Au revoir, austerity

By Michael Petrou with Stavroula Logothettis - Friday, May 11, 2012 at 2:05 PM - 0 Comments

Pascal Le Segretain/Getty Images

Among the casualties of national elections in France and Greece last weekend, Nicolas Sarkozy’s now-finished career is a comparatively insignificant footnote. The outgoing French president suffered a historic defeat, becoming only the second incumbent presidential candidate to lose in half a century when he fell to the Socialists’ François Hollande. But the election wasn’t really about the two men—or at least it wasn’t about Hollande, the bland and modest lifelong politician who possesses little of Sarkozy’s flair and mercurial arrogance.

What is really at stake in France, and across Europe, are competing visions about how the continent might recover from a crushing financial crisis.

In December, 25 of 27 European Union states agreed to a “fiscal compact” to coordinate financial policies and enforce budgetary discipline. But these austerity measures are deeply unpopular in parts of Europe with soaring unemployment and sizzling social unrest. Greece is regularly rattled by strikes and protests. Millions of Spaniards have flooded public squares to protest public spending cuts and record levels of joblessness. In France, where unemployment hovers around 10 per cent, even modest pension reforms provoked massive demonstrations.

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A Greek exit: Good idea, hard to do

By Erica Alini - Tuesday, May 8, 2012 at 4:45 PM - 0 Comments

It may be time for Greece to leave the eurozone. Analysts have been saying since late last year that a Greek exit, now known as “Grexit” among economics dorks, was a likely scenario. Last weekend’s messy elections and this morning’s bombshell statements by the country’s left-wing Syriza bloc make it all the more likely. So what would a Grexit actually look like, and would it be good or bad for Canada and the rest of the world economy?

The short answer is that letting Greece slip out of the eurozone is a good idea in theory, but a hard one to pull off without disastrous consequences in practice. David Smith, economics editor of The Sunday Times, summed it up nicely in a post he wrote before the election results came out:

“A Greek exit, should it occur, would eventually be good for Greece and remaining eurozone members. Getting there, however, without triggering a domino effect, and without a hugely damaging impact of the banking system, is the difficult part.“

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French and Greek elections rattle financial markets

By Gustavo Vieira - Monday, May 7, 2012 at 11:00 AM - 0 Comments

The aftermath of the elections in Greece and France during the weekend has rattled financial markets on Monday. Fears over the eurozone’s ability to reduce spending and stop the bleeding after the election of a socialist president in France and the uncertainty over the results in Greece sent the euro tumbling to a three-month low.

The election of François Hollande in France has been rapidly overshadowed on Monday by the uncertainty surrounding the Greek election, where angry voters didn’t give any single party enough votes to form a government alone. The pro-austerity conservative New Democracy party came first with just under 19 per cent of the vote and now has three days to form a coalition with other parties to form a government, but an agreement is not likely and another election as early as next month is possible.

From the Associated Press (via Canadian Business Magazine):

The one certainty was that parties backing the draconian international rescue package lost their majority in parliament — raising the chances of a possible Greek exit from the common euro currency.

The uncertainty weighed on markets across Europe, with the Athens exchange tumbling 6.4 per cent in afternoon trading.

And from Reuters:

Investors sold bonds of other weaker euro zone member states after the two pro-bailout parties in Greece failed to win a parliamentary majority, rekindling fears over the country’s future in the single currency.

“The Greek election outcome is the ultimate Greek tragedy. Not having a cohesive government means the IMF will not release further funds. Without those funds, Greece will have to leave the euro zone,” Louis Gargour, chief investment officer of London-based hedge fund LNG Capital, said.

Why won’t Germany understand austerity is killing Europe?

