U.S. stocks gets Stark shock; Greece default risk rises - TheNewTopical.com - current events, politics, culture, ethics, economics discussion forum

FredFredson · #1 (**permalink**) 09-09-11, 07:24 PM

U.S. stocks gets Stark shock; Greece default risk rises
September 9, 2011, 2:10 PM

U.S. stocks gets Stark shock; Greece default risk rises - The Tell - MarketWatch

It didn’t take long for headlines out of Europe to overwhelm U.S. markets Friday, as a doubtful reaction to President Barack Obama’s Thursday jobs package snowballed into a steep drop for index futures and a rough start for Wall Street. As headlines highlighting Germany’s increasing coolness to eurozone bailouts continued to roll, the Dow Jones Industrial Average DJIA tumbled into what could be its worst day since the turbulent third week of August. And the closing bell doesn’t chime for about two hours. Read more on U.S. stocks and reaction to Obama’s jobs package.

In a replay of Thursday’s action, the European Central Bank stole the show at the start — this time announcing, following a Reuters report, that board member and chief economist Juergen Stark was leaving over a disagreement. Read more on Stark’s exit.

Then Bloomberg News reported Germany was preparing a plan to support its banks if Greece defaults.

“With Stark’s announcement, and the subsequent headline that Germany is prepared to support its banks in the event of a default, the risk of an imminent default is certainly higher today than it was yesterday,” wrote Dan Greenhaus, chief global strategist at brokerage BTIG LLC.

That’s not a great sentiment to float on a day when markets may also get details of the participation of private-sector investors in Greece’s Brady bonds-styled debt swap. Recent reports have suggested the private sector buy-in would be less than the 90% aimed for by Greece. What’s more, analysts and officials are noticing European short-term borrowing costs are rising, an unwanted reminder of the 2008 financial crisis. Read more on EU’s Rehn and European banks accessing credit.

Some of the analysis may overstate the risk; for instance, it seems likely that Germany will continue to play a key role on the ECB governing board, and that Stark will be replaced by another German.

Point is, says Steve Goldstein, MarketWatch’s DC bureau chief, in the minds of markets these days, European leaders can’t get anything right. Stocks and the euro, now under $1.38, seem to agree. Read more in a First Take on Europe.

– Laura Mandaro

FredFredson · #2 (**permalink**) 09-09-11, 07:37 PM

Reviewing the Market's Classic Bearish Action

By Gary Kaltbaum Sep 09, 2011 1:30 pm
Bear markets are painful, and to date, there hasn't been one characteristic of a potential bottom showing up.

I thought it was appropriate to review my article from earlier this week, Markets Seeing Nothing but Classic Bear Action. See it below. I've bolded the bearish characteristics that I think you are starting to see right now in the markets. This bear move continues to act in a classic fashion. Eventually, you will see more and more recognition that this has not been a garden variety correction:

In my past couple of missives, I said that markets were rallying right back into resistance. This is the "normal" action that occurs in bear markets. To review: When markets gets extended and stretched from the norm, eventually they move back toward the norm before resuming the major trend. In this case, the trend remains down. But that is "the trees" -- that is, the anticipated bounce as well as the stalling at resistance. The forest is simple: This remains a very bearish market -- not only here but across the globe. Let's pick it apart.

It is bearish that after a nauseating drop, many are still calling this a normal correction. I am stunned by some of the "don't worry, everything will be OK" commentary considering we just came off of the 2008 bear market. Amazingly, the past three covers of Barron's indicated nothing but bullishness. For the most part, strategists have not budged with their end-of-year targets.

It is bearish that I have only one group in a bull market, and that group is gold. This is not good news.

It is bearish that financials continue to lead down. This was one of the most important clues when I said back in May that the market would be on borrowed time. On many occasions, I stated the financials were acting just like they did in 2007-08. And speaking of financials -- do not ignore Bank of America (BAC). I continue to wonder just what is going on as the stock was being pummelled before Warren Buffett stepped in. I continue to worry that it had to raise $13 billion when it said it didn't need to. This bears watching as financials have sold off since that news.
It is bearish that world markets are still imploding. Bear markets are directly correlated with the action in world markets. I cannot help but worry about the action in the German DAX as well as others. China, Brazil and a few other countries topped way in advance of the US.

It is bearish that about 1 out of every 10 stocks is in good technical shape -- and frankly, I think I am being nice.

It is bearish that the recent rally was exactly what a bear market rally looks like. Bear market rallies are sharp, quick, make you feel good, get everyone talking about them, suck you in, and bury you soon after.

It is bearish that most major indices did not even get close to the declining 50-day moving average. The only index to make it was the Nasdaq 100. Please notice that it hit the 50-day to the penny and failed. You may also want to look at the Nasdaq, which failed right at the 2,600 level -- the place I said was the major breakdown for this important index.

It is bearish that cash in mutual fund's coffers is still below 4% -- a very low level indicating a lack of ammo, but more importantly, this will mean they will have to sell if redemptions start to pick up. And just to give you an important lesson, it is these redemptions that lead to more selling, which leads into deeper bear markets.

It is bearish that we haven't even begun to see what I call "the coughing up stage"! This is the stage where everyone finally recognizes this is not a correction but something much worse. At that point in time, selling really begins to pick up.

