Greece Fm Project

8/8/2019 Greece Fm Project

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Greece debt default seen as unlikelyBy Robin Harding in WashingtonPublished: September 1 2010 22:32 | Last updated: September 1 2010 22:32

Debt default by an advanced economy such as Greece is unnecessary, undesirable and unlikely,according to a report released on Wednesday by the International Monetary Fund.

That contradicts the market consensus that Greece will eventually restructure its debts.

Markets are overestimating the risk of default, said Paulo Mauro, one of the authors of the IMF paper.

Once Greece has cut its deficit to zero, it will not need any new borrowing to finance its budget. Manyinvestors believe that, once Greece no longer needs them, it will try to cut its existing debts.

But the IMF authors say that in the eight cases during the past 20 years when an advanced economy withhigh government debts cut its deficit to zero, none of went on to default.

Examples include Belgium in 1984, Portugal in 1986 and Italy in 1991.

Once countries have endured the pain of adjustment, they go to great lengths to avoid the pain ofdefault, said Mr Mauro.

Some economists have argued that Greece will be unable to avoid a default because it needs to drivedown wages to become more competitive in the eurozone and that would increase the burden of its debt.But Mr Mauro and his colleagues say that, unlike an emerging market suffering a plunge in an overvaluedexchange rate, the adjustment in Greece will be gradual. They point to Irelands success in improving itscompetitiveness.

In a separate paper, IMF economists argue that the US and the UK could probably increase their public

debt burden by another 50 per cent of gross domestic product beyond projected 2015 levels withouttriggering a crisis.

But they say a further 100 per cent would be unlikely.

The IMF expects UK debt to be 91 per cent of GDP in 2015 and US debt to be 110 per cent of GDP.

The authors estimate how much fiscal space countries have based on their ability to grow and howresponsibly they had handled rising debt in the past.

They find that Greece, Italy, Japan and Portugal are close to the limit while many other countries havelimited room for manoeuvre. Countries would need to undertake fiscal adjustment efforts that are

extraordinary by their historical standards, said Jonathan Ostry, one of the authors of the study.

You want to maintain a considerable degree of fiscal space say 50 per cent of GDP away from the debtlimit, he said.

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Greece to receive 9bn more of EU loansBy Stanley Pignal in BrusselsPublished: August 19 2010 15:10 | Last updated: August 19 2010 17:42

Greece is in line to receive a further 9bn ($12bn, 7bn) in eurozone loans after the EuropeanCommission on Thursday cleared the second tranche of the bail-out facility agreed to alleviate its fiscaltroubles.

Olli Rehn, Commissioner for economics and monetary affairs, praised the measures taken by GeorgePapandreous government in recent months but warned of possible problems ahead.

Greece has managed impressive budgetary consolidation during the first half of 2010 and has achievedswift progress with major structural reforms, said Mr Rehn.

But he warned: Despite the significant progress made, challenges and risks remain. The main immediatechallenge is to safeguard adequate liquidity and financial stability of the banking sector.

Eurozone finance ministers would approve formally their part of the instalment at their next meeting onSeptember 7, said the Commission.

Mr Rehns assessment follows an August 5 visit to Athens by the Commission, the European CentralBank and the International Monetary Fund, the troika that is co-ordinating the 110bn facility put in placeafter Greece became unable to finance its sovereign debt requirements on the capital markets.

The Commission spoke approvingly of reductions that had been made faster than planned in the Greekbudget deficit and cash spending, achieved partly by cutting public sector wages and trimming backcapital expenditure.

But it said revenue generation was still lagging behind, and warned that the effort would have to becontinued in the second half of 2010 and beyond.

It endorsed the structural fiscal reforms undertaken since May, particularly within the public sector.

Measures that the Commission had pushed for, such as a census of civil servants and a crackdown ontax evasion, were also proceeding in a satisfactory way, it said, as were labour market reforms.

George Provopoulos, central bank governor, voiced optimism that Greece was ready to leave behind avicious circle that had undermined the economy.

However, a leading business organisation warned that private Greek companies faced a worseningliquidity squeeze.

Konstantinos Michalos, president of the Athens chamber of commerce and industry, said: Companies

are unable to get funding from the banks, as they in turn have lost access to int-ernational capitalmarkets.

Last week it emerged that the Greek economy contracted by 1.5 per cent in the second quarter, itsseventh consecutive period of decline. It is the only country in the 16-member eurozone to remain inrecession.



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Slovakia under fire over GreeceBy Jan Cienski in Warsaw, Stanley Pignal in Brussels and Gerrit Wiesmann in BerlinPublished: August 12 2010 20:10 | Last updated: August 12 2010 20:10

Slovakias new government came under fire from its eurozone partners, particularly Germany, onThursday after its parliament voted overwhelmingly to reject taking part in a European Union aid packagefor the troubled Greek economy.

The German government criticised the Slovak parliaments decision in unusually harsh terms. Allmember states committed themselves politically to assistance for Greece, said a spokesman forChancellor Angela Merkel. Every member relies on solidarity; solidarity is no one-way street. Ms Merkelwould address the issue when Iveta Radicova, the Slovak prime minister, visited the German capital on

August 25, he added.

The European Commission in Brussels also reacted angrily to the news.

It is a breach of the commitment undertaken by Slovakia in the Eurogroup, Olli Rehn, the economicsand monetary affairs commissioner, said in the wake of the vote. I can only regret this breach of solidaritywithin the euro area and I expect the Eurogroup and the Ecofin Council to return to the matter in their nextmeeting.

