Category Archives: Euro

Pimco says ‘untenable’ policies will lead to eurozone break-up

Pimco says ‘untenable’ policies will lead to eurozone break-up
Pimco, the world’s largest bond fund, has called on Greece, Ireland and Portugal to step outside the eurozone temporarily and restructure their debts unless the currency bloc agrees to a radical change of course.

Bernard Chawmeau-French man against the Euro tears up a mock 100 euro note in the front of the Arc de Triomphe;Paris. Pimco says 'untenable' policies will lead to eurozone break-up
Pimco said current policies are untenable in the absence of fiscal union and will lead to a break-up of the euro 
Andrew Bosomworth, head of Pimco’s portfolio management in Europe, said current policies are untenable in the absence of fiscal union and will lead to a break-up of the euro.
“Greece, Ireland and Portugal cannot get back on their feet without either their own currency or large transfer payments,” he told German newspaper Die Welt.
He said these countries could rejoin EMU “after an appropriate debt restructuring”, adding that devaluation would let them export their way back to health.
Mr Bosomworth said EU leaders were too quick to congratulate themselves on saving the euro last week with a deal for a permanent bail-out fund from 2013.
“The euro crisis is not over by a long shot. Market tensions will continue into 2011. The mechanism comes far too late,” he said.
The bond fund argues that the EU strategy of forcing heavily indebted countries to undergo draconian fiscal austerity without offsetting stimulus is unworkable.
The austerity policies are stifling the growth needed to stabilise debt levels.
“Can countries inside a fixed exchange-rate system like the euro grow and tighten budget policy at the same time? I don’t think so. It didn’t work in Argentina,” Mr Bosomworth said.
Pimco also gave warning that the bond vigilantes have lost faith in the policy and are trying to liquidate their holdings of peripheral EMU faster than the European Central Bank (ECB) can buy the debt, causing a relentless rise in yields, and a vicious circle.
Despite this, the ECB said on Monday that it had cut purchases of government debt last week, settling €603m (£509m), down from €2.68bn a week earlier. The withering comments from the world’s top investor in EMU sovereign debt is a blow for Portugal and Spain. Both nations are hoping bond spreads will start to narrow before they face a funding crunch in the first quarter of next year.
Jacques Cailloux, chief Europe economist at RBS, agreed that last week’s European summit had failed to grasp the nettle.
“None of the policy responses put in place in Europe since the start of the crisis provides a credible backstop to prevent further contagion,” Mr Cailloux said.
“We remain most concerned about an escalation of the sovereign debt crisis hitting larger economies in the euro area. Markets continue to underestimate the potential disruption via financial transmission channels that such an event could trigger.”
Meanwhile, Spain must cut harder and deeper to rein in its finances, the OECD has warned, calling for an overhaul of its labour laws and employment practices. Madrid is already in the midst of harsh austerity measures, but the influential Paris-based think-tank said more must be done. The Spanish economy should be able to shrink its budget deficit from 11pc of GDP last year to the 6pc target next year, the OECD believes.

European Union faces a battle for its very survival

European Union faces a battle for its very survival
November 18, 2010

The warnings about monetary union should have been heeded, writes Ambrose Evans-Pritchard.

The entire European Project is now at risk of disintegration, with strategic and economic consequences that are very hard to predict.

In a speech this week, the European Union President, Herman Van Rompuy, warned that if Europe’s leaders mishandle the current crisis and allow the euro zone to break up, they will destroy the EU itself.

“We’re in a survival crisis. We all have to work together in order to survive with the euro zone, because if we don’t survive with the euro zone we will not survive with the European Union,” he said.

Well, well. This theme is all too familiar, but it comes as something of a shock to hear such a confession after all these years from Europe’s president.

He is admitting that the gamble of launching a premature and dysfunctional currency without a central treasury, or debt union, or economic government, to back it up – and before the economies, legal systems, wage bargaining practices, productivity growth, and interest rate sensitivity, of north and south Europe had come anywhere near sustainable convergence – may now backfire horribly.

Jacques Delors and fellow fathers of European monetary union were told by economists in the early 1990s that this reckless adventure could not work as constructed, and would lead to a traumatic crisis. They shrugged off the warnings.

They were told that currency unions do not eliminate risk: they merely switch it from currency risk to default risk. For that reason it was all the more important to have a workable mechanism for sovereign defaults and bondholder haircuts in place from the beginning, with clear rules that establish the proper pricing of that risk.

But no, the EU masters would hear none of it. There could be no defaults, and no preparations were made or even permitted for such a predictable outcome. Political faith alone was enough. Investors who should have known better walked straight into the trap, buying Greek, Portuguese and Irish debt at 25-35 basis points over German Bunds. At the top of the boom, funds were buying Spanish bonds at a spread of 4 basis points. Now we are seeing what happens when you build such moral hazard into the system, and shut down the warning thermostat.

