Posts Tagged ‘Financial Times’

EU To Increase Bailout Fund, Brussels Demands More Austerity

In Financial Markets, Health and Environment, International Econnomic Politics, Law & Regulations, National Economic Politics, Quantitative Finance, Views, commentaries and opinions on 13.01.11 at 02:13

EU economics and monetary affairs commissioner Olli Rehn calls for a substantial increase of the European bailout fund ahead of the meeting between European finance ministers next week. Mr. Rehn also issue a stark warning about all the deficit-slashing austerity measures that European states have so far imposed – it is not enough.

“There is insufficient ambition and a lack of urgency in implementation. That needs to change.”

Olli Rehn

Well, there is one thing the EU leaders absolutely not is lacking, and that is ambitions.  The economics and monetary  commissioner is asking for Europe to embrace structural reforms to bring an end to the debt crisis – by the end of this year.

“We need to review all options for the size and scope of our financial backstops – not only for the current ones but also for the permanent European stability mechanism too,” EU economics and monetary affairs commissioner Olli Rehn writes in an article in the Financial Times Wednesday.

“There is insufficient ambition and a lack of urgency in implementation. That needs to change,” he writes.

The commissioner, who calls for Europe to embrace structural reforms to bring an end to the debt crisis this year, wants to see changes to tax and benefit systems, reform of labor markets and pension provision, a loosening of business regulation and more investment in innovation.

“This calls for a comprehensive response by the whole EU and for bold fiscal and structural measures in all member states.”

He issued the call ahead of the unveiling of the European Commission‘s first annual growth survey, essentially a template with spending recommendations for EU member states, published as part of an effort to bring European-level coherence to national budgetary plans.

The EU member states are already considering an increase in the effective lending capacity of European Financial Stability Facility (EFSF).

While the EFSF kitty amounts to €440 billion, as more countries become borrowers from rather than guarantors of the fund, the actual capacity of the fund currently sits at roughly €250 billion.

Some governments favor a hike in the effective lending capacity to the full €440 billion, while others are looking to a doubling of the fund.

Member states are considering expanding the role of the EFSF to permit the common purchase of government bonds, an exercise which is currently the competence of the European Central Bank.

According to EU sources, any decision on the matter hinges on the result of government bond auctions this week, particularly Portugal’s trip to the market, reports.

Mr Rehn told reporters Wednesday that “rigorous” cuts and “structural reforms” were necessary for Europe to emerge from its ongoing debt crisis and return to growth.

“Without major changes in the way the European economy functions, Europe will stagnate and be condemned to a viscous circle of high unemployment, high debt and low growth,” he said.

Adding the following warning: “Without intensified fiscal consolidation across member states, we are at mercy of market forces.”

(Now, that’s also an interesting perspective!)

The commission says that “bold” and “resolute policies” are needed to turn around weak projected growth of around 1.5 percent for the EU over the next ten years and 1.25 percent for the euro zone.

Brussels wants to see further cuts to budgets in 2012 on welfare reform – including more conditionality attached to benefits, and a raising of the “premature” retirement ages.

Labor markets should also be made more flexible and “strict and sustained wage moderation” should be maintained.

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Jon Stewart Takes On Obama’s Chief Economic Advisor

In Financial Markets, Health and Environment, International Econnomic Politics, Law & Regulations, National Economic Politics, Philosophy, Views, commentaries and opinions on 26.10.10 at 21:39

Once again Jon Stewart takes on a task that primary should have been performed by the top news media. You know, like Financial Times, Wall Street Journal, CNBC and the other major opinion makers, simply by asking US President Barack Obama’s chief economic advisor what he’s actually advising the president to do about the economic mess.

Austan Dean Goolsbee (born 1969) is an American economist, currently serving under President Barack Obama as the Chair of the Council of Economic Advisers.

Goolsbee is on leave from the University of Chicago where he is the Robert P. Gwinn Professor of Economics at the Booth School of Business.

Okay, here it is; Jon Stewart’s exclusive interview with Austan Dean Goolsbee.

Enjoy !

