Euro Zone Warned of Contagion
ATHENS/BERLIN - European leaders warned on Wednesday the euro zone debt crisis
could spread beyond Greece and investors sold stocks and the euro, as Greek anti-austerity unrest claimed its first lives.
Three people choked to death when rioters
set a central Athens bank ablaze during a protest against wage and pension cuts that were the price of the 110 billion euro
($146.5 billion) EU/IMF bailout agreed on Sunday.
A general strike shut down Greek airports, tourist sites and public services and some 50,000 demonstrators
marched against the planned public spending cuts and tax rises, demanding that tax cheats and corrupt politicians be put on
Hundreds of protesters
threw rocks and bottles at police who responded with tear gas. Prime Minister George Papandreou told parliament he was deeply
shocked by the fire deaths and vowed to bring the culprits to justice.
In Berlin, German Chancellor Angela Merkel said Europe's fate was at stake in the
most serious crisis of the single currency's 11-year lifetime, and other euro countries could be hit unless the rescue for
Affairs Commissioner Olli Rehn said it was vital to stop the crisis spreading beyond Greece.
"It's absolutely essential to contain the bushfire in Greece
so that it will not become a forest fire and a threat to financial stability for the European Union and its economy as a whole,"
he told a news conference.
over a widening of the crisis sent stocks tumbling worldwide, and the euro hit a new one-year low below $1.29.
Battered Greek bank shares shed a further
5 percent on news of the first casualties in three months of sporadic strikes and street protests.
Shares in Spain and Portugal, seen as the next two targets
for investors testing the European Union's will and ability to defend weak euro zone economies, fell for a second straight
day. Lisbon had to pay more than four times its previous yield to sell six-month treasury bills on Wednesday.
In a sign of growing alarm in Brussels, European
Commission President Jose Manuel Barroso launched a fierce attack on financial "speculators," saying the EU executive
could move quickly to further regulate them if they acted irresponsibly.
Merkel, whose foot-dragging many analysts have blamed for aggravating the Greek
crisis, told parliament the success of the rescue package would determine "nothing less than the future of Europe --
and with it the future of Germany in Europe."
Without the aid, a chain reaction threatened to destabilize the European and international financial system,
she said in a debate on approving Berlin's 22 billion-euro contribution to the emergency loans for Athens, despite German
European Central Bank governing council heavyweight
Axel Weber gave German lawmakers a similar warning, saying a Greek default would pose a substantial risk to the stability
of European monetary union and the financial system.
The head of the International Monetary Fund acknowledged the risk of the debt crisis spreading from Greece
to other European countries but said he saw no real threat to the big euro zone states such as France and Germany.
"There is always a risk of contagion,"
Dominique Strauss-Kahn told French daily Le Parisien.
"Portugal has been mentioned, but it is already taking measures and the other countries are in a much
more solid situation ... but we should remain vigilant."
The euro hit a 14-month low of $1.2801 and the cost of insuring Spanish and Portuguese debt against
default spiked to euro lifetime highs.
to calm markets, Rehn said Spain did not need an aid mechanism of the kind created for Greece and he was not going to propose
one. But he also said the deficit levels of all EU states were "worryingly high."
Despite official denials, many economists are convinced Greece
will have to restructure its debt, making private investors take a share of the pain.
"What we are seeing today is very classical financial contagion
effect," said Sebastian Barbe, head of emerging markets strategy at Credit Agricole, Hong Kong.
Concern that Greece's Socialist government will be unable to implement
all the deficit-cutting measures agreed with the EU and IMF because of potential social unrest is one of the drivers of the
euro zone turmoil.
presented an austerity bill to parliament on Tuesday which foresees 30 billion euros in new savings. But the conservative
opposition vowed to vote against it, dooming hopes of a political consensus.
Analysts were watching Wednesday's protest for pointers to the degree of mobilization
of Greece's powerful trade unions.
far, demonstrations have been limited to tens of thousands but anger is mounting, with opinion polls showing ordinary Greeks
believe they are paying the price of the crisis while tax evasion and corruption go unpunished.
