Every bank safe deposit box in Germany is filled with Silver and Gold

There does not seem to be to an ending to the banking and debt crisis contagion in Europe.

On Friday, the gap in yields between German and Spanish 10-year government bonds hit a record high of 2.63%. This, before there is a firm agreement on the Irish problem. Spain’s budget deficit is 11.1%

The yield premium to buy Italy’s 10-year debt over German bunds reached a euro-era record 1.9% on Nov. 12, yet Italy is in itself doing a better job than either Ireland or Spain. Ireland’s deficit of 14.3% in 2009 was almost three times Italy’s deficit of 5.3%.

Keep in mind that European rules dictated spending deficits of under 3%.

Greece is still a problem and the Bundesbank chief Axel Weber claimed the EU had set aside enough money to cover the borrowing needs of the euro zone's worst debtors -- Greece, Ireland, Portugal and Spain -- but could muster more if needed.

Oh, really? Where is all that money going to come from? Germany?

___________________________________


EU rescue costs start to threaten Germany itself

The escalating debt crisis on the eurozone periphery is starting to contaminate the creditworthiness of Germany and the core states of monetary union.


By Ambrose Evans-Pritchard 6:00AM GMT 26 Nov 2010
Telegraph

Credit default swaps (CDS) measuring risk on German, French and Dutch bonds have surged over recent days, rising significantly above the levels of non-EMU states in Scandinavia.

"Germany cannot keep paying for bail-outs without going bankrupt itself," said Professor Wilhelm Hankel, of Frankfurt University. "This is frightening people. You cannot find a bank safe deposit box in Germany because every single one has already been taken and stuffed with gold and silver. It is like an underground Switzerland within our borders. People have terrible memories of 1948 and 1923 when they lost their savings."

The refrain was picked up this week by German finance minister Wolfgang Schäuble. "We're not swimming in money, we're drowning in debts," he told the Bundestag.

While Germany's public and private debt is not extreme, it is very high for a country on the cusp of an acute ageing crisis. Adjusted for demographics, Germany is already one of the most indebted nations in the world.

Reports that EU officials are hatching plans to double the size of EU's €440bn (£373bn) rescue mechanism have inevitably caused outrage in Germany. Brussels has denied the claims, but the story has refused to die precisely because markets know the European Financial Stability Facility (EFSF) cannot cope with the all too possible event of a triple bail-out for Ireland, Portugal and Spain.

EU leaders hoped this moment would never come when they launched their "shock and awe" fund last May. The pledge alone was supposed to be enough. But EU proposals in late October for creditor "haircuts" have set off capital flight, or a "buyers' strike" in the words of Klaus Regling, head of the EFSF.

Those at the coal-face of the bond markets are certain Portugal will need a rescue. Spain is in danger as yields on 10-year bonds punch to a post-EMU record of 5.2pc.

Axel Weber, Bundesbank chief, seemed to concede this week that Portugal and Spain would need bail-outs when he said that EMU governments may have to put up more money to bolster the fund. "€750bn should be enough. If not, we could increase it. The governments will do what is necessary," he said.

Whether governments will, in fact, write a fresh cheque is open to question. Chancellor Angela Merkel would risk popular fury if she had to raise fresh funds for eurozone debtors at a time of welfare cuts in Germany. She faces a string of regional elections where her Christian Democrats are struggling.

Mr Weber rowed back on Thursday saying that a "worst-case scenario" of triple bail-outs would require a €140bn top-up for the fund. This assurance is unlikely to soothe investors already wondering how Italy could avoid contagion in such circumstances.

"Italy is in a lot of pain," said Stefano di Domizio, from Lombard Street Research. "Bond yields have been going up 10 basis points a day and spreads are now the highest since the launch of EMU. We're talking about €2 trillion of debt so Rome has to tap the market often, and that is the problem."

The great question is at what point Germany concludes that it cannot bear the mounting burden any longer. "I am worried that Germany's authorities are slowly losing sight of the European common good," said Jean-Claude Juncker, chair of Eurogroup finance ministers.

Europe's fate may be decided soon by the German constitutional court as it rules on a clutch of cases challenging the legality of the Greek bail-out, the EFSF machinery, and ECB bond purchases.

"There has been a clear violation of the law and no judge can ignore that," said Prof Hankel, a co-author of one of the complaints. "I am convinced the court will forbid future payments."

If he is right – we may learn in February – the EU debt crisis will take a dramatic new turn.

Eurosion Continues

Are we in the middle of a competitive devaluation?




More price erosion will hit hard at housing:

More homeowners choose to default on loans
Choosing not to pay has consequences beyond damaged credit scores

By Amy Hoak, MarketWatch

CHICAGO (MarketWatch) -- "Strategic defaults" are on the rise as more borrowers who are underwater on their home loans decide it's not worth it to stay current on their payments each month. That trend could have repercussions for the housing market, and for borrowers, in the future.

Strategic defaults are when borrowers who owe more on their homes than they're currently worth choose to stop paying their mortgage but continue to meet other financial obligations, according to a definition by Morgan Stanley in a research report on the topic.

In other words, these homeowners neglect their monthly principal and interest payments, but still pay other bills on time, including credit cards and auto loans.

The Morgan Stanley report estimates that 12% of mortgage defaults in February were strategic. Other reports estimate an even higher proportion of this type of loan default.

Growing social acceptance of this behavior could have ramifications not only for personal credit histories and the health of neighborhoods, but also for the future of mortgage lending, according to those studying the issue.

For one, there's a contagion effect: As more people watch their friends or neighbors choose to default, the more it becomes a viable option for homeowners who may otherwise wait years just to return to a positive equity position in their properties, said Sam Khater, senior economist for CoreLogic, a provider of consumer, financial and property information. The volume of foreclosures on the market today is also chipping away at the stigma that used to come with defaulting on a home loan.

"If you know someone who has defaulted strategically, you're more likely to declare you're willing to do it," said Luigi Zingales, professor of entrepreneurship and finance at the University of Chicago's Booth School of Business.

In areas where home prices are severely depressed, social acceptance of this decision could lead to pockets "where strategic default becomes the norm, versus the exception," Zingales said.

