Tag Archives: Italy

Euro Leaders Ready For Another Vacation.

Europe is on the brink again. The region’s debt crisis flared today, as fears intensified that Spain would be next in line for a government bailout.


A recession is deepening in Spain, the fourth-largest economy that uses the euro currency, and a growing number of its regional governments are seeking financial lifelines to make ends meet. The interest rate on Spanish government bonds soared in a sign of waning market confidence in the country’s ability to pay off its debts.

 The prospect of bailing out Spain is worrisome for Europe because the potential cost far exceeds what’s available in existing emergency funds. Financial markets are also growing uneasy about Italy, another major European economy with large debts and a feeble economy.

Stocks today,  fell sharply across Europe and around the world. The euro slipped just below $1.21 against the dollar, its lowest reading since June 2010. The interest rate on its 10-year bond hit 7.56 percent in the morning, its highest level since Spain joined the euro in 1999.

Spain’s central bank said today that the economy shrank by 0.4 percent during the second quarter, compared with the previous three months. The government predicts the economy won’t return to growth until 2014 as new austerity measures hurt consumers and businesses.

On top of that, Spain is facing new costs as a growing number of regional governments ask federal authorities for assistance. The eastern region of Valencia revealed Friday it would need a bailout from the central Madrid government. Over the weekend, the southern region of Murcia said it may also need help.

Spain has already required an emergency loan package of up to €100 billion ($121 billion) to bail out its banks. But that aid hasn’t quelled markets because the government is ultimately liable to repay the money. It had been hoped that responsibility for repayments would shift from the government to the banks. But that shift is a long way off — a pan-European banking authority would have to be created first and that could be years away.

Yet it is far more than Spain’s struggle that has unnerved markets.

Greece is still struggling with a mountain of debt and international creditors will visit the country tomorrow to check on the country’s attempts to reform its economy. There is concern that officials from the European Commission, European Central Bank and the International Monetary Fund will find that Greece is not living up to the terms of its bailouts and could withhold future funds.

Italy has also been caught up in fears that it may be pushed into asking for aid. Italy’s economy is stagnating and markets are worried that it may soon not be able to maintain its debt burden of €1.9 trillion ($2.32 trillion) — the biggest in the Eurozone after Greece. Interest rates on Italy’s government bonds rose steeply Monday while its stock market dropped 2.76 percent.

The collapse in stock prices in Italy and Spain prompted regulators to introduce temporary bans on short-selling — a practice where traders sell stocks they don’t already own in the hope they can make a profit if the stock falls in price.

Pascal Lamy, director of the World Trade Organization, said after a meeting with French President Francois Holland that the situation in Europe is ‘‘difficult, very difficult, very difficult, very difficult.’’

Ireland, Greece and Portugal have already taken bailout loans after they could no longer afford to borrow on bond markets. Yet those countries are tiny compared to Italy and Spain, the third- and fourth-largest economies in the Eurozone. Analysts say a full bailout for both could strain the other Eurozone countries’ financial resources.

Spain has already received a commitment of up to €100 billion from other Eurozone countries to bail out its banks, which suffered heavy losses from bad real estate loans. Eurozone finance ministers signed off on the aid Friday and said €30 billion would be made available right away. But that incremental step cuts little ice with investors. If Spain’s borrowing rates continue to rise, the government may end up being locked out of international markets and be forced to seek a financial rescue.

 ‘‘Events since Friday have been a clear wake-up call to anyone who thought that the Spanish bank rescue package had bought a calm summer for the euro crisis,’’ analyst Carsten Brzeski said.

The Eurozone’s bailout fund, the European Stability Mechanism, has only €500 billion in lending power, with €100 billion potentially committed to Greece. Italy and Spain together have debt burdens of around €2.5 trillion. And the ESM hasn’t yet been ratified by member states plus Eurozone governments have made it clear they won’t put more money into the pot.


That once again pushes the European Central Bank into the frontline against the crisis.

On Saturday, Spain’s Foreign Minister José Manuel García Margallo pleaded for help, saying that only the European Central Bank could halt the panic. But the ECB has shown little willingness to restart its program to purchase the government bonds of financially troubled countries. The central bank has already bought more than €200 billion in bonds since May 2010, with little lasting impact on the crisis.

