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Euro Euro Document Transcript

  • How is the Euro zone debt crisis affecting sterling?by Charles PurdyHere is an interesting question. When and where was the first sovereign debt default? Was it Ancient Rome in 204 AD? Belgium in 1946? Greece in 377 BC? Or China in 1929? History has an uncanny way of repeating itself and the 2011 brand of debt crisis is no different. Greece has the somewhat dubious honour of recording the first sovereign debt default in 377 BC. In a fascinating article published in the Global Post, Barry Neild explores the numerous countries which have been unable to fulfil loan repayments since the first default which took place 2,388 years ago. England for instance, managed to default three times before 1600, starting with Edward III’s failure to pay Italian lenders in 1340. One thing is clear, despite their frequency over the years, sovereign defaults cause many problems. Barely two months on from a second bail out worth €110bn, Athens is fighting for its next tranche of euros from the first bailout package. If Greece does not demonstrate it can meet the required spending cuts, it could soon face another default. So what has been the impact on sterling amid all this?During July, August and early September, sterling and the euro traded in a fairly narrow range of €1.13/£1 to €1.15/£1. However, this level of stability abruptly came to a halt on 9 September after the unexpected resignation of the European Central Bank’s (ECB) chief economist, Jürgen Stark. Mr Stark’s decision immediately unsettled markets causing large and rapid exchange movements. Sterling for instance, surged against the euro gaining by more than two cents and hitting a temporary high of €1.17/£1. This was an exchange rate last seen six months ago.With rumours already brewing that there were potential divisions in the ECB, many started to suspect that euro zone policy makers had run dry on solutions to solve the crisis. With Greece’s austerity measures producing no improvements and recent GDP figures showing the nation contracting, it is becoming evident that the only solution for the Greek government is to default on its debt.Despite a number of meetings and conference calls over the past three weeks, euro zone policy makers were still unable to convince the public that a solution was at foot. The G7 meeting in Marseille did little to put forward any new measures to renew global growth or ease worries over the debt crisis. Additionally, calls between Greek Prime Minister George Papandreou, German Chancellor Angela Merkel and French President Nicolas Sarkozy only reinforced the notion that everything would be done to keep the euro intact, but gave little feedback on how. One option is a full “fiscal union”, centralising fiscal policy and harmonising borrowing with a so-called “eurobond”. This is widely seen as the most positive for markets, though sterling would be likely to depreciate against the euro, but gain against the US dollar. Nevertheless, the political wrangling and effort to achieve this would take many years rather than a few months so, it would not be a short term solution.The second option is one favoured by numerous policy makers and that is to lead Greece through a “managed default”, with creditors taking a “haircut”, that is, agree to be paid back less. The ECB would use bailout funds (expected to total into the trillions of euros) to buy periphery (mainly Italian and Spanish) bonds in order to prevent yields on those bonds spiralling out of control. In this case many expect a gradual recovery in confidence, with currencies remaining in current ranges.This second option was the one favoured at the recent G20 gathering in Washington and is the one that the policy makers and politicians are working hard on. This will require extensive funds to be made available by the International Monetary Fund. A figure of €2 trillion has already been mentioned. This will ensure that any bank has enough to write off their Greek government debt and still stay in business. The big question is, will this work? Nobody knows. But one thing is certain, it will take at least five to six weeks to finalise this process as it is an extremely complex procedure. Particularly for the banks who now have the worrying task of finding more money. Nevertheless, if all elements of this process are nailed down, then fears of contagion are very likely to decrease, leaving the euro zone intact. But what has really surprised me is that despite that brief moment of euro weakness following Mr Stark’s resignation, the euro/sterling exchange rate has returned to its trading range of €1.13-1.15/£1. It would seem that markets are so uncertain of what the outcome will be for a euro zone debt default that they are unable to push the sterling/euro exchange rate one way or the other. <br />IMF: Euro-Zone Crisis Effects Spreading; Recession Can't Be Ruled Out<br />BRUSSELS (DOW JONES)--The effects of the euro-zone debt crisis are spreading to the core countries, banks and investors, and another economic recession can't be ruled out, the International Monetary Fund said in a report Wednesday.