Mr Delors told colleagues that any crisis would be a “beneficial crisis”, allowing the EU to break down resistance to fiscal federalism, and to accumulate fresh power. The purpose of European monetary union was political, not economic, so the objections of economists could be disregarded. Once the currency was in existence, EU states would have to give up national sovereignty to make it work over time. It would lead ineluctably to Jean Monnet’s dream of a fully fledged EU state. Bring the crisis on.

Behind this gamble, of course, was the assumption that any crisis could be contained at a tolerable cost once the imbalances of the one-size-fits-none monetary system had reached catastrophic levels, and once the credit bubbles of Club Med and Ireland had collapsed. It assumed, too, that Germany, the Netherlands and Finland would ultimately – under much protest – agree to foot the bill for a ”Transferunion”.

We may soon find out whether either assumption is correct. Far from binding Europe together, monetary union is leading to acrimony and recriminations. We had the first eruption this year when Greece’s deputy premier accused the Germans of stealing Greek gold from the vaults of the central bank and killing 300,000 people during the Nazi occupation.

Greece is now under an EU protectorate, or the “memorandum” as it is called. Ireland and Portugal are further behind on this road to serfdom, but they are already facing policy dictates from Brussels, and will soon be under formal protectorates as well in any case. Spain has more or less been forced to cut public wages by 5 per cent to comply with EU demands. All are having to knuckle down to Europe’s agenda of austerity, without the offsetting relief of devaluation and looser monetary policy.

As this continues into next year, with unemployment stuck at depression levels or even creeping higher, it starts to matter who has political “ownership” over these policies. Is there full democratic consent, or is this suffering being imposed by foreign overlords with an ideological aim? It does not take much imagination to see what this is going to do to concord in Europe.

My own view is that the EU became illegitimate when it refused to accept the rejection of the European constitution by French and Dutch voters in 2005. There can be no justification for reviving the text as the Lisbon Treaty and ramming it through by parliamentary procedure without referendums, in what amounted to an authoritarian putsch.

Ireland was the one country forced to hold a vote by its constitutional court. When this lonely electorate also voted no, the EU again disregarded the result and intimidated Ireland into voting a second time to get it “right”.

This is the behaviour of a proto-fascist organisation, so if Ireland now sets off the chain-reaction that destroys the euro zone and the EU, it will be hard to resist the temptation of opening a bottle of Connemara whiskey and enjoying the moment. But resist one must. The cataclysm will not be pretty.

Telegraph, London

http://www.smh.com.au/business/european-union-faces-a-battle-for-its-very-survival-20101117-17xm1.html

IMF admits that the West is stuck in near depression

If you strip away the political correctness, Chapter Three of the IMF’s World Economic Outlook more or less condemns Southern Europe to death by slow suffocation and leaves little doubt that fiscal tightening will trap North Europe, Britain and America in slump for a long time.

By Ambrose Evans-Pritchard
Published: 8:00PM BST 03 Oct 2010

Spain, trapped in EMU at overvalued exchange rates, had a general strike last week

The IMF report – “Will It Hurt? Macroeconomic Effects of Fiscal Consolidation” – implicitly argues that austerity will do more damage than so far admitted.

Normally, tightening of 1pc of GDP in one country leads to a 0.5pc loss of growth after two years. It is another story when half the globe is in trouble and tightening in lockstep. Lost growth would be double if interest rates are already zero, and if everybody cuts spending at once.

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IMF warns pound could be at risk from uncertainty


“Not all countries can reduce the value of their currency and increase net exports at the same time,” it said. Nobel economist Joe Stiglitz goes further, warning that damn may break altogether in parts of Europe, setting off a “death spiral”.

The Fund said damage also doubles for states that cannot cut rates or devalue – think Spain, Portugal, Ireland, Greece, and Italy, all trapped in EMU at overvalued exchange rates.

“A fall in the value of the currency plays a key role in softening the impact. The result is consistent with standard Mundell-Fleming theory that fiscal multipliers are larger in economies with fixed exchange rate regimes.” Exactly.


Let us avoid the crude claim that spending cuts in a slump are wicked or self-defeating. Britain did exactly that after leaving the Gold Standard in 1931, and the ERM in 1992, both times with success. A liberated Bank of England was able to cut interest rates. Sterling fell. The key point is whether you can offset the budget cuts.

But by the same token, it is fallacious to cite the austerity cures of Canada, and Scandinavia in the 1990s – as the European Central Bank does – as evidence that budget cuts pave the way for recovery. These countries were able export to a booming world. They could lower interest rates, and were small enough to carry out `beggar-thy-neighbour’ devaluations without attracting much notice. We were not then in our New World Order of “currency wars”.

Be that as it may, it is clear that Southern Europe will not recover for a long time. Portuguese premier Jose Socrates has just unveiled his latest austerity package. He has capitulated on wage cuts. There will be a rise in VAT from 21pc to 23pc, and a freeze in pensions and projects. The trade unions have called a general strike for next month.