A Commission spokesman added that Slovakia had itself benefited from the increased financial stabilitythat resulted from the bail-out facility it originally endorsed.

But he stressed that the loan package to Greece was not put at risk by Slovakia, which was to providejust over 1 per cent of the total needed for the 80bn ($104bn, 66bn) bail-out.

Slovakia, which is much poorer than Greece, adopted the euro last year, and as a member of the zonewas expected to provide more than 800m, its portion of the rescue package that saved Greece this year.

The idea is deeply unpopular in Slovakia. Ms Radicova, who took power after parliamentary elections

in June, had long been opposed to bailing out Greece and her predecessor, Robert Fico, had beenlukewarm about the scheme.

The parliament voted on Thursday by 69-2 to reject the Greek aid package. Mikulas Dzurinda, the foreignminister, explained that Greeces troubles were the result of irresponsible decisions made by memberstates and commercial banks, and that his country was still pro-European.

While rejecting the Greek package, the Slovak parliament did back the countrys 4.4bn participationin the larger 440bn European Financial Stability Facility, aimed at preventing the spread of theGreek crisis.

Slovakia has a per capita GDP of $21,200 at purchasing power parity, while Greece has a per capitaGDP of $32,000. Slovakia embarked on a bout of painful economic reforms in 1998 that transformed itinto one of Europes top economic performers.



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Greece sinks deeper into recessionBy Kerin Hope in AthensPublished: August 12 2010 13:02 | Last updated: August 12 2010 13:31

Greece sank deeper into recession in the second quarter, according to provisional data released onThursday by the national statistics service.

A sharp rise in the year-on-year jobless rate from 8.5 per cent to 12.5 per cent in May a record increase also reflected worsening conditions in the real economy, said analysts.

Jobs are mainly being cut in small and medium-sized companies, which were the first to be affected bythe countrys debt crisis.

The second half of 2010 will be difficult...theres been a very steep decline in construction and the fourthquarter wont be supported by tourism revenues, said Platon Monokroussos, a senior economist at EFGEurobank.

Greece has adopted severe austerity measures in return for a 110bn ($143bn, 91bn) bail-out in Mayby the European Union and International Monetary Fund.

Elstat, the statistics service, estimated the economy had shrunk 3.5 per cent in the three months to theend of June from the same period last year. It said second-quarter gross domestic product had been 1.5per cent lower than in the first three months of the year.

A fall in investment and a significant reduction in public consumption contributed to the decline inGDP...This was partly offset by an improved trade balance, Elstat said.

Anke Richter, executive director of research at Conduit Capital Markets, said the 1.5 per cent contractionwas more than the 1.1 per cent forecast by economists.

But turning around a sovereigns finances is a medium-term project, so it is important not to place too

much stock in todays figures...2011 will be the crunch year that will decide Greeces fate, she said.However, Elstat warned that the year-on-year figure could be revised because the way in which quarterlystatistics are compiled has recently been changed.

Greece passed legislation this year to make its statistical office independent after admitting thatsuccessive governments had fudged economic statistics for political reasons.

A former senior International Monetary Fund official was hired to head Elstat and an official from Eurostat,the European Union statistics service, was appointed to its board.

Experts from the IMF and the EU said in Athens last week that the economy was on track to shrink by 4

per cent this year because of the impact of tax rises and spending cuts.

George Papaconstantinou, finance minister, was slightly more optimistic, forecasting a contraction of 3-3.5 per cent this year.



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ECB says banks refinancing is manageableBy James Wilson in FrankfurtPublished: August 12 2010 12:31 | Last updated: August 12 2010 12:31

Eurozone banks face a manageable task to replace an estimated 1,300bn ($1,667bn) of debt financethat is due to be repaid over the next three and a half years, the European Central Bank said onThursday.

However, banks will face more competition for long-term debt funding, the ECB suggested, withsovereign and corporate issuers likely to step up their own borrowing in the markets.

Concerns about obtaining financing from investors have dogged some eurozone banks for months, withnet borrowing falling in May and June and a number of banks still dependent on funding from the ECBrather than being able to borrow easily in debt markets. Some analysts are also concerned by the amountof fresh finance that banks look set to need in coming months to replace maturing debt.

Yields on bank debt, reflecting perceived risk, sharply increased between April and June as investorsgrew nervous about banks exposure to some indebted eurozone member countries such as Greece.That prompted many banks to refrain from or delay their borrowing.

Basing its estimate on figures from Dealogic, a data provider, the ECB said the refinancing burden onbanks up to the end of 2013 a period of 14 quarters would be less than in the equivalent period oftime dating back to the start of 2007.

Since 2007 about 1,900bn of debt issued by eurozone banks had matured, the ECB said, while bankshad been able to sell about 1,700bn of debt in that period.

The eurozones central bank said the regions banks might in any case rein back on debt issuance inresponse to a need to change their business models after the crisis. Many banks, for example, arestepping up efforts to base more of their funding on customer deposits seen as much more stable thanrelying on debt markets, which all but ground to a halt for bank borrowers at times over the past twoyears.

The need for a renewal of maturing debt securities issued could moreover be lower than in the past, theECB said in its monthly bulletin for August.

The ECB said eurozone banks may also issue less debt as they try to shrink their balance sheets in thewake of the financial crisis, while they could also be facing weaker demand for loans.