By Gabriela Perdomo - Wednesday, April 18, 2012 at 1:03 PM - 0 Comments

Dullhunk/Flickr

German leaders are looking increasingly like loners in their insistence that austerity is the sole cure for the eurozone’s ailing economies. Chancellor Angela Merkel and Bundesbank Governor Jens Weidmann continue to maintain that the only way for Greece, Italy, Spain and Portugal to fix their finances and calm investors’ nerves is higher taxes and spending cuts. But scores of prominent economists have been arguing that too much of that medicine risks killing the patient. Their warnings are becoming more and more dire.

Nouriel Roubini, aka Dr. Doom, was frantically waving red flags from the (web) pages of Slate last week:

“(…) the recession [in Europe] will worsen throughout this year, for many reasons.
First, front-loaded fiscal austerity—however necessary—is accelerating the contraction, as higher taxes and lower government spending and transfer payments reduce disposable income and aggregate demand. Moreover, as the recession deepens, resulting in even wider fiscal deficits, another round of austerity will be needed. And now, thanks to the fiscal compact, even the eurozone’s core will be forced into front-loaded recessionary austerity.

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ECB chief Mario Draghi says worst of the eurozone crisis is over

By Gabriela Perdomo - Thursday, March 22, 2012 at 10:12 AM - 0 Comments

Boasting that Europe is doing better than the U.S. on a number of economic indicators, including inflation and public deficits, European Central Bank chief Mario Draghi said on Wednesday that the worst of the eurozone crisis is behind us. Draghi was defending his plan for stabilizing European banks in an interview with the German Bild newspaper, the BBC reports:

… Draghi is credited with having deflected a much more serious crisis by lending European banks large sums at very low interest rates. Over two rounds, one in December and one in February, the Long Term Refinancing Operation injected more than half a trillion euros of new funds into European banks.

Analysts see Draghi’s interview with Bild as an attempt to assuage German voters, some of whom are skeptical of his loose monetary policy. According to Bloomberg, the Italian ECB chief also said that “investor confidence is back” in Europe and it’s now up to governments to “sustainably secure the euro zone against crises.”

Can Germany rescue its ailing neighbours?

By Chris Sorensen - Wednesday, February 22, 2012 at 10:30 AM - 0 Comments

Odd Andersen/AFP/Getty Images

Though it’s better known for its caviar service in first class and its swank lounges at Frankfurt International Airport, much of the excitement at Lufthansa last year took place at its comparatively drab cargo operations. The carrier’s hulking MD-11 freighters hauled 18 per cent more tonnes of time-sensitive goods—ranging from German-made luxury car parts to pricey chemicals—in 2011 than the year before, when a previous record was set. Even more impressive is the destination for many of those planes: “China remains the core market for air-freight transportation out of Germany with growth at 26 per cent,” says Florian Pfaff, a manager for Lufthansa Cargo.

Apparently, not everyone is losing jobs to Guangdong province.

Despite the deepening eurozone crisis, Germany is booming. While Ottawa might like to brag about its performance through the Great Recession, the real miracle story belongs to Germany, and its manufacturing and export-driven economy. The country of 82 million has enjoyed GDP growth of three per cent or better for the past two years, while exports topped $1.3 trillion for the first time ever in 2011. Unemployment, meanwhile, is sitting at a 20-year low of 6.7 per cent, compared to Canada’s 7.6 per cent. And although it experienced a run on its banks in 2008, Germany has no housing bubble, boasts a high personal savings rate and slays deficits with near-religious zeal.

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Standard and Poor’s to downgrade French rating

By macleans.ca - Friday, January 13, 2012 at 10:10 AM - 0 Comments

A downgrade of the credit ratings of a number of European governments by Standard & Poor’s is said to be imminent, the Wall Street Journal reports, citing two anonymous sources. S&P could announce the ratings cuts as soon as Friday, an unidentified government official told the newspaper. The credit rating agency, which ripped the U.S. of its longstanding AAA rating last summer, had placed 15 euro-zone countries on negative credit watch in December. News of the impending downgrade rattled the markets, with the euro diving to a new low against the U.S. dollar.

