Re: New EC Thread

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1 March 2012 Last updated at 11:31 Share this pageEmail Print Share this page


The unemployment rate in the eurozone continued to rise in January, hitting another record high.

The jobless rate in the 17 countries that use the euro rose to 10.7% in January, while December's figure was revised up from 10.4% to 10.6%.

There are now 16.9 million people out of work in the bloc, Eurostat said.

In Italy, the unemployment rate rose to 9.2% in January, the highest since monthly records began, the national statistics agency Istat said.

Italian unemployment had stood at 8.9% in December, but it is now at the highest rate since the first quarter of 2001, as the country finds itself in a second recession in four years.

Spain continues to have the highest unemployment rate in the euro area at 23.3%, while Austria has the lowest at 4%.

'Huge divergence'

In its latest unemployment report, Eurostat said the unemployment rate in the 27 EU countries reached 10.1% in January, with a total of 24.3 million people out of work.

December's jobless rate was also revised up from 9.9% to 10%.

The data comes a day after the European Central Bank (ECB) said it had provided a further 530bn euros ($713bn; £448bn) of low-interest loans to 800 banks across the EU.

The announcement appeared to have been welcomed by the market, with banking shares rising strongly on Wednesday.

But Steen Jakobsen, chief economist at Saxo Bank, said: "Despite the euphoria in the banking sector following the ECB's loan programme, the real economy remains very depressed and the key factor is the unemployment rate, both socially and because of the damage to growth.

"If you look at Spain's unemployment rate, it is up two percentage points in January and even Italy's rate continues to rise, so I am concerned that we really are lacking the fundamental reforms needed for growth.

"There's a huge divergence between the feelgood factor in the stock market and what's happening in the real economy. For all the money the ECB is printing, there isn't yet a big boost for companies in terms of credit."

'Double whammy'

Meanwhile, separate data from Eurostat showed that inflation in the euro area rose to 2.7% in February, rising slightly from 2.6% in January.

It marks the 15th month in a row that inflation has been above the ECB's target of just below 2%.

Howard Archer, chief European economist at IHS Global Insight, said it amounted to a "double whammy of bad news" for the eurozone.

"This is particularly bad news for consumers, as they are not only facing high and rising unemployment, but also still squeezed purchasing power," he said.

"It had been hoped that eurozone consumer price inflation would be heading down markedly by now, but these hopes are being scuppered by high oil prices."

The data comes ahead of a meeting of EU leaders in Brussels, where they are set to discuss growth and jobs.
More on This Story

[Panda]

From what I can gather this Credit default swap is not going to go away, there are Banks and big Investment Companies , together with Private
investors , not willing to swap . Ten Year Bonds have as much as a 230% Yield so it is in some Investors interest to hang on to them. Greece sold bonds to the ECB at a cheaper rate which is being investigated. the ISDA just looked at the Insurance aspect which only applies if there is a default.
SWAPS asks whether majority bond holders can force minority to agree....they can't, Bondholders are willing to fight a forced bond swap and this now
is serious if Greece uses those Credit defaults valued at E 70 billion next week.

Italy has sold E 300 Billion bonds , but no rulings expected .

Greece rejects "overseer" rto ensure it is doing all it can to reduce its' deficit, Barroso, EU President says Greece is capable of managing its debt.

Monti says Merkel doen't want to discuss firewall in March "luckily there are 31 days in March'. He also says Italy's Labour market must be reformed and
taxes paid.

SaxoBank spokesman says Europe is number one Country "with its foot on the pedal printing money.'Merkel can't build the firewall requirement of 306
Billions .

There have been protest marches in Greece and Portugal at the austerity measures and call for Tax evaders to be caught.
another spokesman says Merkel is like a juggler but maybe has one too many balls in the air.

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European Council

Anti-austerity front grows in Europe


1 March 2012
Le Monde Paris Comment5






The European Union Council, which begins on Thursday, is scheduled to sign the new fiscal compact. But at the same time, a dozen countries, led by Italy, are contesting the austerity policies imposed by "Merkozy" and calling for an economic stimulus package.

Philippe Ricard

French President Nicolas Sarkozy has given the pact minimal support, out of consideration for German Chancellor Angela Merkel. His Socialist opponent (in the up-coming presidential election) François Hollande has promised to renegotiate the accord if he wins the ballot. The Budget Pact is scheduled to be signed by 25 European heads of government on Friday, March 2, in Brussels. Only the United Kingdom and the Czech Republic are expected to abstain, but the issue is not yet closed.

Signing the pact opens the way for the ratification procedure, but this could be tricky at a time when there is a relative reprieve of the sovereign debt crisis due to the Greek bailout. This Tuesday Irish Taoiseach (Prime Minister) Enda Kenny, unexpectedly announced his intention to organise a ratification referendum.

In France, Mr Sarkozy has decided not to rush the ratification of the pact by parliament, preferring to wait until after the presidential election (April 22 & May 6) and the legislative elections (June 10 & 17). But he intends to schedule the ratification vote quickly if he is re-elected. On the other hand, if Mr Hollande is elected, many leftist leaders do not want to ratify the pact as it exists. They hope to strengthen, as of the June EU summit, the growth and economic governance chapters of the pact, which they see as, first and foremost, a way to etch in stone the notion of budgetary discipline so close to Ms Merkel's heart.

Herman Van Rompuy, President of the European Council, whom the heads of government should confirm for another two and a half years in his post, hopes to avoid a challenge to the European Stability Mechanism, which is currently on course for ratification. Under pressure to strengthen this permanent bailout fund, Germany insisted on linking the two agreements politically.

In substance, the difference of opinion on the new treaty between Mr Sarkozy and Mr Hollande reflects the current state of discussions within the 27 EU members. Having, under market pressure, favoured austerity they must now discuss the best way to support their economies without increasing deficits. The austerity plans currently implemented just about everywhere on the continent are being more and more contested by trade unions and by public opinion as unemployment rises in the most precarious countries.


“The crisis we are facing is also a growth crisis”

In addition, they risk, according to many leaders, aggravating the looming recession. "Right now we are focusing too much on the financial penalties and the austerity plans," said Socialist Martin Schultz, President of the European Parliament during a visit to Athens on Tuesday.

Warnings of this sort are more and more frequent. Twelve countries, including Italy, Spain, the Netherlands, the United Kingdom and Poland, are asking for a reorientation of the economic policies defended by the Merkel/Sarkozy duo. "The crisis we are facing is also a growth crisis," they said in a letter initiated by Mario Monti, the caretaker Italian Prime Minister.

But, in the minds of the twelve signatories to this letter, the solution is to be found in greater deregulation, through labour market reform in each of the States and by increased commercial opportunities on the continent. These are not the types of solutions touted by the French left.

The recession that threatens the 27 Member States is of special concern to their international partners. In the short-term, the stakes are also – and perhaps even especially – to define the terms of application of the stability and growth pact, as reinforced last autumn. Spain is also asking for its obligations to be reduced, a request batted aside by the EU Commission as well as the European Central Bank.

Upon taking office, the newly-elected French President will be faced with a dilemma: protecting the credibility of the collective monitoring apparatus slowly emerging from the Eurozone crisis.

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4:56pm UK, Thursday March 01, 2012

The latest deal to cut Greece's debt has not yet constituted a default, an official trading body has ruled.
The International Swaps and Derivatives Association (ISDA) said that new Greek legislation forcing all bondholders to accept losses and steps by the European Central Bank to avoid losses on its Greek bonds, did not equate to a 'credit event'.

It means payments of credit default swaps (CDS) - insurance mechanisms against default - totalling about 3.2bn euros (£2.7bn) have not been triggered.

Sky's economics editor Ed Conway said the reason for the decision was purely down to the fact that private bond-holders are yet to actually suffer their losses.