Many corporate borrowers have in recent weeks found it very cheap to borrow in debt markets rather thanuse bank funding and some analysts believe there may be a long-term shift towards companies by-passing banks perceived as unreliable after the crisis to borrow more using their own bonds instead.

Meanwhile governments are having to raise their own borrowing to pay for the cost of solving the financialcrisis and massaging fragile economies back into life.

The ECB also said some banks were still relying on government-backed guarantees for their debtissuance, in spite of the cost they were charged by governments for using such guarantees.

This points to the existence of a subset of euro area [banks] that are being confronted with very tightborrowing conditions when attempting to tap market-based debt funding without government backing, theFrankfurt-based institution said.


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Eurozone industrial output falls in JuneBy Stanley Pignal in BrusselsPublished: August 12 2010 11:47 | Last updated: August 12 2010 11:47

Industrial production in the eurozone fell unexpectedly in June, prompting concerns over the strength ofthe economic recovery.

Factory output dropped 0.1 per cent, against forecasts of a 0.6 per cent jump, in line with the trendover the previous three months. But the bad news was tempered by an upward revision of the May figure,from 0.9 per cent to 1.1 per cent growth, according to seasonally-adjusted data from the EuropeanCommission.

Unlike most recent economic statistics in the eurozone, there was little to distinguish the so-called coremembers that have performed strongly against the peripheral economies plagued by acute fiscalproblems.

In fact, Germany (-0.5 per cent) and France (-1.6 per cent) accounted for the bulk of the shortfall, thoughGreece, Spain and Portugal also saw retrenchment in industrial production.

Eurozone quarterly gross domestic product figures for the second quarter are released on Fridaymorning. Forecasters are looking for a quarter-on-quarter rise of between 0.5 and 1 per cent, driven byGerman growth well above 1 per cent.

Industrial production is known to be a volatile series, and analysts underlined that bullish data from Julybusiness surveys pointed to a stabilisation if not an outward recovery of factory output in theintervening months.

But the fall in industrial output echoes lacklustre figures in China and the US in June.

Its definitely too soon to declare the eurozone manufacturing boom over, said Peter Vanden Houte,economist at ING. Year-on-year industrial production still rose 8.2 per cent in June. That said, with the

US and China showing signs of slowing, it would be foolish to believe that Europe would remainunaffected.

Manufacturing has been among the healthier of Europes economic sectors, aided by restocking andburgeoning exports on the back of a depreciated euro. However, there are concerns that lack ofconsumer demand from inside the eurozone could eventually hamper industrial output in the second partof the year, particularly if global demand sags.

The drop in industrial output was caused overwhelmingly by lower production in consumer goods, inparticular durables such as home appliances and furniture. That drop more than offset higher energy andcapital goods production.

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Q&A: Greece's financial crisis explainedMarch 26, 2010 -- Updated 1501 GMT (2301 HKT)

STORY HIGHLIGHTS

y Greece's national debt is now bigger than the country's economyy There are fears Greece's problems will infect other eurozone countriesy Country has implemented austere measures to try to curb debt

(CNN) -- European Union leaders have hailed an agreement to use funds from both Europe and the

International Monetary Fund to help financially-crippled Greece as important for the euro zone.

So what's the problem in Greece?

Years of unrestrained spending, cheap lending and failure to implement financial reforms left Greece

badly exposed when the global economic downturn struck. This whisked away a curtain of partly

fiddled statistics to reveal debt levels and deficits that exceeded limits set by the eurozone.

How big are these debts?

National debt, put at 300 billion ($413.6 billion), is bigger than the country's economy, with some

estimates predicting it will reach 120 percent of gross domestic product in 2010. The country's deficit

-- how much more it spends than it takes in -- is 12.7 percent.

So what happens now?

Greece's credit rating -- the assessment of its ability to repay its debts -- has been downgraded to

the lowest in the eurozone, meaning it will likely be viewed as a financial black hole by foreign

investors. This leaves the country struggling to pay its bills as interest rates on existing debts rise.

The Greek government of Prime Minister George Papandreou, which inherited much of the financial

burden when it took office late last year, has already scrapped most of its pre-election promises and

must implement harsh and unpopular spending cuts.

Will this hurt the rest of Europe?Greece is already in major breach of eurozone rules on deficit management and with the financial

markets betting the country will default on its debts, this reflects badly on the credibility of the euro.

There are also fears that financial doubts will infect other nations at the low end of Europe's

economic scale, with Portugal and the Republic of Ireland coming under scrutiny. If Europe needs to

resort to rescue packages involving bodies such as the International Monetary Fund, this would

further damage the euro's reputation and could lead to a substantial fall against other key currencies.

So what is Greece doing?

As already mentioned, the government has started slashing away at spending and has implemented

austerity measures aimed at reducing the deficit by more than 10 billion ($13.7 billion). It has hiked

taxes on fuel, tobacco and alcohol, raised the retirement age by two years, imposed public sector

pay cuts and applied tough new tax evasion regulations.Are people happy with this?

Predictably, quite the opposite and there have been warnings of resistance from various sectors of

society. Workers nationwide have staged strikes closing airports, government offices, courts and

schools. This industrial action is expected to continue.

How are Greece's European neighbors helping?