"With our strike today we are continuing our fight
against harsh and unfair measures that hit workers, pensioners and the unemployed," Yannios Panagopoulos, president of
private sector union GSEE, told us.
Source : Reuters
troubles raise contagion worries
debt troubles send worries through global economy about contagion threats
debt crisis sent a shudder through global financial markets and served as a dramatic reminder of how vulnerable the world
economy remains to the threat of a fast-spreading financial panic.
To many, market developments this
week served as a spooky reminder of the fall of 2008 and the panic that spread worldwide after Lehman
Brothers collapsed with disastrous consequences inSeptember 2008.
people get scared that Greece could default, they are going to be scared that Portugal will default and then other countries.
Once people panic, they panic about everything," said David Wyss, chief economist at Standard and Poor's in New York.
"We saw that in the wake of the Lehman Brothers failure."
Dow Jones industrial average ended Thursday up 122.05 points at 11,167.32, while European stock markets rose after two days
of steep declines.
Those market gains came as European and Germany officials sought to assure investors
that they were working quickly to approve a bailout for Greece with European Union monetary affairs commission Olli Rehn,
saying he was confident that talks on a bailout package of support from European countries and the International Monetary
Fund would be wrapped up in a few days.
Underscoring the need for quick solutions, the White House released
a statement late Wednesday that President Barack Obama and
German Chancellor Angela Merkel had discussed the "importance of resolute action by Greece and timely support from the
IMF and Europe to address Greece's economic difficulties."
In Asia, while there are not yet significant
concerns about the creditworthiness of the region's governments, big economies like China and Japan still have much at stake. Europe is an important export market for Asia, and China
and Japan are among the biggest
investors in the debt issued by the United States and European countries with holdings worth billions of dollars.
lenders in the region, meanwhile, are already fretting that Europe's problems will chill the financial system, making it harder
for banks to borrow the short and long-term money that helps fund their own lending to businesses and consumers.
are also concerns the turmoil in Europe could convince China to delay any appreciation of its currency -- widely viewed as
undervalued -- aggravating tensions with the U.S. and other trading partners. A key meeting on this issue is scheduled for
May 24-25 when Treasury Secretary Timothy Geithner and Secretary of StateHillary Rodham Clinton will
meet with their counterparts for talks in Beijing.
noted that the debt problems hitting Greece and other European countries often occur after a financial crisis. That is because
governments borrow heavily to prop up their banking systems, which sends their own debt burdens soaring.
current crisis, the United States has seen its publicly held debt jump from 36 percent of the total economy in 2007 to 64
percent this year. That's the highest level since 1951, when the country was still paying off the debt run up to fight World
Debt levels of all developing countries are rising to levels not seen over the past 60 years, the
IMF said in an economic survey released last week.
"The Greek problem highlights a broader problem
across the globe," said Mark Zandi, chief economist at Moody's Analytics. "Governments used their resources to end
the financial panic and the Great Recession, but now they have to figure out how to pay for it."
United States and Japan, the world's two biggest economies, also have heavy
debt loads, they enjoy advantages in financing that debt that Greece does not have.
More than 90 percent
of Japan's debt is funded domestically, putting the country at low risk for
capital flight and servicing that debt remains manageable because of low interest rates.
Ratings did warn last week that Japan's credit rating could worsen if Tokyo
does not rein in snowballing debt, which reached 201 percent of gross domestic product in 2009. Deflation, slow growth and
dwindling household savings could eventually undermine Japan's ability to
The rest of Asia is on sounder financial footing, especially considering its rapid growth.
The region underwent a "profound deleveraging" in the 1990s following its own financial crisis, mandated by the
IMF's strict bailout conditions, said Glen Maguire, chief Asia economist at Societe Generale.
government reports its debt at about 20 percent of GDP. But Tom Orlik, an analyst in Beijing for Stone & McCarthy Research Associates, says the figure is far higher than
official numbers suggest.
Add in local government debt and nonperforming loans in the government-owned
banks, and the level tops 50 percent of GDP, he said.