He gave this analysis: "It (Greece) is by almost every other standard in default.

"The question I think is one of timing. ISDA cannot declare that a 'credit event' has happened until it's actually happened."

ISDA, which oversees complex forms of credit-related trading, was asked by an anonymous market participant to determine if a Greek 'sovereign credit event' had occurred earlier in the week.

A second question relating to Greece's solvency was asked on Thursday morning, stepping up the pressure on ISDA's EMEA Determinations committee which made the ruling.

In response to both questions, the 15 members voted unanimously that a "restructuring credit event" had not happened.

The news will delight EU leaders who are desperate to avoid any mention of a default.

But London-based ISDA noted that the situation in Greece was still evolving and further questions relating to the debt-laden nation could be submitted.

The body said that "a credit event could occur at a later date as further facts come to light."

ISDA's review of Greek debt followed Standard & Poor's decision to downgrade the country's debt to below junk status - deciding Greece was in 'selective default'.

It was, S&P said, a reaction to the bond swap plan agreed with private creditors by Athens to reduce its debt burden which will see investors incur losses of up to 75% on existing Greek bonds.

The ECB also moved to temporarily suspend the eligibility of Greek sovereign bonds as collateral for bank loans.

It will start accepting Greek bonds again by mid-March when measures to insure the ECB against losses come into effect.

ISDA's 15-member EMEA Determinations committee is made up of Barclays, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase Bank, Morgan Stanley, UBS, BNP Paribas, Societe Generale, Citadel Investment Group, D.E. Shaw Group, BlueMountain Capital, Elliott Management Corporation, and PIMCO.

At least 12 members have to agree in order for a ruling to be made.

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Default That Dare Not Speaks Its Name Share
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The Default That Dare Not Speaks Its Name


Ed Conway
March 01, 2012 2:56 PM

Recommend post (3) Is Greece in default? Ask the majority of economists, policymakers, commentators and analysts and you'll get a pretty clear answer: yes.

Greece is about to be involved in one of the biggest defaults in history. Whether you define a default as a borrower being unable to repay what it has borrowed, a lender failing to be paid back the initial amount he has lent or an interest payment no longer being paid in full, Greece undoubtedly meets those conditions. Which is why, earlier this week, Standard & Poor’s declared the country to be in “selective default”.

Why, then, has a little-known committee of bankers just ruled, officially, that the country is not in default (or, to put it in its own technical terms, undergoing a “credit event”)? For that's precisely what happened earlier today, when 15 senior investors brought together in Frankfurt by the International Swaps and Derivatives Association (ISDA) voted that, for the time being, the Greek situation did not constitute a default. As a result, those who took out insurance against that prospect (credit default swaps (CDSs)) will not receive a payout.

Although the airwaves are thick with recrimination, with analysts claiming that this decision is an illogical travesty and proclaiming the death of the opaque CDS market, the decision was most probably the right one. The Greek default (politicians prefer to call it a “restructuring” but it amounts to the same thing) has been agreed upon by most of the powers-that-be but, crucially, it hasn’t happened yet.

Investors will, in the next few weeks, swap their current Greek bonds for lower-value ones; should more than 75% but less than 100% of the investors hand over their bonds (as seems likely), Greece will probably activate a so-called “collective action clause” which forces at least some of the refuseniks to hand over their investments. When these two things happen, ISDA will, most likely, be asked to look again at the arrangement and conclude it is a credit event.

That, in turn, will trigger the payout of the CDSs, which, as far as analysts are concerned shouldn’t shake markets too much since they amount to little more than $3bn, which is apparently below the threshold necessary to cause real chaos (if you believe them).

Right now, then, the difference of opinion between ISDA and the rest of the world is one of timing: S&P has put Greece into “selective default” because the chain of events above is now kicking in, and the existence of those CACs undermines the notion that the exchange is entirely voluntary. ISDA can’t declare a “credit event” until it’s actually happened, which will be some time in the next three weeks. As it said in its statement today, the Greek situation “is still evolving” so don’t expect a credit event won’t “occur at a later date, in each case, as further facts come to light”.

But while ISDA is behaving quite rationally now, one shouldn’t rule out the possibility of them taking an unexpected or illogical decision at a later date. Moreover, so far as some are concerned, the way Greece’s default is structured may well cause a fatal malfunction in the still-young CDS market. But all of that is a story for another day.

The lesson is that defaults don’t always happen overnight. All too often, economics is a long-drawn out experience. The Greek default – and the subsequent implications – will almost certainly fit that description too.

[Panda]

Well there's a turn-up......until this crisis is over and the 3%GDP in place why on earth would Europe consider taking in new Members!!! Croatia is
waiting in the Wings too. As one analyst said, until there is Political union, the EURO will not survive.

==============================

European Union leaders have formally made Serbia a candidate for membership in the bloc, in a remarkable turnaround for a country considered a pariah just over a decade ago.

Serbia had been widely expected to get EU candidacy in December after it captured two top war crimes suspects, but was disappointed when Germany delayed the move, saying it wanted to see more progress in talks with Kosovo.

"We agreed tonight to grant Serbia the status of candidate country," EU president Herman Van Rompuy said after a meeting of the bloc's heads of state and government. "This is a remarkable result. I hope Belgrade will continue to encourage good neighbourly relations in the Western Balkans."

Serbia spent much of the 1990s ostracised and isolated from the EU after Slobodan Milosevic started the wars in Croatia, Bosnia and Kosovo. In 1999, Nato bombed Serbia to prevent a crackdown on ethnic Albanians.

Candidate status is an initial step on the road to EU membership. Belgrade will still probably have to wait for about a year to open actual accession negotiations, which can then drag on for several years.

Still, the EU move is politically important for Serbia's pro-EU president Boris Tadic, whose party faces elections soon.

The European Parliament urged the bloc's executive body to open accession negotiations with Serbia as soon as possible.

Kosovo, which many Serbs consider the cradle of their statehood and religion, came under international control after the 1999 war during which Nato forces ejected Milosevic's troops. Kosovo declared independence in 2008, but Serbia refuses to recognise it. The EU has not set recognition of Kosovo as a formal requirement for Serbia's candidacy, but it insists Serbia establish "good-neighbourly relations" with its former province.

Over the past year, the two sides have been engaged in EU-mediated talks dealing mostly with practical matters such as recognising each other's official documents. A key agreement reached last month allows Kosovo to represent itself in international conferences and spell out the technical details of how Serbia and Kosovo will manage their joint borders and border crossings.

Kosovo has been recognised by nearly 90 nations, including 22 of the EU's 27 member states. But Serbia has blocked its membership in the UN, where many countries also reject unilateral declarations of independence.

Press Association

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EU Hopes For 'No Thrills No Spills' Summit
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Herman Van Rompuy has been elected to a second term as president of the European Council
1:46am UK, Friday March 02, 2012

Tim Marshall, foreign affairs editor, in Brussels

EU heads of government are hoping to pull off a "no thrills no spills" summit as they gather for the second day in Brussels.

Instead of the high drama and late night deals of the years since the world economic crisis broke in 2008, the leaders just want to get through this summit without any hiccups in order to give time for their "fiscal compact" deal to calm the financial markets, strengthen the euro, and help to stimulate growth across the Union.

They want "no thrills", as in no dramatic headlines, and "no spills", as in any of the leaders playing eleventh-hour politics and spoiling the agreement to agree.

"Growth" is the watchword of this summit.

The bailouts for struggling eurozone economies have been agreed and the "fiscal compact" treaty should be signed later this morning.

Such is the desire for a quiet summit that the Greek financial crisis is not on the agenda, and although the Syrian and Iranian issues will be discussed, there is no expectation of any dramatic announcements.