Led by Germany's Chancellor Angela Merkel, all 16 countries which make up the euro zone have

agreed a rescue plan for their ailing neighbor. The package, which would only be offered as a last


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resort, will involve co-ordinated bilateral loans from countries inside the common currency area, as

well as funds and technical assistance from the International Monetary Fund (IMF).

According to a joint statement on the EU Web site, a "majority" of the euro zone States would

contribute an amount based on their Gross Domestic Product (GDP) and population, "in the event

that Greece needed support after failing to access funds in the financial markets."

This means Germany will be the main contributor, followed by France. Although the announcementdid not mention any specific figure, a senior European official quoted by Reuters said that the

potential package may be worth around 20 billion euro (US$26.8 billion).

However any European-backed loan package requires the unanimous approval of European Union

members, meaning any euro zone country would have effective veto power.

THE CONTAGION EFFECT

Greece's debt crisis could spread across Europe

ByNeil Irwin

Washington Post Staff Writer

Friday, May 7, 2010; 3:40 AM

MADRID -- A third straight day of decline in world financial markets on Thursday wasvivid evidence of a scary proposition: That the fiscal crisis that began in Greece monthsago is spreading across Europe like a virus, causing growing doubt even about the fatesof nations with far more manageable levels of government debt.

It is called the contagion effect, economists' metaphor for the rapid and hard-to-predict

spread of a financial crisis, and it's driven by the fragility of investors' perceptions.Contagion is a function of vicious cycles in which confidence in a country's ability torepay its debts falls. If investors lose piles of money on the debt of one country, theyassume that owning the debts of other countries with similar finances might cause themto lose even more. So they sell their investment in the second country, which in turn mustpay higher and higher interest rates to get any loans, which adds to its debt and creates afiscal death spiral that can well move on to the next country.

Spain is in the path of the storm and at the mercy of global investors, who are operatingunder the twin pressures of fear and greed. The country has less debt relative to the size

of its economy compared with the United States or Britain, but contagion can threateneven countries that have managed their government debt responsibly if investors changetheir views about the country's future deficits or ability to handle debt.

The odds of a full-blown sovereign debt crisis have risen significantly over the past twoweeks and especially after the market turmoil Thursday, such that Europe in 2010 looks


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increasingly like East Asia in 1997 and 1998, when a currency devaluation in Thailandsparked a broad crisis in South Korea, Indonesia and elsewhere.

Once a panic starts and contagion is spreading, it often takes dramatic government actionto reverse the tide -- including external bailouts and steps to address the underlying cause

of the crisis that are more aggressive than those needed in a non-panic situation.

In the case of Asia in the late 1990s, it took a wall of money from the InternationalMonetary Fund and the United States to arrest the series of crises, combined with painfulausterity measures in the nations involved. Banking panics have similar dynamics, andduring the 2008-2009 financial crisis, the U.S. government stepped forward with the$700 billion Troubled Assets Relief Program, a series of unconventional lending effortsfrom the Federal Reserve, and stress tests for major banks that required many of them toraise more private capital.

One lesson that could apply to the current situation is that a large-scale intervention fromunaffected countries or the European Central Bank could ultimately be needed. Anotheris that government officials in the affected countries might need to promise moreaggressive budget cuts than they would have if the situation hadn't become a marketconfidence game.

"You have to overdo the fiscal consolidation measures to convince people that you areserious," said Rodolfo G. Campos, an economist at IESE Business School in Madrid.

On Thursday, Jean-Claude Trichet, head of the ECB, said there was no discussion at abank policymaking meeting about buying countries' debt -- a decision that would meanessentially printing money to fund borrowing by Greece and other at-risk countries.

That drove up borrowing rates for Greece, Spain, Portugal and other nations viewed as infinancial trouble, and it drove the price of the euro down as low as $1.25 -- down from$1.27 Wednesday and $1.35 three weeks ago -- as investors betting on continuingeconomic turmoil in Europe shifted their money to dollars.

European stock markets fell, with the British market off 1.5 percent, France's down 2.2percent, Spain's down 3 percent and Italy's off 4.3 percent. The Spanish stock market hasdropped 11 percent since Monday.

Analysts had hoped the ECB might use its essentially limitless ability to create money tostanch the crisis, though doing so could hurt the long-term credibility of the central bankas an inflation fighter that does not yield to politics.

"Measures that damage the fundamental principles of the currency union and the trust ofthe people would be mistaken and more expensive for the economy in the longer term,"


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said Axel Weber, a member of the bank's policymaking council, according to BloombergNews.

Still, Trichet did not explicitly rule out buying countries' debt, saying only that theconcept was not discussed. This suggests that the idea is not out of the question if the

situation becomes worse.

It did grow significantly worse since Trichet made his comments, with the Europeanmarket sell-off followed by an even more dramatic decline -- and partial rebound -- in theUnited States. Those losses spread to Asia early Friday, as stock markets tumbled onconcerns over the Greek debt crisis. Japan's Nikkei average slid as much as 3.7 percent inearly trading, before closing down 3.1 percent.

The herd selling seen around the globe is typical of financial contagion and shows howthese crises feed on investor psychology, not just economic fundamentals.

In the case of Spain, the country's public debt only adds up to about 70 percent of itsannual gross domestic product, compared with 84 percent in Germany, 82 percent inBritain, and 94 percent in the United States.

But with 20 percent unemployment and a generous set of social welfare benefits, Spain isrunning a higher annual budget deficit than those other countries -- 11 percent, comparedwith 2.3 percent in Germany. So to keep its debt from rising significantly, Spanishleaders need to rein in spending or raise taxes to reduce annual deficits.