Mr Socrates has already lost his socialist majority, leaking part of his base to the hard-Left Bloco. He must rely on conservative acquiescence – not yet forthcoming. Citigroup said the fiscal squeeze will be 3pc of GDP next year. So under the IMF’s schema, this implies a 3pc loss in growth. Since there wasn’t any growth to speak off, this means contraction.

Spain had a general strike last week. Elena Salgado, the defiant finance minister, refused to blink. “Economic policy will be maintained,” she said. There will be another bitter budget in 2011, cutting ministry spending by 16pc.

Mrs Salgado has ruled out any risk of a double-dip. But the Bank of Spain fears the economy may contract in the third quarter.

The lesson of the 1930s is that politics can turn ugly as slumps drag into a third year, and voters lose faith in the promised recovery. Unemployment is already 20pc in Spain. If Mrs Salgado is wrong, Spanish society will face a stress test.

We are seeing a pattern – first in Ireland, now in Greece and Portugal – where cuts are failing to close the deficit as fast as hoped. Austerity itself is eroding tax revenues. Countries are chasing their own tail.

The rest of EMU is not going to help. France and Italy are cutting 1.6pc GDP next year. The German squeeze starts in earnest in 2011.

Given the risks, you would expect the ECB to stand by with monetary stimulus. But no, while the central banks of the US, the UK, and Japan are worried enough to mull a fresh blast of money, Frankfurt is talking up its exit strategy. It risks repeating the error of July 2008 when it raised rates in the teeth of the crisis.

The ECB is winding down its lending facilities for eurozone banks, regardless of the danger for Spanish, Portuguese, Irish, and Greek banks that have borrowed €362bn, or the danger for their governments. These banks have used the money to buy state bonds, playing the internal “carry trade” for extra yield. In other words, the ECB is chipping at the prop that holds up Southern Europe.

One has to conclude that the ECB is washing its hands of the PIGS, dumping the problem onto the fiscal authorities through the EU’s €440bn rescue fund. That is courting fate.

Who believes that the EMU Alpinistas roped together on the North Face of the Eiger are strong enough to hold the rope if one after another loses its freezing grip on the ice?

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8039789/IMF-admits-that-the-West-is-stuck-in-near-depression.html

How safe is the cash in your wallet?

By Ian Cowie  Last updated: June 28th, 2010

About a tenth of the £20 notes in circulation, worth a total of £30bn, will cease to be legal tender at midnight the day after tomorrow – Wednesday, June 30. But what about other banknotes in your wallet?
That stash of foreign currency stored up from your last European holiday might not be as safe as you thought. Not all euros are the same and some might be worth more than others.
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Each euro banknote’s serial number tells you which country created it. Some could be worth more than others if the Greek crisis causes debt worries to drive a wedge between northern and southern countries in the eurozone.
Worries about sovereign states’ differing abilities to repay their debts prompted world leaders at the G20 Summit in Toronto to pledge they will half their national budget deficits by 2013. But translating words into action will be a more difficult challenge for some than others. For a few, the challenge could prove simply impossible.
Now rising fears about southern European countries’ financial stability mean it could pay to be able to read the code on your euro. SomeGermans are already insisting on holding on to euros issued in their own country and passing on those backed by southern states. They know from not too distant history what it feels like to be left holding worthless paper which used to be official currency.
While it may seem far-fetched to worry about the future of one of the world’s largest currencies, the wealthy speculator George Soros expressed doubts last week and several other commentators have done so earlier.
When I called the European Union Parliament and Commission press offices in London this morning to seek their comments , none was forthcoming. To be fair, there was some sort of a fuss about eggs going on and one of the people I spoke to promised to call me back. I’ll let you know if they do.
All euros are backed by the European Central Bank but the serial numbers prefixed with X may be regarded as most secure because they are issued by Germany. N is also a good prefix, because these come from Austria. P, L, U and Z prefixes may also be favoured because these are issued by the authorities in Holland, Finland, France and Belgium.
If you share widespread fears that the euro cannot last in its present form, you might want to avoid notes with the prefixes F, G, M, S, T or Y. These are issued by Malta, Cyprus, Portugal, Italy, Ireland and Greece.
Here and now, in a long-planned move to make life difficult for forgers, about 150m British £20 notes with a picture of Edward Elgar will be replaced as legal tender on Thursday, July 1, by notes with a picture of Adam Smith. When the change was first announced during the last Labour government, I noted how apt it was that Gordon Brown should replace a great English composer with a Scots tax collector – for that was Smith’s day job before he became an economist.
The transition will no doubt be smooth and the Bank of England says it will continue to honour all the notes it has issued.
Let’s hope the same can be said of the European Central Bank and all its euros.