But look even farther in the future, and the repercussions of substantial strategic defaults could have a larger-scale effect.

"If it really does become a legitimate problem, the implications are pretty dramatic for anyone that wants to buy a home in the future," said Rick Sharga, senior vice president of RealtyTrac, an online marketplace of foreclosure properties. "The lenders would have to build this into their risk models with either larger down payments or higher interest rates."

Some owners 'mimic investors'

Many agree the ranks of people taking this route are growing, but putting a number on the trend isn't as easy. To measure the number of people who are strategically defaulting on their mortgage obligations, you have to assess borrower intent.

"Take all the numbers with a grain of salt, because it's one of those topics which is really difficult to get a firm grasp on," Sharga said. "The projections are based on limited sample sizes, and [people are] doing projections that have a lot of implications on societal behavior and political policy."

Researchers believe that being underwater on a loan is a prerequisite to strategic default, and the more underwater you are, the likelier you are to consider defaulting -- even if you can afford to keep making payments.

"In our data, what we've noticed is at about 25% negative equity, the behavior of owners begins to mimic that of investors -- they're more ruthless and rational, they're looking at it from a cash-flow perspective," Khater said. "The default rate rises as the negative equity gets deeper and deeper."

Here are some estimates of how big a problem strategic default is:

Morgan Stanley's recent report examined the payment habits of 6.5 million borrowers with first-lien mortgages that originated in 2004 or later, and estimated that 12% of all mortgage defaults were strategic in February -- that is, the borrower who is underwater on his or her mortgage obligations and stops paying on that home loan, yet still meets other, "meaningful" non-mortgage obligations. The authors used data from TransUnion in their analysis. The report found that the incidence of strategic default is higher among those with higher credit scores and larger loan balances.

Analysis from Experian and Oliver Wyman estimated that strategic defaulters made up about 18% of all borrowers who went 60 days past due on their mortgage in the fourth quarter of 2008; about 588,000 borrowers strategically defaulted in 2008, up 128% from 2007. Strategic default was also found to be most prevalent in areas that experienced steep price declines, including California and Florida, and among mortgages that originated in or after 2006, because those borrowers didn't experience home price appreciation before prices headed south.

Research from the Chicago Booth/Kellogg School Financial Trust Index found a rising percentage of homeowners are willing to strategically default: The percentage of foreclosures perceived to be strategic was 31% in March, compared with 22% in March 2009. The data is collected through a survey of about 1,000 people.

One possible reason the numbers are rising is some homeowners' belief that lenders aren't aggressively pursuing those who default, according to the Chicago Booth/Kellogg School report.

"With more and more homeowners believing that lenders are failing to pursue those who default on their mortgages, there is a risk that a growing number of homeowners will walk away from their homes even if they can afford monthly payments," said Paola Sapienza, professor of finance at the Kellogg School of Management at Northwestern University and co-author of the report, in a news release. Zingales was a co-author.

People are also learning they often have one or two years before they get thrown out of a home after stopping payments, said Frank Pallotta of RH Reward, or Responsible Homeowner Reward, a program that works with lenders to provide financial incentives for borrowers who are at a high risk of strategically defaulting.

Getting above water

A recovery in home prices could give people hope to stick it out and stay in their homes, even if they're underwater, Zingales said. "If prices were to drop again, people might lose hope," he said.

CoreLogic estimates that the typical underwater borrower is five to seven years away from regaining their lost equity.

Eventually, those who do stick it out will see their equity increase due to simple amortization: Over time, less of your payment is going to interest and more is going to the paying down of principal, Khater said. "If they remain current on their home, simply paying their loan will help drive them back to positive equity," he said.

But for some homeowners, that won't be enough.

"Strategic default will begin to pick up in numbers as the housing market begins to stabilize," Pallotta said. "Now you can almost quantify how long it is to see the light at the end of the tunnel."

If people figure they'll wait more than a decade before regaining the equity they've lost, they're much more likely to cut bait and leave, he said.

Does Anyone Really Believe the Euro Will Survive?

“Sarkozy went so far as to bang his fist on the table and threaten to leave the euro,” said a Spanish politician quoted in El País. “It was Sarkozy on steroids,” added a European diplomat. “He’s always very energetic. This time he was very emotional, too.”

Anyone familiar with Greece and is sceptical about divine intervention knows the Greeks will never make the disciplined changes necessary to fulfill their obligations under the Euro bondage. Greece will return to the drachma and everyone will be better off for it.

Greece is not the issue.

The money thrown at Greece is to buy time to allow the weak sisters of the EU to recover financially and maintain the Euro. In order to maintain the Euro, individual European states will have to surrender their sovereignty to France and Germany.

The reason that the Euro club did not require that surrender in the first place is because the Rulers and Masters in Europe knew that the conservative and sensible majority in Europe would not capitulate to Germany and France.

Will they now? I doubt it and I say that because if given the opportunity to vote, the Germans would return to the DM. It is no different in France.

A recent survey by Paris Match magazine found 69% would prefer the old French currency, the Franc, to come back in place of the euro.

When France switched to the euro in January 2002 only 39% wished to keep the Franc.

It the French and the German people do not want the Euro, that leaves the elite internationalists alone wanting to keep it. It is best to end the failed experiment sooner than later.

______________________________


EUROPEAN UNION | 14.05.2010
Ackermann interview sparks debate on Greek rescue



CEO Ackermann says Greece is unlikely to pay its debt

Deutsche Bank CEO Josef Ackermann told German public television that he doubted Greece could pay off its debt. This set off a new debate about whether the Greek bailout will work - and the future of the euro.

Deutsche Bank CEO Josef Ackermann walked a narrow line Thursday when he expressed his doubts on public broadcaster ZDF that Greece will be able to pay down its debts despite a 110 billion euro ($138 billion) international rescue package.

Ackermann was more optimistic about the success chances of a separate 750 billion euro fund intended to aid faltering economies in Spain and Italy.

"I have my doubts about whether Greece is really in a position to step up its efforts," Ackermann said in the ZDF interview.

The rescue package is in part a political maneuver intended to show European resolve to secure its joint currency and maintain solidarity.