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Japan Struggle To Weaken Yen

In Financial Engeneering, High Frequency Trading, Law & Regulations, Quantitative Finance, Technology on 08.10.10 at 00:22

Tadashi Nakamae, president of Nakamae International Economic Research and a former chief economist of Daiwa Securities, provides valuable insight on the Japanese currency problem in a commentary, published by the Financial Times, Thursday.

“The weaker dollar and renminbi is forcing the Bank of Japan to further ease monetary policy, which poses many dangers for the Japanese banking system.”

Tadashi Nakamae

Even if the yen was overvalued in 1995 there is little doubt that the yen is currently undervalued. Japan’s currency is now at a similar level to its peak in 1995, when it hit Y79 against the dollar, Mr. Nakamae points out.

Japanese competitiveness has increased as a result. Yet Japanese industries are not efficient, competitive nor profitable despite the facts mentioned above. There are two reasons for this.

First, zombie companies, kept alive by ultra-low interest rates and an undervalued yen, prevent surplus capacity from being reduced. They squeeze profit margins and lower productivity at healthy companies.

Second, emerging-market currencies have been undervalued since the Asian crisis in the late 1990’s.

The non-Japan Asian currencies which collapsed during the crisis have never returned to their pre-crisis levels even though their economies recovered and even enjoyed accelerated growth.

Japanese manufacturers have shifted their factories for mass production and mass consumption to emerging markets to take advantage of cheaper wages and better exchange rates.

This has taken jobs away from Japan.

Japan’s domestic manufacturers need to shift to more high value-added capital intensive products to restore their competitiveness. To this end Japan has to create domestic demand for these manufacturers’ goods.

For example, increasing services consumption, such as healthcare and nursing, as well as agriculture, will lead to a substantial rise in demand for robotics. Japan’s robotics producers have to shift their emphasis from cars to these service industries.

There are similarly huge potential domestic markets for high-end manufacturers.

The reason why an undervalued yen was maintained is mostly due to interest rate differentials.

Japanese interest rates have fallen sharply since 1990 reflecting the country’s deflationary trend.

On the other hand, American interest rates remained relatively high as inflation remained positive. Recently interest rate differentials between the two countries have narrowed rapidly and this has been reflected in yen appreciation.

Japan’s latest moves to stimulate its economy will have a limited impact on the yen. For this trend to stop, inflation needs to re-emerge in the US and its long-term interest rate to rise again.

However, deflationary pressures are increasing in the developed world, including the US.

The biggest force behind this is the undervaluation of emerging-market currencies, notably the renminbi. As China refuses to allow its currency to appreciate, inflation in China – and deflation in the developed world – are intensifying, and the correction of exchange rates in real terms is continuing.

The yen continues to be over-valued against the renmimbi and other emerging-market currencies.

As long as China or Korea rejects the appreciation of their currencies, a rising yen should be halted. But any time Japan tries to do this, it is seen as an intervention against the dollar.

Inevitable, since the renminbi and other Asian currencies are more-or-less pegged to the dollar, leaving the dollar as the only key currency against which Japan can intervene in order to produce these results.

The adjustment of the yen against the dollar and the euro, however, has been reasonable. That is surely why it will be almost impossible for any Japanese intervention to succeed. Such actions will only serve to delay the yen’s appreciation.

What would really help Japan is if the United States talked less and acted more on its supposedly firm stance against China’s manipulation of the renminbi.

More importantly, the Federal Reserve should stop talking about another round of quantitative easing, as this is a de facto dollar-devaluation policy.

Whether the Federal Reserve actually implements more quantitative easing is not significant, since hints, leaks and signals are enough to weaken the dollar.

There are two problems:

As the dollar weakens, the renminbi also weakens against the yen, euro and other currencies, giving China, their biggest competitor, an added advantage. Thus the Federal Reserve has created an unintended but very real de facto China export-support policy.

Second, the weaker dollar and renminbi is forcing the Bank of Japan to further ease monetary policy, which poses many dangers for the Japanese banking system.