Update: Later on Friday, Standard and Poor’s notified the French government that the country’s credit rating would be downgraded one notch, from AAA to AA+, a senior French government official told the Wall Street Journal.

Wall Street Journal

Wall Street Journal

Germany possibly entering recession

By macleans.ca - Wednesday, January 11, 2012 at 2:17 PM - 0 Comments

The German economy shrunk by about 0.25 per cent of GDP during the last quarter of 2011, the Financial Times reports. Though the country registered three per cent growth overall for 2011–twice as much as the U.S. and the rest of the eurozone–the latest results stoked fears that impact of the eurozone crisis is finally being felt in Berlin. A second consecutive quarter of negative growth would effectively put the country in recessionary territory.

Financial Times

AP

Italian borrowing costs drop after bond offering

By macleans.ca - Wednesday, December 28, 2011 at 11:14 AM - 0 Comments

Italy saw its short-term borrowing costs drop by about 50 per cent on Wednesday, after investors showed a healthy appetite for its $14 billion bond offering. Strong demand for Italian debt was largely seen as a sign of positive market sentiment about the European Central Bank’s emergency three-year loan program for European banks. Just before Christmas, the Bank stepped in to provide an $647 billion in three-year loans to over 500 banks across the continent, an unprecedented move aimed at easing liquidity strains for the region’s financial institutions.

The Financial Times

The Associated Press

EU agreement fails to sooth jittery markets

By macleans.ca - Monday, December 12, 2011 at 1:23 PM - 0 Comments

The EU’s much-touted fiscal agreement failed to calm financial markets, as traders sent the Euro down and borrowing costs for Italy and Spain up on Monday. News of the new pact, which would commit euro-zone nations to tougher budget targets, sparked a small rally in trading on Friday. Those gains, however, were erased after the weekend, as fears over the still little-defined nature of the agreement spread. French President Nikolas Sarkozy, meanwhile, was said to be preparing officials for a likely downgrade in France’s Triple-A credit rating; as many as 14 other eurozone states are also at risk of a downgrade.

Reuters

EU nations strike fiscal deal

By macleans.ca - Friday, December 9, 2011 at 10:59 AM - 0 Comments

Twenty three EU countries struck an early morning deal on Friday that calls for tighter fiscal integration and stricter budget rules in the economic and political union. The deal, aimed at stemming the ongoing euro crisis, leaves out the U.K., which walked away from negotiations after failing to secure concessions exempting the British financial sector from tightening regulation and scrutiny. Sweden, Hungary and the Czech Republic all left open the possibility of joining the new compact at a later date. Representatives from the three nations said they had to consult their parliaments before going further. The new agreement calls into question Britain’s role in an evolving Europe. Conservative Prime Minister David Cameron may now face pressure from within his own party to move the U.K. away from continental intergration.

Reuters

Rating downgrade threat could spur euro reform

By macleans.ca - Tuesday, December 6, 2011 at 1:02 PM - 1 Comment

A threat by Standard and Poor’s to slash the credit ratings of a number of eurozone countries, including Germany and France, could help Berlin and Paris muster support for sweeping regulatory changes, Reuters reports. S&P put 15 euro-area economies on negative credit watch on Monday, just days before Friday’s European Union summit, when German Chancellor Angela Merkel and French President Nicholas Sarkozy will urge a change to European rules and advise the implementation of mandatory penalties for countries that exceed deficit targets. S&P also warned that slow growth due to heavy austerity measures might lead to a 40 per cent fall in Eurozone output. Merkel and German Finance Minister Wolfgang Schaeuble have dismissed the downgrade threat as “wildly unfair,” and said it simply represents a wake-up call for leaders to “do their duty” on Dec. 9.