Double-dip fears over worldwide credit stress

Double-dip fears over worldwide credit stress

The global credit system is flashing the most serious warning signals in almost a year on triple fears of a Spanish banking crisis, escalating political risk in Asia, and a second leg to the US housing slump.

By Ambrose Evans-Pritchard
Published: 9:20PM BST 25 May 2010

Flight to safety drove yields on 10-year German Bunds to 2.56pc, below the levels touched in the depths of the Great Depression. The spreads over peripheral European debt rose sharply again, jumping to 137 basis points for Italy, 157 for Spain and 220 for Ireland.

The strains in Europe’s sovereign debt markets are nearing levels that forced EU leaders to launch their “shock and awe” rescue package. “If a $1 trillion (£700bn) bail-out did not finally turn sentiment, I struggle to see what can,” said Tim Ash, an economist at RBS.

Dollar Libor rates gauging stress within the interbank lending market have jumped to a 10-month high of 0.5363pc, with credit contagion spreading to every area. The iTraxx Senior financials index – banks’ “fear gauge” – rose 20 basis points on Tuesday to 184. “It turns out we weren’t seeing the light at the end of the tunnel after all, but a train with a big light on it coming towards us of double-dip,” said Dr Suki Mann, at Societe Generale.

While the Libor rate is still far below peaks reached during the Lehman crisis, the pattern has ominous echoes of credit market strains before the two big “pulses” of the credit crisis in August 2007 and September 2008. In each case a breakdown of trust in the interbank market was a harbinger of violent moves in equities and the real economy weeks later.

RBS’s credit team said Libor strains were worse than they looked since most banks in Europe were paying much higher spreads, especially in Spain. The “implied” forward spreads were nearer 1.1pc.

The damage has spilt over to corporate bonds, effectively shutting the market for new issues. May will be the worst single month for debt issues since December 1999, with seven deals being cancelled in recent days. Volume has collapsed to $47bn from $183bn in April, according to Bloomberg.

Mr Ash said North Korea’s decision to cut all ties with the South and abrogate its non-aggression pact – coming days after Thailand sent tanks into Bangkok to crush the Red Shirts – has played into the chemistry of angst gripping markets, adding it was a reminder that Asia has “political/social stress points”. This risk was overlooked during the honeymoon phase of emerging markets when investors were intoxicated by the China story.

Fears that America may slip back into a double-dip recession are returning. Larry Summers, the White House economic tsar, has called for a second stimulus package to keep the recovery on track, warning that the US economy is still in a “very deep valley”.

The S&P Case-Shiller index of home prices is declining again as incentives for homebuyers expire and the slow-burn effect of rising delinquencies exacts its toll. Prices fell 3.2pc in the first quarter of this year. “There are signs of some renewed weakening in home prices”, said David Blitzer from S&P.

The epicentre of the credit crisis is moving to Spain where the seizure by the central bank of CajaSur over the weekend has torn away the veil on credit damage from Spain’s property crash.

Bank stocks fell 6pc in Madrid in early trading on Tuesday on fears that funding will dry up for the cajas – or the savings banks – setting off a broader credit crunch. The cajas hold the lion’s share of loans to property companies and developers, estimated at €445bn (£380bn) or 45pc of GDP by Goldman Sachs.

Spanish construction reached 17pc of GDP at the height of the bubble as real interest rates of minus 2pc set by the European Central Bank for German needs played havoc with the Spanish economy. This was almost double the level in the US during the sub-prime booms. The result is an overhang of unsold Spanish properties equal to four years’ demand.

Markets have been rattled by reports in the German media that the Greek rescue deal contains two secret clauses. The package will be “immediately and irrevocably cancelled” if it is found to breach the EU Treaty’s “no bail-out” clause, either in a ruling by the European court or the constitutional courts of any eurozone state. While such an event is unlikely, it is not impossible. There are two cases already pending at Germany’s top court in Karlsruhe, perhaps Europe’s most “eurosceptic” tribunal.

The second clause said that if any country finds it cannot raise funding for the rescue at interest rates below the 5pc charge agreed for Greece, it may opt out of the bail-out. BNP Paribas said this would escalate quickly into a systemic crisis if Spain were in such a position, because the other countries cannot carry an ever-rising burden. The bank warned the euro project itself may start to disintegrate rapidly if these rescue provisions are ever seriously put to the test.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7765383/Double-dip-fears-over-worldwide-credit-stress.html

