In Europe, a Delicate Decision on Rates
By JACK EWING
Copyright by The New York Times
Published: April 29, 2010
http://www.nytimes.com/2010/04/30/business/global/30ecb.html?th&emc=th
FRANKFURT — Europe’s collective anguish over Greece was interrupted by some good news on Thursday. German unemployment fell more than expected, while earnings surged for some of the country’s biggest companies.
No one is going to complain about signs of robust growth in Europe’s largest economy, which has 10 times the economic output of Greece. But the recovery of the northern half of the euro zone as the southern periphery sinks deeper into crisis sets up a quandary for monetary policy makers that could increase the already serious tensions within Europe.
If growth in Northern Europe continues to gain during the rest of the year, the European Central Bank in Frankfurt will eventually face pressure to raise interest rates to contain inflation.
But a rate increase could harm Greece as well as Spain, Portugal and other countries with debt problems, raising the high cost of borrowing for governments and business.
The central bank “cannot risk inflation in the euro area for the sake of these three countries,” said Zsolt Darvas, an economist at Breugel, a research organization in Brussels. “They will have to face higher interest rates, and it will be very difficult for them to sort out their fiscal problems.”
That view is commonly held in Germany and countries near it. Another view is that relieving the suffering of Southern Europe should trump trying to stamp out future inflation with a heavy hand.
For the central bank, fortunately, the day of reckoning probably will not come until early next year. With no signs yet that inflation is an imminent danger, most economists do not expect an increase in the benchmark interest rate — it is now 1 percent — until March 2011, according to a Reuters poll.
But Jean-Claude Trichet, president of the central bank, and other members of its governing council face plenty of other tough choices in the weeks and months ahead.
One risk is that the loss of faith in Greek solvency will spread to Portugal and perhaps Spain, threatening another bank crisis and forcing the central bank to act.
The central bank has begun to gradually cut back on the nearly unlimited cash it lent to European banks after interbank lending froze in 2008. But some analysts say they believe the central bank could stop that process or even reverse it.
The bank “may have to go back and reopen some of its unconventional measures,” said Nick Matthews, senior European economist at the Royal Bank of Scotland.
The central bank could also face pressure if the United States Federal Reserve began raising rates. Higher rates in the United States would encourage investors to move assets into dollars to earn a better return, causing the euro to fall even more.
A weaker euro would be good for Greece and European exporters in general by making their products less expensive in foreign markets. But the downside is that a weaker euro would increase the cost of oil and other commodities, which are usually priced in dollars. Higher energy costs would feed inflation, adding pressure on the central bank to raise rates.
For now, that risk seems to have eased after the Fed signaled Wednesday that it was in no hurry to raise rates.
The downgrading of Greek debt to junk status by the ratings agency Standard & Poor’s, and the risk of Moody’s and Fitch following suit, presents a more immediate problem for the central bank. Under the central bank’s rules, that would make Greek debt ineligible as collateral for central bank loans, creating serious problems for banks in Greece that use their holdings of domestic bonds to borrow cash.
“The E.C.B. doesn’t want to be the one to push Greece over the edge,” said Janet Henry, chief European economist at HSBC. “If push comes to shove, they would bend the rules.”
But a shift in policy could also damage the credibility of the central bank, said Mr. Darvas, the economist for Breugel. The central bank has already loosened its collateral requirements to help Greece, despite Mr. Trichet’s insistence that the bank would not tailor policy to specific countries.
The central bank also changed course on whether the International Monetary Fund should play a major role in rescuing Greece. Members of the bank’s governing council first said that Europe could deal with its own problems, then pivoted as they were forced to acknowledge that the I.M.F. was indispensable.
Such missteps notwithstanding, bickering among European Union leaders has underlined the importance of the central bank as the one institution in the euro zone able to move decisively in response to an economic crisis.
Alessandro Leipold, former acting director of the I.M.F.’s European department, speculated that the central bank could stretch its mandate even further if Europe’s politicians were too slow to agree on the terms of a rescue package for Greece.
For example, the central bank could organize a bridge loan to allow Greece to meet its immediate financing needs and avoid a default, Mr. Leipold said. “I don’t know the technicalities but it should be possible,” he said. Other analysts said they thought such a move was unlikely.