The current financial rescue gives Greece temporary liquidity

Chancellor Angela Merkel said Thursday as Polish Prime Minister Donald Tusk was awarded the Charlemagne Prize for promoting European understanding that the European Union is facing an "existential" crisis.

"If the euro fails, it's not just the currency that fails, but Europe and the idea of European unification," she said, adding that if the crisis can be overcome, "Europe will be stronger than ever before."

While Ackermann said on ZDF the European Union is sure to lose the money it invests in Greece, he emphasized the necessity of avoiding a Greek bankruptcy. That would lead to a "kind of meltdown" and would "very certainly affect other countries," he said.

Tricky situation

According to Friedrich Heinemann of the Centre for European Economic Research in Mannheim, Ackermann found himself in a tricky situation. He needed to act as a public figure capable of drumming up support and, at the same time, protect his creditability.

Greece will unlikely be able to pay off its nearly 300 billion euro debt, but the rescue package will enable it to hold out for a few more years, according to Heinemann.

"In the end, there will be a restructuring of Greece's debt… but in the meantime before that happens, other countries will make such progress that the danger of a meltdown will no longer exist," he told Deutsche Welle. "This means maybe in 2012 a restructuring of Greece's debt can be undertaken without shock waves being triggered."

Euro-skepticism

But other economists are less optimistic about the future of the common European currency.


Economist Joachim Starbatty is skeptical about the future of the euro

Joachim Starbatty, professor emeritus of economics at the University of Tubingen, said Greece should end its use of the euro. Instead, the country should return to its former currency, the drachma, and devalue it based on market factors, he said.

"Solidarity doesn't mean that we should all sink into this swamp of debt,” Starbatty told Deutsche Welle. “Solidarity means each country should have an opportunity to ascend again economically."

If Greece were to use a devalued drachma, the favorable exchange rate would make its exports more competitive and its tourism industry more attractive, according to Starbatty.

"It is the only possible solution; they don't have solid economic ground under their feet anymore," he said. "I'm advocating a solution with which a long-term future for Greece and Europe can be secured. The politicians are sticking their heads in the sand and believe they can make debts disappear by creating new debts."

Problem only delayed

In contrast to Starbatty, Heinemann believes Deutsche Bank CEO Ackermann was correct to say the euro does have a future.

"Ackermann is right," Heinemann said. "Every expert who looks at the situation will come to the conclusion that the subsidies will bridge Greece's liquidity problem, but not solve the insolvency problem. But keep in mind that these troubled nations states have an enormous desire to reduce their expenditures, and at the moment the global economy is playing along."

Asgar Belke, of the German Institute of Economic Research in Berlin, said while Ackermann's speech was "practical and adept," Greek debt is sure to present more problems in the future. The country's savings ratio is low, he said, and its ability to collect taxes owed is insufficient.

"I think in the future we'll find ourselves confronted with the same problem, and then we'll have to pay again," Belke told Deutsche Welle.

Author: Gerhard Schneibel
Editor: John Blau

€€€€Uee... the Euro Shock and Awe of $957 "B" for Billion Rescue Package!

Just to Help You Visualize One Trillion

May 9, 2010
E.U. Details $957 Billion Rescue Package
By JAMES KANTER and LANDON THOMAS Jr.
NY TIMES

BRUSSELS — European leaders, pressured by sliding markets and doubts over their ability to act decisively, agreed on Monday to provide a huge rescue package of nearly $1 trillion in a sweeping effort to combat the debt crisis that has engulfed Europe and threatened markets around the world.

In an extraordinary session that lasted into the early morning hours, finance ministers from the European Union agreed on a deal that would provide $560 billion in new loans and $76 billion under an existing lending program. Elena Salgado, the Spanish finance minister, who announced the deal, also said the International Monetary Fund was prepared to give up to $321 billion separately.

Officials are hoping the size of the program — a total of $957 billion — will signal a “shock and awe” commitment that will be viewed in the same vein as the $700 billion package the United States government provided to help its own ailing financial institutions in 2008. The package represented an audacious step for a union that had been criticized for acting tentatively, and without consensus, in the face of a mounting crisis.

Underscoring the urgency of the situation, President Obama spoke to the German chancellor, Angela Merkel, and the French president, Nicolas Sarkozy, on Sunday about the need for decisive action to restore investor confidence. And in a sign of the spreading anxiety, the United States Federal Reserve, along with the European Central Bank and the central banks of Canada, Britain and Switzerland, announced the re-establishment of instruments known as swap lines through January 2011. The swaps are intended to help ease pressure on the euro, whose value against the dollar has fallen as fearful investors have bought up dollars.

Stock markets in the Asia-Pacific region rose early on Monday. The leading stock indexes in Japan and South Korea were both up about 1.3 percent soon after the deal was confirmed, recouping some of the losses they had suffered last week. The markets in Singapore and mainland China also opened higher, with the market gauges there up 0.5 percent soon after the open.

New political complications in two of Europe’s most important countries added to the challenge. In Germany, voter anger at the effort to save Greece cost Ms. Merkel an important regional election Sunday, undermining her leadership, and in Britain, the government remained in a state of suspended animation because of the inconclusive Parliamentary elections last week. [Pages A4 and A8.]

The package comes at a time of mounting financial unease. Riots in Greece, ever-tightening terms of credit and the unexplained free fall in the American stock market last Thursday have compounded the sense that the European Union’s inability to address its sovereign debt crisis might lead to the type of systemic collapse that followed the fall of Lehman Brothers.

Olli Rehn, the European commissioner for monetary policy, described the arrangement as “a consolidation pact” that would be “particularly crucial for countries under speculative attacks in recent weeks.” He specifically mentioned Portugal and Spain.

Mr. Rehn said the I.M.F. would provide “half as much as the European Union” following lengthy talks with fund officials.

“We shall defend the euro whatever it takes,” Mr. Rehn said.

What appeared to be emerging from the discussions represented a partial retreat from a system discussed earlier in the day that would have radically expanded the powers of the European Commission to raise funds.

Instead the ministers came up with a system that would speed up the pace at which states that use the euro currency could lend to one another, but on a bilateral and voluntary basis.