Normally, they would have years in which to make that transition; after all, the debt

wasn't going to explode overnight.

But since it became clear to global investors that Greece was more indebted than theyrealized and that the country may not be able to pay back what it owes, buyers ofgovernment bonds have been taking a hard look at countries with debt problems of theirown. And they have focused on Spain, Portugal, Italy and Ireland.

Thus, while Spain may have more in common with Greece's sunny weather and nicebeaches than its level of indebtedness, markets have turned on the nation.

"If you look like somebody who is sick, you get sick," Campos said.

Once borrowing rates rise -- Spanish 10-year bond yields have risen to 4.2 percentThursday from 3.8 percent a month ago, though the shift in Greece was far more dramatic-- a vicious cycle is underway. With the price to roll over maturing debt higher, itbecomes that much harder to trim the budget deficit.


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The contrasts -- and increasingly, comparisons -- between Spain and Greece have becomea fact of life for Spanish politicians and, increasingly, ordinary citizens.

On the streets of Madrid, citizens take umbrage at being compared to the Greeks, whoseproblems were caused by free spending and hiding their degree of indebtedness.

"No, Spain is not like Greece. Our mentality is completely different. We have a differentmentality about working and developing things," said Juan Manuel Heranz, 35, amaintenance technician at the airport.

"We're not Greece," said Alexandra Gonzlez, 28. Her mother, Concepcin Lima,walking with her in downtown Madrid, chimed in: "But if we continue on like this, wewill be."

Q&A: Europe's banks 'stress-tested'By Paul Armstrong, CNN

July 23, 2010 -- Updated 1707 GMT (0107 HKT)

STORY HIGHLIGHTS

y Seven banks - five from Spain, one German and one Greek - fail stress testy Designed to assess how each bank would fare in another economic downturny Banks in the United States tested last year, with 10 told to raise more capitaly European Union hopes tests will restore confidence in banking sector

(CNN) -- European regulators issued report cards Friday following a month-long examination of 91

major banks across the region.

A total of seven lenders, including five smaller Spanish banks, failed the so-called "stress tests,"designed to rate how they would fare in another economic downturn.

Last year, ten of the 19 biggest U.S. banks -- including Wall Street titans Bank of America and

Citigroup -- failed similar tests, and were found to have shortfalls of around $75 billion in their cash

reserves, according to the U.S. Treasury.

Stress test results revealed

Despite this apparent setback, the failed U.S. banks' stocks were actually boosted as investors took

confidence from the transparency the tests provided, and the fact the banks required less new

capital than previously feared.

What did the test involve?

Banks that failed 'stress test'

Spain: Banca Civica, Diada, Espiga, Unnim, Cajasur.

Germany: Hypo Real Estate

Greece: ATEBank


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The Committee of European Banking Supervisors (CEBS) said it tested the banks' resilience during

various "what if" scenarios, including a "double-dip" recession within the EU which sees its economy

contract by 3 percent until 2011.

If the banks' capital is all but knocked out then they will fail the test and be asked to increase their

cash -- or capital -- reserves. This could be done through issuing new shares.

In their tests in 2009, American banks had to assume the U.S. economy would contract by 3.3percent and remain almost flat the following year. They also had to assume that housing prices

would fall an additional 22 percent and that unemployment would increase to 8.9 percent in 2009

and hit 10.3 percent in 2010.

Which banks were tested?

Ninety-one banks of varying size representing each of the member states, which equates to 65

percent of the EU banking sector.

The original plan was to test only the biggest lenders but concerns over many small and medium-

sized institutions prompted the expansion.

Which banks failed?

Seven, including five Spanish savings banks: Banca Civica, Diada, Espiga, Unnim and Cajasur.

Germany's Hypo Real Estate and Greece's ATEBank also failed.Howard Wheeldon, senior strategist at BGC Partners, said most people expected a number of

smaller banks across Europe to fail the test, and that the solution for many could be consolidation

through mergers with other banks.

"In some countries there may be room for that," he told CNN. "In Germany for instance there is a

need for many of the regional savings banks to merge. There are too many of them."

Why were European banks being tested?

The recent sovereign debt crisis that has engulfed a number of countries in the European Union --

including Greece, Spain and Portugal -- has raised fears that banks within the region are too

exposed if these countries default on their debts.

As a result, CEBS, which gives advice to the European Commission on policy and regulatory issues

related to banking, in collaboration with national regulators, assessed the resilience of the EU

banking system to possible adverse economic developments, and looked at the ability of banks in

the exercise to absorb possible shocks on credit and market risks, including sovereign risks.

They wanted to find out which banks -- the results have been published for each individual lender --

are carrying the most government liability, and whether it is German debt or Greek debt that sits on

their books.

Europe's banking system is only just recovering from the effects of the global financial crisis of 2008,

which ushered in the worst recession since the 1930s. Some of Britain's biggest lenders, such as the

Royal Bank of Scotland, were effectively nationalized as they struggled to cope with mounting losses

as the credit market dried up.

It has been a goodexercisein waking up the banks, though Iwouldprefer it was done through a more formalaudit

procedure.

--Analyst Howard Wheeldon


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But there is broad agreement among EU members that the stress test results will help to restore

confidence in the battered industry, while European Commission chief Jos Manuel Barroso said

they should "reassure investors by either lifting unfounded suspicion or by dealing with the remaining

problems that may exist."