Another option, according to analysts at R.B.S., entails the central bank buying government bonds, which the bank has avoided.
The central bank “will defend the region using all the tools at its disposal,” the R.B.S. analysts said in a note on Monday. As global trade recovers, German exporters like Siemens, the electronics conglomerate, and the software maker SAP have reported strong earnings, helping seasonally adjusted unemployment fall to 7.8 percent, from 8 percent.
Economists recall that when Germany was struggling in the middle of the decade, the central bank kept interest rates low even though the policy led to overheated economies in Ireland and other countries. “Then they were setting policy for Germany rather than smaller countries — where conditions were far too loose,” Ms. Henry of HSBC said.
In the coming year, “Germany will feature more prominently than the periphery,” she added. “The E.C.B. has its 2 percent inflation limit, and they will do what it takes to achieve that.”
Europe Acts Swiftly on Long-Delayed Greek Bailout
By NICHOLAS KULISH and DAN BILEFSKY
Copyright by The New York Times
Published: April 29, 2010
http://www.nytimes.com/2010/04/30/world/europe/30greece.html?th&emc=th
BERLIN — European leaders raced Thursday to complete their part of a long-delayed financial rescue package for Greece, hoping to head off a chain reaction against other heavily indebted European nations that could turn into a financial meltdown across the continent.
After balking for months at bailing out the Greek economy, leaders in Germany attacked the crisis with a newfound urgency. One day after Chancellor Angela Merkel declared her support for swift action, opposition parties in Berlin signaled a willingness to move quickly on legislation to send billions in loans to Athens before it needs to repay bondholders more than $10 billion on May 19.
Markets reacted positively Thursday to the news of a plan that would provide up to $160 billion from the International Monetary Fund and the other countries that use the euro currency. The euro strengthened against the dollar on the news, after hitting a one-year low the day before, and the cost of insuring against the default of European bonds fell.
European leaders — many of whom resisted the involvement of the I.M.F. and who have now been prodded to action by its director, Dominique Strauss-Kahn — have struggled for months for an effective response to the Greek problem. In the process, critics say, the costs of a bailout have mounted drastically.
And there was fresh skepticism on Thursday whether the latest proposal would calm the markets for more than a day, in a crisis where official promises of action have been followed by new delays and a steady stream of bad news, like the downgrades this week of the debt of Greece, Portugal and Spain.
Financial experts expressed fears on Thursday that Mrs. Merkel might have waited so long that the contagion had spread beyond even Germany’s ability to contain it. “These downgrades this week show that the market has taken over,” said Alfred Steinherr, research professor at the DIW research institute in Berlin and a former chief economist at the European Investment Bank. “Now, it is very difficult for policy makers to take it back into their own hands.”
There is a risk now that “even Germany will become financially overburdened,” Dr. Steinherr said, if it is forced to pay tens or hundreds of billions to Greece and possibly other euro-area countries like Portugal and Spain. “And that would then become really a huge crisis.”
European leaders tried to claim the initiative and show that they were working together to calm market fears over Greece’s tide of debt and the long-term viability of the euro currency. Traveling in Beijing on Thursday, President Nicolas Sarkozy of France told reporters that he was in constant contact with Mrs. Merkel and that Germany and France were “in perfect agreement” on how to deal with the crisis, a spokesman for the president in Paris confirmed.
Negotiators in Athens pushed to wrap up an agreement for significant cuts in Greek public spending to clear the way for the government to get financing and reassure investors worldwide that European debt was safe.
The Greek prime minister, George Papandreou, met with labor leaders on Thursday to persuade them to accept austerity measures that the government hopes will help clear the way to securing the bailout package.
After the meeting, Ilias Iliopoulos, the general secretary of Adedy, the largest public employees union, said in an interview that union officials had been informed that Greece had been asked to raise its value-added tax to 25 percent and to accept a three-year pay freeze.
He said Mr. Papandreou also intended to introduce new rules to let companies reduce their work forces by 4 percent a month instead of the current 2 percent, and to increase taxes on fuel, tobacco and alcohol.
In Greece, where taking to the streets is a national pastime, some observers have feared a backlash. But analysts said that Greek public opinion, opposition parties and even the unions realized the gravity of the situation and were unlikely to succeed in blocking measures that were necessary to save the country from economic collapse.
