commissioner.org
| Source | Louis Proyect |
| Date | 11/06/17/06:58 |
| www.nytimes.com
Worries Grow About Breadth of Debt Crisis By GRAHAM BOWLEY The tumult in the European monetary zone is spreading concern among investors of a broader crisis in financial markets from Ireland to Spain. The worry is that the worst case, a Greek debt default, would lead to damaging losses for European banks and spur a global panic, replaying the events of September 2008. Then, investors fled all but the safest government debt, unloading everything from corporate bonds to American and emerging country stocks. Global markets froze. As European officials headed into a long weekend of critical talks, the European Union and the International Monetary Fund said that they were confident of a deal to secure a vital 12 billion euros ($17 billion) in outside aid needed to stave off an imminent Greek default. The comments, reflecting belated advances in negotiations that have been going on for weeks, were aimed at calming anxious financial markets. But so far, the deepening concerns are stopping short of transferring forcefully to the United States. For the time being at least, investors seem to believe enough shock absorbers have been built in to comfortably withstand any default by Greece or other highly debt-ridden nation. The interest rate on United States 10-year Treasury bonds remains below 3 percent. In contrast, Spanish bond yields rose to an 11-year high of 5.74 percent as anxious investors fretted that it could be next in the firing line after Greece. “U.S. financial institutions are very cash-rich, so that means a liquidity crisis would have to be extraordinary before it affects them,” said Guy LeBas, the chief fixed-income strategist for Janney Montgomery Scott. After a 179-point sell-off on Wednesday, American markets stabilized, with all the main United States indexes closing higher. But the cost to investors of insuring their holdings of Greek government debt, to make sure they recoup their money in the event of a default, registered its single biggest one-day move. An investor now has to pay about $2 million annually to insure $10 million of Greek debt over five years, compared with about $50,000 on the same amount of United States government debt, according to Markit. Insurance rates on the debt of Irish and Portuguese governments, as measured by rates in the market for credit-default swaps, also climbed to record highs. In addition, Spain struggled to kindle investor interest on its auction of bonds, selling 2.8 billion euros ($4 billion), missing its top target and with average yields creeping up again. The fear is that a Greek default could threaten the integrity of the euro zone, require European countries to bail out banks that lent heavily to Greece and other deeply indebted countries, and spread panic across global markets. The European Union’s top economic official, Olli Rehn, said he had reached a deal with the International Monetary Fund to avoid a Greek default through at least the fall. But he warned politicians they must agree to new austerity measures or the program would be worthless. The mood in the markets was made more nervous when Michael Noonan, finance minister of Ireland, said on Wednesday that the Irish government was ready to impose losses on senior unsecured bondholders of Anglo Irish Bank and the Irish Nationwide Building Society if the European Central Bank agreed. That added to fears that countries beyond Greece might be involved in a broader restructuring. Also, some well-regarded economists say that a Greek default is almost inevitable. The chances of Greece defaulting are “so high that you almost have to say there’s no way out,” Alan Greenspan, the former chairman of the Federal Reserve, said on a “Charlie Rose” broadcast, shown on Bloomberg TV on Thursday night. He added that as a result, some American banks may be “up against the wall.” The financial markets are watching nervously as the Greek government tries to push through austerity measures required to secure more international aid. Greece “needs to better inform the markets as well as the Greek people that what’s being done is actually achieving results, which will help restore confidence,” said Claude Giorno, the senior economist for Greece at the Organization for Economic Cooperation and Development, based in Paris. But the United States, for the time being, appeared insulated from the problems, and American assets remain a destination for anxious global investors, with the dollar and Treasuries rising. The Standard & Poor’s 500-stock index rose 2.22 points, or 0.18 percent, to 1,267.64. The Dow Jones industrial average closed up 64.25 points, or 0.54 percent, to 11,961.52. The Nasdaq composite index fell 7.76 points, or 0.29 percent, to 2,623.70. Still, two Deutsche Bank strategists, Jim Reid and Colin