How does the financial sector view the tests?

As with the U.S. tests last year, some analysts believe the tests are not rigorous enough."This isn't an audit process where someone's actually gone in to interview the banks and look at the

books," said Wheeldon. "It's a self-regulatory procedure where the banks have given the information

freely themselves. So I hope it's correct.

"If we wanted complete satisfaction then each bank would need to have been audited individually via

the European Central Bank, or under the jurisdiction of the European Central Bank.

"Let's see it how this plays out first. But if the (CEBS) report says only two or three banks have failed

then this will be a huge loss to its credibility.

"It has been a good exercise in waking up the banks, though I would prefer it was done through a

more formal audit procedure."

But according to CNN's Jim Boulden, if many of the banks fail some people will question whether the

exercise has done anything more "than scare an already fragile market."Will the banks take notice of the results?

"There's no doubt that they will take full notice of whatever the EU or any other regulator says," said

Wheeldon.

"They have no choice. If a government or a body such as the EU says your bank is not sufficiently

strong enough to withstand certain economic conditions then you have got to do something about it,

such as bringing in new money by issuing new shares."

Greek FinMin: markets still assessing reforms

PHOTOS

Previous Next

Greek Finance Minister George Papaconstantinou speaks to the Associated Press during an interview at his office in Finance

ministry in Athens , on Monday, Aug. 30, 2010. Greece's finance minister predicts international markets will wait until the end of the

year to see whether the country is meeting its financial targets before reacting positively to its efforts to overhaul the economy and

pull itself out of financial crisis.(AP Photo/Petros Giannakouris) (Petros Giannakouris - AP)


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By ELENA BECATOROS

The Associated Press

Monday, August 30, 2010; 1:38 PM

ATHENS, Greece -- The international bond markets will likely wait until the end of theyear before passing judgment on Greece's efforts to overhaul its economy and pull itselfout of a debt crisis that nearly led to the country's bankruptcy earlier this year, the financeminister said Monday.

George Papaconstantinou told The Associated Press in an interview that the marketsneeded time to be convinced that the government was meeting all its targets in a raft ofreform and austerity measures introduced over the last few months. In return, Greece gota financial lifeline from its partners in the eurozone and the International Monetary Fund.

Greece's cost of borrowing remains way too high for the government to tap the markets

for cash yet.

"Markets are not convinced overnight. They need the time. We believe at the momentthey are overpricing Greek risk," Papaconstantinou said.

The finance minister said attention will be focused on whether the government hits itstargets this year, including whether it manages to reduce its deficit from 13.6 percent ofgross domestic product in 2009 to 8.1 percent. So far, it is slightly ahead of its overalltargets, with better than expected performance on spending cuts offsetting a lag inrevenue. An EU and IMF review earlier this month said Greece had made "remarkable"

progress in its reforms.

"I think you will see a change starting in early 2011 which would allow us to come backo the market sometime in 2011," Papaconstantinou said.

Greece has essentially been shut out of borrowing on the international market for months,after an admission that the previous government had fudged the country's financialstatistics sent its borrowing costs spiraling to unsustainable levels.

Unable to tap the markets and in danger of defaulting on its debt, Greece sought helpfrom the IMF and the eurozone and is currently receiving rescue loans from a three-year

euro110 billion ($140 billion) package.

In return, it is implementing a strict austerity plan that has seen it cut civil servants'salaries, trim pensions, overhaul the social security and pension systems and increasetaxes.


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The country is "at the most difficult point" of pulling itself out of the crisis,Papaconstantinou said, adding that positive results were already starting to show.

Athens has already said it will start issuing monthly treasury bills from September,although Papaconstantinou said it was still unclear when the government might test the

waters with a longer-term bond.

"It will depend on how quickly conditions normalize," he said, adding that "it's clear thatat the moment it is of course way too early for that."

Greece can continue drawing rescue loans for three years, provided it meets all the targetsin each of its quarterly reviews. It is due to receive the second installment in September,after an EU and IMF review said the country had made "remarkable" progress in itsreforms.

The minister said it was too early to speculate on whether Greece would try to leave therescue program early or ask for an extension.

"There is a program with a specific timetable, we're abiding with that at the moment andwe're not having second thoughts about alternative timetables," he said.

Greece is currently in a recession - although the government has said it is milder thaninitially expected and the economy will shrink by less than the forecast 4 percent thisyear.

The minister noted that while it was clear there would be negative GDP growth rate this

year and next, "hopefully by mid-2011 you'll start seeing some positive signs of quarterlyGDP. When exactly is of course an open question. That will be the signal that there is aresumption, a serious resumption of growth."

That, coupled with the structural reforms the government is pushing through, willpersuade those seeking to invest in Greece, he said.

"It will convince them that the medium term outlook of the debt is actually manageable,"he said. "Because that is the last remaining element that is out there.

Greek FinMin: recession milder than forecastBy ELENA BECATOROS

The Associated Press

Wednesday, August 25, 2010; 10:02 AM

ATHENS, Greece -- Greece's recession is milder than initially expected and the economywill shrink by less than the forecast 4 percent this year, the finance minister said


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Wednesday, although a separate survey showed many businesses are struggling to stayafloat.

George Papaconstantinou told deputies in Parliament that although problems remained,there was now "light at the end of the tunnel," and reiterated that there was no question of

Greece restructuring its debt.