There will be some "housekeeping". Herman Von Rompuy has been re-elected as EU Council President (there was only one candidate), and Serbia was finally granted "candidate" status in its long bid to become an EU member.

However, a discussion of whether Romania and Bulgaria can join the border-free Schengen zone has been postponed until September.

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Cameron plan for EU growth to solve debt crisis is ignored

David Cameron has accused the European Union of ignoring his proposals to tackle its debt crisis by cutting red tape to free markets and unleash economic growth.







Prime Minister David Cameron gives a press conference after the EU head of states council meeting in Brussels Photo: EPA/OLIVIER HOSLET









By Bruno Waterfield, in Brussels

12:52AM GMT 02 Mar 2012







Despite support from 11 countries for the Prime Minister’s growth plan sent to Brussels 10 days ago, Herman Van Rompuy failed to include any of the proposals in a draft text to be agreed at a summit today.


Instead, said diplomats, the President of the European Council, who runs EU summits, included proposals from France and Germany “almost word for word”.


As last night’s EU employment and growth summit opened, Mr Cameron stood up to “complain” that his call for “clear targets, timetables setting out dates and accountability” had been snubbed, government sources disclosed.


“He complained. He asked why it was that the views of 12 countries, representing more than half the EU’s population, had not been reflected,” said a source.


Mr Cameron clashed with Mr Van Rompuy over his plan to tackle the “crisis of growth” minutes before the Belgian was appointed to a second two-and-a-half-year term as EU president.



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Mr Van Rompuy, who earns £249,000 a year, more than twice the salary of the British leader, has been accused of doing the bidding of Germany and France and of failing properly to represent all 27 EU countries.

Arriving in Brussels for the summit, Mr Cameron insisted that the EU had to do more than tackle high public debt, by focusing on economic reforms to generate growth.

“Britain, together with 11 other European countries, has come together and set out a whole series of measures that the EU can take that would help drive growth, including deregulating businesses to set them free to create more jobs,” he said.

“That’s the agenda I am going to be driving at this European Council, and the aim is to get as many of those measures approved as possible.”

The joint letter called for “bold decisions” and recruited Italy and Spain to the traditionally free market liberal bloc of Nordic, Baltic and East European states led by Britain.

After Mr Cameron’s intervention, Dutch, Finnish and Italian leaders also criticised Mr Van Rompuy for ignoring any ideas not emanating from Berlin or Paris.

Draft summit conclusions, written by the EU president’s staff, have used the same specific wording as in Franco-German texts, stressing that “fiscal consolidation is an essential condition of higher growth and employment”.

In contrast to the Germanic emphasis on austerity, Britain’s proposals call for the EU single market to be opened up in services and the digital economy, potentially providing 9 per cent growth.

They demand “clear and detailed actions to improve implementation of the rules”.

“There’s a whole series of measures that the European Union could take, including deregulating businesses to set them free, to create jobs,” Mr Cameron told the summit.

Accepting his reappointment as the EU’s unelected president, Mr Van Rompuy said: “It’s with pleasure that I accept a second mandate. A privilege to serve Europe in such decisive times; also a big responsibility.”

















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Unemployment in Spain has risen to 24%.

Frieden says Greece's progress is sufficient , details still to be sorted.

Fiscal Compact to be signed this morning.

Analyst says the pain must be felt now and the fiscal measures adhered to, otherwise the next generation will have to pay.

Another analyst says Eurozone Countries have no Central System which is why it takes so long to get anything done.

The Euro is being tested for the first time and it is proving difficult for Countries to cope with this crisis, when they had their own Currency they could
devalue or revalue as necessary. It is felt that Wurope should have converged more before the Currency was created.

It is suggested that Countries unable to meet the stringent rules should be allowed to peel off from the Euro but remain in the EU.

Banks have deposited a record E777 Billion into the ECB, which means there is very little lending to small Businesses which was the ewason the ECB
lends the money at such a low interest rate,

Of the E130 billion bailout to Greece, only 20% goes to the Greek Government , 23% goes to Greek Banks, 35% to Bondholders and the balance in reserve.

The ISDA is to look again at the Bond swap issue.

There is no suggestion at the moment that Germany will lend more money, or that China will get involved.

[Panda]

The Fiscal Policy has been signed , except for Britain and Chechloslovakia.....Ireland have not named a date for the Referendum. EU Government
Leaders say they want Political Union as well as fiscal.

Spain's problem was not overspend on the Budget but a Real Estate bubble burst. Finance Minister says 2012 deficit will be 5.8%.

March 9th is date for debt swap. Charles Dallara IIF Managing Director is acting for the Bondholders and is quite positive that Members will agree the
writedown. He stressed that Members will have to study the deal before making a decision, but the ISFA is to look again at the deal . Apparently some
Bondholders want to keep the Bonds to Maturity to obtain the full yield. The Insurance of these Bonds need to be examined.

A E500 Billion firewall has been made permanently available and a decision will be made on when to use it. Whether it is enough remains to be seen.
Investment Managers are concerned that the quantitive easing of the Euro necessary to bail out Countries and lend to Banks will devalue the Euro,
making the cost of living higher.

There is a feeling now that at last action has been taken , but it is considered too early to make predictions beacuse of the French , Greek and
Italian Elections. coming up.

[Badboy]

NOT SURE IF RIGHT THREAD,BUT I READ YESTERDAY THAT SOME EXPERTS RECKON QE COULD BE STORING UP PROBLEMS FURTHER DOWN THE ROAD.

[Lioned]

Usually inflation,which the Government will deny.Everything is far more expensive than it was a year or two ago yet i still dont wish to put my prices up as it will effect my work load so my standard of living is in decline like lots of others,and the Government still say inflation is 2/3 % but whats left in the basket ?

[Badboy]

PETROL/DIESEL IS SUPPOSEDLY GOING TO GO UP IN PRICE(UK)

[Panda]

Part of this is because the price of Oil has risen so dramatically, and inflation has been high for some time. The value of the currency reduces as a result, fine for exporters like Germany, but no good for those Countries which import more than they export,. It is being touted that the Olympic Games
will bring in more Revenue but for the Billions it has cost the Government, it is the Franchisors and shops, restaurants who will benefit. Britain lost it's Export income many years ago and the emerging markets are top dogs now.

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Friday March 02 2012

THE IMF has urged the EU and ECB to give Ireland a break on Anglo Irish Bank debt.

It said such a restructuring would improve Ireland's sustainability ... and help the country return to market funding next year.

Its Deputy Mission Chief to Ireland, Craig Beaumont, said the IMF was encouraging the EU to "proactively take steps to re-enforce the prospects of Ireland gaining adequate market access in 2013".

He said such steps could help Ireland avoid ongoing reliance on official funding.

And it would contribute to European economic stability.

Mr Beaumont said discussions on the promissory note issue were ‘‘making good progress’’ and that a substantial amount of time had been spent on the issue.

But he said there was no deadline on the matter. A payment of €3.1bn on the promissory note falling due at the end of the month.

He said market access was still possible for Ireland in 2013, but he said the risks that this might not happen were still high.

Meanwhile, in its fifth review of Ireland's bail-out programme, the IMF says that the 2011 targets were met, or exceeded.

But it also warns that the economy faces greater external and domestic challenges than expected.

It expects a bigger fall in consumer spending because of house price falls and the level of debts in Irish households.

The IMF said the growth projected for 2012 has been revised down to 0.5pc, with the expected euro zone recession expected to slow the country's export growth to 2.75pc.

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European officials described David Cameron's claims of agenda-setting at the Brussels summit as 'nonsense'. Photograph: Yves Logghe/AP


European leaders sought to prevent two years of financial crisis turning into a full-blown economic meltdown on Friday by redirecting their emphasis from crushing austerity packages to policies to boost growth.