Tan, warned in a report on Thursday that this Greek crisis had echoes of the collapse of the Lehman Brothers investment bank in September 2008, an event that plunged the financial system into chaos and required the commitment of trillions of dollars in government support to stave off another Great Depression. “Everyone in every corner of global financial markets should be keeping a very close eye on upcoming Greek events,” they wrote. “The period is resembling the buildup to the Lehman collapse where, although markets were increasingly nervous, virtually everyone expected a last-minute buyer.” One ugly scene that some analysts are imagining involves a default by Greece leading to losses inflicted on banks in other European countries that own large amounts of Greek debt. The European Central Bank, too, is a big holder of debt, and analysts said in the event of a default it might need to be recapitalized, another blow to confidence. Those losses could then cascade to the United States because the American and European banking systems are so interlocked, lending billions of dollars to each other every day. American banks and insurance companies may also be liable for the biggest share of default insurance payments to European institutions if Greece or other countries fail. And the trillion-dollar money market fund industry could also suffer. About 44.3 percent of money-market fund assets are European bank debt, according to Fitch Ratings, although they may be a little insulated because they have sold much of their Spanish, Portuguese and Irish debt. The funds have never held Greek bank debt, which rarely met the funds’ credit rating standards. The markets are keenly watching for signs that contagion is spreading through the global financial system. The renewed volatility in the markets has again trained a spotlight on the Chicago Board Options Exchange Volatility Index. The VIX, as it is known, measures the implied volatility of options on the Standard & Poor’s 500-stock index. It rose to settle above 21 on Thursday for the first time since March. Another pressure gauge under scrutiny is the overnight interbank lending rate. As of Monday, investors’ expectations for three months from now of the overnight interbank lending rate showed an increase of about 10 basis points to nearly twice its current levels. Still, increases in those two measures so far pale in comparison to the spikes in both during last year’s flare-up in Europe. Contributing reporting were Eric Dash, Stephen Castle, Matthew Saltmarsh and Liz Alderman. ----- NY Times June 16, 2011 Greek Turmoil Raises Fears of Instability Around Europe By RACHEL DONADIO ATHENS — The instability rocking Greece this week is the latest manifestation of a troubling new phase in the global financial crisis: political turmoil is sweeping through Europe, toppling governments and threatening to undermine efforts to rescue the financial system and, ultimately, the euro zone itself. It seems likely that Prime Minister George Papandreou of Greece will manage to hold his government together long enough to push through the deep cuts required for his debt-ridden country to receive its next installment of international aid. He reshuffled his cabinet on Friday, replacing Finance Minister George Papaconstantinou with veteran Socialist Evangelos Venizelos as part of a broader cabinet reshuffle aimed at restoring waning confidence among Greeks and foreign creditors. But with a rising tide of voter anger against bank bailouts, budget cuts and austerity measures, his popularity is plummeting. And it is not just Mr. Papandreou who is feeling the public’s wrath. Across Europe, people are complaining that they are unfairly paying the price for the mistakes of their governments while they are growing increasingly resentful of the international banks and the preferential treatment they seem to receive. And they are getting louder. “They took everything, and we have to pay,” said Katerina Fatourou, 30, an elementary school music teacher in Athens, summing up a common sentiment here after a large and sometimes violent general strike. It is not likely to be the last in Europe this summer. In a vicious cycle, the rising political turmoil is sowing unrest in global financial markets, raising the interest rates paid by heavily indebted nations in Europe to ever higher levels and threatening their solvency. European officials are also worried that if Greece’s politicians bow to popular anger and reject the austerity route, other countries might follow, with potentially dire consequences for Europe’s banks and the common currency. So concerned were European Union officials about the potential for trouble that the bloc’s top financial official, Olli Rehn, hinted in Brussels on Thursday that Greece might get the new financial aid even if European finance ministers failed to approve