"We all know that three months ago, the Greek economy came to the brink of the abyss.We know that three months ago, it found itself a breath away from a suspension ofpayments," Papaconstantinou said. "We managed to avert the worst. We managed toavoid bankruptcy."

Still, a survey by GSEVEE, an association representing small businesses - which makeup 98.7 percent of Greek enterprises - showed that eight in 10 businesses have seen theiroverall economic situation deteriorate in the first six months of the year.

Greece narrowly avoided defaulting on its debt in May, after receiving the first batch ofrescue loans from a three-year, euro110 billion ($138.74 billion) package of loans fromthe International Monetary Fund and European Union. In return, it is implementing astrict austerity plan that has seen it cut civil servants' pay, trim pensions, overhaul thesocial security and pension system and increase consumer and income taxes.

The government has pledged to reduce its deficit from 13.6 percent of gross domesticproduct last year to 8.1 percent at the end of 2010 and below the EU's limit of 3 percentfor countries using the euro by the end of 2014.

"Problems remain. The Greek economy is in a recession. But it is in a recession that isshallower than we could have expected," the finance minister said, adding that "the yearwill close with a better performance than that which is foreseen ... in other words acontraction in real terms of 4 percent."

Papaconstantinou acknowledged that "jobs are being lost and will be lost," but insistedthat the overall situation was improving.

"We are starting to see the light at the end of the tunnel. We are starting to see the time atwhich we will be able to tell Greek citizens that the worst is over, that the Greek

economy is stronger, that income is increasing again," he said.

The IMF and EU have praised Greece's fiscal adjustment efforts, and the latest figuresshow the country has managed to reduce its deficit by 39.7 percent from January to July,slightly above the target of 39.5 percent.


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But while spending cuts are above target, revenue has grown at a slower pace thanexpected, and Greek business representatives have been painting a bleaker picture,especially for small enterprises employing less than 50 people.

The GSEVEE survey, which questioned 960 small businesses nationwide between July

15 and 28, showed conditions were tough. Of the polled companies, 77.8 percent saidthey had seen a fall in turnover, while 77 percent had seen a drop in demand and aboutone in five had to reduce their staff.

"The true economy ... is touching the limits of its buckling point," GSEVEE headDimitris Asimakopoulos said during a news conference. "A bit more, and it will exceedthe limits of what it can bear. It will break, and the consequences will be incalculable."

According to the survey, 44.4 percent believe they will quite likely or very likely faceproblems so severe they would have to shut down their businesses in the near future.

Why another fiscal stimulus won't do

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By Mohamed A. El-Erian

Friday, August 27, 2010

The great hope a few months ago was for a "recovery summer," with the economyresponding favorably to various policy initiatives. Yet the recovery has lost momentum,and while the end of the year will not be as gut-wrenching as the final 3 1/2 months of2008, when the global economy suffered a cardiac arrest, it will be as consequential inaffecting the welfare of millions of people.

Throughout the summer, data signals have become more alarming. Despite all therhetoric about job creation, unemployment remains stubbornly high and the problem isbecoming structural in nature (and, therefore, harder to solve). Consumer credit continuesto contract while small companies find it difficult to access new bank lines of credit.Housing activity is falling, and home values are poised for further declines asforeclosures increase. The trade balance has taken an ominous turn, with exportsstagnating and imports surging. More Americans are falling through the large holes in thecountry's safety net.

The equity markets are again under pressure while yields on Treasury bonds have

collapsed, reflecting that market's growing concerns about the weak economic outlook.With such fragility, households and companies have become even more cautious,undermining the "animal spirits" needed for economic expansion.

Meanwhile, the United States has received little help from the rest of the world. Yes,German growth is up, but a significant part reflects its well-functioning export machine.The beneficial spillover effects have been immaterial. And despite the political narrative


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to the contrary, market concerns with debt solvency in some eurozone countries (Greece,Ireland, Portugal and Spain) remain high.

Even a steadily growing China is proving to be of limited help. While Beijing isimplementing additional structural changes to reorient its economy toward domestic

consumption, the pace remains measured; what is understandable from a Chinese nationalperspective does little to help sustainably rebalance the global economy.

In sum, the current policy approaches here and abroad are unlikely to deliver a durableand robust U.S. recovery and, critically, create sufficient growth in jobs. Yet the maindebate in Washington is whether to do more of the same -- namely, another fiscalstimulus and another round of quantitative easing by the Federal Reserve. This clearlyconflicts with evidence that a broader and more holistic response is needed.

These realities will fuel debate among economists, who already hold unusually divergent

views, and reignite the discomforting notion that economic unthinkables and improbables-- such as a double-dip recession and a deflation trap -- are more of a possibility.

What is critical to keep in mind is that this situation is part of a broad, multiyear processdriven by national and global realignments. It's a secular phenomenon that needs to bebetter understood and navigated -- by recognizing its structural dimensions and byurgently broadening the excessively cyclical policy mindsets that abound. Unfortunately,the approach in too many industrial countries has been to kick the can down the road,seemingly hoping for a series of immaculate economic recoveries.

Policymakers must break this active inertia by implementing a structural vision toaccompany their current cyclical focus. Measures are needed to address key issues, whichinclude the change in drivers of growth and employment creation; the high risk of skillerosion and lost labor productivity; financial deleveraging in the private sector; debtoverhangs; the uncertain regulatory environment; and the unacceptably high risks facingthe most vulnerable segments of society.