This will push down long-term interest rates (short-term interest-rates are already at zero), narrowing the yield spread, which constitutes most of the banks’ profit margin (their main business of lending is losing money).

Even so, Japan’s aim should not be to stop yen appreciation but adapt to a stronger yen by accelerating structural reform by shifting from exports to domestic consumption.

If it succeeds, a stronger yen, may well turn out to have been a boon for the Japanese economy.

By Tadashi Nakamae

President of Nakamae International Economic Research and a former chief economist of Daiwa Securities.


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In The Mind Of Jean-Claude Trichet

In Financial Markets, International Econnomic Politics, National Economic Politics, Views, commentaries and opinions on 17.09.10 at 02:46

Governor Jean-Claude Trichet of the European Central Bank is considered one of the most powerful and influential people in the world, alongside the US FED chief Ben Bernanke. But there are big differences in their fundamental way of economic thinking; Trichet being a product on the European anti inflation policy, Bernanke a traditional US FED banker who don’t hesitate to use the money supply to manage conjunctures at the expense of the possible inflation threats. Jean-Claude Trichet don’t give many interviews. But last week he sat down with two reporters from the Financial Times. Here’s a full transcript of the interview.

“We have permanently to be in a state which I call credible alertness.”

Jean-Claude Trichet

Jean Claude Trichet gestures before his conference in Madrid.

The following interview was conducted by Messrs Lionel Barber and Ralph Atkins from the Financial Times, and published on September 10th. Until now the rare interview has only been available to FT subscribers. However, by the courtesy of Bank of International Settlements, here’s a full transcript:

Financial Times: After the events of the past few years, are you confident that the euro can survive, and if so, why?

Jean-Claude Trichet: Yes, I am confident, of course! You know how much skepticism there was in the run-up to the setting-up of the euro. The best way to measure how much has been done is to conduct a thought experiment and place ourselves at the beginning of 1998 or, perhaps even more boldly, in 1994, and imagine hearing somebody say the euro would be launched on time in January 1999, that it would start with 11 countries, that very rapidly there would be 16 countries. And that after 11 ½ years, for these 16 countries and more than 330m people, not only would the stability of the euro be in line with our definition of price stability – below but close to 2 per cent – but that the level of price stability would be better than that obtained in the previous 50 years by major currencies before the euro. Over the 11 ½ years, euro area inflation has averaged 1.97 per cent. That would certainly have been considered much too bold, much too optimistic, perhaps totally unrealistic – but that is what we’ve been doing. So “yes, sir”, the euro is there. The euro area faces a lot of challenges, as is the case for all major advanced economies. All their central banks have a lot of challenges today, and this is no time for complacency for any of us, but the success of the euro, measured as I just suggested, is obvious.

Financial Times: What would you describe as the main challenges facing the euro today?

Jean-Claude Trichet: I would say that we have all the challenges of major central banks in the advanced world. There is the challenge of coping, in terms of our own responsibility, with the “turbulent episode” in which we find ourselves since three years. We have to cope with the challenge of globalization. We have to cope with the challenges of science and technology, which is developing so rapidly that it creates for the central bankers a lot of additional challenges, in particular in terms of assessing correctly productivity and the impact of IT on the financial sector. Population aging is also a big challenge for all central banks. We have two other challenges that other major central banks do not have. One is them deepening and overall implementation of the single market with a single currency, which has been Europe’s ambition since the very beginning. We are the only central bank which is transforming, by virtue of its own activity, the economy under its jurisdiction. The second challenge is enlargement. We were 11 countries at the beginning. Next January we will be 17, with Estonia joining. This highlights the challenge of permanently strengthening and deepening the governance of the euro area, with new economies coming in.

Financial Times: Before we talk about governance, let me ask you some specific questions about the crisis management measures. How are you going to reduce the dependence of the likes of Greece, Portugal, Spain, Ireland on extra liquidity provided by the ECB?