the loan at a meeting this weekend. In recent months, the governments of Ireland and Portugal have been ousted over efforts to cut budgets and benefits. Students have rioted to protest tuition increases in Britain, and young people who feel shut out of their own futures have held nationwide sit-ins in Spain, where the governing Socialists are in trouble in the polls. Right-wing political parties are gaining strength, tapping, in part, the populist rejection of austerity plans. This week, Mr. Papandreou became the latest politician pulled in opposite directions by the markets, which hang on his every word, and his country’s citizens, who have already been stung by one round of wage and pension cuts and are resisting new spending reductions and tax increases. But he needs those measures to persuade the International Monetary Fund to release the next installment of a $155 billion bailout package negotiated a year ago. “It’s hard enough to get the electorate to support austerity at the best of times,” said Simon Tilford, the chief economist of the Center for European Reform in London. “They promised endless austerity with no prospects of a return to growth, and there will be mounting opposition to this.” In Athens this week, the pessimism was as thick in the air as the tear gas that the police sprayed during Wednesday’s demonstration. “A year ago it was bad, but not like now,” said Irene Anastasiou, 22, a quiet marketing student who has been taking part in a peaceful sit-in in Athens’s central Syntagma Square for the past three weeks. “I am a young Greek girl. I have dreams, and they destroyed them,” she said of the government. In Greece, “clearly there is a sense that this society is reaching the breaking point,” said Jens Bastian, an economist at the Hellenic Foundation for European and Foreign Policy in Athens. People are asking: “ ‘Where is this going to lead? Why are we making these cuts? Why do I have to accept that I have less income? What’s the larger purpose of this?’ ” But those questions are not being asked only in Greece. Across Europe, politicians have failed to sell skeptical electorates on a variety of austerity measures. Earlier this month, Portugal’s center-right Social Democratic Party unseated the governing Socialists, as voters punished José Sócrates, the Socialist caretaker prime minister, for his failure to get public finances under control and help reverse a slump in the economy that has pushed the unemployment rate above 12 percent. Instead, Portugal was forced to negotiate a $110 billion international bailout in return for pledging more austerity measures, even as analysts forecast that its economy will contract by 2 percent this year and next. Mr. Sócrates resigned in March because of parliamentary opposition to his austerity plan. In Greece, the center-right opposition is also opposed to the terms of the bailout and is instead calling for tax breaks — a strategy that experts said would make the deficit rise sharply and lead to further turmoil. More and more experts are questioning the wisdom of budget cutting because countries like Greece and Portugal are already caught in what they call a “debt trap.” Further cuts, they say, will only depress the economy, reducing tax revenues and making it harder to repay the debt. “The E.U. and I.M.F. are insisting on a course of action that has already failed,” Mr. Tilford said. “That is not going work but is going to impose huge economic and social costs.” Voters are increasingly sending politicians the same message. In Ireland in February, the governing party, Fianna Fail, which had run the government for 14 years, suffered its worst showing in its more than 80-year history and was kicked out of power. In Britain, retail sales were down 1.4. percent in May, which was taken as a sign that consumers have no faith in the Conservative government’s economic plan, while the opposition called for an emergency cut in the value added tax to increase spending. British labor unions representing about two million employees say they plan to hold coordinated strikes on June 30, upset at layoffs, pay freezes and changes to the pension system. They have prompted talk of a “summer of discontent” with echoes of the 1970s, when the country was crippled by general strikes. Back in Athens, many Greeks said the government, not the people, should be held accountable for the country’s problems, raising an ancient question. “Could we and should we trust the people?” asked Konstantinos Poulis, a playwright and actor who attended Wednesday’s demonstration. “Or should it be someone who knows better? Even if Plato were governing the country, and not Papandreou, the problem would be the same.” Raphael Minder contributed reporting from Madrid, Sarah Lyall from London and Niki Kitsantonis from Athens. |
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