<br />The IMF forecasts growth for Europe to slow to 2.3% in 2011 from 2.4% in 2010, and to 1.8% in 2012. Inflation is expected to decline from 4.2% in 2011 to 3.1% in 2012.<br />As a result, a more relaxed monetary policy would be justified. In addition, the European Union should make it easier for the European Central Bank to have a steady presence in markets, said the IMF.<br />However, Antonio Borges, director of the IMF's European department, said most countries are not in a position to deliver a stimulus program.<br />"[They] will, of course, have to maintain very strong discipline on the fiscal front," said Borges.<br />Greece, in particular, must accelerate the implementation of economic reforms, such as the privatization of government entities.<br />Borges said negotiations between the troika of international lenders and Greece for the country's next tranche of a loan are in no rush.<br />Welcome back to our live blog, which will be covering rate announcements by both the European Central Bank (11:45 GMT) and the Bank of England (11:00 GMT), news on the euro-zone debt crisis and market movements.<br />The BOE has kept rates at 0.5% but surprised many by announcing that it will inject £75 billion of new quantitative easing.<br />The ECB’s also left key interest rates unchanged. Attention then turned to ECB President Jean-Claude Trichet who gave his last ever press conference (12:30 GMT) before the curtain came down on his eight-year reign.<br />Stay with us for further reaction.<br />Sort by:<br />Oldest<br />Newest<br />8:50 pm<br />Merkel and Lagarde<br />by John Crowley, Wall Street Journal<br />Add a Comment<br />German Chancellor Angela Merkel, flanked by Christine Lagarde from the IMF, is discussing debt crisis in Berlin. They are currently giving a press conference.<br />8:31 pm<br />Words Matter More Than Deeds for SNB<br />by Lauren Mills<br />Add a Comment<br />Nicholas Hastings, senior columnist for Dow Jones Newswires, says:<br />"Any assumptions that the SNB has been busy supporting the euro against its own currency with market intervention were proved wrong Thursday when the central bank published data showing that its foreign reserves had barely risen since the new policy was introduced and the gains that had been made were largely due to changing valuations and currency swaps.<br />"In other words, the bank achieved its policy goal of driving the franc lower and helping its beleaguered exporters without spending a proverbial single centime."<br />Read his post on The Source here.<br />8:17 pm<br />ECB Rate Will Go Down to 1% in December, say RBC Europe<br />by Martin Essex<br />Add a Comment<br />With euro-zone inflation now close to peaking, and activity data in the area likely to remain generally soft in the weeks ahead, economists James Ashley and Gustavo Bagattini at RBC Europe think it is now only a matter of time before the consensus on the ECB Governing Council swings in favour of reversing its refi rate back down to 1.0%.<br />“It is possible that the Governing Council may reach that point as early as next month, but we think a 50bp cut (back to 1.0%) is more likely in December when inflation will no longer be heading higher and policymakers will have the benefit of published 2013 macroeconomic projections for the first time,” they say.<br />“In light of today’s press conference, we now expect the ECB to cut its refi rate by 50bp, to 1.0%, at the December meeting.”<br />8:11 pm<br />IMF: Expect Completion of Greek Loan Program Mission Within Days<br />by Ian Tally<br />Add a Comment<br />Ian Talley, of Dow Jones Newswires, writes:<br />"The International Monetary Fund loan program mission to Greece is expected to conclude within days, an IMF spokesman said Thursday.<br />The IMF, European and Greek officials have been negotiating for weeks on the next tranche of a joint EUR110 billion emergency bailout loan. Failure to meet fundamental program targets has held up disbursement, however."<br />8:09 pm<br />Bank of Portugal Cuts 2012 Growth Forecast<br />by Carla Canivete<br />Add a Comment<br />Carla Canivete, contributing to Dow Jones Newswires, writes from Lisbon:<br />"The Bank of Portugal Thursday cut its economic forecasts for the country for next year, as government austerity measures depress consumption and a slowdown in the global economy weighs on exports.<br />In its autumn economic bulletin, the central bank said it now expects the country's gross domestic product to shrink 2.2% next year, more than the 1.8% contraction it had expected in its last bulletin.<br />However, it also raised its GDP projection for this year slightly, and now expects the economy to contract 1.9% this year compared with its previous estimate of a 2% contraction.<br />Portugal's economy is expected to remain sluggish as the government strives to comply with the goals set under the €78 billion bailout agreement with the European Union and the International Monetary Fund."<br />8:05 pm<br />Europe's Bank May Need Recapitalization Soon<br />by Frances Robinson and Matina Stevis<br />Add a Comment<br />"Dexia’s woes come as European leaders discuss the reality that Europe's banks may need recapitalization sooner rather than later. Work is already underway on some aspects of this, European Commission President Jose Manuel Barroso said earlier Thursday following a meeting with Finnish Prime Minister Jyrki Katainen.