But the first EU summit since February 2010 not to be hijacked by the Greek debt drama and its threat to the single currency saw clashes between David Cameron and French president Nicolas Sarkozy over competing visions of how to secure growth.

There was further wrangling over the eurozone's bailout fund for protecting the euro, and growing unease over the new eurozone fiscal pact aimed at forestalling a rerun of the debt crisis.

The summit sought to square the circle of how to boost growth in an age of severe austerity packages that are beginning to hit the real economies of Europe in the form of soaring unemployment, shrinking GDP and lack of credit getting through to businesses and households.

The stark reality of the challenges facing Europe's leaders was brought home by Spain's new prime minister, Mariano Rajoy, who told his counterparts that his budget deficit this year would be 5.8% rather than the 4.4% he is pledged to deliver.

With the exception of David Cameron and his Czech counterpart, 25 of the 27 EU heads of government signed the new fiscal pact, a German-inspired international treaty aimed at resolving Europe's debt crisis by setting constitutional limits on national debt levels and budget deficits and empowering the European commission and the European court of justice to rule on the pact's compliance and levy hefty fines on fiscal sinners.

It was clear that Spain will struggle to meet the binding targets while on Thursday it emerged that the Netherlands will also breach the new rulebook over the next three years unless it can make massive savings.

While all agreed on the need for growth, the disputes were over the means to that end, with Britain the foremost advocate of a liberalisation drive opposed by an electioneering French president.

After complaining on Thursday evening that no one in Europe was listening to him, David Cameron on Friday claimed that the summit had gone his way and that he had converted the rest of the EU leaders to his free market vision of deregulation and liberalising services.

"Today in Brussels we have made our voice heard. The communique has been fundamentally rewritten in line with our demands," he said. "Our letter really did become the agenda" for the summit.

That view was dismissed by other European officials as "nonsense".

In the run-up to the summit Cameron enlisted the support of 11 other EU heads of government for a letter calling for a liberalising free market drive to boost growth in Europe. The signatories went beyond habitual UK allies on the issue in Scandinavia to include the new prime ministers of Italy and Spain.

Downing Street sees the Italian and Spanish support as a coup.

The UK-led drive was not explicitly supported by the EU's two biggest countries, Germany and France, however, and President Nicolas Sarkozy of France gave short shrift to the British position.

Germany and France could comfortably support much of the demands in the UK-drafted letter, said Sarkozy, before adding: "The temptation of deregulation is ever-present with our British and Swedish friends and there we don't want to see that on the table."

Cameron isolated Britain in December when he vetoed the move to entrench the new fiscal pact in European law, forcing the 25 to sign an international treaty.

Sarkozy showered Cameron's summit letter with sarcasm.

"Usually if you write a letter signed by other friends, it is because it is important. You are either announcing that you are leaving or saying you love someone," he said. "I take Mr Cameron's letter, after his decision not to join this latest treaty, as a sign that he doesn't want to get left behind, and I am delighted by that because we need the British in Europe."

Chancellor Angela Merkel of Germany, the architect of the stiff new pact, hailed the signing as "a milestone in the history of the European Union".

The treaty could yet run into trouble, however, since it has still to be ratified. The Irish have announced a referendum on the treaty while Francois Hollande, the French socialist tipped to become president in May, is threatening to re-open it. And the Dutch, grappling with a sudden budget crisis, are increasingly unhappy with the straitjacket limiting budget deficits to 3% of GDP. The country is forecast to run a deficit of 4.5% this year.

Cameron also clashed with Merkel, officials said, over the firewall the eurozone is building to contain the debt crisis and prevent contagion from Greece. The eurozone said on Friday it would "reassess" the capacity of the €500bn (£416bn) bailout fund, the European Stability Mechanism, by the end of the month. Cameron urged the summit to commit to boosting the pot of money before meetings of the International Monetary Fund in Washington next month.

Chancellor Merkel tetchily dismissed the demand from the prime minister, witnesses said.

Courtesy of the trillion euros in cheap three-year loans that the European Central Bank has showered on EU banks in two months, leaders appeared confident that the Greek debt crisis was being contained.

Analysts said the confidence risked tipping into complacency. Sarkozy bragged that France's borrowing costs were at a historical low.

Cameron confirmed there was no "air of crisis" at the summit for the first time in two years.

"This European summit reeked of missed opportunities, premature celebration and undeserved backslapping," said Sony Kapoor of the ReDefine thinktank in Brussels. "This may come back to haunt our leaders sooner than they think."


Ireland struggles


The International Monetary Fund has cast doubt on whether Ireland would be able to return to international debt markets by next year. Dublin, which signed up to an €85bn EU and IMF bailout in late 2010, aims to return to long term debt markets later this year to help it prepare for the ending of official funding next year and borrow €20bn in 2014.

The IMF, one of the country's troika of lenders along with EU institutions, said it Ireland could achieve the modest market financing planned for this year through selling short-term treasury bills.

However it reiterated a call for extra European help to back Irish plans for a full return to bond markets next year for the first time since September 2010. It forecast only 0.5% growth for the country this year, as against the 1.3% Dublin expected. "Whether the government manages to meet its financing needs next year will depend not only on continued strong policy implementation on its part, but also on developments in the euro area," the IMF mission chief for Ireland Craig Beaumont said in a statement accompanying the IMF's latest bailout report.

"Because of this uncertainty, the IMF is encouraging the European authorities to proactively take steps to reinforce the prospects of Ireland having adequate market access in 2013."

Ireland's performance has been held up by European leaders as a glowing example of how their plans to fight the eurozone debt crisis are working and the IMF said once more that Dublin's policy implementation remained strong.

However, with weaker exports and a larger than expected decline in consumption weighing on Ireland's economy, it said the challenges were greater than envisaged at the outset of the programme.

This week Ireland said it would put the new European fiscal pact to a referendum. A rejection of the treaty would rule out any further bailout cash.

The IMF said Ireland remained on target to reduce its budget deficit to 8.6% of GDP and again urged the government not to ramp up its austerity plans for this year, even if there is a further reduction in growth projections.






Eurozone crisis blog: Friday's events


EU leaders - except David Cameron and the Czech PM - have signed the fiscal compact



UK banks take over €37bn in ECB loans


Martin Rowson on the EU summit – cartoon


Greeks try to keep the peace with their dwindling German tourists


Spain and Netherlands put new rulebook to test


Nils Pratley: Final whistle yet to blow


Q&A: Greece's 'credit event' and ISDA


Peter Sands warns QE is 'laying seeds for next crisis'


ECB makes €529bn in emergency loans


Why Berlin is fixed on a German solution to the eurozone crisis


Quantitative easing a great unknown, says Vince Cable

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3 March 2012 Last updated at 00:03 Share this pageEmail Print Share this page


Moody's has cut Greece's credit rating again, citing a risk of default despite a recent debt write-off deal.

Moody's cut Greece's rating to "C" from "Ca", the lowest level on its scale.

The firm said on Friday: "Today's rating decision was prompted by the recently announced debt exchange proposals for Greece, which imply expected losses to investors in excess of 70%."

The deal writes off 107bn euros ($141.3bn; £89bn) of Greece's debt.

Moody's said the planned debt exchange, which involves private investors of Greek debt writing off much of the 206bn euros in Greek bonds they hold, "would constitute a distressed exchange, and hence a default".

The agency acknowledged that the deal was necessary to help stabilise Greece. But Moody's said: "The risk of a default even after the debt exchange has been completed remains high. Moody's believes that Greece will still face medium-term solvency challenges.

"The country is unlikely to be able to access the private market once the second assistance package runs out; and its planned fiscal and economic reforms will still face very significant implementation risks."

Earlier this week the Standard & Poor's agency classified Greek debt as in "selective default".

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Today's agenda

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David Cameron speaking to the press after the Brussels summit today Photograph: Yves Logghe/AP


6.04pm: And with that it's time to close the blog for the week.