Whatever Germany does, the euro as we know it is dead

“Money can’t buy you friends, but it does get you a better class of enemy” – Spike Milligan
For Angela Merkel, leader of the eurozone’s richest country, a queue is forming of high-quality adversaries. As she tips German Geld und Gut into the furnace of a rescue package for the euro, while going it alone in a misguided ban on market “manipulators”, the brass-neck Chancellor has infuriated domestic voters, angered her EU partners (in particular the French) and invited the so-called wolf pack of global traders to do its worst.
In one respect, Mrs Merkel is right: “The euro is in danger… if the euro fails, then Europe fails.” What she has not yet admitted publicly is that the main cause of the single currency’s peril appears beyond her control and therefore her impetuous response to its crisis of confidence is doomed to fail.
The euro has many flaws, but its weakest link is Greece, whose fundamental problem is that for years it spent too much, earned too little and plugged the gap by borrowing in order to enjoy a rich man’s lifestyle. It flouted EU rules on the limits to budget deficits; its national accounts were a moussaka of minced statistics, topped with a cheesy sauce of jiggery-pokery.
By any legitimate measure, Greece was unworthy of eurozone membership. That it achieved card-carrying status was down to the sleight-of-hand skills of its Brussels fixers and the acquiescence of central bank bean-counters. Now we know the truth, jet-hosing it with yet more debt makes no sense. Another dose of funny money will delay but not extinguish the need for austerity.
This is why the euro, in its current form, is finished. The game is up for a monetary union that was meant to bolt together work-and-save citizens in northern Europe with the party animals of Club Med. No amount of pit props from Berlin can save the euro Mk I from collapsing under the weight of its structural dysfunctionality. You cannot run indefinitely a single currency with one interest rate for 16 economies, when there are such huge fiscal disparities.
What was once deemed unthinkable is now, I believe, inevitable: withdrawal from the eurozone of one or more of its member countries. At the bottom end, Greece and Portugal are favourites to be forced out through weakness. At the top end, proposals are already being floated in the Frankfurt press for a new “hard currency” zone, led by Germany, Austria and the Benelux countries. Either way, rich and poor are heading in opposite directions.
When asked on Sky if, in five years’ time, the euro will have the same make-up as it does today, Jeremy Stretch, a currency analyst at Rabobank, the Dutch financial services giant, told me: “I think it’s pretty unlikely.” The euro was a boom-time construct. In the biggest bust for 80 years, it is falling apart.
Telegraph loyalists with long memories will be shocked by none of this. In 1996, Sir Martin Jacomb, then chairman of the Prudential, set out with great prescience in two pieces for The Sunday Telegraph why a European single currency, without full political integration, would end in disaster. His prognosis of the ailments that might afflict the eurozone’s sickliest constituents reads as if it was penned to sum up today’s turmoil.
“A country which does not handle its public finances prudently will find its long-term borrowing costs adjusted accordingly,” Sir Martin predicted. “Although theory says that default is unlikely, nevertheless, a country that spends too much public money, and allows its wage costs to become uncompetitive, will experience rising unemployment and falling economic activity. The social costs may become impossible to bear.”
Welcome to the headaches of George Papandreou. The bond markets called his country’s bluff. Greece is skint, but its unions don’t want to admit it. There is insufficient political will to tackle incompetence and corruption, never mind unaffordable state spending. But, locked into the euro, Greece cannot devalue its way out of trouble, so it relies on the kindness of strangers.
Dishing out German largesse to profligate Athens, with little expectation of a reasonable return, is a sure way for Mrs Merkel to join Gordon Brown as a political has-been. Fully aware of the revulsion felt by Mercedes and BMW employees at the prospect of their taxes being used to pay for a Hellenic car crash, she has resorted to creating a bogeyman – The Speculator.
By announcing a ban on the activities of short-sellers (those who bet to profit from falling prices in financial markets), she is hoping her decoy will avert German attention from the small print of Berlin’s support for Greece, which talks of developing processes for “an orderly state insolvency”. This sounds ominously like a softening-up process for a form of default.
Greece’s severe difficulties were home-made. The euro has come under pressure not from dark forces of speculation but respectable investors, many of them traditional pension funds, which, quite correctly, worked out that when the crunch came, the Brussels elite would sanction an abandonment of its no bail-out rule and cough up for a messy fudge.
In 1990, the late Lord Ridley, when still a government minister, caused a storm by telling The Spectator that Europe’s planned monetary union was “a German racket designed to take over the whole of Europe”. One knew what he was getting at, but it has not turned out that way.
Protecting the euro has become a project via which profligate states dip their fingers in Berlin’s till. Germany is taking on nasty obligations without gaining ownership of the assets. Germany’s version of The Sun, Bild Zeitung, feeds its readers a regular diet of stories about the way ordinary Germans are being taken for mugs. Trust has turned to suspicion. Next stop is divorce.
As for the United Kingdom, we must be grateful that those frightfully clever Europhiles, such as Lord Mandelson and Kenneth Clarke, did not get their way. Had they been able to scrap the pound and embrace the euro this country would be even closer to ruin. Without a flexible currency, the colossal deficit clocked up by Mr Brown would have crushed us completely. We have little to thank him for, but it would be churlish to deny that his decision to reject Tony Blair’s blandishments in favour of the euro was a life-saver.
Sterling’s devaluation has not been pretty, but it is helping to keep our exports competitive while the coalition Government begins rebuilding the nation’s finances. Siren voices from across the Channel, calling for closer integration between Britain and the rest of the EU, can be confidently rejected. As for joining the euro, I find it impossible to imagine any circumstances under which it would be in the UK’s interest to do so.