<br />"We are already in the process of preparing certain aspects," Mr. Barroso told reporters in the VIP corner of the European Commission building here. "It may be necessary to make more efforts as the situation in the market has changed, following the last stress tests."<br />"Although they didn’t mention Dexia by name, Mr. Katainen compared the situation to that following the collapse of Lehman Brothers in 2008 and 2009, and stressed the need for a common effort across Europe.<br />"Europe is full of good and sound banks which are suffering from tangible uncertainty which has gone on for too long.<br />"We have to ensure there's not a new financial crisis which comes from the uncertainty, without any more important reason," the Finnish PM said.<br />8:00 pm<br />More on Dexia<br />by Laurence Norman<br />Add a Comment<br />This comes from Laurence Norman, Deputy Bureau Chief for Dow Jones and The Wall Street Journal in Brussels.<br />“Dexia shares were suspended after plummeting on nationalization talk. They were down 17.2% in Brussels when Euronext took the decision.”<br />7:57 pm<br />U.S. Stocks<br />by Kate Gibson, MarketWatch<br />Add a Comment<br />U.S. stocks on Thursday tilted slightly lower after U.S. jobless claims rose less than expected last week and European Central Bank President Jean-Claude Trichet spoke of increased downside risk to the region at his monthly news conference.<br />The Dow Jones Industrial Average was off 13.40 points at 10,926.55. The Standard & Poor's 500 Index shed 1.58 points to 1,142.45. The Nasdaq Composite Index declined 2.28 points to 2,458.23.<br />7:46 pm<br />Breaking News on Dexia<br />by Dow Jones Newswires<br />Add a Comment<br />Dexia Shares Suspended In Paris Until Further Notice-Euronext<br />Dexia Shares Also Suspended In Brussels-Euronext<br />7:44 pm<br />Short-dated German Bond Yields Rise<br />by Mark Brown<br />Add a Comment<br />Mark Brown, Assistant News Editor for Dow Jones Newswires on sovereign bonds, reports:<br />Short-dated German bond yields rise as Trichet stops short of signalling an imminent rate cut and instead emphasises the role of non-standard measures, chiefly providing liquidity to the banking sector and buying covered bonds.<br />"These measures will help at the margin, but they are small in scale,” says Stewart Robertson, senior economist at Aviva in London.<br />“The ECB should have done more and will eventually have to do so, including significantly lower policy interest rates.”<br />Mr. Trichet’s comment that today’s decision was not unanimous suggests that “euro-zone interest rates will be lowered soon, but it is too late to prevent a stagnation in growth,” he adds.<br />7:38 pm<br />Spain's Banking Issues Similar to Ireland's<br />by Lauren Mills<br />Add a Comment<br />Spain's approach to recapitalizing its banks could land the country with Irish-style problems, according to David Roman from our Madrid bureau.<br />He interviewed Jesus Fernández-Villaverde, a prominent blogger and professor of Economics at the University of Pennsylvania. In his view, Spain’s authorities are wrong to be looking for someone to take on rotten bank CAM’s assets and liabilities, and probably should liquidate the savings bank instead.<br />Greece signed up to a EUR110 billion loan last year with fellow euro-zone members and the IMF in exchange for dramatic fiscal and economic reforms.<br />"The key message is that we are not in any particular hurry," said Borges, adding that he is confident the talks will reach a "positive conclusion."<br />The troika review of Greece's economy is now expected in the second half of October.<br />Borges also said the size of Greece's second bailout, previously estimated at EUR109 billion, will have to be revised. He called that figure "outdated."<br />"All figures were extremely tentative," he said.<br />The next program will have to place greater emphasis on generating economic growth, instead of focusing mainly on Greece's balance sheet, said Borges.<br />He said once the euro-zone's bailout fund, the European Financial Stability Facility, is approved by all the 17 member-state governments, the IMF could act alongside the vehicle's secondary market operations. For that purpose, the IMF would have to create a special-purpose vehicle to intervene in secondary and primary markets.<br />Leaders agreed previously that the EFSF should be able to intervene in secondary bond markets. Slovakia and the Netherlands still have to approve the terms, and are expected to do so this month.<br />Borges highlighted European banks' particular risk, and repeated the IMF's position that all large regional banks should be recapitalized. The recapitalization should come from governments if not the private sector, he said.<br />But these resolutions must take a more pan-European approach. He called for a European resolution mechanism and deposit insurance fund.<br />"These are all feasible," said Borges, although it will be difficult to put in place because of political obstacles.