"The number is higher than the government
acknowledges, and that is well known, but it is still not a very alarming number," Orlik said.
appears strong enough to avoid the debt problems engulfing Greece and Europe, it hasn't been immune to the anxiety the turmoil
has produced with Asian equity markets being hammered this week, in line with deep share declines in Europe and the U.S.
what may lie ahead, the chief executive of ANZ Banking Group Ltd., an Australian lender with operations across Asia, warned
Thursday that the sovereign debt crisis in Europe could make it harder for banks to access credit.
am still quite worried about the global economy," Smith told reporters. "Europe is a mess."
Source ; Associated Press
Euro Sales Extend as Morgan Stanley
Mulls EU Breakup
NEWS BLOOMBERG- Investors are abandoning the euro at a rate not seen since the collapse of Lehman Brothers Holdings Inc. as
Europe’s worsening fiscal crisis threatens to splinter thenation currency union.
and banks sold euros this month at the fastest pace since the second half of 2008, when the currency tumbled more than 25
percent against the dollar between mid-July and the end of October, according to Bank of New York Mellon Corp., the world’s
biggest custodian of financial assets with $23 trillion. Demand for options giving the right to sell the euro against the
dollar versus those allowing for purchases rose yesterday to the highest level since November 2008.
that went into the makeup of the euro- zone, and hence the euro, are now being brought into question and revalued,”
said Eric Busay, a manager of currencies and international bonds in Sacramento at the California Public Employees’ Retirement
System, the largest U.S. public pension, with $202 billion under management. “There are differences, and screaming differences,
that have now been shown between the regions of the euro-zone.”
While the euro became a rival to
the dollar after the common currency’s inception in 1999, the debt crisis that began in Greece shows how it is being
shaken by one country comprising 2.6 percent of the region’s economy. The euro’s 11 percent decline in the past
six months made it the worst performer among its 16 most-traded peers. Standard & Poor’s cut the credit ratings
on Greece, Portugal and Spain in the last two days.
swaps on the debt of Greece, Portugal and Spain climbed to record highs as the 16 nations making up the euro failed
to bridge economic and political differences fast enough for traders.
The euro fell to a one-year low
of $1.3115 yesterday in New York, down from 2009’s high of $1.5144 on Nov. 25, as German Chancellor Angela Merkel said
in Berlin the “stability of the euro zone” was at stake if a 45 billion-euro ($59 billion) loan package for Greece
orchestrated by the International Monetary Fund can’t be delivered soon.
Currency strategists are having
a hard time keeping up with the decline. The median average of 32 forecasts compiled by Bloomberg is for the currency to end
the year at $1.32. In February, the estimate was $1.43. The euro was at $1.3238 at 3:21 p.m. in New York today.
Bank of New York Mellon’s chief currency strategist, Simon Derrick in London, said the euro may tumble
to $1.10 by the end of 2011. Morgan Stanley predicts it will trade at $1.24 by year- end. Without central bank support, the
euro’s long-term fair value is $1.20, UBS AG said April 26.
Investors are on course to sell a net
50 billion euros of euro-region bonds this year, compared with purchases of 225 billion euros in 2009, according to a Nomura
Holdings Inc. projection.
Central banks reduced the share of euros in their $8.1 trillion of reserves to 27.6
percent in the fourth quarter of 2009 from 28 percent in the previous three months, according to Morgan Stanley calculations
based on IMF data. The figure was about 17 percent when the euro was introduced 11 years ago.
bankers and institutional investors have spent 10 years pricing out the likelihood of a euro-zone break-up, and now they have
to price it in again,” said Emma Lawson, a currency strategist in London at Morgan Stanley. “The euro will no
longer have this additional support going forward.”
‘Shift in Attitudes’
one-month option risk-reversal rate fell to minus 1.97 percent yesterday, the lowest level since Nov. 4, 2008, and down from
minus 0.9 two weeks earlier, signaling a relative increase in demand for puts, which grant traders the right to sell the currency.
It was at minus 1.7 percent today.