Poor US jobs data knocks Wall Street, reignites global stock market sell-off

Poor US jobs data knocks Wall Street, reignites global stock market sell-off


The world stock market sell-off got a second wind on Thursday afternoon after disappointing US jobs data compounded investors’ already bleak view of the world economy




1 of 3 Images
European markets gave up early rises after the Dow Jones opened down 2.1pc following a jump in US jobless claims to 471,000.

European markets gave up early rises after the Dow Jones opened down 2.1pc following a jump in US jobless claims to 471,000. Photo: Getty
European markets gave up early rises after the Dow Jones opened down 2.1pc following a jump in US jobless claims to 471,000. Economists were expecting them to fall to 440,000.
The poor news on the US economy added to jitters about a tightening of financial regulation, pushing London’s FTSE 100 down 2pc. Germany’s DAX skidded 2.3pc, France’s CAC 2.8pc and Spain’s Ibex 1.7pc. Earlier, Asian markets fell for a second day with the Nikkei sliding 1.5pc and Australia’s ASX 1.6pc.
Gilt yields on 10-year bonds fell further in the US, Germany and UK in a flight to safety.
European tensions over a unilateral German ban on the shorting of government bonds and some financials stocks on Tuesday evening continued to reverberate across financial markets.
The euro, which came off fresh four-year lows around $1.21 on Wednesday after a massive €9.5bn intervention by the Swiss central bank, remained volatile.
The currency spiked above $1.24 in early trade on speculation of a possible co-ordinated intervention from central banks, and talk that Greece may be about to leave the eurozone. This rally was short lived and it was trading around $1.2340 just before 3pm.
Angela Merkel, the German Chancellor who yesterday caused a stir by warning that the euro was in danger, today said she would campaign for a tax on financial markets at the G20 summit in Canada.
In a wide-ranging speech on financial regulation, she stressed the importance of tightening the fiscal rules governing the euro area, the breech of which has contributed to the current crisis.
“If you have a currency like the euro … then you need stricter rules than other governments that just decide for their own currency,” she said.
“We need to tighten up the Stability and Growth Pact,” she insisted, ahead of a meeting of EU finance ministers and the EU president Herman van Rompuy to discuss the pact Friday in Brussels.
She also called for a European version of the rating agencies which have been accused of exacerbating the crisis.
“I would be in favour of introducing a European rating agency which would act as a competitor to other rating agencies on a level playing field,” she said.
Earlier in the day investors were tempted back into the market following yesterday’s steep falls. Bank shares were in demand and by 11.30am Britain’s FTSE 100 was up 0.3pc, Germany’s DAX had dipped 0.3pc and France’s CAC-40 has gained 0.04pc.
But market watchers were wary. “The day will be a roller coaster, no doubt,” said David Keeble, an analyst at Credit Agricole. “The German short ban has emphasised that Europe is not unified and this is at a juncture when it really, really needs to be.”
Christine Lagarde, French Economy Minister, told RTL radio that the German decision “should have been taken in concert” with other European nations and was in itself “open to debate”.
The crisis in Europe is being driven by debt and public deficit levels which have soared way above EU rules as governments increased spending to get their economies through the worst recession in decades.
French President Nicolas Sarkozy added to worries wheh he said France’s constitution should be altered to compel new governments to sign up to a timetable to balance their budgets. He also said he wanted to freeze public spending for three years.
Greek authorities deployed hundreds of extra police in Athens for the fourth general strike in four months which caused widespread disruption. During Greece’s last general strike on May 5, three workers — including a pregnant woman — died while trapped in a bank that rioters set ablaze.
Public anger has grown in Greece against deep pension and salary cuts, as well as steep tax hikes, imposed in an attempt to pull Greece out of an unprecedented debt crisis.
The measures were needed for Greece to receive a €110bn (£95bn) three-year rescue loan package from other EU countries and the International Monetary Fund that staved off bankruptcy.
Spain also braced for street protests by public service workers against a tough government austerity plan aimed at reining in the public deficit amid fears of a Greek-style debt crisis.
The country’s main unions has called for demonstrations in front of government buildings throughout the country at the same time as the government is set to approve the belt-tightening plan later Thursday.

http://www.telegraph.co.uk/finance/markets/7745696/Poor-US-jobs-data-knocks-Wall-Street-reignites-global-stock-market-sell-off.html

Behind the drama in Europe lies a global crisis

Behind the drama in Europe lies a global crisis


The euro is under threat – along with our entire free-market system, warns Edmund Conway.


Angela Merkel, the German Chancellor, followed the unilateral German shorting ban with a warning that the euro was in danger, urging the EU speed up supervision of financial markets.

