Deseret News: Greece remains in a deep recession

August 12th, 2011

Greece, which is set to receive its second multibillion bailout, remains mired in a deep economic recession as household finances remain pressured by deep austerity measures, official figures showed Friday.

The country’s statistics agency said the economy contracted by 6.9 percent in the second quarter of 2011 compared to the same period last year, down on the 8.1 percent recorded in the first quarter.

The figures are not adjusted for seasonal factors.

The agency said a fall in domestic consumer spending and investment contributed to the contraction in the second quarter, though that was partially offset by an improvement in the country’s trade position.

Analysts said the figures indicated the contraction of the economy was slowing, but potentially not fast enough to meet forecasts by the European Commission.

“We calculate that if the (second quarter) pace of contraction was sustained through the remainder of 2011, GDP for the full year would be on track to record a fall of near 5.5 percent,” said Malcolm Barr of JP Morgan. “The July review of Greek program had seen the European Commission forecast a 3.8 percent fall. So as much as the pace of contraction is easing, it is not doing so quickly enough to deliver on the macro forecast at this point.”

The figures come a day after the agency released jobless figures, showing unemployment levels reaching a new record of 16.6 percent in May.

Greece has been in the grip of a severe financial crisis since the end of 2009, and has relied on funds from bailout loans from EU countries and the International Monetary Fund since last May.

Last month, European leaders agreed on a second bailout worth €109 billion ($155 billion), on top of the initial €110 billion package of rescue loans.

In return, the government has introduced strict austerity measures, including cutting public sector pay and pensions and hiking taxes.

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The Economist:The midget and the mighty

August 10th, 2011

IT STARTED in Greece, and has spread steadily since. This week’s episode of the euro-zone crisis has focused on Spain and Italy, but other countries, at both ends of the size spectrum, keep coming into view. Cyprus, a midget within the monetary union, has been pushed to the brink of a bail-out. France is still in the rescuers’ camp, but it, too, is starting to attract attention.

Cyprus’s outsize banking sector, with assets of more than seven times GDP, is heavily exposed to Greece. In a “mild” stress scenario, featuring a haircut on Greek government bonds and losses on private-sector loans, Moody’s, a ratings agency, estimates that Cypriot banks will require a capital injection worth 16% of the island’s GDP. Domestic deposits were down in four of the first six months of the year, including a particularly steep drop in June. The shares of the largest listed banks have lost around half of their value so far this year.

The government’s ability to support the banks is in doubt following an explosion on July 11th that destroyed the Vasilikos power station, taking out half of the country’s electricity supply. The blast was triggered by seized Iranian munitions stored in containers at a nearby naval base. Amid regular power cuts, Cyprus will be lucky to eke out any economic growth this year. Progress on reform of Cyprus’s bloated public sector, already faltering, has broken down completely following the explosion, with President Demetris Christofias dismissing his cabinet on July 28th and the junior party in the ruling coalition leaving the government on August 3rd.

At first glance, the island’s fiscal situation does not look particularly precarious. Cyprus’s 2010 budget deficit, at around 5% of GDP, was akin to that of the Netherlands. But electricity shortages and political gridlock could drive it to 7% of GDP this year, or higher. The finance ministry insists that it can cover debt repayments for the rest of the year but a daunting €1.1 billion ($1.6 billion) of debt matures in January and February next year. Refinancing this at current yields (see chart) would be impossible. Bank of Cyprus, the country’s largest lender and a crucial investor in government debt, warned this week that the sovereign faced an “imminent” bail-out.