Lastly, my big worry is that the beginning of this big drop reminds me of big bear markets and not something more garden-variety. Of course, we will only know this in time.

There are other things I could go over but I gather I've already ruined your day. The question is whether there is any light at the end of the tunnel. Right now -- not much. If recent lows can hold for a while and start stair-stepping up, that would be a start, but we can't go there just yet. Here are those levels that will need to hold:

About Dow 11,000 which would be the bottom of the trendline off the recent bearish wedge. And then of course the lows would come into play at 10,604.

About S&P 1150 and then 1101.

A break of these levels -- especially the lower number -- and good night. This would mean the NDX and the Nasdaq would be breaking their lows also.

This is classic bear action. There is no way around it. The topping out process was classic, the drop was classic, the reaction to the drop was classic, the rally into resistance was classic, and now the resumption of selling is classic. And the most important point (also classic) is how the market telegraphed the major economic slowdown before the numbers came out. Only now are people worried about another recession. This is why I warned months ago about what was to come.

Bear markets are painful, and in the case of the past two bear markets, brutally painful. I have not seen to this date one characteristic of a potential bottom showing up. Just like tops and bear markets have their characteristics, bottoms and bull markets have their own. For sure, we are going to continue to see some wild action both up and down. For sure, we are going to have a lot of news-driven events like another massive spending bill and QE3. I am not so sure the markets already know this and could care less.

FredFredson · #3 (**permalink**) 10-09-11, 10:49 PM

Canada fears Euro fallout
Published On Tue Sep 06 2011

Les Whittington Ottawa Bureau

Canada fears Euro fallout - thestar.com

OTTAWA—With the economic picture in Europe darkening, Canada’s main concern is that the turmoil on European financial markets be checked before it causes damage globally, a senior federal Finance Department official says.

Despite fears of a double-dip world recession, Finance Minister Jim Flaherty will be sticking to the Conservative government’s deficit-cutting plan when he goes into a meeting with his G7 counterparts on Friday, the official said.

The Sept. 9-10 meeting in France will include financial captains from the world’s most advanced economies.

It takes place against a backdrop of prolonged market disorder in Europe and a weak recovery in the United States.

The finance department official, who briefed reporters on a non-attribution basis, said the situation in Europe is getting worse, with economic growth slowing and investors becoming more fearful about the stability of debt-burdened countries such as Italy and Spain.

Concerns about European fiscal issues continued to weigh on markets, as Toronto’s main stock market index fell to a one-week low on Tuesday, tracking U.S. and world stocks. The Toronto Stock Exchange’s S&P/TSX composite index ended the session down 83.87 points, or 0.67 per cent, at 12,518.54. Earlier it fell to 12,355.92, its weakest point since Aug. 29.

France, Germany and other countries have been struggling for months with little success to repair the debt crisis battering the euro zone and Canada hopes above all that European leaders can take new steps to solve the problem before it spreads through the financial markets on the continent and beyond, the official remarked.

It’s too early to say what Canada would do if G7 finance ministers issue a collective call for each country to do more to stimulate their economies, as happened in the depth of the recession in 2008, reporters were told.

For now, Flaherty is still committed to the Conservatives’ plan to reduce Ottawa’s $32-billion annual budget deficit by cutting spending by $4 billion a year. But this strategy could be modified depending on the impact in Canada of global economic conditions, the official commented.

Still, any short-term bailout plan by the G7 would not be a repeat of the massive stimulus spending the group agreed to in 2008 because governments in Europe and the United States could not afford it now, the official added.

As for the U.S., the official said Canada believes the U.S. will not slide back into another recession but faces a period of slow growth.

Reporters were also told that G7 finance ministers may use the meeting in France to discuss a strategy to ease up in the short run on efforts to chop at their government budget deficits. The belt-tightening measures are proving counterproductive because they are contributing to slower economic growth in European countries. However, Canada wants to see continued commitment by G7 finance ministers to credible long-term strategies to rein in government debt on the continent, the official said.

Last month, Flaherty told the Commons finance committee that for now he isn’t budging from his deficit-cutting fiscal strategy. But he acknowledged for the first time that his plan may have to be amended if the world economy gets worse.

“Canada is a trading nation, with exports representing about a third of our economic output and the U.S. as our largest trading partner,” he told Members of Parliament. “As such, global economic turmoil—in the U.S. and Europe—will inevitably impact our existing trading relationships and our economy.”

“If we were to see the situation globally deteriorate in a dramatic way, we would obviously do what is needed to protect our jobs and economy and families in Canada.

“We would act in a pragmatic way as we have done successfully previously,” Flaherty said in a reference to the Conservatives’ two-year, $46-billion stimulus program.

FredFredson · #4 (**permalink**) 12-09-11, 01:51 PM

This will be an interesting week.
F

Global stock markets down on debt fears as euro falls

BBC News - Global stock markets down on debt fears as euro falls

Stock markets have slumped and the euro has fallen on fears that Greece may default on its debts.

A series of news reports that Germany may be preparing for an "orderly default" by Greece sent Asian and European bourses down.

German officials sought to shore up confidence on Monday, saying the stability of Greece and the euro was "the common goal".

Bank shares were hardest hit, with France's BNP Paribas down 14%.