<br />Singling out Dexia, which has come under acute stress this week, Borges said France and Belgium have no choice but to work together to resolve the issue.<br />UPDATE 1-Airbus sees no impact on orders from euro zone debt crisis<br />Reiterate forecasts for $3.5 trillion in new planes<br />* Will help with financing if necessary - Airbus<br />* In active talks with credit agencies in recent weeks (Adds detail)<br />By Michael Smith<br />SYDNEY, Oct 6 (Reuters) - European aircraft maker Airbus said it may help customers with aircraft financing if the euro debt crisis makes it necessary as concerns grow about European banks' ability to fund increasing plane orders.<br />Airbus on Thursday did not expect any impacts on orders though and reiterated forecasts for $3.5 trillion of aircraft orders over the next 20 years.<br />It did say there was a question mark over the appeal of financing, particularly dollar-funded transactions.<br />"We will, if necessary, enter into some financing although we're not a bank," Tom Williams, Executive Vice President, Programmes for Airbus told a media briefing in Sydney.<br />Williams said the industry would again look to government export credit agencies for support. Those agencies filled the gap during the 2008 crisis with guarantees as market sources of funds dried up.<br />"We will look again to the ECAs (export credit agencies) and we have been very active in talking to them in the last few weeks," Williams said.<br />Lenders and airlines have warned the global aviation industry faces financing uncertainty due to Europe's debt crisis despite record numbers of planes leaving the production lines at Airbus and rival Boeing . .<br />French banks that specialize in bankrolling the $80 billion annual jetliner market have scaled down lending amid problems in securing dollars, as U.S. investors withhold deposits from institutions perceived as most exposed to Greece.<br />However, Williams said he had seen no immediate impact on the debt crisis on aircraft orders, noting the company's biggest challenge in 2011 so far was political upheaval in the Middle East which impacted some business.<br />Airbus reiterated forecasts, released on Sept. 19, that the industry globally was expected to buy about 27,800 aircraft over the next 20 years to meet demand for travel to and from Asia's growing cities and to renew ageing fleets in the West. (Reporting by Michael Smith; editing by Narayanan Somasundaram<br />NEW DELHI: India's economic growth is likely to remain below 8 per cent in the coming quarters owing to aggressive monetary tightening and worsening global prospects, Citigroup said in a research report. "Recently-released macro and sectoral data indicate a clear slowdown in economic activity," Citigroup said, adding that the "growth in the coming quarters will likely remain in the sub-8 per cent range and average 7.6 per cent in FY'12." India's GDP growth slipped to 18-month low of 7.7 per cent in April-June quarter, the second consecutive quarter of sub-8 per cent growth. "We expect this trend to continue due to lagged effect of 500 bps of tightening, structural policy issues, and worsening prospects on the global front," the report added. The domestic economy had clocked 8.5 per cent growth last fiscal, following which the government had first projected a 9 per cent growth in the Budget, but revised it downwards to 8.2 per cent after the worsening of the Eurozone sovereign debt crisis and the fear of a double-dip recession in the US. The worsening global economic situation has taken a toll on the domestic currency and equities. Moreover, higher deficits and peaking inflation is likely to further add to the burden, Citigroup said. Over the last month, the rupee has weakened 7.3 per cent, and the BSE benchmark Sensex has dropped 3.98 per cent. The headline inflation for August stood at an uncomfortable 9.78 per cent. "While we have been expecting inflation to remain elevated due to higher minimum support prices of agricultural crops and continued upward revisions to past data; two further price pressures have emerged, firstly commodity prices have showed no sign of abating despite slowing global demand and secondly, weakness in rupee, which adds to inflationary woes," the report said. "This puts the RBI in an unenviable position of balancing slowing growth and rising inflation," Citigroup said. The central bank has raised its key rates 12 times in 18 months to control inflation, with effective tightening at 500 bps. India is, somewhat in a better place than its Asian peers. Positives for India include the country's low exports to GDP ratio, domestically financed fiscal deficit, limited exposure to foreign liabilities, and a healthy banking system. However, in times of risk aversion, India immediately comes on the radar due to its reliance on external capital, Citigroup said. India's April-July fiscal deficit stood at Rs 2,288 billion, compared to Rs 909 billion in the year-ago period. "Despite the announcement of austerity measures, we expect the government to miss its deficit target due to both lower revenues and higher expenditures," the report added.<br />