One of the crucial decisions that ministers made was to create what they called a “special purpose vehicle” to disburse the 440 billion euros in new loans, should that support be required by member states in economic difficulties.

The use of such a financial instrument reflected the difficulties that individual European governments — and Germany’s in particular — have in committing huge sums to a central authority like the European Commission to oversee the economic management of the bloc, seen as a clash with national sovereignty.

In a statement following their meeting, the ministers underlined that the special purpose vehicle would expire after three years and that its use would be strictly dependent on “national constitutional requirements.”

Ministers said their first line of defense against financial turmoil was to offer loans of 60 billion euros to member states in need, and to use the further loans of up to 440 billion euros as a “complement” as required.

While the sums being discussed are eye-catching, some bankers questioned whether they would be enough to calm the markets. One banker said that with more and more European economies coping with rising deficits that raising, guaranteeing or backing such a large number would not be an easy task — unless the European Central Bank stepped in in a more forceful and specific manner. The bank has so far rebuffed calls to inject liquidity into the markets by buying back European bonds.

There were many complications in trying to forge a consensus on a new package. They included defining the role of Britain, which lies outside the euro zone and had said it would not help in propping up the euro, as well as the European Central Bank. The fractiousness underscores the frailty of a monetary union in which its richest member, Germany, is also the most opposed to a financial rescue.

“The fact that they are worried is clear,” said David Marsh, the author of “The Euro,” a book on the history of monetary union. “But I don’t think that there is enough commitment or economic firepower in Germany to provide the massive loan guarantees to satisfy the markets.”

Predictably, politicians blamed speculators for the market upheaval. The Swedish finance minister, Anders Borg, said immediate action was needed to tackle “herd behaviors in the markets that are really pack behaviors, wolf pack behaviors.” Mr. Borg warned that volatility in markets could “tear the weaker countries apart.”

Since it became clear that Greece would not be able to meet its financial obligations and fears spread that other indebted nations like Spain, Portugal and Ireland would have similar troubles, Europe, hampered by Germany’s opposition to a bailout, has responded with measures that have been seen as too little too late.

Even now, despite the lashing rhetoric and the Sunday night meeting, there is still a feeling that Europe should be doing more — notably with regard to freeing the European Central Bank to go against its charter and print money by buying back distressed European bonds from the secondary market.

Sunday’s meetings represented an extraordinary convergence of diplomatic activity, crammed into a tight time frame. Political leaders including Mr. Sarkozy of France said early Saturday morning, at the end of an earlier summit meeting, that a loan mechanism intended to restore confidence should be ready by Monday morning. That effectively left the European Commission and finance ministers a single weekend to change the way the European Union operates its finances.

Ms. Merkel of Germany attended a victory parade on Red Square in Moscow on Sunday, a sign of how seriously Germans consider reconciliation with Russia. Mr. Sarkozy and the Italian prime minister, Silvio Berlusconi, opted not to attend, regarding the financial crisis as more urgent.

Mr. Sarkozy held a strategy meeting with ministers on Sunday.

“At stake is the euro and the euro zone,” a French official said. “We need to give a clear signal to markets.”

Sewell Chan contributed reporting from Washington.

Greece Gets What Greece Does Not Deserve, $146 Billion

And it is not all German money. It is all to prove that the Euro itself is not a failed idea. Angela Merkel said there was no alternative to the bailout. What does that say?

Obviously, there was no alternative for Merkel and Germany as the Euro was the construct of German Progressives and Germany is stuck with the Euro (for now). Germany committed itself to a bad idea but it has worked for Germany industry.

It has not worked so well for ordinary Germans.

Most Germans were dead set against giving up the German Mark. The DM was an amazingly stable currency and it was inconceivable to most Germans that it was to be given up for a currency that would tether Germany to countries such as Italy and Greece. Today, most Germans are still against the Euro. Too bad for them.

The Greeks had one hell of a party with the Euro. They lied about their being ready to join the Euro. They were not ready. They covered up their true situation and probably still are. So many numbers have been bandied about as to what this will cost, and with each passing week the number has gone up.

Tough times ahead for Greece's Prime Minister Papandreou? Oh yea. The Greek unions are already rioting in the streets and calling a national strike to protest the fact that they have to give anything up. The socialist mobs like spending German money and have built their unsustainable life style on it. The trouble is, it is now IMF money propping up Greece and that is American money, money we do not have to throw around.

A lesson here? Oh yea again. Progressive German politicians, big business and big banks ignored the majority wishes of the German people constructing the Euro. Greek socialists created a majority class of people that take more from the system than they put in. Sound familiar? It smells familiar, the whiff of the wildly popular Obama Eau de Cologne. It smells great when first put on, but lingers and decays to something far less happy to the nostrils.

________


ECONOMY | 02.05.2010 DW
Eurozone agrees unprecedented multi-billion euro bailout for Greece

Eurozone finance ministers have endorsed a record 110-billion-euro bailout for Greece. The aid package requires that Athens implement tough austerity measures.

Eurozone finance ministers, in an emergency session on Sunday, approved a loan package to save Greece from defaulting on its debt. Eurogroup head Jean-Claude Juncker said a total of 110 billion euros ($146 billion) would be spread out over three years. Up to 30 billion euros will be ready to be disbursed in 2010.

Euro states are expected to give 80 billion euros while the rest is to be provided by the International Monetary Fund (IMF).

It is by far the largest bailout ever assembled for a country.

Juncker announced a fresh EU summit for May 7 to officially approve the bailout. He stressed the help for Athens was conditional on the Greek government implementing strict financial reforms.

He also said that at Germany's insistence, all ministers would discuss with their national banking sector the possibility of voluntary bank contributions to the aid package.

International support

EU President Herman Van Rompuy welcomed the agreement.

"I am convinced that this sound and ambitious program will enable Greece to put right its economic and financial situation as well as its competitiveness," he said in a statement.

In exchange for financial aid from both the EU and the IMF, Athens has promised further austerity measures to get the country's budget back into shape.

Greek Prime Minister George Papandreou said the he would "do anything to avoid the country going bankrupt."

"It is an unprecedented support package for an unprecedented effort by the Greek people," a somber Papandreou, wearing a dark purple tie, the color used for funerals in Greece, told a televised cabinet meeting.