By midday, London's FTSE 100 was down 2.3%, France's Cac 40 had shed 4.2% and Germany's Dax was 3.2% lower. The declines followed heavy falls in Asia, where Hong Kong ended 4% down.

The euro fell to a 10-year low against the yen, and investors poured money into German bonds in a flight to safety.

The latest crisis of confidence in the markets came amid worries that Germany had lost patience with Greece - and other heavy indebted eurozone nations - and might not help future bailouts.

Germany's Economy Minister Philipp Roesler said in a newspaper article at the weekend that an "orderly default" by Greece could no longer be ruled out.

On Monday, adding to the tensions, the general secretary of German Chancellor Angela Merkel's junior coalition partner suggested that Greece could leave the eurozone.

"In the final analysis, one also cannot rule out that Greece either must, or would want to, leave the eurozone," Christian Lindner, the general secretary of the Free Democrats (FDP), said in a television interview.

This followed Friday's surprise resignation of the European Central Bank's (ECB) chief economist, Juergen Stark.

His departure was seen as a sign of divisions within the ECB and among eurozone leaders over what to do about Europe's debt crisis.

On Monday, a spokesman for Mr Roesler, who is also vice-chancellor, tried to dampen the impact of his newspaper comments.

"Our common goal is the stability of the euro and we want Greece to stay in the euro," the spokesman said.

At the same news conference, Mrs Merkel's spokesman said that Germany "assumes that Greece is doing everything it can" to implement strict austerity measures to battle its deficit woes.

"Our goal is quite clear: we want to stabilise the eurozone as a whole," he said.

But stock markets remained deep in the red, especially French banks' shares, which are among the most exposed to Greek debt.

France's two other big banks, Societe Generale and Credit Agricole, were down 8%. In Germany, Deutsche Bank fell 9% and Commerzbank 6.5%.

UK banks escaped relatively lightly, helped by the release of the Vickers report on breaking up UK banks and a belief among some investors that the recommendations may be watered down.

HSBC was down 2.5%, Lloyds and RBS fell 1%, and Barclays was 0.5% lower.
Investors flee

The euro fell to 104.09 yen, its lowest since June 2001. The euro was also down against the dollar.

Germany's cost of borrowing for 10-year bonds fell to historic lows on Monday, as investment funds fled riskier assets.

The yield - or interest rate - indicated by the price of German 10-year bonds fell to 1.709% from 1.770%.

Satoshi Tate, a currency dealer at Mizuho Corporate Bank, said: "We are watching Greece and only Greece.

"Conditions are getting very serious and everyone is worried how the issue will unfold," he added.

Marc Ostwald, market strategist at Monument Securities, added: "With German officials seemingly in destructive overdrive, as per all the public talk of preparing for a Greek default and even a Greek euro exit, markets can hardly be blamed for the latest charge for the bunker and tin hats."

FredFredson · #5 (**permalink**) 13-09-11, 06:29 PM

Did Fannie Mae Bail Out Bank of America?

By Anthony Randazzo Sep 13, 2011 9:15 am
Fannie Mae agreed to buy the mortgage servicing rights of a portfolio of loans from BofA, but the purchase price is unknown because absolutely no one is talking.

Why is no one in Congress up in arms over the possibility of a half-a-billion-dollar bailout of Bank of America (BAC) last month?

Early in August, Fannie Mae (read: taxpayers) agreed to buy the mortgage servicing rights (MSRs) of a portfolio of 400,000 loans with an unpaid principal balance of $73 billion from Bank of America. In exchange for these rights to collect payments from homeowners in this portfolio, Bank of America reportedly received “more than $500 million.”

Strangely, the actual purchase price is unknown. So, too, are the contents of the mortgage portfolio, because neither Fannie Mae, its regulator the Federal Housing Finance Agency, nor the selling bank itself is talking.

Whatever the quality of the MSRs, though, Fannie Mae stands to lose a bundle if President Obama's national refinance program, proposed officially in his jobs speech last week, is pushed forward by the White House and Treasury. Anything that causes borrowers to refinance or prepay mortgages causes the value of MSRs to decline. A revamp of the Home Affordable Refinance Program—which has so far been a total failure—to streamline reducing interest rates would significantly reduce the value of the recently purchased MSRs overtime and possibly lead to serious losses beyond just delinquencies.

Of course, discussion of a more streamlined refinance program has been on the table for months now. Fannie Mae and its regulator, the Federal Housing Finance Agency, knew about this possibility and went ahead with the deal anyway. Considering the lack of transparency and the possibility for millions in losses for Fannie (i.e., taxpayers) on this deal, the transaction is more than a little suspicious.

At least five or six private financial institutions were given access by Bank of America to analyze the mortgage portfolio and perform due diligence before potentially bidding on the MSRs. However, Bank of America didn’t wait for even a single competing bid. Perhaps Bank of America decided that Fannie Mae’s offer was far above anything it could get from the private sector. Or even worse, perhaps Bank of America knew the delinquency risks in the portfolio were so high that no private actor would want to consider acquiring such a toxic asset.

If either of these cases turned out to be true, the Fannie Mae offer amounts to nothing less than a bailout. And if the government did overpay for the MSRs, the only possible reason is that the Treasury wanted to infuse Bank of America with cash to keep it stable.