The central bank has also cut its benchmark interest rates to a record low of 0.75 percent in the hope of kick-starting lending. Yet many economists question how much stimulus this provides as the rates are already very low — and no one wants to borrow anyway.

There has been speculation the ECB could eventually have to follow the Bank of England and the U.S. Federal Reserve and embark on a program of ‘‘quantitative easing’’ — buying up financial assets across the Eurozone to increase the supply of money. That could assist governments by driving down borrowing costs as well.

But so-called QE is fraught with potential legal trouble for the ECB — a European treaty forbids it from helping governments borrow.

In the case of Greece, the country is dependent on foreign bailout loans to pay its bills. A cutoff of aid over its inability to meet the loan conditions would leave it without any source of financing — and could push it to exit the euro so it can print its own money to cover its debts. Really?


Germany’s economy minister, Phillip Roesler, said the prospect of Greece leaving the euro was now so familiar it had ‘‘lost its horror’’ and that he was skeptical Athens would meet conditions for continuing rescue money.

The deteriorating situation follows a summit June 28-29 that many hoped would convince markets political leaders were getting a handle on things. The summit agreed on easier access to bailout money and to set up a single banking regulator that could take the burden of bank bailouts off national governments. Yet many of those changes will take months or years to introduce — and there has been no increase in bailout money.

It is an echo of a similar summit in July 2011, when leaders agreed on a second bailout and debt reduction for Greece, only to see borrowing costs spike dramatically as leaders headed off for August vacations.

Stephen Lewis, chief economist at Monument Securites Ltd, said that ‘‘events are following a pattern often repeated in the course of the Eurozone’s troubles, in which the powers-that-be hail progress only to see confidence, almost instantaneously, plumb fresh depths.’’

Must be time for another vacation, I guess.


You Can Run, But You Can’t Hide.

Europe is desperately working to prop up Spain’s wobbling banks, but the European leaders still face a problem that plagues the Continent’s increasingly vulnerable financial institutions; an addiction to borrowed money that provides day-to-day survival financing.


Analysts are now saying that one of France’s biggest banks, Crédit Agricole, could face heavy losses in their lending exposure to Greece.

Italy, whose fragile economy is even bigger than Spain’s and whose banks also rely heavily on borrowed money to get by, is in serious trouble as well. In Spain’s case, the flight of foreign money to safer harbors, combined with a portfolio of real estate loans that has deteriorated along with the economy, led to the collapse of the mortgage lender, Bankia. It was their failure that set off the current contagion.

“I think you are lying.”

Europe claims that this latest bailout — worth up to 100 billion euros that will be distributed to Spain’s weakest banks via the government in the form of loans, adding to their long-term debt — can resolve the problem. I think they are either lying or in denial, or both. Heavy emphasis on the lying part.

Investors and analysts worry that highly indebted banks in other weak countries like Italy might face constraints similar to those of Spain in the months ahead.

Last month, the ratings agency Moody’s Investors Service downgraded the credit standing of 26 Italian banks, including two of the country’s largest, UniCredit and Intesa Sanpaolo. Moody’s warned that Italy’s most recent economic slump was creating more failed loans and making it very difficult for banks to replenish their coffers through short-term borrowing.

Because they have yet to experience a colossal real estate bust, Italian banks have long been viewed as healthier than their bailed-out counterparts in Ireland and Spain. And bankers in Italy were quick to argue in recent days that Italian banks should not be compared with those of Spain.

Italy may not have the mortgage exposure that the Spanish banks have, but as economic activity throughout the region came to a near halt, the worry was that bad loans and a possible flight of deposits from Italy would pose a new threat to banks that already were barely getting by on thin cushions of capital. And Italian banks cannot avoid the stigma of the government’s own staggering debt load. Italy’s national debt is 120 percent of its gross domestic product, second only to Greece among euro zone countries.

Also hanging over Europe’s banks are the losses that will hit them when (not if) Greece leaves the euro currency union, throwing most of their euro-denominated loans into a state of default. Banks in France and Germany would be hurt the most, as they have been longstanding lenders to Greece.