Just a heads up for some of the key events coming up, courtesy of Dow Jones:

Monday 5 March: Euro-zone February services PMI data.

Tuesday 6 March: Revised EU fourth-quarter GDP growth data.

Wednesday 7 March: German bond auction.

Thursday 8 March: Bank of England interest rate decision. European Central Bank interest rate decision and press conference. German January industrial production data. Last day for banks to sign up in Greek PSI offer.

Friday 9 March: Euro-zone finance ministers may hold conference call to sign off on Greek bailout.

Monday 12 March: Euro-zone finance ministers meet. Greece aims to complete PSI by this date.

Tuesday 13 March: German March ZEW economic sentiment indicator. Italian and Greek T-bill auctions. International Monetary Fund board likely to discuss participation in Greek bailout.

Tuesday 20 March: EUR14.4 billion of Greek government bonds mature. Spanish and Greek T-bill auctions. Euro-zone finance ministers expected to hold talks on the region's bailout funds.

Goodnight, have a good weekend all, and thanks for the comments. Back on Monday...

5.43pm: George Papandreou, the former Greek prime minister replaced by a technocrat, has been interviewed for David Frost's Al Jazeera programme, and says the Greek people should have been allowed a vote on the austerity measures demanded by the troika - the European Union, European Central Bank, and International Monetary Fund.

In the programme, to be broadcast at 8pm tonight, he says:


I think the idea of a referendum was the right decision then but it was wrongly criticised by a number of European leaders.

The fact that Ireland has made this decision only enhances my conviction on the necessity to have had a referendum on Greece.

In fact the referendum never took place and Papandreou resigned. Needless to say he has views on the unelected rulers now in place in some EU countries:


I believe sooner or later not only Greece but other countries will be asking for stronger democratic procedures in Europe.

Meanwhile Standard & Poor's has kept its CCC/C ratings on four Greek banks - National Bank of Greece, EFG Eurobank, Alpha Bank and Piraeus Bank - despite putting the country's short term credit ratings on selective default. It said:


We read the Greek authorities' public statements as indicating that sufficient public funds should be available to address immediate potential capital and liquidity shortfalls.

And still with Greece, there's this doing the rounds:




DJ FX Trader@djfxtrader


IMF considering lending #Greece EUR18-21B in second bailout -2 people with direct knowledge. Final decision may be March 13.

2 Mar 12 Reply
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DJ FX Trader@djfxtrader


New IMF commitments would be between EUR8B-10B, with another approx EUR10B coming from unpaid funds from 2010 Greek loan.

2 Mar 12 Reply
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The IMF contributed around a third of Greece's first €110bn bailout but earlier indications were it would cough up only 10% of the second €130bn package, or €13bn.

4.40pm: European markets have closed and they've been relatively unmoved by the whole EU summit, even the prospect of Spain missing its budget deficit targets.

The FTSE 100 has ended down 20.12 points at 5911.13, Germany's Dax is down 0.29% and France's Cac is up 0.04%. The Dow Jones Industrial Average is currently 23 points, or 0.18%, lower. Angus Campbell, head of sales at Capital Spreads, said:



What would normally be considered as quite an eventful week has actually seen markets trade sideways and today's session was not much more fun than watching paint dry.

4.35pm: The International Monetary Fund has just issued its fifth report on Ireland (available here) and it's reasonably positive.

The fund said the 2011 fiscal and economic targets were met. Financial sector reforms were on track, with almost €15bn of assets sold at better than expected prices. But possible clouds on the horizon include the knock-on effect of any eurozone recession, and the country's still high unemployment levels.

In an interview IMF mission chief for Ireland Craig Beaumont said:


Looking to 2012, lower growth in Ireland's main trading partners is expected to slow exports somewhat. But because Ireland exports goods such as pharmaceuticals and IT services that are less sensitive to the economic cycle than typical consumer goods, it may escape a more pronounced slowdown.

For this reason, we are still expecting positive GDP growth in 2012, in the order of ½ percent. There are some downside risks to this scenario, linked mainly to developments in the euro area, but the scale of these risks appears to have eased recently.

3.55pm: And at the risk of overusing the word "worrying", Spanish 10 year yields have gone above Italy's for the first time since August.

Spanish yields are currently 4.919%, Italy 4.909%.

That might mean investors are getting more comfortable with the situation in Italy, of course. But it might not.

3.52pm: Greek prime minister Lucas Papademos has called on the country's other political parties to back the commitments made to the EU.

Speaking at the close of the summit he told reporters the austerity measures which had been demanded were inevitable. But he seems unlikely to get any brownie points - either from those demonstrating against the cuts or his fellow politicians - for saying that the hardship for the Greeks had been made worse by the previous government being slow to implement the measures.

3.18pm: Steve Collins at London & Capital Asset Management has just tweeted a worrying indicator:




Steve Collins@TradeDesk_Steve


*GREECE CREDIT-DEFAULT SWAPS RISE TO RECORD 76% UPFRONT *GREECE CREDIT SWAPS SIGNAL 99% PROBABILITY OF DEFAULT

2 Mar 12 Reply
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And US economist Nouriel Roubini has said what many are already thinking about whether Greece really has avoided a credit event, as the ISDA concluded yesterday:




Nouriel Roubini@Nouriel


In spite of ISDA temporary decision Greek CDS will be triggered once enough holdouts force Greece to use CACs inserted into the new bonds

2 Mar 12 Reply
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The CAC - Collective Action Clause - would force creditors that did not want to swap the debt to do so, provided a certain threshold of acceptances is reached. The representatives of the private bondholders are hopeful this clause will not be used, and the ISDA said that including it in the deal was not enough to trigger a credit event. Using it, though, would be another matter.

2.51pm: Here's an interesting tale from Greece.

A number of people are being questioned on the island of Samas after a man was found carrying almost a million euros of counterfeit banknotes in his luggage.

No mention of them finding any counterfeit drachma....

2.46pm: Stock markets seem to be taking the day's developments fairly calmly.

With no key US data to bother the scoreboard, the Dow Jones Industrial Average has opened around 10 points lower. After an earlier wobble on the news that Spain had set a 2012 deficit target of 5.8% of gross domestic product - compared to the 4.4% agreed with Brussels - European markets have edged back up. The FTSE 100 is currently down 9.62 points at 5921.63.

Martin Farrar has left the building now, by the way, having overdosed on olive oil, and has left the blog in my hands, Nick Fletcher.

2.09pm: Here's Ian's full story in which he also points out that Cameron lobbied again for the 17 eurozone countries to provide a bigger firewall to prevent the crisis spreading.

Many think this can be done by combining the €250bn left in the eurozone's temporary bailout fund, the European financial stability facility (EFSF), with the future €500bn European stability mechanism (ESM). Germany has been against the creation of such a super-fund and Ian reports that 'Chancellor Merkel tetchily dismissed the demand from the prime minister'.

However, the euro heads' statement says they will reassess the size of the firewall and it is possible they have been influenced by ECB president Mario Draghi who reportedly told leaders at a dinner last night that his injection of cheap money for the banks would not be repeated. The ECB has provided two tranches of cheap loans - €489bn in December and €530bn this week, equivalent to nearly 10% of euro zone output.

Reuters reports:


Officials said Draghi had told the leaders that the central bank's provision of more than 1 trillion euros of cheap three-year loans was not going to be repeated. It had merely brought the euro zone time, he said, and made it essential that structural reforms were pushed through promptly.

"We will use this time," said Merkel. "We will certainly not take such additional measures. The liquidity goes out of the market again."

"We've got three years to reform, otherwise things are going to get very complicated," said one euro zone diplomat.