Reuters

France and Germany agree on new fiscal rules

By macleans.ca - Monday, December 5, 2011 at 12:13 PM - 0 Comments

France and Germany announced on Monday they had reached an agreement over a new set of fiscal rules for the eurozone that they will ask EU members of the currency union to approve at a summit on Friday, the Financial Times reports. The new measures include amendments to the EU’s governing statutes to ensure that countries maintain balanced budgets. German Chancellor Angela Merkel also reportedly agreed to drop a provision requiring private bond holders to bear some of the losses involved in sovereign debt restructurings, a point Berlin insisted on earlier this year when coming to Greece’s rescue. Fear among investors that they may not be repaid when holding bonds from other highly indebted governments such as Italy and Spain resulted in steep increases in the yields of those countries as well.

Financial Times

Eurozone on the brink

By macleans.ca - Monday, November 28, 2011 at 12:03 PM - 2 Comments

The eurozone’s sovereign debt crisis is the biggest threat facing the global economy, according to the Organization for Economic Co-operation and Development, Reuters reports. The OECD also said that a collapse of the currency zone is now a possibility, and called on the European Central Bank to continue with its extraordinary measures, such as buying government bonds, to defuse the crisis. Separately, rumours emerged in the Italian press that the country was in talks with the International Monetary Fund to obtain $827 billion at a rate of between 4-5 per cent to refinance it debt for the next 18 months. An IMF spokesperson later denied that emergency aid negotiations were ongoing, according to Reuters. U.S. President Barack Obama also said he would put pressure on eurozone leaders to find a bold and comprehensive solution to the crisis, which is emerging as an important issue in the 2012 U.S. election.

Reuters

Reuters

Reuters

Eurozone leaders push for “fiscal union”

By macleans.ca - Friday, November 25, 2011 at 11:55 AM - 2 Comments

The leaders of the eurozone’s three largest economies, Germany, France and Italy, jointly called on Thursday for a “fiscal union” to be enshrined in a treaty, the Financial Times reports. The measure would drive economic integration and serve to enforce greater budgetary discipline, said German chancellor Angela Merkel, French President Nicolas Sarkozy and newly appointed Italian Prime Minister Mario Monti, who’s been eagerly welcomed by eurozone leaders, unlike his predecessor Silvio Berlusconi. Creating a fiscal union may be what’s needed for Merkel to warm up to the idea of commonly backed eurobonds, a proposal which some say is the best option to stave off a possible collapse for the euro. Talk of fiscal unity, however, failed to calm the markets, which pushed yields on Italy’s short-term bonds to euro-era highs on Friday, and even higher than long-term bonds, meaning investors are pricing in the risk that Italy could soon default.

The Financial Times

The Financial Times

German bond sale fizzles

By macleans.ca - Wednesday, November 23, 2011 at 3:47 PM - 0 Comments

A bond sale by Germany’s Bundesbank on Wednesday fizzled, as investors shied away even from the country that has so far been the eurozone’s financial stalwart, the Financial Times reports. The bond auction raised only two-thirds of the amount targeted, a worrying sign that the markets are concerned the debt crisis won’t spare Europe’s biggest economy and that the continent’s monetary union could collapse.

The Financial Times

Italy’s borrowing costs enter danger zone

By macleans.ca - Wednesday, November 9, 2011 at 12:45 PM - 0 Comments

The yield on Italy’s bonds crossed the red line of seven per cent on Monday, as the planned resignation of Prime Minister Silvio Berlusconi failed to reassure jittery investors. Analysts told Reuters Italy is now in a situation similar to the one that forced Greece, Ireland and Portugal to seek bailouts. The markets had long been pushing for the reform-shy leader to leave the helm of Italian politics, but optimism about his planned departure quickly turned to panic among fears that Berlusconi’s resignation won’t end paralysis and uncertainty in the country.

Reuters

Greece drops referendum

By macleans.ca - Thursday, November 3, 2011 at 4:47 PM - 0 Comments

Greek Prime Minister George Papandreou has dropped plans on Thursday evening to hold a referendum on his country’s future in the eurozone, the New York Times reports. The PM said he no longer saw the need for a popular consultation now that the opposition has said that it supports accepting emergency funds from eurozone countries and the International Monetary Fund. Several commentators are suggesting the referendum was a daring an astute political manoeuvre by Papandreou to force his political enemies to admit Greece has no alternative but say yes to the bail-out.

