Archive for November, 2010

Factbox: Key staging posts in spread of euro zone debt crisis

Tuesday, November 30th, 2010 | Finance News

LONDON (Reuters) – European leaders insist Ireland's bailout will help draw a line under the euro zone debt crisis but investors are already looking to Portugal and Spain as candidates to fall next.

Following are key factors and staging posts which could dictate whether the sovereign debt crisis, which has already engulfed Greece and Ireland, will spread further.

BOND YIELDS

Perhaps the most important factor will be what happens to Spanish and Portuguese borrowing costs.

Portuguese Finance Minister Fernando Teixeira dos Santos has said borrowing costs above 7 percent could force the country to seek outside help although the government has since backtracked on that.

Portuguese 10-year government bond yields are hovering around 7 percent. Equivalent Spanish yields are lower at 5.4 percent. Some economists view a yield of 6.5 percent on benchmark 10-year Spanish bonds as the tipping point that would push the country into an unsustainable financing cycle.

EUROPEAN STABILITY MECHANISM

Investors have been spooked by German-led plans for a permanent mechanism after 2013 when the safety net it set up after the Greek crisis expires.

Germany had insisted it should involve substantial write-downs for private bondholders, prompting markets to push yields yet higher as they built in the risk of taking a "haircut" in any sovereign debt restructuring.

Those demands have been dropped as finance ministers laid out a more nuanced mechanism that would involve bondholders being dealt with on a case-by-case basis.

How this plan develops over the rest of this year and next will be crucial for euro zone borrowing costs. Look to next month's meeting of euro zone finance ministers followed by an EU heads of government summit as the first key staging posts.

PORTUGAL

Lisbon has targeted a budget deficit of 7.3 percent of GDP for 2010. Data will be released in January. If it has succeeded, some of the market heat on Portugal may dissipate. Of course, the reverse is also true.

Either way, it will not be out of the woods even though it has a relatively manageable fiscal deficit and debt compared to its struggling peers, no major problems at its banks and no property bubble -- buying it some extra time.

Portugal faces hefty redemptions next year -- maturing government bonds that will have to be repaid. In April, it has to repay 4.5 billion euros, and in June, nearly 5 billion euros in bonds come due. Either could prove to be a breaking point if market conditions have not improved.

The government's budget passed with opposition support but popular unrest is growing at its harsh austerity measures and will test politicians' resolve next year.

SPAIN

A Spanish bailout would cost far more than those of Greece, Ireland, or any aid for Portugal and would be the point at which the euro zone's safety net would be stretched to breaking point.

Madrid does have a banking problem, although not with its largest ones. The government has provided 15 billion euros in credit lines to smaller savings banks and forced them to merge. The success of that process will be crucial.

After a construction and property market bubble burst, the main problem could be generating enough economic growth to raise the tax revenues to eat into public debt.

The government aims for a budget deficit of 6 percent of GDP next year, but that target is based on what many see as an overoptimistic forecast of 1.3 percent growth.

Spain's deeply-indebted autonomous regions -- with a combined debt of 10 percent of GDP -- must also play their part if the government's programme is to succeed.

Spain's budget forecasts a cut in net debt issuance in 2011 to 43.3 billion euros from 76.2 billion this year, which should help. But the government faces some big debt repayments next year with the first major maturity on April 30.

Nonetheless, a Reuters poll of economists this month showed that while 34 of 50 expected Portugal to need outside aid, only four thought Spain would need to be bailed out.

BELGIUM/ITALY

Most analysts do not expect Belgium, generally seen as part of the European core, to need a bailout given solid growth, an entrenched savings culture and a relatively low budget deficit but here, politics is key.

Dutch- and French-speaking parties have been bickering since a June election, in which a party wanting the region of Flanders to split from Belgium won the most seats. A caretaker government did pass a budget for 2010, but its mandate is essentially limited to keeping the country ticking over.

Italy also looks safe for now. Ratings agency Moody's said this month that political instability -- with Prime Minister Silvio Berlusconi facing no-confidence votes -- is nothing new and on the upside, public finances had deteriorated less than in many of its peers and it had reformed its pension system.

TIME

For Ireland and Greece the granting of more time than expected to pay back their EU/IMF loans could be crucial. Ireland's loans will run for an average of 7.5 years and the European Union agreed to extend the maturities on Greece's three-year rescue package too.

Greek Finance Minister George Papaconstantinou said Athens will now have until 2021 to repay its 110 billion euro ($145.7 billion) EU/IMF bailout loan in return for slightly higher interest rates.

He had previously flagged up 2014 and 2015 as a potential crunch point when the state would have gone from paying off 40 to 50 billion euros a year to 70 billion.

For Greece, the IMF's offer of more help if needed after its bailout programme ends, could also help but with the European Commission forecasting its economy will contract 4.2 percent this year and by 3.0 percent next, it is still in dire straits.

(Writing by Mike Peacock; editing by Janet McBride.)

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Obama, Hill leaders to meet: taxes, treaty on tap

Tuesday, November 30th, 2010 | Finance News

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WASHINGTON – A House Republican leader heading into a postelection meeting with President Barack Obama Tuesday said the GOP remains steadfastly opposed to any tax increases.

House GOP Whip Eric Cantor said his party wants to "make sure no one gets a tax hike while we're trying to create jobs in the private sector."

Cantor, who will be House majority leader when the new Congress convenes in January, seemed to co-opt a principal issue set for discussion later when Obama hosts the leadership of both parties. It will be their first formal sitdown since the GOP recaptured control of the House and narrowed the Democratic majority in the Senate in the Nov. 2 elections.