“Euro weakness is driven by a broad shift in investor attitudes,
a shift which goes well beyond shorter-term foreign- exchange position changes within hedge funds,” Nomura foreign-
exchange analysts Jennifer Hau in London and Jens Nordvig in New York wrote in an April 20 report to clients.
euro, introduced on Jan. 1, 1999, at a rate of about $1.17, weakened to 82.30 U.S. cents in 2000 as the region’s economy
slumped amid the bursting of the dot-com bubble. It peaked at $1.6038 in July 2008 as the global financial crisis worsened.
the European Union shares a common monetary policy, members are responsible for their own fiscal decisions. That allowed Greece’s
budget deficit to expand to almost 14 percent of its gross domestic product, exceeding the EU’s 3 percent limit without
penalty. Germany’s is 3.2 percent of its GDP.
$357 billion economy is 2.6 percent of the euro zone’s $13.6 trillion and compares with $3.65 trillion for Germany,
according to data compiled by Bloomberg.
Even though Merkel called for a quick resolution of the aid package
for Greece, she has delayed German approval of loans in the face of voter opposition. Almost 60 percent of Germans don’t
want to help Greece, the Die Welt newspaper reported this week, citing a survey of 1,009 people.
with Europe, and people had forgotten about this over the past decade, is that the experiment of monetary union without political
union, and without any sort of federalism across the euro-zone, puts them in a very vulnerable spot,” Scott Mather,
head of global portfolio management at Pacific Investment Management Co. in Munich, said in a Bloomberg radio interview on
“So when push comes to shove and you have
these large imbalances that develop between countries, it is very likely that they go back to the old world of being more
nationalistic,” said Mather, whose Newport Beach, California- based firm runs the $220 billion Total Return Fund, the
world’s biggest bond fund.
The outlook for the euro and the dollar are both poor, according to Kenneth
Rogoff, a former IMF chief economist and professor at Harvard University in Cambridge, Massachusetts. President Barack Obama
has increased U.S. marketable debt to an unprecedented $7.76 trillion to fund a budget deficit the government predicts will
swell to $1.6 trillion in the fiscal year ending Sept. 30.
“There’s a tremendous surge to diversify
out of the dollar, and the euro is still the main alternative,” Rogoff said in a telephone interview. “Both the
euro and the dollar have their longer-term vulnerabilities.”
Since 2001 the percentage of currency
reserves held in dollars has fallen to 62.1 percent from 72.7 percent, according to the IMF in Washington.
Nobel Prize-winning economist Robert Mundell said the Greek crisis is a fiscal issue,
not a broader credibility peril for Europe’s common currency.
“It’s not a euro problem;
the euro has been a great solution,” Mundell, a professor at Columbia University in New York, said in an interview yesterday
on Bloomberg Television. “It’s a deficit and debt problem.”
Mundell said there must be
conditions attached to the financing package for Greece with a year-by-year target to reduce the country’s debt and
cut its deficit “well below 3 percent” of GDP.
“It could be handled if the Greeks would
be able to demonstrate to Germany and the other countries that they will keep the line and do this,” Mundell said. “There
has to be that transformation, otherwise the alternative is a big restructuring of the Greek debt.”
The euro’s weakness may also help Europe’s economy rebound as its exports become more competitive.
Bundesbank President Axel Weber said April 26 that Germany’s recovery will gather steam in the second quarter. The nation’s
exports rose 5.1 percent in February from the previous month, the most since June 2009, a government report showed on April
To fix the region’s fiscal crisis the EU may need a plan larger than the $700 billion Troubled Asset
Relief Program deployed by the U.S. after the collapse of Lehman Brothers, according to Goldman Sachs Group Inc., JPMorgan
Chase & Co. and Royal Bank of Scotland Group Plc.
Lower credit ratings on EU nations may force banks
to boost the amount of capital they’re required to hold against bets on sovereign debt, said Brian Yelvington, head
of fixed-income strategy at broker-dealer Knight Libertas LLC in Greenwich, Connecticut. While bank capital rules give a risk
weighting of zero percent for government debt rated AA- or higher, it jumps to 50 percent for debt graded BBB+ to BBB- on
the S&P scale and 100 percent for BB+ to B-.
Yields on Greek two-year
notes soared to a record 26 percent yesterday. Portugal’s jumped to 7.05 percent and Spain’s reached 2.53 percent.