1.29pm: Our Europe editor Ian Traynor, pictured, has been monitoring events in Brussels today and writes that Britain, although, it has won support from some unlikely countries for greater deregulation to support growth, is still arguing the toss with France.

Here's the top lines from Ian's story, which will be on the main site soon:


European leaders today sought to refocus their efforts to tame the financial and economic crisis away from the crushing austerity programmes hitting much of Europe and towards policies to boost
growth.

But while an EU summit in Brussels agreed on the need for growth, there were bitter disputes over the means to that end, with France and Britain at loggerheads over how best to kickstart moribund economies.

After complaining on Thursday evening that no one in Europe was listening to him, David Cameron on Friday claimed that the summit had gone his way and that he had converted the rest of the EU leaders to his free market vision of deregulation and liberalising services.

"The [summit] communiqué has been fundamentally rewritten in line with our demands," the prime minister asserted. "Our letter really did become the agenda for the European Council [summit]."

That view that was dismissed by other European officials as "nonsense".

.

1.16pm: A reader, Sualdam, makes the point that since the treaty is not in force yet why are we talking about Spain facing possible sanctions. A fair point but the treaty will come into force and on current prices Spain doesn't stand a chance of meeting its targets and therefore it looks likely it will be fined by the EU.

A spokesman for the European Commission said today that there was no chance they would move the goalposts. AP reports that the spokesman, Amadeu Altafaj Tardio said:


The excessive deficit procedure foresees a target of 4.4% in 2012. Therefore our assessment is based on that target.

He also warned that Madrid, which currently has unemployment higher than 20 percent and a shaky banking sector, could come under renewed market pressure if it fails to rein in its deficit.


There is an issue of confidence at stake here.

He added that the Commission still wants Madrid to provide details on why last year's deficit was so much higher than expected and what it plans to do about it this year before the end of the month.

1.01pm: Spain has admitted that it will miss its budget deficit targets for this year, risking possible sanctions from the EU.

Prime minister Mariano Rajoy said the deficit will reach 5.8% of GDP this year, busting this year's target of 4.4% promised to other EU states. But he said Spain would still meet next year's target of 3%. Spain missed last year's 6 percent deficit target it recorded a 8.5 percent total instead.

12.43pm: The European Council representing the whole 27 has also released a statement setting out what was agreed this morning. As promised the focus is on growth and the statement sets out an exhaustive 24 points. These can be roughly summarised as follows:

• promote growth but not if it breaks the new 3% deficit rules
• make tax systems more efficient, ie collect more tax
• increase overall employment in the EU to 75% by 2020 by making it easier to hire people and reducing red tape
• strengthen the single market and remove trade barriers. Commission to provide a 'transparent scoreboard' of each nation's progress to aid reform by 'peer pressure'
• promote innovation and research
• complete reform of banks and ratings agencies, and encourage lending to businesses

12.35pm: It's all over in Brussels and we're busy picking the bones out of various press conferences. David Cameron is claiming victory because he thinks he has won the support of some Mediterranean countries for his vision of how to stimulate growth in Europe, eg deregulation etc. Not sure if that's exactly how the history will be written but our Europe editor Ian Traynor is on the case and will file soon.

The eurozone

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What if the euro crisis were merely a devilish experiment set up by a gigantic computer disguised as Planet Earth? The Berlin cabaret artist Horst Evers runs though the euro crisis – but by the rules of Douglas Adams’ alternative universe. And he finds the human race isn’t quite up to their job.

Horst Evers

In Douglas Adams' novel “The Hitchhiker's Guide to the Galaxy”, the Earth is a kind of gigantic computer built by a higher intelligence to ponder the eternal questions of the universe. This higher, extra-terrestrial intelligence is therefore constantly setting up tricky and complex experiments to test mankind’s skills and level of development.

If this conjecture by Douglas Adams were true – that is, that this is the deeper meaning of human existence – then our handling of the euro crisis would probably be setting us back many, many places in the interplanetary IQ rankings.

For months now the eurozone has been stepping again and again through the same hoops of the experiment at ever increasing speed and rising panic.

Hoop 1: The eurozone states determine that the measures taken thus far are vastly inadequate, the demand for money significantly higher than expected, and the situation even more critical than assumed. Thus follows -

Hoop 2: A summit is called, where a solution absolutely must be found and a breakthrough made. The seriousness of the situation is stressed: there are no second chances, there must be no more mental taboos, and to please the media, the leaders claim to be speaking merely the plain truth. From this there necessarily follows -

Hoop 3: Rigid austerity measures are brought in – swingeing cuts and drastic programmes – that will get a stranglehold on the debt and guarantee it’s all paid back. Cue to smooth transition to -

Hoop 4: The hard line is regretted, but the will to take unpopular measures is praised: no more living beyond our means. The stock markets breathe a sigh of relief, countries in debt feel humiliated and led around by the nose – but they go along with it, which is taken as a great success and a real breakthrough. Very soon, however, there begins –

Hoop 5: Economic experts worry that the slashing cuts and austerity measures will put real brakes on the economy. The economies of the eurozone will suffer dreadfully, if indeed they don’t collapse entirely. The experts quail before the fearful prospect of a recession, and so there follows –

Hoop 6: Surprisingly, the rating agencies share these worries. Despite the harsh austerity measures, they do not feel too good about the way things are going – not too good at all, gentlemen, which is why, tragically, they see no other option but to revise their forecasts and ratings for many eurozone countries and banks downwards. This leads to –

Hoop 7: The costs and charges for more loans and other measures soar up again sharply, thanks to the glummer ratings. Confidence in the eurozone, especially in the out-of-pocket states, takes flight. Many banks have considerable problems on that account too. Slowly it’s grasped that the measures taken thus far are nowhere near enough, the demand for money significantly higher than expected, the situation even more critical than assumed – which completes the leap through Hoop 1. Again we bend low and head directly to -

Hoop 2: A summit must be held...

It’s difficult to wager whether that higher intelligence that set up this series of tests for us is amused or depressed. They’re probably looking on impassively as mankind, especially the eurozone species, is continually trying to get off this hamster wheel using the same old methods. Lately they’ve increased their speed and intensity, but otherwise they’re just bravely and unflinchingly following the same old reflexes.

Or perhaps the higher intelligence is already so bored that it’s simply ratcheting up the experimental conditions. And so it’s toughening up the stress test for the two main animals by, for one of them, placing a tough election campaign in his path and, for the other, inventing a scandal to brush aside a harmless President and bring a much more complicated successor into the game.

Perhaps there will soon be even more radical and more detailed proposals in order to pull off the rescue. It may be proposed to Greece that the country sell off its starting place in the European Football Championship to China. Eventually, other experts on Europe might even encourage Britain, for example, to be traded for China.

No doubt, there are many who want to help Greece. Provided, of course, that the Greeks send a token of their good will – for example by signing away their entire country, their entire work force, their entire economy to their creditors, and for the rest of time. Maybe Europe will even get a rating agency of its own off the ground, or maybe even a rating agency for rating agencies.

In Douglas Adams’ book the questions of the universe don’t get answered. On the contrary, the giant computer Earth, in order to make way for a hyperspace bypass, gets blasted out of the galactic road. Such measures would, however, certainly be an exaggerated way of tackling the euro crisis.

Translated from the German by Anton Baer

On the web
Original article in Cicero de

Related
Anti-austerity front grows in EuropeLe MondeParis
Europe says goodbye to solidarityFinancial TimesLondon

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Greek default looms as voluntary debt deal looks set to fail

European leaders are braced for the eurozone’s first ever sovereign default this week as Greece’s efforts to secure a €206bn (£172bn) “voluntary” bond swap looks increasingly unlikely.








