland’s financial troubles loomed large Wednesday as investors – betting that the country soon could join Greece in seeking an EU bailout – drove the interest rate on the country’s 10-year borrowing to a new high.
The yield on 10-year bonds rose above 8 percent for the first time since the launch of the euro, the European Union’s common currency, 11 years ago.
The cost of funding Irish debt has risen steadily since September, when the government admitted its bailout efforts of five banks would cost at least euro45 billion, equivalent to euro10,000 for every man, woman and child in Ireland. That gargantuan bill, in turn, has made the projected 2010 deficit rise to 32 percent of GDP, the highest in post-war Europe.
Police and youth have clashed in a dozen cities reports the Independent, and the country has been forced to tap its crisis fuel supply says the New York Post.
Yet what’s most shocking about the strikes is the modest pension reform they are opposed to. The French government is merely increasing the age of retirement to 62 from 60, by 2018, which is nothing compared to the far harsher austerity measures people are protesting in places such as Greece and Spain.
The former chief economist of the World Bank and a Nobel prize winner also predicted that short-term speculators in the market could soon start putting pressure on Spain, which is struggling with a large deficit and high unemployment. Last week, Moody’s cut the country’s credit rating from AAA to Aa1.
The former adviser to President Bill Clinton also says that the banking sector has gone back to “business as usual” too quickly and that there are still risks of another financial crisis despite some improvements in regulation.
Anti-austerity protests erupted across Europe on Wednesday ”” Greek doctors and railway employees walked out, Spanish workers shut down trains and buses, and one man even blocked the Irish Parliament with a cement truck to decry the country’s enormous bank bailouts.
Tens of thousands of demonstrators poured into Brussels, hoping to swell into a 100,000-strong march on European Union institutions later in the day and reinforce the impact of Spain’s first nationwide strike in eight years.
While some withdrawals point to capital flight by wealthy Greeks, it is clear that households and companies are running down savings to make ends meet. The Athens Chamber of Commerce warned yesterday that its members are in “dire straits”, with a majority facing a liquidity threat.
Simon Ward from Henderson Global Investors said Greek lenders are covering their funding gap through loans from the European Central Bank (ECB), which reached a record €96bn in July. “The question is how much eligible collateral they have left to take to the ECB. It must be nearing the limits,” he said.
“What is worrying is that this is not just Greeks. Portuguese banks borrowed €50bn in July compared to €41.5bn in June. Together with Ireland and Spain they have borrowed €387bn from the ECB,” he said.
The austerity measures that were supposed to fix Greece’s problems are dragging down the country’s economy. Stores are closing, tax revenues are falling and unemployment has hit an unbelievable 70 percent in some places. Frustrated workers are threatening to strike back.
The feast of the Assumption of Mary on Aug. 15 is the high point of summer in the Greek Orthodox world. Here in one of the country’s many churches, believers pray to the Virgin for mercy, with many of them falling to their knees.
The newspaper Ta Nea has recommended that the Greek government adopt the very same approach — the country’s leaders have to hope that Mary comes up with a miracle to save Greece from a serious crisis, the paper writes. Without divine intervention, the newspaper suggested, it will be a difficult autumn for the Mediterranean state.
In many countries, including the United States, there are calls for the government to spend more to jump-start the economy, and to avoid the temptation to cut back as debts mount.
Germany, however, has decided to cast its lot with fiscal prudence. It has managed rising growth and falling unemployment, while putting together a plan for a nearly balanced budget within six years. On fiscal policy and economic recovery, Americans could learn something from the German example.
Twentieth-century history may help explain German behavior today. After all, the Germans lost two World Wars, experienced the Weimar hyperinflation and saw their country divided and partly ruined by Communism. What an American considers as bad economic times, a German might see as relative prosperity. That perspective helps support a greater concern with long-run fiscal caution, because it is not assumed that a brighter future will pay all the bills.