Jean-Claude Trichet: As you know, the European economy relies very much in terms of financing on commercial banks. So it’s not surprising that our own “non-standard measures” concentrate much more on bank refinancing than on intervening in markets, in comparison with the Fed. As markets gradually stabilize, our non-standard measures, which are fully consistent with our mandate and, by construction, temporary in nature, will continue to be 2 BIS Review 115/2010 progressively phased out. So we are accompanying the market as it progressively goes back to normal. But, as I said already, it is a process which takes time.

Financial Times: Do you have in mind, though, a need to phase out “non-standard” refinancing and do you have a sort of time horizon for this?

Jean-Claude Trichet: We of course have to consider all those measures as transitory. They are there to cope with a situation which is abnormal – to help correct those markets that are dysfunctional and thereby help restore a more normal transmission mechanism for our monetary policy. We have eliminated one-year liquidity, and we have also phased out six-months liquidity. The decisions we took last week take precisely into account, through three fine tuning operations in the last quarter, this progressive phasing out and its impact on liquidity.

Financial Times: Where do you think we are in this crisis? It’s a difficult question. I mean, if I’d asked Roosevelt in 1935 he would have had a hard time answering the question too…

Jean-Claude Trichet: I guess so, yes. I would say that the correct response is that we are in a situation where central banks in particular, and also other authorities, have to remain alert and have to know that we are in an uncertain universe. We always have to be prepared for new challenges that can not necessarily be foreseen and that might be in some respect unpredictable. We have permanently to be in a state which I call credible alertness.

Financial Times: How close did the euro area come to disaster in May?

Jean-Claude Trichet: No, I don’t think that the euro area was close to disaster at all – seen from inside. I know how Europe functions. I know how the constellation of authorities functions, at the level of the various nations and at the level of the European institutions,. Seen from the outside, I would say that it’s always difficult for external observers to judge and analyze correctly the capacity of Europe to face up to exceptional difficulties. There is no other model to which we can refer – either in history or in a fully fledged political federation such as the US, and certainly not in comparison with centralized states such as Japan or the UK. But I’m always confident. In May we had additional proof of the capacity of Europe to cope with new challenges.

Financial Times: Can you explain why [in May] the ECB changed its mind on government bond purchases? There was a lot of criticism in Germany especially.

Jean-Claude Trichet: When I talk of “credible alertness” I really mean it. When we decided on 9 August 2007 that it was appropriate to embark in an unlimited supply of liquidity in our own money market, and we supplied 95 billion euros for 24 hours, that was not a decision that was in the textbooks. We were criticized a little bit at the time, and then, after a while, it was recognized that this decision had been wise and lucid. So in May this year I would say that we were in a situation where it was considered appropriate by the governing council of the ECB to take the decision, as I said earlier, to help restore a more normal functioning of our own monetary policy transmission mechanism. We had previously purchased covered bonds and we had not excluded intervening in other markets.

Financial Times: What lessons do you draw in terms of euro governance from this crisis to date?

Jean-Claude Trichet: First of all, we are on the record as having always asked for full and decisive implementation of the governance measures that already exist. We combated very fiercely the position of the heads of government of the three major countries in the euro area when they wanted to weaken formidably the stability and growth pact, back in 2004 and 2005. It was a very, very fierce battle. They wanted to really unravel the pact. What I would sum up as our position today is very simple. We call for “a quantum leap” in the reinforcement of fiscal surveillance, with, in particular, what I would call the reversal of the BIS Review 115/2010 3 burden of the proof. We have called for the “quasi-automaticity” of procedures and sanctions. We have called for a reinforced independent way of assessing the fiscal situation and we have also called for a quantum leap as regard the surveillance of competitiveness and imbalances in euro area member countries. And, finally, we have called for decisive measures to enhance the quality of statistics. As regards the methodology, we consider that a change of the treaty would be appropriate, but we accept that this would involve a long or very long procedure at the level of 27 EU countries. That’s why we have called for the maximum use of secondary legislation as a first step, to exploit all the possibilities that secondary legislation can offer to go in the direction of the necessary goals. That’s the idea.

Financial Times: And what about temporary suspension of membership or even expulsion of a member that is systematically breaching this…?