Credit rating agencies have warned they will declare Athens to be in default if they force bond swap on investors. Photo: Getty







By Louise Armitstead

9:30PM GMT 03 Mar 2012



132 Comments





Authorities in Athens are ready to enforce the controversial collective action clauses, or CACs, to impose the restructuring deal on all bondholders as the number of voluntary agreements look set to fall short of the required amount.


Credit rating agencies have warned they will declare Athens to be in default if the CACs are triggered which would be a dramatic culmination to a three-year rollercoaster ride for Athens, the eurozone and global markets.


While the markets have been ready for a Greek default for months, the move could leave Greece and its banks barred from funding from the European Central Bank (ECB). On Monday, Standard & Poor’s declared Greece to be in a state of “selective default” which led to the ECB announcing it would no longer accept Greek government bonds as security for new loans.


The rating agency said its decision had been prompted by the threat of the CACs and the actual use of them is likely to tip Greece into actual default. The agency said it regarded the process as a “distressed debt restructuring”.


Raoul Ruparel of Open Europe, the London-based think-tank, said: “Greece is likely to struggle to reach the targets for a voluntary agreement so the credit rating agencies are almost certainly going to see this as a default.

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The IMF and the eurozone: weighing unconventional options to stabilise the global economy

January 19, 2012 5:56 pm by Financial Times.

13 inShare.6

3.

By Domenico Lombardi and Sarah Puritz Milsom

Following the unprecedented downgrade of the European Financial Stability Facility and nine eurozone sovereigns by Standard & Poor’s, there is a renewed impetus for the International Monetary Fund to step up its involvement in the deepening euro area crisis. In an executive board meeting earlier this week, managing director Christine Lagarde requested that the membership step up the fund’s own war chest in an effort to better equip the institution to adequately confront the growing global threat. The move follows an earlier reshuffle at the helm of the European department of the IMF, signalling that the fund has been quietly preparing itself for the gloomiest scenario in which the situation in Europe develops into a full-blown systemic crisis.


Credit: Hannelore Foerster/Bloomberg

Currently, the IMF is unable to ring-fence the euro area and contain any spillovers to the global financial system unless its global membership agrees to provide a significant boost to its resources. As it stands, the organisation has some $385bn in its forward commitment capacity, including the activation of the contingent facility — the new arrangements to borrow — that can be used “to cope with an impairment of the international monetary system or to deal with an exceptional situation that poses a threat to the stability of that system.”

This is grossly inadequate. To put things in perspective, in the current year alone, the Italian treasury will issue some €440bn on a gross basis, including short-term bonds. If one were to include corresponding amounts for Spain and—possibly—France, that figure would rapidly balloon. In contrast, the EFSF has at its disposal a bit more than $300bn net of its commitments to Greece, Ireland, and Portugal. Moreover, its recent downgrade by S&P will make it increasingly difficult to issue bonds to sustain its interventions. The prospect of leveraging that amount is less likely now that two among its top guarantors — France and Austria — have lost their AAA-ratings.

Against this backdrop, we propose an option to expand the international community’s firepower against a worsening crisis in the eurozone. The mechanics of the proposal are relatively simple, but it is also conditional upon Europe credibly strengthening its policy framework so as to reassure the IMF membership that its policies are worth funding. Our proposal is as follows: the IMF membership should decide on a general allocation of Special Drawing Rights (SDRs) as a way to provide confidence and generate additional financing that could be partially mobilised toward the euro-area crisis.


Christine Lagarde, head of the IMF. Getty Images

SDRs are international reserve assets and can be thought of as a potential claim on the freely usable currencies of IMF member countries. Their issuance would relax the constraints currently complicating the financing of the EFSF. Since the EFSF relies on guarantees provided by the euro-area member states through their respective treasuries, any step up in the guarantees to the EFSF triggers a corresponding increase in the contingent liabilities to be borne out by that member’s public sector budget. For many sovereigns, this could entail a further deterioration in their rating status.

If approved by at least 85 per cent of the fund’s total voting power, the SDRs allocated to member countries through their fiscal agents — typically, national central banks — could be mobilised for this purpose thus relaxing the constraint on public sector budgets. General allocations of SDRs are distributed based on the quotas that members hold in the fund’s capital subscription — the euro-area countries together hold 23 per cent of the capital base. Once allocated, euro-area countries could use their SDRs to provide a guarantee to a “vehicle,” which could in turn leverage on such guarantees to further expand its financial capability.

Such an arrangement, where euro-area members use their SDR allocations to guarantee a vehicle, would bear zero cost for the guarantors as long as the SDRs were not called upon. If the guarantee was triggered, then the SDRs would need to be exchanged with assets denominated in any freely usable currency, including the euro. The transaction would trigger an “open” position in SDRs for which euro-area members would bear a cost equal to the SDR interest rate, which is indexed to money market rates. Currently, the SDR annual interest rate stands at approximately at 0.10 per cent, while, for instance, yields on Italian one-year bonds stand at over 3 per cent. So long as the SDR guarantees were not called upon, there would be zero cost for the guarantors. And if the guarantee was triggered, then the interest rate charged to the euro members would be equal to the more advantageous SDR interest rate relative to current eurozone sovereign borrowing costs.

A general SDR allocation would also allow some smaller, developing economies to increase their liquidity buffers as a protection against global liquidity shocks that might arise if market turmoil continued. Other IMF members, in particular those with large reserve assets, could join a “pool of the willing” by exchanging their SDR allocations to buy euro-denominated bonds issued by the vehicle described above. These euro bonds would yield some percentage on an annual basis, which would be a multiple of the SDR rate charged on the “open” SDR position. To give an idea, currently EFSF bonds yield more than 3 per cent against the 0.10 SDR rate that an IMF member would be charged in “opening” its SDR position. Moreover, assuming that such members would have diversified in euros anyway, they would not need to hedge against exchange rate exposure.

The proposal above will not solve the deep-seated problems of the euro area crisis but will help to galvanise the international community’s resolve and partially alleviate the financing constraints once the Europeans finalise a credible and reassuring policy framework.

Domenico Lombardi is president of The Oxford Institute for Economic Policy and a senior fellow at the Brookings Institution. Sarah Puritz Milsom is a research analyst at the Brookings Institution. They have co-authored “The Euro-Area Crisis: Weighing Options for Unconventional IMF Interventions” published by the Brookings Institution and the ForeignPolicy.com’s Deep Dive Section.





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ReportAlfred E Neuman | January 20 1:06am | Permalink

More smoke and mirrors to hide the fact that deficit spending needs to be eliminated.



ReportZee Waffer-Thin Mint | January 20 12:58pm | Permalink

"The proposal above will not solve the deep-seated problems of the euro area crisis but will help to galvanise the international community’s resolve and partially alleviate the financing constraints once the Europeans finalise a credible and reassuring policy framework."

Shave a few points on the interest payments?

How marvelous: this gets more and more like gambling in a bluffer's game, and no one has a good hand. Perhaps we should promise our first-born?

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Europe's recovery won't slide away on Greece, but it could slip up over oil

Just when Europe might be congratulating itself on heading off imminent disaster, the threat of soaring crude prices looms over world economies again


Comments (14)

The Observer, Sunday 4 March 2012
Article history





Oil prices closed at $123 a barrel on Friday, and the cost of petrol on Britain's forecourts jumped to a record high. It was hardly the backdrop Europe's politicians had hoped for as they gathered in Brussels to rubber-stamp their new tax and spending rules (while stressing that growth, not austerity, is their priority).

Just when policymakers and businesses were daring to believe that growth was returning, after the eurozone crisis hammered confidence at the end of 2011, they've got a different and more viscous enemy to worry about. As Stephen King, chief economist at HSBC put it, "oil is the new Greece".

Even the most pessimistic commentators think the combination of the European Central Bank's long-term repo operation, and the €130bn bailout for Athens – albeit with half the money held back for the moment – has bought the eurozone some valuable time.