EU Commissioners for Economic and Monetary Affairs Olli Rehn welcomed Athens' latest austerity efforts as a "very convincing and comprehensive program."

US President Barack Obama told Papandreou in a telephone interview late on Sunday that he welcomed Greece's ambitious reform programs and the support from the EU and the IMF.

Germany's Merkel backs bailout

Much of Sunday's talks depended on the attitude of Germany, which is expected to foot the largest chunk of the bill - around 22 billion euros.

German Chancellor Angela Merkel had been hesitant about rushing aid to Greece because it is unpopular among Germans.

On Sunday however, Merkel got fully behind the measure, calling the Greek austerity program very ambitious and saying there was no choice but to save Greece.

"I think this is the only way we can restore the stability of the Euro," Merkel said. "I'm going to work for the Greece program and its passage."

German Finance Minister Wolfgang Schaeuble said the German cabinet would meet Monday to work on a draft legislation for the aid. He said the bill would then be approved in the German parliament by Friday.

To ensure the stability of the euro, Schaeuble told German public television ARD late on Sunday, "we, as well as the German people and the taxpayer, have to take on this difficult decision [to approve the aid deal]."

He also warned Greece that "the smallest deviation [from the austerity plan] would have consequences, that much is clear," he told ARD.

Widespread protests across Greece

But Athen's plans for painful wage and pension cuts have already triggered widespread protest in Greece with unions planning a nationwide strike on Wednesday.
The austerity measures are deeply unpopular in Greece

The fresh round of cuts aims at saving 30 billion euros ($40 billion) over the next three years with civil servants and pensioners bearing the brunt of the effort.

"These sacrifices will give us breathing space and the time we need to make changes," Papandreou said, defending the measures.

"I want to tell Greeks very honestly that we have a big trial ahead," he said.

ai/ng/dpa/AFP/Reuters
Editor: Nigel Tandy

The Euro, Past, Present and Future

Bernanke wants answers on Goldman role in Greece
Thu Feb 25, 2010 12:09pm EST
Related News
Greece not alone in exploiting EU accounting flaws
Mon, Feb 22 2010
Reuters

* Bernanke says SEC also 'interested' in Goldman role

* Shouldn't use derivatives to destabilize countries

* Bernanke says US economy weak, job losses a worry

* Congress needs to agree to get deficits down, now

By Glenn Somerville and Pedro da Costa

WASHINGTON, Feb 25 (Reuters) - U.S. regulators are looking into how Wall Street firms like Goldman Sachs (GS.N) helped debt-stricken Greece arrange derivatives deals that critics say were used to disguise the size of its budget deficits.

Federal Reserve Chairman Ben Bernanke made the disclosure on Thursday and suggested securities regulators also wanted the information.

"We are looking into a number of questions related to Goldman Sachs and other companies in their derivatives arrangements with Greece," Bernanke said in response to a question from U.S. Senate banking Committee Chairman Sen. Christopher Dodd before testifying to the group for a second day on the state of the U.S. economy.

Bernanke said the Securities and Exchange Commission similarly was "interested" in Wall Street's activities in helping Greece do derivatives deals.

He stopped short of saying an official inquiry of Goldman Sachs' activities was under way by either the Fed or SEC. The SEC had no immediate comment when contacted.

"Obviously, using these instruments in a way that potentially destabilizes a company or a country is counterproductive," Bernanke said. "We'll certainly be evaluating what we learn from the activities of the holding companies that we supervise here in the U.S."

Goldman Sachs spokesman Michael DuVally said, "As a matter of policy, we don't comment on legal or regulatory matters."

FED HAS STRONGER HAND NOW

In the midst of the severe financial crisis that swept the U.S. economy from 2007 to 2009, Goldman and other Wall Street firms converted to bank holding companies, putting supervision of them more firmly in the Fed's hands.

Goldman Sachs has come under scrutiny for deals it did with Greece before it staggered into a debt crisis that has raised fears of a sovereign debt default and forced the European Union to say it will help if necessary to avert one.

The Greek crisis has pressured the euro and EU partners fear it may spread to weaker euro zone economies like Portugal and Spain.

Goldman Sachs entered into currency swaps with Greece, which critics say helped it disguise its debt, and has defended them as neither uncommon at the time nor inappropriate.

Cross-currency derivatives that Goldman Sachs conducted for Greece in 2001 helped reduce the size of its debt at a time when the country was keen to meet criteria for entering the EU and adopting the euro.

Goldman Sachs has a particularly high profile in Washington, having produced numerous alumni including former Treasury Secretary Henry Paulson, many of whom still play active roles in key agencies like Treasury.

It also has attracted a heavy share of public anger over gold-plated banker pay packages, not helped by comments such as chief executive Lloyd Blankfein's assertion last November that the bank was doing "God's work."

The bulk of Bernanke's testimony was a repeat of remarks he made on Wednesday when he told the U.S. House of Representatives that a weak U.S. job market means interest rates must stay low for a long time to try to spur activity.

A key uncertainty is whether the economy can grow fast enough in future to bring unemployment down at an acceptable rate, Bernanke said, a particularly poignant remark in view of a Labor Department report on Thursday that showed unemployment insurance benefit claims rising for a second straight week.

FINANCIAL SERVICES TOO BIG

With the Senate working toward a bill on financial regulatory reform, expected to be unveiled by Dodd early next week, Bernanke said in response to questions that he hoped it would lead to a downsizing in the importance of the financial services sector, which he said has become too big.

He appeared to pour cold water on the idea of a "Volcker rule" that would ban banks from engaging in so-called proprietary trading -- using government-guaranteed capital to make bets for their own account -- as the Obama administration had advocated but Congress seemed to be moving away from.

"We all agree that we don't want excessive risk-taking, particularly not on a 'tails I win, heads you lose basis,' certainly, "Bernanke said, but added there could be "unintended consequences" from such a rule.

He has said that banking regulators should get more powers to monitor and stop some bank trading activities if they deem it necessary to protect financial stability.

One key theme that Bernanke turned to repeatedly during a question-and-answer session was the need for lawmakers to come to agreement on measures for shrinking soaring U.S. budget deficits.