Given Bank of America’s recent struggles—its stock has fallen 55 percent from the beginning of 2011 to its lowest point last month—it has had a not-so-clandestine need for capital and confidence. Warren Buffett’s $5 billion capital injection to this end was a much-discussed event in August. The Treasury Department’s $500 million-plus capital injection via Fannie Mae two weeks before the Oracle of Omaha got back in the bank saving game was not.

The secrecy is a problem, particular given the absurdity of Fannie Mae—which itself needed a $5.1 billion bailout just two months ago—bringing more liabilities onto its balance sheet.

Mortgage servicing rights can be particularly challenging to assign a value, particularly during volatile interest rate environments. And without a liquid secondary market for MSRs, each portfolio must be valued independently. But since the characteristics of the loan pool that Fannie Mae purchased are unknown to the public, it is impossible to assign a value to the mortgage servicing rights, and to know whether $500 million is a fair price.

However, there are a few things we do know that would suggest the taxpayers are yet again getting a raw deal.

Earlier this year Bank of America was forced to buy back $2.5 billion in misrepresented toxic mortgages from Fannie Mae. Who knows how many of those might be underlying the servicing rights just sold to taxpayer supported Fannie Mae?

Even though Bank of America estimates the pool of loans has a 13 percent delinquency rate, many outside analysts believe the default rate on the mortgages that underlie the MSRs could be as much as double that. One financial institution that reviewed a portfolio of Bank of America MSRs, which looked suspiciously similar to what Fannie Mae purchased, estimated the loans had a delinquency rate of 25 percent.

Of course, it is possible that this is just bad housing policy and a lack of transparency. But even if it turns out that the portfolio’s risks are low, and the MSRs turn a nice profit for Fannie Mae, there remains a question: Why are the taxpayers outbidding the private sector for mortgage servicing rights? If this truly is a profitable asset, then a healthy bank could benefit both its shareholder and the economy by using the cash flow to increase loans to businesses and individuals. Is that not what the White House wants?

Adding to the confusion of this bizarre story, FHFA recently filed lawsuit against Bank of America and 16 other banks for mortgage-related fraud. Why bail out a bank only to turn around and sue it? Imagine the scandalous possibility of Bank of America settling for $500 million in this new legal drama.

Given all the condemnation of bailing out banks, you would think the Democrats, who blame the financial crisis on Wall Street, would be outraged over the idea that another big financial institution receiving a cash infusion. We should at least see the Republicans and Tea Party wanting to get to the bottom of this suspicious purchase. And it is especially urgent with a streamlined refinance program in the wings that might only be stopped with evidence that it will hurt the taxpayers more than help them. With Congress back from their August recess, hopefully someone will stand up to discover exactly what Fannie Mae purchased, and whether Bank of America got yet another backdoor bailout.

FredFredson · #6 (**permalink**) 13-09-11, 06:41 PM

Holy shit!
If this is true then a Greek default/ exit Euro is imminent!

Tuesday, September 13, 2011
The Return of The Drachma?

Loans and Finance: The Return of The Drachma?
Reuters report that the Greek Prime Minister, George Papandreou, will hold a conference call today with French President Nicolas Sarkozy and German Chancellor Angela Merkel.

The call comes amid renewed talk among eurozone policymakers about a Greek default, prompted by the country's failure to meet the fiscal goals set out in its EU/IMF bailout.

Sarkozy's office denied earlier on Tuesday that Paris and Berlin would issue a joint statement on Greece, after a French government source had said a statement would be made.

There is another rumour circulating that Greece will, tomorrow, announce a return to the Drachma. This is ironic as on 19th August I tweeted the following:

ken_frost Ken Frost
@
Greece to introduce "new Drachma" around 15 Sept..apparently.. #greece
19 Aug Favorite Reply Delete

FredFredson · #7 (**permalink**) 13-09-11, 06:55 PM

In my more paranoid moments this would actually be a confirmation of imminent default!
F

SEPTEMBER 13, 2011, 1:46 P.M. ET

Merkel Quells Speculation on Greek Default

By MARCUS WALKER and NOEMIE BISSERBE

Merkel Quells Speculation on Greek Default - WSJ.com

BERLIN–German Chancellor Angela Merkel sought to quash talk that cash-strapped Greece might have to declare bankruptcy soon or even leave the euro zone, rebuking her junior coalition partner for fuelling market speculation about Greece's fate.

German Chancellor Angela Merkel (L) and Finnish Prime Minister Jyrki Katainen (R) after a joint press conference following their meeting at the Chancellery in Berlin Tuesday.

Ms. Merkel's comments helped to calm jittery markets on Tuesday, and contributed to a sharp rebound in French banking stocks, which have been hammered recently by fears of a chaotic Greek bankruptcy that could inflict painful losses on banks elsewhere in Europe.

The chancellor stressed that Germany remains committed to financing Greece through the euro zone's bailout funds until Greece can repair its own finances through austerity measures. She gave a thinly veiled rebuke to German politicians, including her own economics minister and deputy chancellor Philipp Rösler, who have suggested in recent days that Greece should be allowed to go bust.

"I think we will do Greece the biggest favor by not speculating much, but instead encouraging Greece to implement the commitments it has made," Ms. Merkel told RBB Inforadio, a public broadcaster in the Berlin region. "What we don't need is unrest in the financial markets – the uncertainties are already big enough," she said.