For decades, the loans that European banks made to individuals, corporations and their own spendthrift governments far exceeded the deposits they were able to collect — the money that typically serves as a bank’s main source of ready funds. To plug this funding gap, which analysts estimate to be about 1.3 trillion euros, European banks borrowed heavily from foreign banks and money market funds. That is why European banks have an average loan-to-deposit ratio exceeding 110 percent — meaning that on any given day, they owe more money than they have on hand.

This, as you might have guessed, is not a really good thing for a bank.  

The End of the Euro Nears.

As we watch the growing deterioration of the Greek and Spanish banking systems, I thought it might be interesting to take a closer look at the major U.S. banks’ overseas positions and exposures.

Citigroup has the largest net exposure to non-U.S. sovereign governments, with a little more than €14 billion ($17.5 billion) on their balance sheet.  JPMorgan Chase comes in second, with about €8 billion ($10 billion), while Morgan Stanley is third with €5 billion ($6.2 billion), and Goldman Sachs holding the smallest position of the four big banks with €4 billion ($5 billion) in non-U.S. sovereign debt. Remember how Wall Street reacted when JPMorgan lost $2 billon in derivative exposure a couple of weeks ago? Now, imagine a $39 billion loss. As Senator Everett Dirksen famously declared, “A billion here, a billion there, pretty soon it adds up to real money.”

This is an important data point because the U.S. banks are completely exposed to the growing European banking disaster. Europe’s entire banking sector has the potential to collapse completely if the contagion catches and runs completely amok. With the current run on Greek and Spanish banks, the possibility is slowly becoming a probability. Without an EU-wide deposit guarantee, depositors will withdraw all of their funds and move them to their mattresses.

In addition, the bigger of the PIIGS, Spain and Italy, have their debt spread out across Europe, putting them in the unenviable position of causing systemic ignition to just such a contagion.  As one example, French banks (Credit Agricole and Societe Generale) hold a substantial portion of their credit portfolio in Italian sovereign debt. Which we know is worthless.

Europe as a whole is in deep trouble as this latest iteration of the never-ending sovereign debt crisis could finally result in at least a partial breakup of the EU.  The actual likelihood is that Greece, then Spain, followed by Portugal, Italy and Ireland will drop out of the EU.

If that happens, Germany’s most rational choice would be to withdraw as well. After all, why should they continue their exposure to more poorly managed countries who will only default on what remains of their sovereign debt?  France, Sweden, Belgium, the Netherlands and the U.K. would be quick to follow in Germany’s footsteps, leaving behind, a handful of countries like Cyprus, Estonia, and Latvia to sort out the remaining arguments for remaining in the Union and supporting a single currency.

It doesn’t take much of a mental stretch to imagine what would happen next.

The Arrogance of Wall Street.

Here’s the actual headline: “This Gorgeous Model Is A Finance Wiz Who Turned Down A Job At JP Morgan!

Xenia Tchoumitcheva - Girls

This headline was in one of our nation’s leading business news dailies yesterday (Friday), and it says all you need to know about the arrogance of Wall Street bankers. It might as well have said: This Dopey Broad Turned Down A Job At JP Morgan. Can you imagine That?

Swiss model Xenia Tchoumitcheva, who interned at JPMorgan London offices last summer, stopped by (this news daily) to talk about her experience working in finance and to fill them in on why she could possibly turn down such an offer. I mean, she was just an intern and the amazing house of Morgan was ready to make her a Wall Street Master of the Universe.

“I have to say it was a very positive experience for me — better than any other industry in the world — I would say, or whatever else I tried — because there was a huge respect for my skills and what I was able to do …”.

Despite receiving an employment offer from JPMorgan, Xenia decided to pursue her own business interests.  Since her internship, the 2006 Miss Switzerland pageant first runner-up (at 17) has been hosting beauty contests and last month she started hosting her own business TV show in Italy called “L’Italia Che Funziona.” (Italy That Works.) She graduated college in 2010 after having achieved a 3-year Bachelor Degree in economics. She speaks five languages (Italian, Russian, German, French and English). Six, if you include economics, having interned in 2011 at Merrill Lynch.

Good for you, Xenia … good for you!

And By the Way, Close Your Borders!