Republicans are reluctant to raise taxes and Democrats have measures before Congress, including healthcare reform, that would at least initially raise deficits, leaving the two sides stalemated on a wide range of fiscal issues and making progress on deficit reduction next to impossible.

"It could become a problem tomorrow if bond markets are not persuaded that Congress is serious about bringing down the deficit over time," Bernanke warned. Big deficits can erode confidence in a country's ability to repay debt, in turn driving the value of currency down and push inflation up.

(Editing by Andrew Hay)

Many experts think the € may tumble on the back of the Greek debt crisis

Something very ugly is happening with currencies and to this observer, it looks like the beginning stages of competitive devaluation.

The problem's roots are in the unsustainable amount of government debt, borrowing and spending. We hear about Greece, by any measure a very small country, but Greece does not stand alone with some very bleak statistics, discussed in the video and article. Those statistics are not that far of from those of The United States.

In the most optimistic reading of events, Greece is said to have to cut spending and reduce their budget deficit by 4%. Easily said, but dangerously difficult to do. Greece, like all members of the euro zone, has another problem. It cannot devalue its currency. It uses the euro.

Either at the top, the Germans or French people are going to get tired of bailing out the lesser members of the European Union, or the smaller members will take the easy way out, drop the euro and return to their own currencies.

Unfortunately for the United States, we have a president in Barack Obama who sees nothing but increasing the size of government as the answer to every problem. He is probably the least fit person to fill that office at this time.

We are in trouble, big trouble, but at least we control our own printing presses.

__________________________



Can anyone fix the euro puzzle?

A crisis-strewn week has left the single currency on the edge of a precipice, write Edmund Conway and Bruno Waterfield

Published: 12:14AM GMT 14 Feb 2010
Telegraph

The summit started as it meant to go on – in chaos, confusion and unintended farce. The big moment – the heads of state meeting which is supposed to be the centrepiece of every European summit – was scheduled to begin at 10am in the wood-panelled Bibliothèque Solvay in Brussels' European quarter, but as the hour approached, it became clear that nothing was doing. As more time passed, it became clear that something was wrong. Eventually, Herman van Rompuy – the new European president, in charge of his first big set-piece – explained that a snowstorm had held up a number of the participants. The meeting would be delayed by two hours.

It was a poor excuse. Everyone knew what was really holding up the summit. Behind the scenes, in ill-tempered exchanges in private conference rooms nearby, the grand European plan to help prevent Greece sliding into economic collapse was unravelling – and fast. In a radical move, the leaders – from President Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany to the European Central Bank (ECB) president Jean-Claude Trichet – had already agreed to throw out the usual European Council agenda and replace it with one topic: Greece's economy. The problem was that no one could agree on what to do about the stricken nation.

By now, the story will be painfully familiar. The southern European nation was having trouble raising money. Never the most sensibly-run economy, Greece had seen its budget deficit balloon to terrifying proportions in the wake of the recession sparked by the financial crisis. To make matters worse, the incoming government, led by Prime Minister George Papandreou, had uncovered the fact that their predecessors had hidden billions of euros worth of borrowing outside their official statistics. The combined effect was to cause a sudden sharp increase in the country's borrowing rates and its default insurance spreads, as investors speculated that it was entering a fiscal debt trap from which it could no longer escape.

In such circumstances, a country would devalue its currency, but this is not an avenue open to a member of the euro like Greece. With investors pulling their money out of the country at such a rapid rate that the interest rate spread between Greek and German government bonds hit its highest level since the creation of the euro, it became clear that someone was going to have to step in and help.

It wasn't merely that Greece, a relatively small economy, was close to collapse; it was that, left unchecked, the panic could spread to Spain, Portugal, Italy or Ireland – all of whom suffer the same ballooning budget deficits and overburdened consumers.

For a whole swathe of euro members to be allowed to crumble would beg questions about the entire euro project. Indeed, as Papandreou pointed out at the World Economic Forum at Davos last month, the attack could be seen as a speculative assault on the euro, targeted at first through its "weakest link". As if to bear out his point, figures from the Chicago Mercantile Exchange released on Monday indicated that speculators had amassed their biggest positions against the currency since its foundation more than a decade ago.

So it was that a week before Thursday's summit, in a bilateral meeting in Paris, Sarkozy told Merkel that France and Germany would have to mastermind some kind of plan to protect Greece. His broad proposal was that the northern European nations should at the least issue a statement promising to stand behind Greece, and perhaps go so far as to spell out how much they would put into a potential lifeboat. Merkel was not convinced. For one thing, she was well aware that Sarkozy had his own political motivations for such a move: the alternative, an International Monetary Fund (IMF) bail-out, would enable IMF chief Dominique Strauss-Kahn, Sarkozy's most likely opponent at the next French election, to ride in and "save the euro".

But, more fundamentally, by organising a bail-out Germany would be seen as providing unfair support for a country which had proven itself incapable of fiscal rectitude. Such a move would not only be hideously unpopular with German taxpayers, it would potentially encourage poorer countries to follow Greece's lead. Moreover, under the German constitution, such moves were legally tricky to organise.

And so the battlelines were drawn prior to a week of frantic behind-the-scenes negotiations as the French and Germans tried desperately to find common ground.

Finally, it seemed as if the ministers had patched together a deal. Some kind of bail-out package – a "firewall" provided by a "coalition of the willing", according to insiders – would be revealed at the summit.

Then came van Rompuy's excuse about the snow. But it wasn't ice and water that delayed the summit. That morning, the key players – Merkel, Sarkozy, Papandreou, Jean-Claude Juncker, head of the euro group of nations, and Trichet – held a last-minute meeting. According to insiders, voices were raised with Trichet and Merkel banging fists on the table as Sarkozy and Juncker tried to push for a bail-out plan. The statement that emerged from the meeting was a thinly-disguised compromise. Three-quarters of it seemed to be focused only on insisting that the Greeks cut their budget deficit by 4pc this year; the final paragraph, which appeared to be specifically aimed at appeasing the French, said: "Euro area Member states will take determined and coordinated action, if needed, to safeguard financial stability in the euro area as a whole," before adding: "The Greek government has not requested any financial support."