Conflicting statements this week by German politicians about Greece have added to markets' fear that Greece will default on its debt and might be forced out of the euro. Tensions between Greece and the team of international inspectors charged with overseeing its fiscal overhauls have also hit investors' confidence that Europe can tame the festering debt crisis in parts of the single-currency zone.

The chancellor also expressed her confidence that Greece would redouble its efforts to trim its budget deficit to qualify for its next slice of international aid. Later on Tuesday, after a meeting with Finnish premier Jyrki Katainen, Ms. Merkel told reporters that all actions taken in the euro zone must be "controlled and the consequences known." Berlin officials say that wouldn't be the case with a Greek debt default.

Her comments helped reassure financial markets panicked by recent rumors of an imminent Greek default and possible euro exit.

The biggest beneficiaries, some traders said, were French banks, whose stocks rose strongly Tuesday. Shares in Société Générale SA, France's second-largest bank by market value, rose 15%, BNP Paribas SA shares rose 7.2% and Crédit Agricole SA gained 6.7%.

Société Générale's reprieve comes after a prolonged sell-off since Aug. 1, in which its stock sank 46%. French banks are the most exposed in the euro zone to Greek borrowers, including businesses as well as the Athens government, and stand to lose heavily from a Greek financial meltdown.

Mr. Rösler, leader of the Free Democratic Party, junior partner in Ms. Merkel's conservative-led coalition government, wrote in a newspaper column published on Monday that Europe might have to put Greece through some sort of insolvency procedure in order the stabilize the euro. "There should be no taboos," his article in German newspaper Die Welt said.

Mr. Rösler's FDP, which is reeling from a series of electoral defeats and plunging opinion-poll ratings, has seized on the unpopularity of taxpayer bailouts of Greece as a way to win back voters, political analysts say. The party is fighting to avoid another heavy defeat in elections to Berlin's state legislature on Sunday, and has focused its Berlin campaign on the euro-zone debt crisis, with posters attacking proposals for common European bonds.

The FDP leader repeated his comments on Tuesday, saying that voters expect "honest answers" about

Another German coalition member, Bavarian conservative leader Horst Seehofer, went further than Mr. Rösler at the weekend, saying that Europe should consider throwing Greece out of the euro zone.

Ms. Merkel's Christian Democrats, the largest party in the government, rejected the idea, with the chancellor warning that a Greek exit could lead to a disastrous domino effect, with financial markets speculating against other countries' ability to remain in the euro.

In her radio interview, Ms. Merkel sought to calm fears that Europe's strategy for handling the Greek crisis is falling apart. She expressed optimism that Greece's fiscal efforts would satisfy the inspectors from the European Union and International Monetary Fund this month, allowing Greece's next aid payment to go ahead.

"Everything I hear from Greece is that the Greek government has hopefully understood the signs of the times and (...) has started doing some things that need to be done," she said.
—Bernd Radowitz contributed to this article.

Write to Marcus Walker at marcus.walker@wsj.com

FredFredson · #8 (**permalink**) 13-09-11, 11:36 PM

WRAPUP 2-Merkel warns on Greece, Obama voices U.S. alarm

WRAPUP 2-Merkel warns on Greece, Obama voices U.S. alarm | Reuters

Global stocks, euro rise on Greek crisis hopes
4:41pm EDT
Italy under pressure as debt worries grow
3:14pm EDT
Merkel warns against Greek default, euro exit
5:29am EDT
Analysis: Counting the cost if EMU fails
5:29am EDT
UPDATE 4-Italy confirms China meeting as debt pressure mounts
4:30am EDT

Tue Sep 13, 2011 9:15am EDT

(Adds Fiat CEO, Citi's Buiter)

* Merkel warns against disorderly Greek default

* Obama says EU needs better fiscal coordination

* Italy yield at euro lifetime record despite plea to China

* Fiat CEO says euro system could go "off the rails"

By Noah Barkin and Stefano Bernabei

BERLIN/ROME, Sept 13 (Reuters) - German Chancellor Angela Merkel sought on Tuesday to quash talk of an imminent Greek default as the United States voiced concern at the euro zone's inability to stem its debt crisis.

Market confidence in the 17-nation currency area suffered another blow when Italy had to pay the highest yield since it joined the euro in 1999 to sell 5-year bonds. And the chief executive of carmaker Fiat warned that the euro system "could go off the rails" if EU leaders do not get a grip.

Merkel said in radio interview that Europe was doing everything in its power to avoid a Greek default and urged politicians in her own coalition to weigh their words carefully to avoid creating turmoil on financial markets.

Asked by RBB inforadio whether a Greek default would doom the euro, she answered: "We are using all the tools we have to prevent this. We need to avoid all disorderly processes with regards to the euro."

Calling Europe's challenge "historic", Merkel added that everything must be done to keep the euro zone intact "because we would see domino effects very quickly".

Merkel and French President Nicolas Sarkozy conferred by telephone on the crisis on Monday, a senior French government source told Reuters, but Sarkozy's office said there was no plan to issue a joint statement on Greece on Tuesday, which the source had said was coming. There was no immediate explanation.