“The reaction of the unions so far has been mild by Greek standards,” said Nikos Magginas, senior economist at the National Bank of Greece, the country’s largest commercial bank. “Public opinion in Greece is in shock and realizes that Greeks have no other choice but to do what is necessary to prevent economic collapse. A social consensus exists that this is necessary.”
European leaders also sought to head off a harsh public reaction to the bailout plan. Olli Rehn, the European Union commissioner for monetary affairs, said at a news conference in Brussels on Thursday that the loan package would be a benefit to all member states sharing the euro currency — not just a sop for spendthrift Greeks. “This is absolutely crucial for our economic recovery,” he said.
Prominent German officials, including President Horst Köhler and Axel Weber, the president of the German Bundesbank, made public statements in support of Mrs. Merkel’s plan, with a similar emphasis on the benefits to Germany from such an agreement.
“Germany should, in its own interest, provide its contribution to the stabilization,” Mr. Köhler said in a televised speech in Munich.
“The German taxpayer profits from a stable euro, and that holds for protecting it,” Mr. Weber told Germany’s highest-circulation newspaper, the tabloid Bild, which has hammered relentlessly on the theme of Greek greed and wastefulness since the crisis began this year. The interview with Mr. Weber ran on the second page of the paper, while a giant headline on the front page declared, “Greeks want even more billions from us!”
“If Greece is allowed to fail, the damage to the German budget and German taxpayers will with certainty be greater than if we rescue it,” said Roland Koch, state premier in Hessen and a leading member of Mrs. Merkel’s Christian Democrats, in an interview on Thursday with the daily newspaper Berliner Zeitung. “The faster a decision is made, the less harm will arise,” Mr. Koch said.
It was unclear whether the pleas were having much impact. A poll of a thousand adults by the research group Emnid on behalf of the television news channel N24 found that 76 percent of those surveyed said they did not believe Greece would repay its debts, compared with just 19 percent who thought it could.
“You don’t help an alcoholic by putting a bottle of schnapps in front of him,” said Frank Schäffler, a member of the Finance Committee in the German Parliament for the pro-business Free Democrats, the junior member of Mrs. Merkel’s governing coalition. But even Mr. Schäffler said the proposal was likely to pass Parliament quickly, now that opposition parties like the Social Democrats and the Greens were prepared to act.
“The population in Germany is with a very, very great majority against, and the Parliament will probably approve it with a very great majority,” Mr. Schäffler said.
Germany will raise its share of the money through KfW, the state development bank, according to lawmakers and a letter attached to a draft version of the bill sent out this week. The legislation is one page long and includes a one-page explanatory statement. In the version of the bill circulated to members of the government on Tuesday, the sum of $11 billion is listed for this year. The figure for the following two years was yet to be filled in.
Dan Bilefsky reported from Athens. Reporting was contributed by Jack Ewing from Frankfurt, Matthew Saltmarsh and Katrin Bennhold from Paris and James Kanter from Brussels.
Euro Rises After I.M.F. Boosts Pledge to Aid Greece
By LANDON THOMAS Jr. and NICHOLAS KULISH
copyright by The Associated Press
Published: April 29, 2010
http://www.nytimes.com/2010/04/30/business/global/30euro.html?hpw
European stocks rose modestly and the euro halted its decline Thursday, a day after the International Monetary Fund promised to increase the 45 billion-euro aid package for Greece to as much as 120 billion euros over three years to quell the fund’s biggest crisis since the Asian woes of 1997.
The fund is racing to conclude an agreement for more painful austerity measures from Greece by Monday, clearing the way for the government to receive funding and reassuring investors worldwide that European debt is safe. On Wednesday, Dominique Strauss-Kahn, the I.M.F.’s forceful managing director, made the higher aid pledge in a private meeting with German legislators. The package would be the equivalent of up to $160 billion and would come from both the I.M.F. and from other countries using the euro.
But as has frequently been the case during Europe’s debt crisis, the promise of help was overshadowed by more disturbing news — in this case a cut in the debt rating of Spain by a major agency just a day after downgrades for Portugal and Greece.
The growing fear is that the fallout from Greece and even Portugal — which together compose just 5 percent of European economic activity — could be a mere sideshow if Spain, with its much larger economy, has difficulty repaying its debt.