Specific measures would include pro-growth tax reform, housing finance reform,increased infrastructure investments, greater support for education and research, jobretraining programs, removal of outdated interstate competition barriers and strongersocial safety nets.

That, of course, is what is desirable; how about what is likely?

With the recovery's visible loss in momentum, more people are coming to appreciate theimportance of structural issues. Indeed, some elements of the package are visible. Yet, tomy dismay, the prospects for a sufficiently bold policy reaction are doubtful. Post-financial crisis, it is no longer just about the "unusually uncertain" economic outlook and


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related challenges for a policy approach that remains too reactive and ad hoc. The politicsof structural change are now a material impediment.

An already polarized political environment is becoming even more fractured by real andfar less substantive issues. There is virtually no political center that can anchor consensus

and enable sustained implementation of policy. Meanwhile, as anti-Washingtonsentiments rise, interest in a national agenda is increasingly giving way to the electioncycle. Internationally, the impressive degree of cross-border coordination seen during theglobal financial crisis has been reduced to inconsistent -- and at times contradictory --national responses.

This worrisome trio of increasingly ineffective national and global policy stances, intensepolitical polarization and growing social pressures speaks to the risk that the economy'srecent soft patch will evolve into something even more troublesome and sinister.

I hope that sober policy responses will accompany the coming cooler temperatures.Given the proximity of the November elections, however, I worry they may not.

Mohamed A. El-Erian is chief executive and co-chief investment officer of the investment

management firm Pimco and author of the 2008 book "When Markets Collide."

European banks may face more frequent stress tests

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By Ben Moshinsky and Sara Eisen

(c) 2010 Bloomberg News

Tuesday, August 24, 2010; 5:09 AM

Aug. 24 (Bloomberg) -- Lenders in Europe may face more frequent stress tests to bolsterconfidence in the region's banking industry, Europe's top economy official said.

The European Union is considering at what "kind of interval" to repeat the bank stress-testing exercise that ended last month, Olli Rehn, the EU commissioner for economic andmonetary affairs, said yesterday in a Bloomberg Television interview in New York.

"This is something I have to talk to the finance ministers about," he said. Stress tests are"a very useful instrument of reinforcing confidence for transparency and sound and solidanalysis," said Rehn, who will meet with European finance chiefs in Brussels on Sept. 7.

EU regulators carry out yearly stress tests on the biggest lenders in the region. Last month91 banks, accounting for 65 percent of Europe's banking industry, were examined ontheir resilience in the event of a shrinking economy and a drop in government bondvalues.

Only Germany's Hypo Real Estate Holding AG, Agricultural Bank of Greece SA and fiveSpanish savings banks lacked adequate reserves to maintain a Tier 1 capital ratio of atleast 6 percent under the worst-case scenarios, according to results published on July 23.

While the July test results provided greater transparency about lenders' holdings ofsovereign debt, they were criticized for not being stringent enough. European banks wereshown to need only 3.5 billion euros ($4.4 billion) of new capital, about a tenth of thelowest analyst estimate.

The evaluations took into account potential losses only on government bonds the bankstrade, rather than those they are holding until maturity. That ignored the majority ofbanks' holdings of sovereign debt, analysts have said.

The "stress tests were certainly viewed as not credible," Linda Yueh, an economist at

Oxford University, told Bloomberg Television today. Nonetheless, they "opened up thebalance sheets of these banks" and "that sort of transparency does reassure anyone who isworried about" the region's banking industry.


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How bad is Greece's debt?Posted ByAnnie Lowrey Wednesday, February 10, 2010 - 12:48 PM

Here are a chart and a graph showing the PIIGS' and the United States' indebtedness -- more

specifically, their public debt and 2009 deficit relative to GDP.

Just glancing at the chart, and remembering that the PIIGS are among the weakest economies in

Europe, it seems that the United States isn't in great shape either. It's just on par with Spain, whose

economy is struggling.

But the United States has a number of advantages that make its debt and deficit picture brighter. In

the future, Washington might answer to Beijing when it comes to its debt addiction. But for now, it

determines its own fiscal and monetary policy measures. Not so for the euro-using PIIGS.

Washington can slash its interest rate to zero, devalue the dollar, and perform quantitative easing --

none of which the PIIGS can do. Plus, Washington has much lower debt costs; much of the country's

debt is basically free, due to the dollar's status as the world's reserve currency.


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In contrast, countries like Spain and Greece are mostly at the mercy of their partners in the

Eurozone. At The Guardian, economist Claus Vistesen notes that there is no "systemic set-up," no

playbook, for what the Eurozone should do to prevent or counter the default of one of its members.

The European Central Bank can't bail Greece out, per Europe's own rules -- the Maastricht treatysays that "the Community should not be liable for or assume the commitments of central

governments, regional, local or other public authorities of another member state." Simon

Johnsonargues that the IMF might be the obvious player to step in, but throws cold water on the

idea -- would it have enough money to bail all of the flailing PIIGS out? Would it provide the same

sweetheart deals it did to Eastern European countries? Where would that leave the Eurozone?

I'm a bit more bullish on the prospect of the IMF stepping in with an emergency deal. But I think it is

more likely the strongest of the big European economies, led by Germany, will eventually come

around to coming together along with other partners to write a check and keep Greece afloat.

http://en.wikipedia.org/wiki/2010_European_sovereign_debt_crisis

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