The hope was that the statement alone would be enough to reassure markets that in the event of a proper "sudden stop" in funding to Greece, the rest of the euro area would step in. However, the financial crisis has proven that without concerted plans to back them up, statements of broad intent are pretty useless at containing market concerns.

Within moments of the statement, the euro dropped to a nine-month low against the dollar and share prices in the euro area stalled. The rot continued on Friday and, according to economists, will persist unless finance ministers meeting tomorrow provide any detail on what a rescue package might involve.

What makes any hopes for clarity appear forlorn is that the euro has no mechanism for dealing with crises of this sort. It is monetary rather than fiscal union. As Martin Feldstein, a Harvard professor, puts it: "There's too much incentive for countries to run up big deficits as there's no feedback until a crisis."

The ECB could offer the country extra liquidity support, but there is a sense that unless other euro nations dip into their pockets the suspicions over Greece will linger – and those about the rest of the euro's debt recidivists. Juncker's plan would involve a web of bilateral loans from euro members, perhaps being made not directly but through state-owned banks, so as to circumvent those German constitutional obstacles.

However, it is an open question as to how the populations of those donor countries will take the proposal that they once again come to the rescue of their misbehaving neighbours. Nor indeed how the Greeks will take it when it emerges that their coruscating deficit cuts and public sector wage cuts are being overseen by the Germans. Although the political will is clearly still strong in Brussels to fight off any talk about a euro crisis, it is clear even to fans of the single currency that this is its single greatest test. According to Albert Edwards of Société Générale (himself not, it should be pointed out, a fan), "any 'help' given to Greece merely delays the inevitable break-up of the eurozone". The problem, he adds, is a "lack of competitiveness within the eurozone – an inevitable consequence of the one-size-fits-all interest rate policy.

"Even if the PIGS [Portugal, Ireland, Greece and Spain] could slash their fiscal deficits, as Ireland is attempting, to maintain credibility with the markets in the short term, the lack of competitiveness within the eurozone needs years of relative [and probably absolute] deflation."

This problem – that under eurozone rules Germany is able to pursue an entirely divergent economic strategy to its Mediterranean counterparts – suggests that the best course of action may be for Germany to pull out of the currency union, according to former Bank of England policymaker David Blanchflower.

"That might be the only solution," he says. "At the moment it simply isn't working. And the imbalance makes it almost impossible for countries like Greece or Ireland to escape from this situation."

It is not merely economists who have clocked on to this inherent weakness. According to Simon Derrick, of Bank of New York Mellon, the mood among investors feels not dissimilar to the time the Exchange Rate Mechanism faced speculative attack in the early 1990s.

Back then the targets were currencies; this time they are government bonds. But the objective is the same – to test whether governments really have the political will to persevere with a system plagued by inherent economic weakness and illogicality.

Has any hedge fund put its head above the parapet in this destructive trade, as George Soros did back then, owning up to shorting the pound before successfully "breaking" the Bank of England? Not yet, though the rumours are that John Paulson, the man who made billions betting against the US housing market, has significant positions against some of the weaker euro members. But a currency union is rather more difficult to break than an exchange rate agreement. Betting against the Europeans' political will to further integration remains a gamble.
Still, the difficulties have at least offered Gordon Brown a rare opportunity for genuine self-satisfaction. After all, he decided in 2003 – against Tony Blair's wishes – not to join the single currency, and only now is it clear how wise that decision was. Britain, though marred with similar fiscal difficulties as Greece, has at least had the luxury of being able to devalue the pound.

Business Secretary Lord Mandelson, the arch europhile, still clings on to the dream, saying last week: "I think in the longer term it would be in Britain's interests to be part of the eurozone."

Even with sterling, the UK can hardly rest easy. For one thing, British banks have a large balance sheet exposure to the troubled Club Med nations – estimated by the Bank for International Settlements to be around £240bn – so any collapse there would trigger a secondary crisis in London.

Second, the Greek crisis serves as a reminder that no country is immune to a sudden investor exodus. And if one runs one's finger down the list of leading nations, no prizes for guessing which country has a Greek-style combination of rocketing budget deficits, high current account shortfalls and rising national debt.

China tightens, The Germans bore no gifts to Greece, The World turns

Will markets call EU bluff on Greek rescue?

Greek bail-out accord lacks substance and finance's poker players may soon call its bluff.

By Ambrose Evans-Pritchard, International Business Editor
Published: 9:49PM GMT 11 Feb 2010
Telegraph

The white smoke has at last emerged from the Bibliotheque Solvay in Brussels, but global markets do not like its odour. The Greek rescue plan agreed by EU leaders after a week of leaks is strangely thin, raising suspicions that Germany, Holland and the creditor states of Northern Europe still cannot agree on the terms of any bail-out.

The euro tumbled 1pc to a nine-month low of $1.36 against the dollar and Club Med debt yields jumped as investors read the summit text, searching in vain for details of debt guarantees or bilateral loans, or guidance on an EU eurobond. All they found was an expression of "political will".

"Euro area member states will take determined and co-ordinated action, if needed, to safeguard financial stability in the euro area as a whole. The Greek government has not requested any financial support," it read.

The 27 leaders never even discussed how they might shore up Greece or the rest of Club Med. German Chancellor Angela Merkel said she was not willing to broach the subject at all. The only relevant topic was whether Greece was complying with Treaty obligations, and how the country would slash its budget deficit from 12.7pc to 8.7pc this year – in a slump.

"They offered nothing," said Jochen Felsenheimer, a credit expert at Assenagon in Frankfurt. "It was just words without any concrete measures, hoping to buy time."

Whether the EU has time is an open question. Credit Suisse says Greece must raise €30bn (£26bn) in debt by mid-year, mostly in April and May. Greek banks have been shut out of Europe's inter-dealer markets, forcing them to raise money at killer rates. They are suffering an erosion of deposits as rich Greeks shift money abroad. This could come to a head long before April.

"Economically, we are in a very risky situation. Greece is close to default. We face systemic risk like the Lehman collapse and unless there is a bail-out for Greece, there will have to be a bail-out for the whole European banking system within two or three months," he said.