Jean-Claude Trichet: No, I don’t call for expelling members, but a temporary suspension of voting rights is something that should be explored.

Financial Times: In retrospect, shouldn’t Europe have undertaken bank stress test earlier?

Jean-Claude Trichet: I think so. The ECB and the Bank of England were very much in favour of this stress test. Of course, we have a very complex institutional environment, involving cooperation in real time among 27 EU capitals. It was really essential to have this exercise undertaken on a unified basis, simultaneously. You know that we particularly welcomed the detailed publication of the results for the 91 banks involved.


There’s more!

Download a copy and read the rest of the interview here.


Roubini: Federal Reserve Out of Ammo

In Financial Markets, Health and Environment, International Econnomic Politics, National Economic Politics, Views, commentaries and opinions on 06.09.10 at 12:22

“The US remains on course either for a double dip recession or growth that is so sluggish that it has a recessionary feel,” says Professor Nouriel Roubini of the Stern School at New York University.

Talkking with James Blitz at this year’s Ambrosetti Forum in Italy, Roubini says there are few if any options for policy-makers to stimulate the economy – and that a new round of quantitative easing by the Federal Reserve will be ineffective.

Here’s the interview from Financial Times:

(Click to play)

Robert Shiller Says Double Dip Imminent

Albert Edwards Sees S&P500 Returning To 1982-Level at 450 Points

El-Erian: Economy Losing Momentum For Recovery

Rosenberg Says US Virtually Certain To Fall Back Into Recession

Welcome To The Double-Dip!

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US Now Matches Indian Outsourcing Costs

In Financial Markets, Health and Environment, International Econnomic Politics, National Economic Politics on 22.08.10 at 23:45
Times are certainly changing.  I guess this is the first time American companies are able to compete with Indian companies about outsourcing contracts, like call services. And as a result European outsourcing companies are being squeezed out of the market.

“We need to be very aware of what’s available as people in the US are open to working at home and working at lower salaries than they were used to.”

Pramod Bhasin

Some outsourcing jobs are becoming as cheap to fill in the US as they are in India, according to the head of the country’s largest business process outsourcing company. High unemployment levels have driven down wages for some low-skilled outsourcing services in some parts of the US, particularly among the Hispanic population.

At the same time, wages in India’s outsourcing sector have risen by 10 per cent this year and senior outsourcing managers based in the country command salaries above global averages, the Financial Times writes.


Pramod Bhasin, the chief executive of Genpact, says his company expected to treble its workforce in the US over the next two years, from about 1,500 employees now.

“We need to be very aware of what’s available as people in the US are open to working at home and working at lower salaries than they were used to,” Mr Bhasin says. “We can hire some seasoned executives with experience in the US for less money.”

The narrowing of the traditional cost advantage is also spurring other Indian outsourcers to hire more staff outside India.


Wipro, the Bangalore-based IT outsourcing company, started to recruit workers in Europe, the Middle East and Africa during the global economic downturn.

Suresh Vaswani, joint chief executive of Wipro Technologies, forecasts that half of his company’s overseas workforce will be non-Indians in two years, from the current 39 per cent.

India is still expected to retain the overall cost advantage, particularly in more sophisticated software outsourcing.

Observers say that while the cost of some senior positions may have equalized with the US and certain call center services may be more cost-effective to set up in depressed areas of the US, this phenomenon may not outlast the US downturn.

Even after a tripling in numbers, Genpact’s US workforce would still be only about a ninth of its total staff.


The former in-house outsourcing unit of US multinational General Electric has operations in Chicago, Pennsylvania, Tennessee and New York.

The move to expand operations in the US also comes as protectionist rhetoric against outsourcers rises in Washington.

Last week, Charles Schumer, a US senator, described Indian IT outsourcing companies unflatteringly as “chop shops”, a term referring to places where stolen cars are dismantled for their parts.


Mr Bhasin says Indian outsourcers needed to be more sympathetic to the deep economic woes in the US, not least because US business had helped India’s outsourcing industry “piggy-back” on its success.