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The Star: Italy unveils plan to calm fears of escalating debt crisis

August 9th, 2011

By Anthony Faiola -

Seeking to calm fears of an escalating debt crisis in Europe, Italy’s embattled Prime Minister Silvio Berlusconi unveiled a plan for widespread economic reform Friday that would speed up painful austerity measures and move the world’s seventh-largest economy toward adoption of a balanced-budget amendment.
The sweeping plan, which came just 48 hours after Berlusconi had dismissed the need to do more, came as pressure intensified on European leaders to stem the slide of massively indebted Italy into the same kind of fiscal crises that have swept over the smaller economies of Greece, Ireland and Portugal. Berlusconi’s announcement appeared to pave the way for the European Central Bank to engage in a buying spree of Italian bonds in an attempt to bring its borrowing costs down from unsustainably high levels.
Berlusconi’s move came after European heads of state interrupted their summer vacations, scrambling for a consensus in a flurry of phone calls. But it remained unclear whether the package would be enough to ease the panic over Europe’s debt crisis that, along with fears of a slowdown in the United States, erased $2.5 trillion off global stock markets this week. The Europeans, analysts noted, were falling far short of the kind of financial shock and awe unleashed by Washington in 2008 to contain the US financial crisis, expressing little political will to put up the kind of cash it would take to bail out Italy and troubled Spain should their plights worsen.
It brought into focus the stark options ahead for a group of 17 European nations that for years have sought to share one currency without making the politically hard decisions that would make German and Italian taxpayers, for instance, just as liable for the region’s collective debt as the residents of, say, Virginia and California are to US debt.
If Italy’s plan fails to calm markets, analysts warned, Europe’s only way to resolve the crisis may be through tough, bold steps to integrate more fully—or face the prospect of a messy breakup of the euro zone.
“This is about the future of Europe now,” said Peter Bofinger, an influential German economist. “If Italy blows apart, the (euro zone) blows apart. This isn’t like Portugal or Ireland or Greece. The consequences for Europe are now great. They have to, they must, act.”
Berlusconi, a leader plagued by sex and financial scandals who has warred with his finance minister over cuts, acted after Italy’s borrowing costs jumped higher than Spain’s on Friday. He laid out a reform plan aimed at balancing the budget a year early—by 2013—and tackling the highly charged issues of welfare and labor reform.
It amounted to a recognition that an earlier austerity plan passed by Rome fell short of investor hopes.
“We consider it appropriate to introduce an acceleration of the measures which we introduced recently in the fiscal planning law to give us the possibility of reaching our objective of balancing the budget early,” Berlusconi said, adding that finance ministers from the Group of Seven industrial nations would hold an emergency meeting in coming days.

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Fox Business: Hungary Swiss Franc Mortgage Payments Up Dramatically

August 9th, 2011

Hungarian households indebted in Swiss francs could see their monthly instalments for August rise by as much as 10,000 forints ($52) on average, state news agency MTI calculated Tuesday.

The instalment compares to an average Hungarian monthly wage of HUF211,000, latest official data of January-May 2011 shows.

Considering the strengthening of the franc over the past months, from the monthly payment of HUF50,000 that was due in April, a hypothetical household with an average HUF5-million loan taken out for 25 years would now have to pay HUF60,000.

The franc hit yet another peak of HUF264 against the forint in Tuesday’s trading.

Debtors in the Japanese currency, although only 1%-2% of all mortgage debtors, are no better off, with 100 yen now traded at around HUF245 against the forint compared with just HUF225 in April.

Hungarian households tended to apply for foreign-currency-based mortgage loans before the economic crisis in 2008, mainly in francs, but also in euro and yen as these were cheaper than their forint-denominated counterparts. Moreover, mortgages were also subsidized by the state.

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The Baltic Course: Uncertainty in investment environment will increase

August 8th, 2011

The recent developments on the international financial markets will increase uncertainty and various speculations in the investment sector, by Finance Minister Andris Vilks (Unity).

Commenting the downgrade of the U.S. credit rating and financial markets’ pessimism, Vilks predicted that consumers will become more cautious, reducing the total consumption.

However, potential investors will still seek the so-called “safe islands” that have successfully managed to overcome the crisis, which opens up new possibilities for Latvia. The country is looking good and could attract new investments, since “money loves stability”.

“Investors will continue to seek partners, and Latvian businessmen will have the opportunity to use the crisis to their advantage and claim their foreign colleagues’ business niches” said Vilks.