Even if this pessimism proves wrong more often than not, it is like buying earthquake or fire insurance: sometimes it comes in handy. You can’t judge the policy by asking whether your house catches on fire every single year.
Kevin Rudd may be happy about at least one thing: he can avoid Toronto this weekend.
Nothing against Canada’s business capital, but by stepping down suddenly as Australia’s premier, Rudd got himself out of a much-hyped gathering with virtually no chance of putting the world economy on a more even keel.
Why is that? We are suffering from a chronic leadership vacuum, one starkly underlined by Rudd’s untimely departure. The Group of 20 will go through the motions and consider the burning issues of our day. Yet the list of pressing problems is a daunting one….
So far, European leaders have tried to deal with this spreading disaster by ruses. Existing European treaties ban bail-outs of member states. So the “European Stabilisation Mechanism”, recently set up precisely to provide these illegal bail-outs, does so under Article 122.2 of the Lisbon Treaty. This article gives emergency assistance to a member state “threatened with severe difficulties caused by natural disasters or exceptional circumstances beyond its control”.
Natural disasters! We are experiencing a totally unnatural disaster, one brought about by the artificial structure of the European project. Exceptional circumstances beyond its control! It was this system that every eurozone member state proudly (though usually without asking their electorates) voted for.
The situation is not funny for the people of Greece, Portugal, Spain, and so on, because their governments have run up dreadful public debts while sacrificing their power to devalue to become competitive. They cannot cut their exchange rate, so they must cut wages and jobs. Unemployment in Spain is already 20 per cent ”“ and 40 per cent among young people.
It is not funny for Germany, either. German banks are overcommitted in the southern countries now afflicted. The German people are fed up with paying for the profligacy of their poorer neighbours and furious at the suggestion that the only solution is that they should pay even more.
Nearly half of Germans want a change in Chancellor Angela Merkel’s center-right coalition government, with one out of five wanting her to resign and call new elections, the latest poll showed Wednesday.
The findings in the poll conducted by Forsa for Stern weekly news magazine showed that a further 22% want back the grand coalition of conservative parties and the Social Democrats, which Ms. Merkel headed in the previous legislative term.
Just 8% said the chancellor can continue governing as she has done since the coalition won the elections in September.
The rebellion against the 1930s fiscal and monetary policies of the Euro-complex is gathering pace.
Il Sole has published a letter by 100 Italian economists warning that the austerity strategy imposed by Brussels/Frankfurt risks tipping Europe into a self-feeding downward spiral. Far from holding the eurozone together, it will cause weaker countries to be catapulted out of EMU. Others will leave in order to restore sovereign control over their central banks and unemployment policies.
At worst it will blow the EU apart, leading to the very acrimony that the European Project was supposed to prevent.
Spain has upped the ante in a high-stakes poker game with Germany, pushing for the release of EU stress test results for major banks in a move that risks precipitiating a dramatic escalation of Europe’s financial crisis.
“We’re not afraid of transparency,” said the Spanish Banking Association (AEB), saying the full truth would put an end to rumours battering Spain’s instutitions. El Pais reported that the government backs the initiative, putting it on a collision course with Germany which insists on secrecy.
Josef Ackermann, head of Deutsche Bank, warned last week that it would be “very dangerous” to publish the results of each bank, fearing that it would trigger flight from weak lenders and set off a chain reaction.
Democracy could ”˜collapse’ in Greece, Spain and Portugal unless urgent action is taken to tackle the debt crisis, the head of the European Commission has warned.
In an extraordinary briefing to trade union chiefs last week, Commission President Jose Manuel Barroso set out an ”˜apocalyptic’ vision in which crisis-hit countries in southern Europe could fall victim to military coups or popular uprisings as interest rates soar and public services collapse because their governments run out of money.
The stark warning came as it emerged that EU chiefs have begun work on an emergency bailout package for Spain which is likely to run into hundreds of billions of pounds.