S&P lowered its rating on Greece by three steps to BB+, or below investment grade, from BBB+ on April 27, minutes after
cutting Portugal to A- from A+. It reduced Spain’s rating one step to AA from AA+ yesterday.
is not the euro we initially bought into,” said Roddy Macpherson, investment director in Edinburgh at Scottish Widows
Investment Partnership Ltd., which manages the equivalent of $216 billion of assets. “The whole confidence in the euro
has taken a bit of a bashing. We’re short the euro.”
EU Sets up Massive
BRUSSELS — The European
Union and the International Monetary Fund pledged a massive nearly $1 trillion defense package for the embattled euro Monday,
hoping to finally turn back relentless attacks on the eurozone's weakest members and allow the continent to resume its hesitant
Under the three-year aid plan, the EU Commission will make €60 billion ($75 billion) available
while countries from the 16-nation eurozone would promise bilateral backing for €440 billion ($570 billion). The IMF
would contribute an additional sum of at least half of the EU's total contribution, or €250 billion, Spanish Finance
Minister Elena Salgado said.
"We shall defend the euro whatever it takes," EU Commissioner Olli Rehn
said after an 11 hour-meeting of EU finance ministers. The meeting capped a hectic week of chaotic sparring between panicked
European governments and aggressive markets.
The massive sums come after a week of political posturing and soothing
words by euro zone leaders that had no impact on global investors. In the end, even longtime skeptic Germany realized Europe
had to show the money after financial attacks on Greece's debt seemed poised to spread to Portugal and Spain.
are placing considerable sums in the interest of stability in Europe," Salgado said after the meeting.
talks were called on Friday night after a eurozone summit in Brussels amid concerns that the financial crisis sparked by Greece's
runaway debt problems had begun to spread to other financially troubled eurozone countries such as Portugal and Spain.
"We are facing such exceptional circumstances today and the mechanism will stay in place as long as needed to
safeguard financial stability," the ministers said in a statement.
Spain and Portugal, which have begun to
see the same signs of trouble that Greece had three months ago, have committed to "take significant additional consolidation
measures in 2010 and 2011," the statement said, and the two countries will present them to the EU's finance ministers
at their meeting on May 18.
The EU's slow response to the crisis and its failure to keep Greece from reaching the
brink of bankruptcy triggered slides in the euro and global stocks last week, and intensified fears the crisis would spread.
Ministers had hoped to have something approved by the time stock markets opened Monday in Asia, but they missed their
deadline by a couple of hours.
"We need to make progress today because in the night, when the markets are
opening, we cannot afford disappointments," Swedish Finance Minister Anders Borg said as he headed into the meeting Sunday
"We now see herd behaviors in the markets that are really pack behaviors, wolf pack behaviors,"
he said. If unchecked, "they will tear the weaker countries apart. So it is very important that we now make progress."
Some eurozone nations blamed the fragile governments and a lack of European cooperation for the crisis.
against putting all the blame on speculation," said Austrian Finance Minister Josef Proell. "Speculation is only
successful against countries that have mismanaged their finances for years."
Compounding the Greek financial
crisis, attention has centered on fragile finances of countries like Spain and Portugal, which in turn could drag the whole
of the euro zone down. Fear of default led to investors demanding high interest rates that Greece could not pay, forcing it
to seek a bailout; the risk is that market skepticism will make Portugal and Spain pay more and more to borrow, worsening
Early Saturday, the eurozone leaders gave final approval for an €80 billion ($100 billion) rescue
package of loans to Greece for the next three years to keep it from imploding. The International Monetary Fund also approved
its part of the rescue package — €30 billion ($40 billion) worth of loans — in Washington Sunday.
Financial markets have continued to sell off the euro and Greek bonds even as EU leaders have insisted for days that the
Greek financial implosion is a unique combination of bad management, free spending and statistical cheating that doesn't apply
to other euro-zone nations.
Many economists think Greece will eventually default anyway, which could deal a sharp
blow to the euro and lead to sharply higher borrowing costs for other indebted countries in Europe. Default, or market contagion
to other countries could lead to panic, intimidating consumers from spending and making banks fearful to lend money to businesses
Sorce : JPOST