U.S. President Barack Obama told Spanish journalists in a group interview published on Tuesday that euro zone leaders needed to show markets they were taking responsibility for the debt crisis. Weakness in the global economy would persist so long as it is not resolved, he said.

In a measure of growing alarm in Washington, Treasury Secretary Timothy Geithner will take the unprecedented step of attending a meeting of EU finance ministers in Poland on Friday. It will be his second trip to Europe in a week after he met his main EU counterparts at a G7 meeting last weekend.

Obama said that while Greece is the immediate concern, an even bigger problem is what may happen should markets keep attacking the larger economies of Spain and Italy.

"In the end the big countries in Europe, the leaders in Europe must meet and take a decision on how to coordinate monetary integration with more effective co-ordinated fiscal policy," the news agency EFE quoted him as saying.

ITALY YIELDS SOAR

Markets have already priced in the near certainty of a Greek debt default. Credit default swap prices suggest a 90 percent probability of default in the next five years, according to CDS pricing data provider Markit.

Greek TV said Prime Minister George Papandreou would hold a conference call with Merkel and Sarkozy on Wednesday. International inspectors are due to return to Athens to review deficit-cutting steps before deciding on the next tranche of aid.

Greece has said it only has a few weeks' cash and needs the 8 billion euro tranche in October to pay salaries and pensions.

Pressure on Italy mounted on Tuesday at a bond auction that showed the limits of European Central Bank efforts to hold down Rome's borrowing costs by buying government bonds in return for austerity measures to cut its budget deficit.

The five-year bond yield hit a euro lifetime high of 5.60 percent despite ECB purchases in the secondary market that led to the resignation of the central bank's German chief economist, Juergen Stark, last Friday.

"Markets want to see decisive action and they want to see someone in control of the situation," said Marc Ostwald, an analyst at Monument Securities in London.

"Nothing that we've had, be it at a domestic level in Italy, be it at a pan-euro zone level, or above all from Germany, indicates that anyone really is getting to grips with presenting euro zone policy with one voice," he said.

The CEO of Italian carmaker Fiat, Sergio Marchionne, asked at the Frankfurt car show whether the euro's survival was at risk, told reporters: "I think there is a possibility, if the wrong steps are taken, that the system goes off the rails."

Hopes that China might step in as a saviour to buy Italian bonds, after an Italian request and recent talks, failed to provide much support for the auction.

Italian Economy Minister Giulio Tremonti met Chinese officials last week including the head of its sovereign wealth fund, a Treasury spokesman said, after the Financial Times reported that Rome had asked China to buy "significant" quantities of its bonds.

A Chinese Foreign Ministry spokesman said Beijing had confidence in Europe's ability to handle its debts, but sought assurances that Europe would ensure the safety of its investments in the region.

Wu Xiaoling, a former deputy governor of the People's Bank of China, told Reuters on Tuesday that investor "panic" about Europe's debt crisis was unnecessary, and China was ready to work with others to boost market confidence.

Chinese leaders have repeatedly offered verbal support to Greece, Portugal and Spain but encouraging words have not so far been matched by spectacular action.

China held just over 7 percent of euro zone government bonds at the start of this year, according to an estimate published by the French business daily La Tribune and confirmed privately by a senior EU official as "in the ballpark".

Beijing has continued to buy European debt this year but traders say the volume has been modest and mostly in high-grade paper rather than bonds of the weaker peripheral countries.

French bank shares fell further on Tuesday after losing 10 percent on Monday due to market concern about their exposure to Greek and other peripheral EU debt.

Markets have been unsettled by growing talk among German politicians about the likelihood of a Greek default and a possible suspension of Greece from the single currency area.

In a note published on Tuesday, Citigroup chief economist Willem Buiter said a Greek exit from the euro zone would be a "financial and economic disaster" for both Athens and the remaining 16 members. Such a step would have severe economic and political implications for the broader EU and global economy.

"As soon as Greece has exited, we expect the markets will focus on the country or countries most likely to exit next from the euro area," Buiter said.

Merkel said the euro zone would only have a procedure for an orderly default in place from 2013, when a permanent crisis resolution mechanism is due to come into effect.

"In a currency union with 17 members, we can only have a stable euro if we prevent disorderly processes. Therefore it is our top priority to avoid an uncontrolled default, because it would hit not only Greece. The danger would be very high that it would hit many other countries," she said.

Obama's comments suggested that Washington is trying to nudge European governments towards closer fiscal union or a bigger bailout fund to recapitalise teetering banks but European politics, especially in Germany, make that difficult.

The German Constitutional Court last week appeared to rule out issuing common euro zone bonds unless Berlin amended its Basic Law and the EU adopted a new treaty.

Merkel suggested the way forward should involve sharper punishment for states that violate the bloc's budget discipline rules, which have been repeatedly breached in the last decade, including by central euro zone powers Germany and France.

"Until now, for example, if countries violate the Stability and Growth Pact they cannot be taken before the European Court of Justice," she said

FredFredson · #9 (**permalink**) 13-09-11, 11:38 PM

Why one former central banker says Greece should ‘default big’

Aris Messinis/Reuters
A Greek Presidential guard (Evzonas) stands guard at the tomb of the Uknown soldier in front of the parliament in Athens.