The midmorning meeting came a day after Obama, preempting the Republicans, announced he was proposing to freeze the salaries of some 2 million federal workers for the next two years. The White House talks Tuesday were seen as an opportunity for the two parties to size up each other as they struggle for common ground, not only on taxes but also on a new nuclear arms treaty with Russia.

The Virginia Republican's sentiments were echoed by Arizona's Sen. John McCain. Asked pointblank if Republicans would yield on their resistance to termination of any of the tax cuts enacted during George W. Bush's presidency, he replied, "We don't want to raise anybody's taxes."

In a double-bylined op-ed piece Tuesday in The Washington Post, House Speaker-to-be John Boehner, R-Ohio, and Senate Minority Leader Mitch McConnell, R-Ky., signaled that any compromises with the White House on spending and tax cuts would have to be on their terms.

"We can work together and accomplish these things, but the White House and Democratic leaders in Congress first will have to prioritize," they wrote. "It's time to choose struggling middle-class families and small businesses over the demands of the liberal base. It's time to get serious."

Cantor said he believes uncertainty about tax policy, particularly in the small business community, is stifling efforts to speed up job creation.

"We're walking in this room with the realization we're not going to agree with the president on everything," he said, "but I do hope we leave this meeting with a resolve to address the economy."

Obama's meeting with House and Senate leaders from both parties — eight altogether — will help define the interaction between the White House and a divided Congress for the next two years.

Obama said Monday he hopes the session "will mark a first step toward a new and productive working relationship, because we now have a shared responsibility to deliver for the American people on the issues that define not only these times but our future."

Despite their political gains, Republicans approached Tuesday's session with some apprehension. Presidents typically gain a public relations advantage by inviting leaders of the opposition party to the White House.

Many Republicans still bristle at the health care summit that Obama called last February. Democrats got more time to make their case than Republicans, and the session yielded no Democratic compromises.

Cantor on Monday accused Obama of engaging in "class warfare." "This country is about making sure everyone has a fair shot," he said in an interview.

Republicans applauded Obama's announcement on the pay freeze. But traditional Democratic allies, including the AFL-CIO, denounced it as shortsighted.

The White House had initially scheduled the meeting for Nov. 18 but rescheduled at the request of McConnell and Boehner. That session was to have concluded with a private dinner. Tuesday's session was expected to last an hour and end before lunch.

"No doubt there are interesting dynamics," said chief White House political adviser David Axelrod. "There are people who say they want to take steps to deal with our long-term debt issues. We'll work with anyone who wants to work with us on that in a productive way."

Cantor was interviewed on CBS's "The Early Show" and NBC's "Today" program and McCain appeared on ABC.

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Ireland deal to take time to calm markets: IMF

Tuesday, November 30th, 2010 | Finance News

DUBAI (Reuters) – The deal to bail out Ireland from its debt crisis will take time to reverse market momentum, but growth is likely to return in the short term, the IMF's first deputy managing director said on Tuesday.

The extension of Ireland's deadline for plugging its budget black hole is also a positive step but the challenge to stabilize the country's financial system remain.

"It isn't just a matter of showing that banks are adequately capitalized. You have to show that they have adequate access to funding," John Lipsky told Reuters Insider.

"The European authorities have announced that a new round of (bank) stress tests will, in addition to examining issues of regulatory capital, will also look at the challenge of funding. And that may produce a different answer about the backup facilities that may be required to ensure confidence in the stability of banking systems," he said.

Some analysts have described this year's health checks on European Union banks, which none of Ireland's lenders failed, as an irrelevance in light of the Irish bailout.

The EU approved an 85 billion euro ($115 billion) rescue for Ireland on Sunday and outlined a permanent system to resolve Europe's debt crisis, in which private investors would gradually share the cost of any future default.

"It is not going to be easy, but we expect growth is going to resume in relatively short order if the appropriate measures are taken successfully," Lipsky said, speaking on the sidelines of a World Economic Forum (WEF) conference in Dubai.

The European Commission forecast on Monday that Irish gross domestic product (GDP) would grow by just 0.9 percent next year, roughly half the level penciled in by the government just a few weeks ago, and a fraction of the 3.25 percent Dublin was originally forecasting.

Finance ministers from the 16-nation euro zone, anxious to prevent market contagion spreading to Portugal and possibly Spain, unanimously endorsed the emergency loan package to help Dublin cover bad bank debts and bridge a huge budget deficit.

"It would have been unrealistic to expect that a set of announcements over the weekend were going to completely reverse market momentum. To reverse this momentum will take some time, even in the best of circumstances," Lipsky said.

Some 35 billion euros was earmarked to help restructure the shattered banks, of which 10 billion will be an immediate capital injection and the rest a contingency fund.

Ireland will contribute 17.5 billion euros of its own cash and pension reserves toward the bank rescue, with the IMF contributing 22.5 billion euros.

"Market participants will be skeptical initially, they will want to see actual performance on the economic measures and disbursement of the cash," Lipsky said.

"The challenge for Ireland is to stabilize the financial system, to stabilize the fiscal situation, to give confidence in the sustainability of the economic environment for some time to come," Lipsky said.

EU finance ministers also approved outlines of a permanent crisis-resolution mechanism based on a joint proposal by Germany and France.

Lipsky said European debt worries over the past year and Ireland's bailout were not impacting growth in the Gulf oil-producing countries.

"We don't see a direct connection. More important to the Gulf is the health of the global economy, especially the energy markets, but also the strength of Asian economies that are emerging as trading partners for this region," he said.

The MENAP region's gross domestic product, which includes Afghanistan and Pakistan, should expand by 4.2 percent this year, unchanged from May's projection, after 2.3 percent in 2009, the global lender said in October.

(Reporting by Martina Fuchs, Editing by John Stonestreet)

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