Angela Merkel, the German Chancellor, followed the unilateral German shorting ban with a warning that the euro was in danger, urging the EU speed up supervision of financial markets.Photo: Getty
It is now accepted, even by Angela Merkel, that as Europe battles its financial crisis, the very fate of the euro is at stake. Her belated discovery of this home truth is welcome, but she does not go far enough. The real concern is that the crisis bubbling on the other side of the Channel represents a make-or-break moment for globalisation.
If that sounds rather exotic, consider two apparently separate events from the past couple of days. The first features George Osborne. While things have gone pretty well back home for the new Chancellor, he is already having trouble in Europe, where the Commission has been fighting not only to de-claw the hedge fund industry – against British wishes – but also to impose new rules on its member states.
The Commission’s latest idea is that every European finance minister (including Osborne) should be compelled to send his Budget plans to Brussels for approval before announcing them to his own MPs and citizens. The rationale is that if there is to be a central bail-out fund for stricken European nations, there should be someone in the middle making sure no one misbehaves. Osborne, understandably, was having none of it, using his inaugural European summit to insist that when it came to a country’s budget, “the national parliament must be absolutely paramount”.
The second event took place a few thousand miles away in Washington, where the US Senate voted 94:0 to prevent the International Monetary Fund from using its cash to help countries that are inextricably trapped in a debt spiral. Though barely reported on this side of the Atlantic, this vote could have enormous consequences – such as preventing the fund from providing its share of the grand European bail-out package announced with such fanfare last week, which amounts to a third of the trillion-dollar total.
Though superficially unconnected, the two events share a similar theme: for the first time in many years, the technocrats who run our economies are realising that the main barrier to resolving a crisis and reinstating business-as-usual is not so much our ability to afford it, but our populations’ willingness to pay.
As long as things were going well, economies were growing rapidly, and affluence was increasing, it was easy for politicians to pretend that when it came to economics, national borders didn’t much matter any more. But now the chips are down, nationalism is back.
The rule of thumb here is as follows: of the three aims we have been striving towards in recent history – democracy, national sovereignty and global free trade – you cannot have any more than two at any one time. 

  • Want to run your country as an independent state, open to the whims and volatility of the free markets? The voters will punish you at the ballot box. 
  • Insist that your nation has full control of its own affairs? Then you have to jettison any plans to play a full part in the global economy. 
  • Want democracy and globalisation? Then you have to suborn your sovereignty.
This is what Professor Dani Rodrik of Harvard University calls the “policy trilemma”, and it is what lay behind the breakdown of the last era of globalisation, which coincided with the Industrial Revolution. Under the British Empire, free trade flourished, reinforced by the gold standard (in some senses a precursor to the euro) and the Royal Navy.
However, this only came about because most politicians were able to ignore their citizens’ protectionist impulses. The first decades of the 20th century brought not only the First World War but also a mass electorate; when Churchill tried to revive the gold standard in the 1920s, at the cost of deflation and depression in the UK, the public revolted. Churchill called the blunder his “worst ever mistake”.
Scarred by the beggar-thy-neighbour policies of the 1930s, John Maynard Keynes could only contemplate a “globalisation-lite” as he rebuilt the world’s economic structure after the Second World War. But the Bretton Woods system, which intentionally suppressed the free market through capital controls, lasted only so long. Liberalisation went into overdrive with the fall of the Berlin Wall and the opening-up of China. Yet the resulting system is actually something of a patchwork. Europe exemplifies the problem: the continent is a hodge-podge of nations trying to disguise itself as a completely liberalised market. Unfortunately, its people have different ideas: the Germans are furious about the Greek bail-out; the British insist on remaining on the sidelines.
Perhaps recognising the danger of alienating her voters, Mrs Merkel has now taken what might be a first step towards curtailing economic globalisation, by banning the short-selling of German banks. Some worry that a return to capital controls is the next step in the European effort to prevent meltdown. Others suspect that the European Central Bank has already intervened in the markets to prop up the euro.
Quite what the real plan is remains to be seen. Most likely, there isn’t one – yet. But unless they intend to embrace totalitarianism, Europe’s members will eventually have to abandon either their national sovereignty or globalisation itself. Given the continent’s size, and our reliance on it as our largest trading partner, this is not a drama we can afford to ignore.

http://www.telegraph.co.uk/finance/comment/edmundconway/7742164/Behind-the-drama-in-Europe-lies-a-global-crisis.html

Euro crisis biggest test – Merkel

Euro crisis biggest test – Merkel
May 20, 2010 – 7:03AM

Germany rocks world markets

Germany’s ban on risky trading sent ripples of shock through the markets, stunning investors and sending the euro back down to a four-year low.

Chancellor Angela Merkel has called for a radical overhaul of Europe’s fiscal rules along German lines, warning of “incalculable consequences” for the European Union if the euro were to fail.