Vilks believes that the U.S. credit rating’s downgrade was expected and could serve as a good signal to introduce the necessary changes and restore stability on the international financial markets. The minister also lauded the international credit rating agencies’ courage to assess the world’s largest economies, LETA reports.

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Forbes: Here Come the Currency Battles

August 4th, 2011

The debt-ceiling distraction now behind us, the real global economic story shifts to currencies. Desperate to maintain or restart growth, the developed world is effectively competing to devalue its money. The European Central Bank today took off its tightening indicator, no doubt concerned that the “rescue” of Greece (and soon other debtors) will require a loose overall monetary stance. UK, ditto on hold, even with soft sterling. Japan, already at virtually a zero interest rate, is intervening in forex markets to cheapen a surging yen. The Swiss have also dived in to ward off further appreciation of their franc. And, of course, Ben Bernanke’s Federal Reserve must be contemplating another round of “quantitative easing” to stir the sluggish U.S.

All the while, these inflationist moves, while only showing spotty symptoms in the countries of origin, are lighting fires around the emerging markets. India and China, most prominently, are trying to contain price increases while not seeing their currencies move up too much to hurt exports. The same holds in much of the rest of Asia. Turkey, too. Brazil just cut its interest rates, having seen enough of a shock to exports from its zooming real.

Oh, yes–there’s gold. Now bullion is headed to $1,700 an ounce (and the Bank of Korea is buying!). Other commodities, after a summer slowdown, cannot be far behind. No wonder that equities, even those of blue-chip companies with solid balance sheets and pretty good business prospects, are taking a hit amid this wave of uncertainty.

At the root of most of this is an unwillingness on the part of major Western economies to let the prices of certain asset classes–especially real estate, in the U.S., and various additional bad bank debt in Europe–find their actual value. In that sense, the notion that governments are protecting Big Finance and other powerful lobbies from the consequences of betting on a bubble is true.  Just as with the Washington debt-ceiling pact, the reckoning is being put off. Our best hope is that a sufficiently stable world economy can keep growing enough to cover the ever-widening exposure.

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NASDAQ: Greek Bank Lending Drops 1.2% in June

August 4th, 2011

The pace of total banklending to Greek businesses and households fell further in June, shrinking 1.2% on the year, the central bank said Thursday.

The annual growth rate declined 1.1% in May 2011 and was flat in December 2010, the Bank of Greece said in a statement.

Net lending to households shrank by EUR249 million in June, after a EUR433 million decline in May.

At the same time, the net flow of credit to businesses expanded by EUR666 million in June after dropping in the previous month.

In May, bank credit to private businesses contracted by EUR959 million, following a rise of EUR212 million in April.

Greek banks have restricted the flow of credit since the start of the country’s financial crisis in early 2010, as they attempt to deleverage their loan portfolios and cope with liquidity shortages and rising non-performing loans.

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Bloomberg: ECB Said to Buy Bonds of Portugal, Ireland to Cap Decline

August 4th, 2011

By Keith Jenkins and Anchalee Worrachate - 

The European Central Bank bought Irish and Portuguese government bonds, according to three people with knowledge of the transactions.

The ECB wasn’t seen buying securities from any other euro- region nations, said the people, under condition of anonymity because the trades are confidential. The central bank’s press office in Frankfurt didn’t immediately return a call seeking comment. ECB President Jean-Claude Trichet signaled that the central bank bought government bonds today to fight tensions in euro region debt markets. The ECB was not unanimous in voting for a resumption of bond buying, he said.

“I never said the SMP had been interrupted and you will see what we do,” Trichet said at a press conference in Frankfurt, referring to the ECB’s Securities Market Program. “I wouldn’t be surprised that before the end of this teleconference you would see something on the market.”

The yield on the Irish 10-year bond fell 14 basis points to 10.50 percent as of 2:34 p.m. in London. The Portuguese two-year yield dropped 57 basis points to 14.74 percent.

German two-year yield fell 10 basis points to 0.94 percent, while 10-year yields were two basis points lower at 2.38 percent.