The fabric of the European Union is becoming frayed around the edges. George Friedman of Stratfor has pointed out in writing for that site that immigration is a much higher priority among many European voters than maintaining the euro. It is not talked about in polite circles, but it shows up in the polls. In line with that thought, Dennis Gartman, who has never been accused of being politically correct, asks some very hard questions. In a few paragraphs with the provocative heading “And By the Way, Close Your Borders Too While Your At It…” He writes:

“The enmity between Greece and her northern European ‘cousins’ such as Germany and Austria is already high and wide, but it is growing higher and wider by the moment. It is almost to the point where the polite bounds of political correctness are about to be broken asunder, for German and Austrian political figures are now asking that Greece seal her borders and stop the flow of ‘foreigners’ through Greece and into the rest of the EU.

“Yesterday, the Austrian Home Affairs Minister, Ms. Johanna Miki-Leitner, minced few words and opened the rather racist front when she said, ‘We need to put real political pressure on Greece to implement their asylum authority as rapidly as possible. This border is as open as a barn door.’

“There you have it … out in the open for all to see: northern European dissatisfaction and open disdain for the South and for ‘foreigners’ generally. And it is not just Greece that the Austrians and Germans fear as a port of entry for ‘foreigners’ into Europe; they fear Italy too, for Italy has been a port through which North Africans, fleeing the lesser chaos of Tunisia but the greater chaos of Libya and of Egypt, have arrived in shockingly large numbers to European shores. Indeed, more ‘foreigners’ have gotten access to Europe through Italy than have through Greece, but for the moment it is easier for an Austrian official to take on Greece than it is to take on Italy, and so Greece bears the burden at this point.

“As the German Minister of Justice, Mr. Hans-Peter Friedrich, rather ominously said yesterday, ‘The question remains, what happens when a country is not capable of securing its borders, as we see in Greece. Is it possible to reinstate border controls? I want to clarify that this is still part of our discussion.

“Which then raises the question: Will Germany take it upon itself to secure Greece’s borders? Oh my, we don’t want to go down that path now, do we?”

Portugal’s Debt Efforts Should Be a Warning for Greece

This is a re-post from Const4ntino’s Free Zone.
As debt-plagued Greece struggles to meet Europe’s strict terms for receiving its next round of bailout money, the lesson of Portugal  bears watching.

Unlike Greece, Portugal is a debtor nation that has done everything that the European Union and the International Monetary Fund have asked it to, in exchange for the 78 billion euro (about $103 billion) bailout Lisbon received last May. And yet, by the broadest measure of a country’s ability to repay its debts, Portugal is going deeper into the hole.

The ratio of Portugal’s debt to its overall economy, or gross domestic product, was 107 percent when it received the bailout. But the ratio has grown since then, and by next year is expected to reach 118 percent.

That’s not necessarily because Portugal’s overall debt is growing, but because its economy is shrinking. And economists say the same vicious circle could be taking hold elsewhere in Europe.

Two other closely watched European countries on the debt list, Spain and Italy, now also have rising debt-to-G.D.P. ratios — even though they, like Portugal, have adopted the budget-slashing and tax-raising measures that the European officials and the I.M.F. continue to prescribe.

Without growth, reducing debt levels becomes nearly impossible. It is akin to trying to pay down a large credit card balance after taking a pay cut. You can slash expenses, but with lower earnings it is hard to set aside money to pay off debt.

Vitor Gaspar, the Portuguese finance minister who came to power as part of a new government last summer, is highly regarded by European economic and finance officials. He has reduced the government’s budget deficit by more than one-third so far, through tough measures that include cuts in spending and wages, pension rollbacks and tax increases.

But many economists say those moves are also a reason Portugal’s economy shrank by 1.5 percent in 2011 and is expected to contract by 3 percent this year.

“Portugal’s debt is just not sustainable,” said David Bencek, an analyst at the Kiel Institute for the World Economy, a research organization in Germany. “The real economy does not have the structure to grow in the future and thus will not be able to pay back its debt in the long run.”


The Portuguese public has so far has generally gone along with the government’s policies without the violent demonstrations that have rocked Greece, but it is starting to lose patience.

On Saturday, more than 100,000 people assembled peacefully in Lisbon’s sprawling Palace Square to rally against the austerity measures and the nation’s 13 percent unemployment, while chanting “I.M.F. doesn’t call the shots here!”. The head of Portugal’s largest labor union vowed to hold additional protest rallies around the country.