Bloomberg News Sep 13, 2011 – 2:00 PM ET | Last Updated: Sep 13, 2011 2:45 PM ET
By Eliana Raszewski and Camila Russo
Greece should default on its bonds to stop a deterioration of the economy, said Mario Blejer, a former Bank of England adviser who took the reins of Argentina’s central bank after its 2001 default of US$95-billion.
“Greece should default, and default big,” Mr. Blejer, who was was an adviser to Bank of England Governor Mervyn King from 2003 to 2008, said in an interview in Buenos Aires. “You can’t jump over a chasm in two steps.”
Rescue programs backed by the International Monetary Fund and European Central Bank are “recession creating” efforts that will leave Greece saddled with more debt relative to the size of its economy in coming years and stifle growth, Mr. Blejer said. A Greek default would push Portugal to do the same and would put Ireland “under tremendous pressure to at least symbolically default” on some of its debt, he added.
Mr. Blejer’s statements puts him at odds with German Chancellor Angela Merkel, who said the risks of contagion from a Greek default are too big and that an “uncontrolled insolvency” would further agitate turbulent global markets.
German coalition officials stepped up their criticism of Greece last week after a delegation from the European Commission, European Central Bank and IMF suspended a report on progress made in Athens in meeting the terms of its rescue program. The delay threatened to derail a payment to Greece due next month.
‘Totally Ridiculous’
“It’s totally ridiculous what is going on,” Mr. Blejer said. “If you assume that these countries do everything that is in the program, they do all these adjustments and privatizations, at the end of 2012 debt-to-GDP will be bigger than this year.”
Greece’s government now expects the economy to shrink more than 5% this year, more than the 3.8% forecast by the European Commission, as austerity measures deepen a three- year recession. Prime Minister George Papandreou approved a plan to help repair the budget deficit at the weekend amid swelling resistance from Greeks.
It costs a record US$5.8-million upfront and US$100,000 annually to insure US$10-million of Greece’s debt for five years using credit-default swaps, up from US$5.5-million in advance on Sept. 9, according to CMA.
Mr. Blejer didn’t advocate Greece leaving the eurozone, which he said would be a “very complicated” move that would force a rewriting of business contracts and would push more lenders toward bankruptcy. Germany and France will have to bear the brunt of financing efforts to help Greece and other countries that default re-start their economies, he said.
Someone Will Pay
“Someone will have to pay,” Mr. Blejer said. “If they are not willing to pay for the euro they will have to get out of the euro.”
Greece’s 10-year bond yield rose 109 basis points, or 1.09 percentage points, to 24.64% as of 10:50 a.m. in New York, after earlier climbing to a euro-era record of 25%.
Mr. Blejer took the reins of Argentina’s central bank for five months starting in January 2002, when the country was reeling from the effects of the biggest sovereign default in history and the loss of four presidents in just over two weeks. The government had just ended the peso’s one-to-one peg with the dollar when Mr. Blejer accepted the position from then-President Eduardo Duhalde.
To help stabilize the currency after the devaluation, Mr. Blejer created short-term bonds known as lebacs that paid an annual interest rate of as much as 140%, he said.
Argentina’s economy shrank 10.9% in 2002 before starting a nine-year growth streak, aided by rising commodity prices and an expansion in neighbouring Brazil.
Mr. Blejer left the central bank in June 2002 after disputes with then-Economy Minister Roberto Lavagna over lifting restrictions on the withdrawal of bank deposits.

FredFredson · #10 (**permalink**) 14-09-11, 06:29 PM

End game approaches for Greek crisis

By William L. Watts, MarketWatch

End game approaches for Greek crisis - MarketWatch

FRANKFURT (MarketWatch) — Financial markets indicate Greece’s chaotic sovereign-debt saga is moving inevitably toward default, economists said, leaving European leaders and policy makers scrambling to avert a potentially disastrous domino effect that could wreck the euro and send the global economy into a tailspin.

German Chancellor Angela Merkel, French President Nicolas Sarkozy and Greek Prime Minister George Papandreou are slated to hold a conference call late Wednesday afternoon as Greece finds itself under pressure to implement further austerity measures in an effort to meet its deficit targets.

But many economists fear policy makers have failed to grasp the imminent likelihood of a Greek default and the damage it could do.

“The risk of a banking crisis is very real. I don’t think policy makers have the luxury of time in getting ahead of this,” said Neil Mackinnon, global macro strategist at VTB Capital in London.

A default by Greece appears likely in a matter of days or weeks, he said, putting the onus on policy makers to come up with a mechanism similar to the Troubled Asset Relief Program, or TARP, put in place in the United States after the collapse of Lehman Brothers and the rescue of AIG.

While European equities rebounded Tuesday and were on the rise Wednesday, credit markets continue to point to imminent default by Greece, strategists say.

French banks — carrying the heaviest exposure to Greek debt — have plunged sharply since early August. Moody’s Investors Service on Wednesday delivered long-expected downgrades to Societe Generale SA (EPA:FR:GLE) and Credit Agricole SA (EPA:FR:ACA) while continuing its review of BNP Paribas SA (EPA:FR:BNP) . Read about the downgrades.

Yields on one-year Greek government bonds have traded above 100%. In the market for credit default swaps on Greek sovereign debt, participants now provide “up-front” quotes that require those seeking protection to provide a massive initial payment.

