Euro Crisis Coverage

Berlin experts fear euro break-up from bail-out escalation

Plans to increase the firepower of Europe's bail-out machinery with extra leverage threaten France's AAA rating and risk setting off a dangerous chain of events, a top German institute has warned.

By Ambrose Evans-Pritchard

the Telgraph

18 October, 2011

Berlin's DIW institute, one of Chancellor Angela Merkel's five official advisers, said attempts to boost the €440bn (£384bn) EFSF bail-out fund – possibly to €2 trillion – with guarantees to shore up Southern Europe would be "poisonous" for France's credit worthiness.

Dr Ansgar Belke, the group's research chief, said the leverage proposal emerging as part of the EU's "Grand Plan" to restore confidence is self-defeating. "It counteracts efforts made so far to stabilise the eurozone debt crisis, which are premised on the AAA rating of a sufficiently large number of strong economies. In extremis, it would probably cause the break-up of the eurozone", he told newspaper Handelsblatt.

Berlin yesterday played down hopes of a major breakthrough as EU leaders rush to complete their plan before a deadline next week. Mrs Merkel's spokesman said "dreams that everything will be resolved and dealt with by next Monday cannot be fulfilled".

European stock markets slid as traders took profits on the October rally, digesting Chinese data showing a sharp fall in new loans. Germany's DAX fell 1.8pc, Italy's MIB was off 2.3pc and the FTSE 100 eased 0.5pc.

Wolfgang Schäuble, Germany's finance minister, said there would be no "definitive solution" but expected a deal to use an enhanced EFSF in "the most efficient way". It is unclear whether such plans breach last month's ruling by Germany's top court, which said the Bundestag may not transfer "fiscal responsibilities" to EU bodies or take on "incalculable" liabilities beyond German control. Any change would need a new constitution and a popular vote. 

George Magnus, of UBS, said the eurozone's quest for a "Holy Grail" is likely to disappoint, warning moves to recapitalise banks may "accentuate the coming economic contraction in the eurozone by forcing the pace of asset shrinkage".

Refusal to expand the European Central Bank's mandate leaves the system without an anchor. "In the absence of a stronger ECB backstop, eurozone countries may end up piling up layers of possibly non-credible sovereign guarantees. This is just financial debauchery by another name," he said.

Mr Magnus said a drive for economic growth is needed to pull Euroland out of its tailspin, and called for the austerity strategy to be "abandoned or softnened". "This would be more convincing in dealing with sovereign solvency than anything likely to be announced," he said.

Wolfgang Schäuble dampens hopes of swift resolution to eurozone crisis

Stock markets and oil prices fell in response to German finance minister's comments

the Guardian,

Monday 17 October 2011 20.53 BST

Germany’s finance minister has sparked fears that a eurozone rescue deal due to be outlined this weekend will fall short of the "big bazooka" that markets believe is needed to prevent a full-blown crisis.

Wolfgang Schäuble, who is a key player in talks over the fate of the eurozone, played down the chances of enhancing the current multibillion-euro bailout fund beyond using it "flexibly and efficiently".

He also said on Monday that detailed talks were likely to go beyond this weekend with a final package not in place until the G20 world leaders' summit in Cannes next month. Schäuble's comments dismayed investors concerned that Berlin and Paris have failed to grasp the magnitude of the eurozone's debt crisis.

Stock markets in London, Paris and Frankfurt all fell, while in New York, the Dow Jones industrial average plummeted 247 points by the close of trading. A two-month-long flight of cash from European banks accelerated, according to analysts, while fears grew that ratings agencies were poised to downgrade French sovereign bonds, increasing the difference between France's borrowing costs and those of Germany to its highest level since 1995.

Oil prices, which had steadied after recent falls, turned downwards again and the euro fell against the dollar as investors sought safe havens.

For article GO HERE

Europe's bankers resisting bigger debt losses

By John W. Schoen, Senior Producer

MSNBC

17 October, 2011

Following yet another failed round of talks to head off a Greek debt default, it is increasingly clear that European bankers are about to get a big haircut.

And they’re embracing the idea about as well as a squirming 3-year-old.

European political and financial leaders have set an Oct. 23 deadline to come up with yet another set of proposals to resolve a debt crisis that threatens the send the continental into a deep and painful recession. After months of failed efforts to help the Greek government make good on those debts, Europe’s politicians have now finally accepted that avoiding default simply isn’t feasible, according to Paul De Grauwe, professor of international economics at Leuven University.

“Everyone agrees today that the Greek government will not be able to pay its debt,” he said. “And we had better face that fact and start that process of restructuring - and haircuts that will allow Greece to have a lighter debt burden”

That “haircut” for bankers and other holders of Greek debt means accepting less than 100 cents on the euro. The question European leaders are wrestling with is: How big a hair cut will it take to stabilize Greece’s budget?

European leaders thought they had reached a working solution in July, when the European Union agreed to a series of endlessly-debated proposals that include, among others, a “voluntary” swap of Greek debt for newly-issued bonds that would force bankers to take a loss of 20 percent. The hope was that a voluntary plan would dodge the legal definition of an outright default.

That distinction is critical. A legal default could reverberate through the financial markets because it would trigger a wave of claims on a debt loss insurance known as credit default swaps. Uncertainty about the size of swaps holdings, and which investors and banks held them, were a central cause of the global financial Panic of  2008. 

Three months later, it appears the July plan doesn’t go far enough. Now, bankers who face much bigger losses are pushing back on proposals that they cut the value of their Greek debt holdings by as much as 50 percent. Many banks are believed to have too little capital in reserve to covers those losses, prompting calls by regulators to force bankers to raise more capital.

Without stronger capital cushions to withstand Greek debt losses, European governments fear they’ll have to step in to clean up the financial mess. Earlier this month, France and Belgium took over the failed bank Dexia after it’s investment losses burned through the last of its cash.

Faced with the prospect of seeing the value of their Greek bonds cut in half, European bankers are not going quietly. On Thursday, Deutsche Bank CEO Josef Ackermann warned that the combination of stricter capital requirements and deeper losses on bond holdings would force bankers to write fewer loans.

"A question remains over whether banks will be able to provide financing, or whether possible haircuts in the euro zone and the new regulatory environment will practically force them to be restrictive," Ackermann told a conference of corporate executives in Berlin. "We need to find the right balance between stricter regulation of the financial sector and the impacts these have on the economy as a whole."

A credit crunch couldn’t come at a worse time for the European economy, which is now teetering on the brink of another recession. That, in turn, is raising debt pressures on other countries with weak economies, including Ireland, Portugal and Spain. Unless those economies recover sharply, their governments will likely have to follow Greece down the path of debt restructuring, former IMF chief economist Kenneth Rogoff told a group of business reporters Friday.

While a Greek debt restructuring may now be unavoidable, it will represent the beginning of a long, difficult period of recovery as investors stop lending to the Greek government. Jittery lenders and investors may also have second thoughts about lending to countries now seen as being at risk of a future default, according to Roger Nightingale, economist at RDN Associates.

“It’s going to be pretty frightful,” he said. “There’ll be no private sector lending to Greece, and they’ll be no private sector lending to any at-risk country for years to come. I think this is no solution at all. This makes things very much worse.”