However, the hardening competition about outsourcing contracts are also claiming its first victims.

In southern Italy, call centres were encouraged to set up shop in Italy’s poorer south by government and EU incentives.

But the end of those boosts have seen some fly-by-night companies shut up shop and their managers arrested as investigations continue.

Thousands have been made redundant, some with wages owed in a region plagued by high unemployment.

Watch the video at here.


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Germany's Manic Depression

In Financial Markets, International Econnomic Politics, National Economic Politics, Views, commentaries and opinions on 05.08.10 at 18:34

There is a saying about the Germans that they are either “himmelhochjauchzend or zu Tode betrübt” – either totally euphoric or depressed. Right now, the Germans are euphoric – at least about their economy, Financial Times columnist Wolfgang Münchau points out as German business confidence is approaching all-time high, reached in 1990 and 2007.

“We are heading away from himmelhochjauchzend to the other choice.”

Wolfgang Münchau

The Happy Faces of Vice Chancellor Guido Westerwelle and Chancellor Angela Merkel.

The mood swing of German industrialists during the first half of this year is quite astonishing, Münchau notes and ask the obvious question:  “What happened? And how should we read these data?”

Well, here’s his answer, published in today’s Financial Times Deutschland:

For a start, we should recall that the German economy contracted by 5% in 2009. Even 2.5% growth in 2010, and a hypothetically optimistic 2% growth rate in 2011, will only just get Germany back to the end-2007 of growth by end-2011.

What we have been seeing in Q1, Q2, and early Q3 is a fast recovery from a very low position after the 2009 slump.

Things are slowly returning to normal.

No Miracle

So when discussing the German economy, it is important to look at actual levels, not just at relative shifts. If you compare German and US real GDP, say over the last 10 years, the US is faring better both in terms of the total period, but, most importantly, also in terms of catch up to the pre-crisis level of real GDP.

The data, at least up until the first quarter, do not suggest that there is a particular German miracle.

All they show is a somewhat greater degree of volatility. Germany slumped faster than the others, and is recovering a little faster.

That’s it.

German Business Confidence. July 2010.

Not Sustainable

I expect Germany’s relative performance to be better this decade, by a little, not by a lot.

We should be clear about why this is likely to be the case. This has nothing to do with productivity enhancing reforms – or some underlying structural features of the German economy.

The main reason is the country’s success in depressing its real exchange rate.

Germany is now reaping the dual benefits of the depreciation of the real exchange rate inside the euro zone, and the nominal depreciation of the euro from the $1.40 plus level to the $1.20 plus level.

Can this be sustained?

Probably not. If the current developments persist, German companies are bound to hit capacity limits shortly, which will in turn put some pressure on the labor market. I have heard estimates according to which we may not be all that far away from that situation.

I would thus expect the Germans on the ECB’s governing council to press for a monetary exit relatively soon. They need higher interest rates to prevent German wages from rising.

If they succeed, Germany’s imbalanced growth strategy might continue for a little while, but this would clear come at the expense of any adjustment within the euro zone.

It really is a zero-sum game.

3 Arguments Against Recovery

I suspect that Spain and southern European countries may not be able to close the competitiveness gap with Germany quickly, but at the same time it is hard to conjecture that the gap might continue to rise further.

In addition, I see three structural factors that speak against the sustainability of the upswing.

They are the decrepit state of the banking system, the global economy, and the self-imposed balanced budget rule. Overtly, the German banks did alright in the stress tests.

The results are not all that different than for the EU average. What the stress tests do not mention is an over-reliance on hybrid capital – which is at best only partially a risk-absorber in a crisis.

If you removed the hybrid capital, the German Landesbanken would be effectively insolvent.

The second factor is the global economy, on which Germany’s export model depends. Unless the upswing is sustained on a global level, Germany will not be able to maintain the most recent momentum.

And finally, the self-imposed constitutional fiscal rule will not have much impact in the short term, as the 2011 fiscal consolidation is relatively modest. But it is likely to be a constraint further down as we proceed through the economic cycle.