The ECB’s bond-buying program differs from so-called quantitative easing policies pursued by the Federal Reserve and the Bank of England because the central bank mops up the liquidity created by the purchases, meaning the net effect on the money supply is neutral. The ECB began the program on May 10 last year to stabilize markets rocked by the region’s sovereign- debt crisis.

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Sydney Morning Herald: European crisis deepens as Spain, Italy hit

August 3rd, 2011

EUROPE has lurched back into financial crisis as Spain and Italy near the red line that triggered emergency bailouts for Ireland, Greece and Portugal.

Spanish and Italian leaders urgently moved to respond to interest rates on their sovereign bonds soaring to nearly 7 per cent, as investors spooked by the US debt crisis became more anxious about Europe’s stragglers.

Spain’s socialist Prime Minister, Jose Luis Rodriguez Zapatero, has delayed his summer holiday to manage the threat. Italian Prime Minister Silvio Berlusconi was due to address both houses of Parliament separately overnight to defend his policies and ward off calls for his resignation.

Italy’s Finance Minister, Giulio Tremonti, called an emergency meeting of Italy’s financial stability committee and was due to meet the head of the euro zone finance ministers’ group, Jean-Claude Juncker, overnight.

Ten-year Spanish bonds rose to 6.45 per cent and Italian bonds to 6.25 per cent, their highest levels since the creation of the euro zone. High interest rates make it difficult for countries to service their debts.

Sovereign bonds are issued by national governments to raise money and finance their debts. If a country is seen as less likely to be able to meet its repayments, its bonds will attract higher interest rates to compensate for the risk.

The trigger for the market alarm is believed partly to be anxiety over the US debt debate between Republicans and Democrats and fears the country might yet lose its AAA credit rating. If the US economy stalls, it will make it harder for struggling European countries to trade their way out of their problems.

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Reuters: Hungary local govts seek delay in franc repayments

August 3rd, 2011

Hungarian local governments have asked Prime Minister Viktor Orban to step in and encourage banks to accept a one-year moratorium on principle payments on about 600 billion forints ($3.18 billion) of Swiss franc loans.

The Swiss franc’s recent strong gains have brought new trouble for Hungary, which suffered a series of fiscal blowouts in the past and was saved from collapse with an international bailout in 2008.

Unorthodox revenue-side measures will swing the budget into a one-off surplus this year but growth could again come under threat if the franc’s strength persists and the government is forced into further fiscal cuts.

Like thousands of households in Hungary, local governments borrowed in Swiss francs and are suffering from the broadly stronger franc’s rise to record highs against the forint.

The structure of the debt issued in 2007-2008 provided for gradual repayments of the amount borrowed to begin three years into the loan period.

The chairman of the alliance of local governments said on Wednesday the body was now seeking a one-year delay to the start of such payments in the hope the forint can recover against the franc.

“The Alliance of Hungarian Local Governments has a proposal, which we will present in a letter to Prime Minister Viktor Orban today,” Gyorgy Gemesi, Chairman of the body told public radio MR1-Kossuth in an interview.

“These are mainly bonds issued with a 20-year tenor and if the start of principal payments is delayed by one year, this will mean a lower burden for (the remaining) 17 years (of the repayment period) than what this 250 Swiss franc level means.”

He added that based on informal talks, banks seemed open to the idea of a one-year delay.

The borrowers have been paying the interest on the loans and he made no mention of any change in that.

The Prime Minister’s Office could not immediately comment. A spokesman for the Hungarian Banking Association could not be reached immediately.

At 1001 GMT, the forint traded at 245 versus the franc, off record lows at 252 hit earlier in the day after the Swiss National Bank stepped in to stem further franc gains, but still some 37 percent weaker than average levels in 2007-08.

On Tuesday the central bank reiterated that the findings of its April stress test, which showed that domestic banks can absorb shocks from sharp gains in the Swiss franc, were still valid.

The tests were based on a 245 CHF/HUF exchange rate for the end of 2011 and a 257 CHF/HUF exchange rate for the end of 2012.

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