On Wednesday, insuring $10 million of Greek debt against default for five years via CDS would require such a payment of $5.85 million and annual payments of $100,000, up from an up-front quote of $5.6 million on Tuesday, according to data provider Markit.

Reuters
Prime Minister George Papandreou as he addressed the Greek parliament at the end of June amid contentious debate over austerity measures. (Reuters photo: Giannis Liakos.)

“The term ‘end-game’ is over-used, but in the context of the euro-zone sovereign crisis, and in particular, Greece, it does appear that we are approaching it,” said Simon Smith, chief economist at FxPro, in a note to clients.

“Many charts are maxing out or in free-fall, be it Greek CDS, European bank shares, peripheral spreads over Germany or German yields themselves” Smith said, noting the retreat in the 10-year bund yield to a record low below 1.75% on Tuesday before rebounding slightly Wednesday.

German bunds have rallied sharply, sending yields lower, on massive safe-haven flows as the euro-zone crisis has deepened.

Signs of stress in the banking system continue to mount. The European Central Bank on Wednesday said it allotted $575 million in dollar loans to two banks, marking the second time in a month that its dollar swap facility has been tapped.

While the amount isn’t massive, it comes as other gauges of stress in the banking sector show institutions are becoming more reluctant to lend to each other in the interbank market.

Overall worries were further exacerbated last week by the resignation of European Central Bank executive board member Juergen Stark, in a move that reports tied to his alleged unhappiness with the expansion of the ECB’s bond-buying program the previous month.

The situation in Greece is increasingly attracting the attention of international leaders. In an unprecedented move, U.S. Treasury Secretary Timothy Geithner is scheduled to meet with EU finance ministers at their monthly gathering later this week in Wroclaw, Poland.

The Greek newspaper Ekathimerini reported that the Wednesday conference call between Merkel, Sarkozy and Papandreou was prompted after the intervention of U.S. officials.

For their part, European leaders are seeking to tamp down fears of imminent, disorderly default.

“We must always keep in view that we do everything in a controlled way, that we know the consequences, because otherwise a situation could very quickly arise in the euro zone that none of us wants and that could have very, very difficult consequences for us all,” Merkel told a German radio station on Tuesday.

Wednesday’s conference call, due to take place around 5 p.m. London time, or noon Eastern, is expected to see Papandreou outline the government’s timetable for its privatization program and efforts to cut public spending, Ekathimerini reported.
July euphoria long gone

The premier is also expected to urge Merkel and Sarkozy to press French and German banks to participate in the debt swap that is part of the second bailout deal agreed on in Brussels on July 21, the newspaper said.

Euro-zone leaders at that time hailed the agreement to provide a second bailout for Greece and to enhance the powers of the European Financial Stability Facility, the region’s rescue fund, in an effort to prevent the spread of the sovereign-debt crisis to major economies such as Italy, its third largest, or Spain, its fourth largest.

But several factors — a fight over collateral demands by Finland, uncertainty over banks’ participation in a private-sector Greek debt swap, and fears Greece may not receive its next round of aid after falling short on its deficit-reduction targets — have helped undermine confidence in the arrangement.

And doubts remain over whether the 440 billion euro EFSF will have sufficient firepower to head off crises after leaders refused to boost its size at the July meeting. Meanwhile, national parliaments have to approve the changes before the EFSF can take over bond-buying duties from the European Central Bank.

For economists and investors, it’s a repeat of a pattern in place since the Greek crisis first began brewing late in 2009, eventually forcing bailouts for Greece, Ireland and Portugal.

The problem is that markets move faster than policy makers and can push funding costs to levels where a vicious circle takes hold relatively quickly, while EU policy makers react to changing circumstances at a “glacially slow” pace, said Charles Diebel, head of market strategy at Lloyds Bank in London, in emailed comments.

“This brings us to the point where it feels very much like we are standing on the precipice,” he said.

Diebel said the only way policy makers can hope to buy more time is to come up with a solution that encompasses the entire region and calls for increased fiscal integration and cooperation across the euro zone.

But since that’s unlikely to happen quickly, the burden is likely to remain on world central banks to provide ample liquidity for the banking sector and shore up growth, he said.

For the European Central Bank, the only card left to play may be “full monetization” of European debt by halting the sterilization of its bond purchases, Diebel said. Under the bond-buying program, the central bank “sterilizes” its purchases by draining liquidity from the system equal to the amount of bonds it has purchased.

“This is very much contrary to the DNA of the ECB,” he said, but it may be the only way to go “while the political machine slowly moves toward the ‘end game.’ “

The most pressing issue is whether Greece will receive its next tranche of aid under the first bailout approved in May 2010. A review team from the so-called troika of lenders — the International Monetary Fund, the European Commission and the European Central Bank — abruptly departed Athens earlier this month and are set to return this week.

But with Greece failing to meet deficit reduction targets, fears remain that Greece may not receive the funds. Greek officials have said the country would run out of cash within weeks.

“Right now, it’s far from clear that conditions will be met for the next bailout installment, whilst progress on the debt swaps and rollovers that were an integral part of the July package have fallen short of expectations,” said FxPro’s Smith. “There inevitably becomes a point where it’s easier to cut Greece loose from the EU/IMF lifeline rather than cut them more slack.”