The extra €1 trillion of three-year loans sloshing around from the ECB's two interventions, in December and last week, has helped to avert the possibility of a full-blown credit crunch or a domino run of bank collapses for the time being. And the new loan to Athens will enable it to pay its bills for a while – though few believe that Greeks will ultimately put up with the penury to which they are being subjected.

But even as the flood of bad news from the eurozone abates for the time being, the crippling cost of commodities could choke off the recovery in Europe before it begins.

HSBC's King points out that early in 2011, there was an optimistic mood abroad and forecasters were pencilling in a healthy year's growth. Yet this renewed confidence, plus the cheap money that was the legacy of quantitative easing (QE) on both sides of the Atlantic, helped push up the cost of commodities such as oil and metals.

Even before the euro crisis reached its most dangerous phase last summer, these high commodity prices were depressing demand in the developed world – including from cash-strapped British families – and prompting the authorities in China, India and other emerging economies to tighten monetary policy to control inflation.

There are reasons to fear that oil prices could continue to rise this year, too: political tension in the Middle East over Iran's purported nuclear ambitions has already led to increasingly tight sanctions on a key exporter of crude. Iran, for its part, has threatened to retaliate by shutting off the crucial supply route of the Strait of Hormuz.

At the same time, some of the new wave of cheap money from the latest round of QE by the Bank, plus the ECB's repo operation, is likely to flow into commodities – after all, part of the way QE is meant to work is by pushing up the price of "other assets". And thirdly, as King points out, there is a longer-term trend towards higher prices, as the balance of global growth shifts over time towards more energy-hungry emerging markets.

And high oil prices are exactly what the fragile economic recovery doesn't need. In the short term, they feed straight through to high inflation, giving central banks a headache; but the west's debt-burdened consumers are unlikely to be able to stomach those prices for long. So in the longer term, costlier energy will bear down on demand, knock confidence and hammer growth.

Germany led the eurozone into a downturn in the final quarter of 2011, and GDP contracted in the UK too, but there had been hopes more recently that the worst was over.

But if the upward pressures on the oil price continues, Europe's strategy for economic recovery, such as it is, and George Osborne's hopes that the UK will scrape clear of a double-dip, may soon be consumed by an oil slick.

Questions for Barclays


The heat over two of the Barclays tax avoidance wheezes – "highly abusive" schemes, according to the government – seems to have died down in no time. Indeed, a large slice of commentary has been preoccupied by the notion that changing the law retrospectively, which the government is doing in one case, sets a poor precedent. How are companies meant to plan for the future, it is asked, if tax laws can be changed on the hoof?

What nonsense. The retrospective change in this case is terribly modest – three months. What's more, the government has a firm basis on which to act: it didn't

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Euro


Eurozone crisis

Try the Greek yoke on, Herr Hansen


29 February 2012
Cicero Berlin Comment16





What would the life of an average German official be like if the Federal Republic were forced to follow the same draconian austerity measures it is currently imposing on Greece? With the help of some experts, Cicero tries to imagine it.

Marie Amrhein

Let’s call him Eric Hansen. Hansen works in public education in a small town in Hesse. Now and then he takes the young people in his care to the nearby town of Marburg to play in the bowling centre.

In the future, however, Mr. Hansen must consider very carefully whether he wouldn’t prefer taking the kids for a walk in the forest – the tickets for the bowling centre might be too expensive, because Hansen must save where he can. Just like the rest of the country.

Let's look at the hypothesis that the Hans Böckler Foundation put together with the help of the Institute for Macroeconomic Policy (IMK) in order to understand how the pain of Greek austerity might feel for us in Germany.

Just the beginning of Greek austerity

Eric Hansen's monthly salary would shrink from €3,250 to €2,760. His health insurance, in contrast, would increase by €530 per year, while VAT would go up from 19 to 22 percent. Hansen, who likes to smoke a cigarette in the evening with his beer, will have to pay a tax increase on alcohol, cigarettes and petrol of 33 percent.

A tense mood prevails among Hansen's colleagues. In the public sector, the government announces, 460,000 jobs will be cut. German pensioners will have to reckon on €1,000 less a year. This idea is controversial, considering the protests that the announced freezes have already sparked in Germany.

Why are Eric Hansen and the others being left to languish like this? Because, if the demands made on Greece were to shift to our latitudes, the Federal Republic of Germany would have to save some 500 billion euros over five years. IMK expert Henner Will has added it all up and concluded that the troika – the European Central Bank, the European Commission and the International Monetary Fund – has underestimated the impact of austerity.

In 2011, when Greece was presented with the necessary austerity plan, the official calculation was that the country’s gross domestic product would contract by 2.6 percent. In the end it contracted by all of five percent, and that was only in 2011. And this is just the beginning of Greek austerity.

Country sunk to third-world status

The numbers are dramatic and they speak for themselves. If things go on like this, the Greeks will save themselves into destitution. The more this this off-key chorus on the Greek question has more members, the longer the show will drag on, the more the future of the euro, Greece, and therefore the European Union will become an article of dogma. How does the story end? No one knows.

A glance at Greece might point the compass straight and allow the conclusion that for the Greeks the end of the story has long been foretold, the disaster complete, and the country sunk to third-world status.

In the meantime, our theoretical Eric Hansen has lost his job. The educator had to make some compromises with his unemployment benefits. The state retains €600 per year. That’s how Eric Hansen is saving the euro.

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Ireland

Berlin reviews Dublin’s problems first


1 March 2012


The Irish Times Comment6




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The Irish Times, 1 March 2012

“Commission report on Irish economy revealed to Bundestag,” headlines the Irish Times, after it emerged that sensitive information concerning the Irish economy has circulated in the German parliament before being made public in Ireland itself. The European Commission document warns that a global economic slowdown in 2012 could lead to further “fiscal tightening” in Ireland and see next year’s planned return to financial markets “evaporate”. It also demands “a revised asset sale programme after dismissing the Government’s original plan as ‘not sufficiently ambitious,’” the Dublin daily notes.

This is the second time a European Commission report about the Irish economy has been released to the Bundestag, raising fears that Ireland’s economic sovereignity has all but vanished following the €85 billion EU/ECB/IMF bailout of 2010. It follows the disclosure last November of the national budget in advance of a formal announcement on the part of the Irish government. The Irish Times notes that the leak –


… came at an awkward moment a day after the decision to hold a referendum on the European Stability Treaty.

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Bundesbank lectures ECB


1 March 2012


Frankfurter Allgemeine Zeitung, Süddeutsche Zeitung Comment5





Frankfurter Allgemeine Zeitung, 1 March 2012

"The Bundesbank is demanding better guarantees from the ECB," concludes German daily Frankfurter Allgemeine Zeitung from a letter sent by the President of the German Central Bank to Mario Draghi, head of the European Central Bank. Jans Weidmann thus warned him of –


... the growing risk in the euro system and proposed a return to the security rules that prevailed before the financial crisis.

A view also reflected in another daily, Süddeutsche Zeitung, which says that by choosing to focus on saving the euro and not simply on regulating inflation, Mario Draghi is become a politician taking many risks. Although this policy is unquestionably favourable to the single currency by causing interest rates to fall and by stabilising the banks in the southern countries, this bailout plan is threatened by a grave danger, the paper says. As was the case with the decisions taken by the former head of the U.S. Federal Reserve, Alan Greenspan, these policies -


... introduce a lot of cheap capital which pours into a number of products and whose prices soar – at first as if by magic – to then brutally collapse. The consequences are millions of people throughout the planet lose their jobs and the banks must be bailed out with several billions of tax payer's money. Draghi's low-interest billions are creating a new financial bubble.

The only solution to avoid such a collapse would be for the ECB to withdraw this money from the circulation before it reaches and paralyses the economy. But that will not be a simple matter to arrange.

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