There is some cyclical leeway in the rules, but the average allowed deficit of 0.35% is extremely tight, and its legal force is significantly higher than previous soft-constrained budget rules.

Fiscal policy is likely to be a constraint on growth for some time.

A Ricardian Reality Show

The German official line is that the increase in public savings will be perfectly offset by a decrease in private sector savings.

Wolfgang Münchau


They really do believe in all this Ricardian equivalence stuff, despite the fact that there is no empirical support in its favor.

In summary, Germany may still outperform southern Europe, but then so will almost everybody else.

With fiscal and monetary tightening ahead, less scope from windfall gains in the real exchange rate, and a persistently under-capitalized banking sector, it will be tough to maintain the most recent momentum.

In other words we are heading away from “himmelhochjauchzend” to the other choice.

By Wolfgang Münchau


Financial Times Deutschland

Related by the Econotwist:

Merkelomics, The Euro Zone And The United States

Wolfgang Münchau: A Cynically Calibrated Test To Fix The Result

German Banks With More Than 200 Billion Euro In Faul Credits

Global Economy On Fast Track To Disaster

Warns Against Euro Zone “Elite”

Why Optimists Are Wrong About The Euro Zone

Goodbye Keynes – Hello Ricardo!


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European Bank Stress Tests Are Loosing Credibility

In Financial Markets, International Econnomic Politics, National Economic Politics, Views, commentaries and opinions on 21.07.10 at 12:08

Investors and analysts say that unless there are a credible number of failures among the 91 institutions being stress tested, then the whole exercise – whose raison d’être was to scotch skepticism about European banks’ financial strength – risks backfiring.

“If HRE is the only German bank that fails, that completely discredits the tests – not just for Germany but for the whole of Europe.”

Senior banker

"There will be full transparency," Spain's prime minister José Luis Zapatero said on June 17th.

On Tuesday, German banks – including the poorly capitalised public-sector Landesbanken – indicated in private that they had passed the test, following similar indications in recent days from regulators and politicians in France and Italy, The Financial Times reports.

That followed news on Monday that Hypo Real Estate, the nationalized German property lender, would fail the test. “If HRE is the only German bank that fails, that completely discredits the tests – not just for Germany but for the whole of Europe,” one senior banks analyst said on Tuesday.

According to a report from PriceWaterhouseCoopers the amount of non-performing loans in German banks increased by 50% in 2009, to over €200 billion, and is still rising.

Confusion Increasing

Meanwhile, confusion about the parameters of the tests deepened on Tuesday.

Banks from France and Greece told the Financial Times that the so-called haircut being applied to holdings of Greek government debt – the most extreme in Europe – were about 23 per cent, rather than the 17 per cent figure that banks and regulators in Germany and the UK have referred to in private.

Bankers say the impact of those haircuts is likely to be insignificant in any case – explaining in large part why so few banks look set to fail the tests – because the sovereign debt haircuts are being applied only to bonds held in banks’ trading books.

Debt In Different Books

According to research by Morgan Stanley, 90 per cent of banks’ Greek sovereign debt is now held not in trading books but in banking books, where they are designed to be held to maturity.

Under certain circumstances, accounting rules allow banks to switch investments between trading and banking books. Only a few months ago, analysts estimated that 50 per cent of sovereign debt was held in short-term trading books and 50 per cent in banking books.

The Committee of European Banking Supervisors, the umbrella body for the continent’s bank regulators, is due to publish the results of the tests after the markets close on Friday, but it remains unclear how much detail will be published about the parameters of the tests.

Bank executives said on Tuesday that even some of the core questions – for example, whether or not to publish banks’ disclosures about the entirety of their sovereign debt holdings – were still under discussion.

Related by the Econotwist:

The EU Stress Test: Working The Media

Bundesbank: Ireland Will Destroy The Euro Zone

Investors; Fasten Your Seatbelts!

Stress Level Rising In Europe; Some Banks Might Not Survive

EU Stress Test May Trigger Capital Injection Of EUR 85 Billion

European Banks Hunting For EUR 1,65 Trillion


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