The I.M.F., for its part, predicts that Portugal will eventually grow enough to reduce its debt to a manageable level. But even the I.M.F. warns in its recent economic review that  if growth were to disappoint, Portugal’s debt “would not be sustainable.”

The finance minister, Mr. Gaspar, an economist who is a former research director at the European Central Bank and a disciple of the bank’s austerity-focused philosophy, insists that his country’s debt is manageable. And he has no plans to ease up on austerity. This year he intends to slash government pension payments by 1.2 billion euros, or close to $1.6 billion, and cut the bonus payouts that public sector workers in this country have long earned.

In discussing his record, Mr. Gaspar prefers to focus on the effect his efforts have had on Portugal’s budget deficit — the difference between what it spends and what it takes in — which has fallen to 5.6 percent last year, from 9.1 percent in 2010. For this year, Mr. Gaspar forecasts a decline to 4.5 percent.

“We have delivered, and our adjustment program stands out in the euro area,” he said during an interview on Friday in the ornate surroundings of the finance ministry here.

Once Portugal’s budget reforms take hold, Mr. Gaspar predicts, the country’s economy will grow by more than 2 percent from 2014 on, and the debt will fall accordingly.

Mr. Gaspar has won plaudits from Europe’s leadership and the I.M.F., which are eager to champion an exemplar of economic revamping in contrast to Greece’s unspooling disaster. In fact, Portugal is deemed such a model of reform that the Europe Union and I.M.F. are widely expected to come up with more money for Portugal next year if necessary — as was suggested in an overheard exchange between Mr. Gaspar and the German finance minister at a meeting last week in Brussels.

But as Portugal’s slowly rising debt-to-G.D.P. ratio indicates, being Europe’s model debt patient does not necessarily make it easier to get out of debt. Others might find it even tougher.

Spain, whose debt-to-G.D.P. ratio was 36 percent before the debt crisis began, is projected to be more than double that — 84 percent — by 2013. Italy, whose ratio was already at 105 percent in 2009, is expected to reach 126 percent by next year.

Greece’s number is even worse — nearly 160 percent by the most recent measure. And even if Athens receives all the bailout money it has been promised — a sum sure to exceed 200 billion euros — its debt-to-G.D.P. ratio is still expected to be onerous, 120 percent, in the year 2020. That grim outlook even factors in the big write-down of its debt that Greece is now trying to negotiate with its private creditors and the European Central Bank.

If Portugal and other European debtors find it increasingly difficult to pay off their creditors because of slow or no growth, some experts predict they, too, might eventually need to negotiate debt write-downs. That was how things played out in Latin American in the 1980s, once it became clear that the I.M.F.’s relentless austerity push was impeding the growth that countries needed to pay down debt.

Charles Wyplosz, an international economist, argues that until economic activity resumes in debt-burdened countries like Greece, Portugal and Italy, it is pointless to punish citizens with growth-sapping policies.

“It’s all pseudo-science,” he said. “That is why I think Portugal will have to default on its debt, and you can argue that Italy will have to restructure as well.”


Mr. Gaspar, though, contends that once his country’s reforms take hold, “we will put our debt-to-G.D.P. ratio on a sustainable path again.” And he is adamant that Portugal will not try to renegotiate its debt obligations, because of the permanent damage it might do to Lisbon’s reputation as a borrower.

“That possibility is completely excluded,” he said, citing George Washington as saying that one of a country’s most precious assets is its ability to borrow on the bond market.

Economists accept that during the initial stage of a major spending adjustment program, the debt-to-G.D.P. ratio will spike as economic growth suffers. The bet, however, is that over time the economy will pick up enough that the country starts to generate a primary surplus — that is, a budget in the black, once debt payments are excluded.

But there are many who believe that just as Greece’s debt picture is fundamentally untenable, so is Portugal’s.

According to the calculation of Mr. Bencek, the economist, Portugal would need to produce a primary surplus of about 10 percent of G.D.P. in the coming years to reduce its debt ratio to a permanently serviceable level. That, he said, would require a degree of cuts in spending far beyond what Mr. Gaspar and his team have already been able to achieve.

As even the current cuts bite ever deeper, many Portuguese are asking if it might not be better for their government to trying negotiate easier terms with its lenders.

