The Eurozone crisis

Billions wiped off Europe's biggest companies as political rebellion rocks eurozone

More than £122.3bn was wiped off the value of Europe's biggest companies on Monday amid fears that the eurozone's commitment to austerity was being swept away by political rebellion - just as its debts hit record levels

the Telegraph,

23 April, 2012

Stockmarkets plunged as traders panicked that Angela Merkel could lose her key allies in France and the Netherlands and that the debt crisis rescue plans could unravel.

The Dutch prime minister Mark Rutte, who is one of the eurozone's "hardliners" on fiscal discipline, dramatically quit in the wake of his coalition's refusal to accept Europe's debt pact. Snap elections could be called as early as June.

Traders were also rattled by Francois Hollande's victory over Nicolas Sarkozy in the first round of the French presidential election. The socialist Mr Hollande has vowed to renegotiate the fiscal pact that including a 3pc of GDP deficit limit.

The political concerns were compounded by data that showed eurozone debt has hit 87.2pc of GDP - the highest level since the launch of the single currency in 1999. Eurostat said that the 17 eurozone members had reduced their deficits from 6.2pc of GDP in 2010 to 4.1pc in 2011 - but overall debt levels had risen by 1.9pc.

Spain, meanwhile, officially sank back into recession as the economy shrank 0.4pc in the first quarter of the year, and German manufacturing shrank at its fastest rate for three years in March. The French composite PMI also fell, according to Markit.

By the end of the day, the Stoxx Europe 600 index has sunk 2.3pc to its lowest level for three months. The German Dax dropped 3.4pc, while France's CAC and Spain's Ibex were down 2.8pc each. In London, the FTSE 100 closed down 1.9pc. In the US, the Dow closed down 0.8pc, the S&P 500 lost 0.8pc and the Nasdaq shed 1pc.

Borrowing costs for the core "sinner states" of Spain and Italy rose back towards "unsustainable" levels. French borrowing costs also rose, widening the spread between oats and German bunds to a record 146.9 basis points. The euro fell almost 1pc against the dollar.

The ECB's bond-buying programme went unused for the sixth week in a row last week, the central bank said. But Brussels moved to reassure markets that the fiscal pact, which Ms Merkel said would "last forever", was still intact.

The European Commission said the pact was signed by states, not governments. "Governments change but commitments on behalf of states cannot be changed without discussion with European partners," said the Commission.

The Dutch finance minister, Jans Kees de Jager, insisted his country would stand by its austerity plans. "The Netherlands will retain its solid fiscal policy and will also show the market it will lower its deficit and also have a path of sustainable government finances," he said.

Risk of Sharp Euro Fall Increasing: Citi

Having successfully agreed a package to restructure Greek debt, European policy makers had hoped they would have some time to push on with economic reforms without the threat of imminent financial crisis

CNBC,

24 April, 2012

Unfortunately events have again overtaken them, analysts at CitiFX said.

“The rapid advent of the Spanish crisis, its spread to Italy, new concerns on the Netherlands and very poor economic data have caught them flat-footed and so far there is no indication that any policy response is thought to be needed," said Steven Englander, the global head of FX strategy at CitiFX said in a research note following a volatile session for global assets on Monday.

With conditions turning around so quickly Englander believes the European Central Bank needs to show it takes the deterioration in conditions very seriously.

“If the ECB does not provide relief and especially if they give a complacent signal on market conditions, the euro [EUR=X 1.3194 --- UNCH ] is likely to break to the downside sharply,” said Englander, who believes the upside risk for the euro is also considerable if the central bank puts together an effective policy response.

With rising 10-year borrowing costs increasing costs for euro zone members - with the exception of Germany - Englander says growth rates, or lack of growth, is becoming a major problem.

The spread between peripheral debt and the German bund is, according to Englander, about a risk premium and not a result of ECB policy. But will have the same result nonetheless, he said.

“One reason that tail risk is euro negative is that it reduces any prospect that the euro zone has of growing out of its debt crisis. Hence, if FX investors perceive that no policy response is forthcoming, the euro is at risk of falling sharply,” said Englander

More grief for Greece as recession seen deeper

Greece's economy will contract a deeper than expected 5 percent this year, the country's central bank chief said on Tuesday, piling more pressure on to a citizenry already battered by crippling austerity and record joblessness.

News Daily,

26 April, 2012

The projection topped a previous forecast the central bank made in March, when it projected the 215 billion euro economy would contract 4.5 percent after a 6.9 percent slump in 2011.

Twice bailed-out Greece is in its fifth consecutive year of recession.

Speaking to shareholders at the central bank's annual assembly, George Provopoulos, also a European Central Bank Governing Council member, urged strict adherence to reform and fiscal adjustment commitments Greece has agreed with its euro zone partners, saying they were needed to return the economy to sustainable growth.

Athens is under pressure to apply more fiscal austerity to shore up its finances as part of a new rescue package agreed this year with its euro zone partners and the International Monetary Fund (IMF) to avert a chaotic default.

Its continued funding under the 130 billion euro package will hinge on meeting targets.

Provopoulos warned that Greece's euro zone membership was at stake if it failed to follow through on its pledges, especially after national elections next month.

"If following the election doubts emerge about the new government and society's will to implement the program, the current favorable prospects will reverse," he said.

Greece is set to pick a new government on May 6, with the two main parties in the current coalition seen barely securing a majority in parliament, according to the latest opinion polls.

Whoever wins will have to agree additional spending cuts of 5.5 percent of GDP, or worth about 11 billion euros for 2013-2014, and gather about another 3 billion from better tax collection to keep getting aid, the IMF has said.

IMPROVING COMPETITIVENESS

The central banker projected Greece's current account gap, a key indicator reflecting eroded economic competitiveness, would shrink to 7.5 percent of gross domestic product (GDP) this year from 9.8 percent in 2011. In March the central bank forecast the gap would drop to 7 percent of GDP this year.

"The expected drop in unit labor costs in 2012-13, coupled with the projected price trends will lead to a marked improvement in competitiveness, contributing to a rise in exports and import substitution," he said.

Consumer inflation is seen slowing to 1.2 percent this year and may fall below 0.5 percent in 2013. Weak domestic demand combined with downward wage pressures have shrunk the country's inflation differential with other euro zone states.

The central bank estimates that by the end of this year the economy will have regained up to three quarters of competitiveness lost during 2001-09. Greece joined the euro in 2001 and enjoyed a consumption boom on lower borrowing costs.

Provopoulos said the fiscal shortfall had come down markedly but remained high. Last year Greece shrank its budget gap by 1.2 percentage points to 9.1 percent of GDP and aims for a 6.7 percent deficit this year.

Austerity measures including income and property tax increases, a rise in value-added tax rates and cuts in wages and pensions, helped reduce the gap from 15.6 percent of GDP in 2009, when its debt crisis erupted.

"The sought attainment of primary surpluses from 2013 is now achievable," the central banker said.

Provopoulos also said private sector bank deposits had declined by more than 70 billion euros since the end of 2009, a sum equivalent to about one third of the country's GDP, in a blow to the banking sector's lending capacity.