In European morning trading, the euro was at $1.3237, up slightly from $1.3220 late Wednesday in New York. The Euro Stoxx 50 index, a barometer of euro-zone blue chips, rose 0.8 percent, and the FTSE-100 index in London rose 0.5 percent.
Trading in U.S. index futures suggested Wall Street stocks would open slightly higher, after the Dow Jones industrial average rose 53 points Wednesday to close at 11,045.27.
Most major Asian markets fell, with both the Hang Seng index in Hong Kong and the S&P/ASX 200 index in Sydney dropping 0.8 percent. Tokyo markets were closed for a holiday.
In many ways, the current troubles in Europe go to the heart of the fund’s new mission to serve as a firewall in the financial crisis — an objective that was bolstered by $750 billion in fresh capital from Group of 20 countries last year.
Unlike its previous efforts in smaller, emerging economies in Asia in 1997, and more recently in Hungary, Romania, Latvia and Iceland, the fund has been hamstrung in its efforts to act quickly and decisively by political concerns within the European Union, which insists on assuming a leading role.
“It is a problem,” said Alessandro Leipold, a former acting director of the I.M.F.’s European department. “It should not be that difficult — they did it in Hungary and Latvia. But the egos are different in industrialized countries.”
A case can be made that if Greece had sought help from the fund late last year after the forecast for its budget deficit doubled, the amount of support needed to reassure investors would have been much less than the 120 billion euros that even now might not be enough.
In that vein, Mr. Leipold said Portugal and Spain should ignore any stigma associated with an I.M.F. program and make the case to the European Commission in Brussels that asking proactively now for aid would soothe skeptical markets and save Europe billions in the future.
“The market has seen its worst fears come true,” he said. “What it needs is a surprise on the upside.”
Concerns have already surfaced in Congress that the broad demands of the sovereign debt crisis will quickly exhaust the I.M.F.’s reserves and leave the United States, the fund’s largest shareholder, with the bill.
Representative Mark Kirk, a Republican from Illinois, said such a drain could occur if Portugal, Ireland and Spain sought I.M.F. aid at the same time. Mr. Kirk worked at the World Bank during the 1982 debt crisis in Mexico, which came close to depleting the fund’s reserves.
“We have seen this movie before,” he said. “Spain is five times as big as Greece — that would mean a package of 500 billion.”
Mr. Kirk sits on the House Appropriations Committee that oversees I.M.F. funds and said that he had already asked for hearings on the fund’s ability to handle a European collapse.
In Athens, the Greek government had no choice but to seek an I.M.F. solution after its costs of borrowing skyrocketed, but that has not made the negotiations for aid any easier.
The fund has sent one its most senior staff members, Poul Thomsen, who has overseen complex fund negotiations in Iceland and Russia, to assist Bob Traa, the official responsible for Greece, to work out a solution.
According to people who have been briefed on the talks, the aim is to secure from Greece a letter of intent for even deeper budget cuts than the tough measures imposed so far, like reductions in civil service pay, in exchange for emergency funds.
Steps being discussed include closing down parts of the little-used Greek railway system, which employs 7,000 people and is estimated to lose a few million euros a day; limiting unions’ ability to impose collective bargaining agreements, which lead to ever-higher public sector pay; cutting out the two months of pay that private-sector workers get on top of their annual pay packages; increasing the retirement age and cutting back on pensions; and opening up the country’s trucking market in an effort to lower extremely high transportation rates that have hindered the country’s competitiveness.
With Greece now shut out of the debt markets, it has little leverage to resist — especially in light of the 8 billion euros it needs to repay bondholders on May 19. Analysts expect a deal by next week at the latest.
But whether a Greek resolution calms investor fears about the ability of Portugal and Spain to repay their own maturing debt remains unclear.
In a recent note to investors, Ray Dalio, founder of Bridgewater Associates, one of the world’s largest hedge funds, described the market concern as intensely focused on Spain.
“Spain’s cash flows (current-account and budget deficit) are extremely bad,” Mr. Dalio and his colleagues wrote in a February letter. “Spain’s living standards are reliant on not just the roll of old debt, but also on significant further external lending. For these reasons, we don’t want to hold Spanish debt at these spreads.”
David Jolly, Matthew Saltmarsh and Sewell Chan contributed reporting.
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