Yet they are damned if they don't, and damned if they do. "A Greek bail-out increases the risk of EMU break-up, because monetary union can only work if everybody sticks to the rules," Mr Felsenheimer said.

French banks have $76bn of exposure to Greece, the Swiss $64bn, and the Germans $43bn. But this understates cross-border links. There are large loans between vulnerable states. The exposure of Portuguese banks to Spain and Ireland equals 19pc of Portugal's GDP. Interlocking claims within the eurozone zone are complex. Contagion can spread fast.

Marc Touati, of Global Equities in Paris, said the "haemorrhage of Greece" must be stopped to prevent a domino effect. "We have to move fast, above all to keep Greece in the eurozone. If not, Spain, Portugal, and Italy will be next. It could reach France," he said.

French President Nicolas Sarkozy drew an explicit parallel with Lehman Brothers in his press conference with Chancellor Merkel, saying EU leaders had given a cast-iron pledge that no eurozone member would be allowed to fail, just as they promised during the financial crisis that no big bank would be allowed to fail.

Details can be thrashed out later, in this case by finance ministers next week. The talk is of a "coalition of the willing", a group of states acting outside the EU Treaty structure. Britain would not be obliged to help. The IMF would bring "expertise" but not set policy.

Each country will choose its own way of helping, perhaps using state banks or sovereign wealth funds to buy Greek debt. In Germany's case this might be KFW: for France in might be Caisse des Depots. The arm's-length solution is elegant but it does not hide the fact that such action amounts to a debt guarantee for a serial violator of EMU rules. It implicitly opens the door to bail-outs for a string of countries in crisis.

BNP Paribas said any rescue confined to Greece is doomed to fail. "The market would only concentrate on its next 'victim', which would be Portugal," it said. Put another way, investors will demand a similar guarantee for Iberian debt.

It is this worry over open-ended liability that made Germany hesitate. Such help would need approval by the German Bundestag – and some other national parliaments. If Germany finances an unpopular rescue that merely puts off the day of reckoning, or if Athens squanders the aid, the deal will come back to haunt Mrs Merkel.

There was an element of bluff in Thursday's accord, as if the EU leaders hope to muddle through with "constructive ambiguity", fingers crossed that their vague political pledge will never be tested. Bluff is a valid tool of statemanship, but in this case their bluff could be called very soon.

A 'Lehman-style' tsunami hits Spain and Portugal

Fears of 'Lehman-style' tsunami as crisis hits Spain and Portugal

The Greek debt crisis has spread to Spain and Portugal in a dangerous escalation as global markets test whether Europe is willing to shore up monetary union with muscle rather than mere words.

By Ambrose Evans-Pritchard Telegraph
Published: 7:29PM GMT 04 Feb 2010

Julian Callow from Barclays Capital said the EU may to need to invoke emergency treaty powers under Article 122 to halt the contagion, issuing an EU guarantee for Greek debt. “If not contained, this could result in a `Lehman-style’ tsunami spreading across much of the EU.”

Credit default swaps (CDS) measuring bankruptcy risk on Portuguese debt surged 28 basis points on Thursday to a record 222 on reports that Jose Socrates was about to resign as prime minister after failing to secure enough votes in parliament to carry out austerity measures.

Parliament minister Jorge Lacao said the political dispute has raised fears that the country is no longer governable. “What is at stake is the credibility of the Portuguese state,” he said.

Portugal has been in political crisis since the Maoist-Trotskyist Bloco won 10pc of the vote last year. This is rapidly turning into a market crisis as well as investors digest a revised budget deficit of 9.3pc of GDP for 2009, much higher than thought. A €500m debt auction failed on Wednesday. The yield spread on 10-year Portuguese bonds has risen to 155 basis points over German bunds.

Daniel Gross from the Centre for European Policy Studies said Portgual and Greece need to cut consumption by 10pc to clean house, but such draconian measures risk street protests. “This is what is making the markets so nervous,” he said.

In Spain, default insurance surged 16 basis points after Nobel economist Paul Krugman said that “the biggest trouble spot isn’t Greece, it’s Spain”. He blamed EMU’s one-size-fits-all monetary system, which has left the country with no defence against an adverse shock. The Madrid’s IBEX index fell 6pc.

Finance minister Elena Salgado said Professor Krugman did not “understand” the eurozone, but reserved her full wrath for the EU economics commissioner, Joaquin Almunia, who helped trigger the panic flight from Iberian debt by blurting out that Spain and Portugal were in much the same mess as Greece.

Mrs Salgado called the comparison simplistic and imprudent. “In Spain we have time for measures to overcome the crisis,” she said. It is precisely this assumption that is now in doubt. The budget deficit exploded to 11.4pc last year, yet the economy is still contracting.

Jacques Cailloux, Europe economist at RBS, said markets want the EU to spell out exactly how it is going to shore up Club Med states. “They are working on a different time-horizon from the EU. They don’t think words are enough: they want action now. They are basically testing the solidarity of monetary union. That is why contagion risk is growing,” he said.

“In my view they underestimate the political cohesion of the EMU Project. What the Commission did this week in calling for surveillance of Greece has never been done before,” he said.

Mr Callow of Barclays said EU leaders will come to the rescue in the end, but Germany has yet to blink in this game of “brinkmanship”. The core issue is that EMU’s credit bubble has left southern Europe with huge foreign liabilities: Spain at 91pc of GDP (€950bn); Portugal 108pc (€177bn). This compares with 87pc for Greece (€208bn). By this gauge, Iberian imbalances are worse than those of Greece, and the sums are far greater. The danger is that foreign creditors will cut off funding, setting off an internal EMU version of the Asian financial crisis in 1998.

Jean-Claude Trichet, head of the European Central Bank, gave no hint yesterday that Frankfurt will bend to help these countries, either through loans or a more subtle form of bail-out through looser monetary policy or lax rules on collateral. The ultra-hawkish ECB has instead let the M3 money supply contract over recent months.

Mr Trichet said euro members drew down their benefits in advance -- "ex ante" -- when they joined EMU and enjoyed "very easy financing" for their current account deficits. They cannot expect "ex post" help if they get into trouble later. These are the rules of the club.