“Portugal would save 3 billion euros a year if it restructured its debt,” said Pedro Lains, an economic historian and a blogger at the University of Lisbon.

Mr. Lains spoke not only as a theorist. He feels austerity firsthand. Because his salary at the government-run university has been slashed by 30 percent in the last year, his family has needed to dip into its savings.

He said that wage contraction throughout the country was prompting increasing numbers of Portuguese to leave the country, even as their government labors to prove it is worthy to remain part of the euro zone.

Why, Mr. Lains asks, should he and his fellow citizens suffer while the bond holders get their money back?  “It’s not the fault of the Portuguese people,” he said. “The fault lies with the structure of the euro.”

Euro Banks Swap Cash for Trash.

Cheap loans being offered by the European Central Bank to help reflate the Eurozone are encouraging some banks to boost their profits by loading up on risky bonds.

Jan Stromme / Getty Images

Desperate attempts by the European Central Bank to pump air into the deflating Eurozone are also encouraging leading European banks to load up their portfolios with potentially risky debt. This could lead to big problems down the road if some Eurozone countries do actually default or force the banks to accept big writedowns on loans.

The problem is what’s known as the carry trade, a term that sounds like something out of Jane Austen: “Mr. Willoughby may not be a gentleman, but he is very rich. He has made a fortune in the carry trade, you know.” In fact, today’s carry trade is concerned with a different kind of unsuitability. In place of totally safe investments, bankers buy risky bonds and reap a substantial profit from “carrying” these hot potatoes. The enhanced earnings typically come from the fact that the yields on these bonds are a lot higher than the cost of borrowing the money to buy them.

But the carry trade has become a problem recently because the European Central Bank has started lending huge amounts of money on incredibly easy terms (sort of like mortgage loans in the U.S. a few years ago). The ECB’s new procedures, known as “crisis loans” or LTRO (long-term refinancing operations), are a bit complicated to explain. For a full-length treatment, you can read this article by Ambrose Evans-Pritchard, but here’s the short, oversimplified version:

The European Central Bank has two big worries. One is that countries with a lot of debt, such as Italy and Spain, won’t be able to sell bonds at reasonable prices to cover deficits and also to pay off old bonds that are coming due. The other is that major European banks will temporarily run out of cash and find that short-term loans aren’t available — either because the bonds they own won’t be good enough to be accepted as collateral or because other banks are cutting back lending generally.

The ECB’s solution has been to lend money to banks really cheaply while being extremely accommodating about the quality of collateral. In December, the ECB lent an enormous 489 billion euros to more than 500 banks at a rate of only 1% for three years, an unusually long period for this sort of loan. The U.S. Federal Reserve was also involved, making sure that dollars as well as euros were available. An even bigger such loan is scheduled for later this month.

(MOREWhy Europe’s Backdoor Bailouts Won’t Work)

This lending obviously solves European banks’ short-term cash worries. But it also has another clever consequence. Banks can borrow more than they actually need and use some of the money to buy high-paying debt securities and profit from the difference between the yield on the bonds they buy and the low cost of the loan from the ECB – that’s the so-called carry.

For the banks, the question is how much profit to reach for – and how much risk to take. The low yield on three-year German bonds (completely safe) would actually result in a negative cost of carry – in other words, a loss. Investing for 10 years in France (fairly safe) would earn 3%, or a profit of 2%. Ten years in Italy (somewhat risky) would earn a profit of almost 5%. Portugal (probably unsafe) would earn double-digit returns.

The ECB strategy has worked brilliantly, at least so far. Banks have the cash on hand that they need. They are also earning invisible subsidies by the grace of the ECB (and the Fed) by loading up on bonds that have varying degrees of risk. Just like, I dunno, a bubble?

There are just two drawbacks: First, few banks are daring enough to lend a lot to the most troubled countries, so while yields in Italy and Spain have come down, those in Greece, Portugal and maybe Ireland are still too high for those countries to escape eventual default.

Second, banks may be tempted to buy too much low-rated debt. If they do, and one of the countries defaults or is severely downgraded by credit-rating agencies, the banks could find that they have swapped cash for trash. The losses would cut into their required capital and possibly also leave them short of ready money. But such a squeeze could only happen if the bankers get reckless and greedy – and that could never happen, right?