Defending Germany’s part in a near trillion US dollar package to prevent the troubles of debt-ridden Greece spreading to the rest of Europe, she said the single currency was facing an “existential test” as it plunges on the markets.

“The current crisis facing the euro is the biggest test Europe has faced in decades, even since the Treaty of Rome was signed in 1957,” she said in a speech in parliament on Wednesday, referring to the treaty that created the European Union.

“This test is existential and it must be overcome … if the euro fails, then Europe fails,” she said, facing frequent heckling and jeers from opposition parties.

“The euro is in danger. If we do not avert this danger, then the consequences are incalculable and the consequences for the whole of Europe are also incalculable,” she cautioned.

To overcome the turmoil that has battered the euro, the German chancellor proposed a “new stability culture” in Europe.

“We need a comprehensive overhaul of the Stability and Growth Pact,” the rules stating that EU countries should keep budget deficits below three per cent of gross domestic product (GDP) and debt below 60 per cent of GDP.

“The rules must be geared to the strongest, not to the weakest … our (German) stability culture is tried and tested.”

German Finance Minister Wolfgang Schaeuble will on Friday propose a raft of measures to tighten the rules at a meeting with EU president Herman Van Rompuy.

Merkel said that European funds could be withheld from fiscal sinners and voting rights withdrawn. She also said that an “ordered sovereign insolvency procedure” needed to be established in Europe.

She confirmed a decision made on Tuesday by Germany’s securities market regulator to ban so-called naked short-selling in the shares of 10 financial institutions and eurozone government bonds.

Naked short-selling is when investors sell securities they do not own and have not even borrowed, hoping to be able to buy them back later at a lower price, thereby earning a profit.

She said the ban would be in place until Europe-wide regulations were agreed, prompting scorn from market players.

Saying that Merkel had “thrown her toys from the pram” in a fit of pique, Howard Wheeldon from BGC partners in London said she appeared “determined to undermine the euro and the euro economy at this particularly difficult time.

“It seems to me that all the German chancellor has managed to do by this affront to market integrity is succeed in fuelling more fears that the European sovereign debt crisis may just be even worse than it looks,” he said.

The euro hit a new four-year low against the dollar after the move was announced.

Merkel also reiterated that she would campaign at the Group of 20 leading industrial powers for an international tax on the financial markets.

Schaeuble later told a parliamentary committee: “If we can get that through on the global level, then good. That would be ideal. If that does not work, then we must look to the Europe (European Union).”

“And if we have a problem with Britain, then I think we should try it with the eurozone,” he added.

Frank-Walter Steinmeier, parliamentary head of the opposition Social Democrats, attacked Merkel for her conduct in the crisis, branding her “powerless and helpless.”

Germany’s parliament is expected to vote Friday on the country’s share of the 750 billion euros ($A1.06 trillion) eurozone bailout package, which could be as much as 150 billion euros ($A211.83 billion).

Merkel’s party has a clear majority in the parliament, meaning the package is certain to pass.

AFP

Stocks fall, euro at 4-yr low, oil dips

Stocks fall, euro at 4-yr low, oil dips




NEW YORK: Stocks fell for a third day on Monday on growing concerns that Europe’s debt problems will hamper a global rebound. The Dow Jones industrial average fell about 80 points in late morning trading. The Dow fell 81.4 points, or 0.8%, to 10,538.6. It has fallen seven of the last nine days.

Stocks fell after the euro, which is used by 16 countries in Europe, fell to a four-year low. Investors are questioning whether steep budget cuts in countries including Greece, Spain and Portugal will hinder an economic recovery in Europe and in turn, the US traders are also concerned that loan defaults could ripple through to banks in stronger countries like Germany and France.

The austerity measures are required under a nearly $1 trillion bailout programme the European Union and International Monetary Fund agreed to last week. The rescue package provides access to cheap loans for European countries facing mounting debt problems.

The euro fell to as low as $1.223 early Monday before moving higher. The plunging euro has been driving trading around the globe in recent days. The weakness in the euro has helped boost the value of safe-haven investments like the dollar, Treasuries and gold. It has also driven commodities like oil lower.

Oil fell below $70 a barrel for the first time since February. Oil is priced in dollars so a stronger dollar deters investment in oil. Crude oil fell $1.76 to $69.8 per barrel on the New York Mercantile Exchange. That hit shares of energy companies.

A disappointing report on regional manufacturing from the New York Federal Reserve weighed on sentiment. A forecast from home-improvement retailer Lowe’s Cos also fell short of expectations. The questions about Europe overshadowed other news and dominated trading. Investors in the US who had been growing more confident about a rebound in this country now are questioning whether the problems in Europe will disrupt a recovery.


http://timesofindia.indiatimes.com/Biz/International-Business/Stocks-fall-euro-at-4-yr-low-oil-dips/articleshow/5942500.cms