The New York Times

ECB opts for surprise rate cut

By macleans.ca - Thursday, November 3, 2011 at 10:49 AM - 0 Comments

The European Central Bank cut its key interest rate to 1.25 per cent from 1.5 per cent on Thursday morning, earlier than analysts expected. The move comes as new ECB President Mario Draghi reacts to signs that the euro zone is sliding into recession.

The Wall Street Journal

Greek referendum in doubt

By macleans.ca - Wednesday, November 2, 2011 at 1:47 PM - 2 Comments

Financial markets in Europe rallied this morning on the news that Greek Prime Minister George Papandreou may not be able to jump through all the hoops required for holding a referendum, the Financial Times reports. On Monday evening Papandreou announced Greece would hold a referendum about whether or not to accept the latest installment of the bail-out from the European Union and the International Monetary Fund. The news sent markets across the world into a tailspin on Tuesday, as investors feared Greek voters would turn down the emergency funds, triggering a disorderly default on Greece’s sovereign debt. Papandreou is due in Cannes, France, on Wednesday evening for emergency talk with French President Nicolas Sarkozy and German Chancellor Angela Merkel. The Financial Times also reports that Greece will likely hold the referendum in mid-December, and formulate the question not in terms of accepting or rejecting the conditions of the financial rescue, but rather whether Greece should continue to be part of the European Union and the eurozone.

The Financial Times

Clouds gather over new eurozone deal

By macleans.ca - Friday, October 28, 2011 at 11:28 AM - 2 Comments

Eurozone leaders are struggling to preserve the optimism with which financial markets initially welcomed a new comprehensive deal to bail-out Greece and shore-up other high-debt countries announced on Thursday morning. Shortly after the agreement was made public, French President Nicolas Sarkozy told reporters that China had “a major role to play” in ensuring the new emergency financial tools would work, Reuters reports. As of Friday, though, Beijing has yet to express any concrete commitment to continuing to buy bonds issued by the European Financial Stability Facility. Thursday’s agreement also failed to reassure investors about Italy, whose borrowing costs rose to record heights at a government bond auction on Friday. Spain was also under financial market pressure.

Reuters

Eurozone leaders emerge with plan to stem debt crisis

By macleans.ca - Thursday, October 27, 2011 at 11:16 AM - 0 Comments

After marathon negotiations, and tensions that flared up into an epic fist fight among Italian lawmakers on Wednesday, eurozone leaders announced on Thursday morning that they have reached a deal to shore-up Greece’s debt, and increase the firepower of a fund meant to prevent contagion to other troubled European economies. The agreement sees private investors accepting a 50 per cent loss in the face value of their Greek bonds, a measure expected to reduce the country’s debt levels to 120 per cent of GDP by the end of the decade, according to the Financial Times. European leaders also said they would provide risk insurance over new bonds issued by countries struggling with high-level debt, such as Italy, a mechanism believed to boost the eurozone’s bailout fund to about $1.4tn. French president Nicolas Sarkozy called his Chinese counterpart, Hu Jintao, shortly after the deal, in what analysts say may be an attempt to get China to help bankroll the EU’s plan to rescue Greece, the Wall Street Journal reports. Prime Minister Stephen Harper expressed “cautious optimism” about the eurozone deal.

The Financial Times

The Wall Street Journal

The Canadian Press

Complex and controversial financial tools weighed in eurozone rescue

By macleans.ca - Wednesday, October 26, 2011 at 9:51 AM - 0 Comments

The prospect of a fully fledged plan to solve Europe’s debt crisis emerging at Wednesday euro-zone summit is fading. But what is becoming clear is that any solution will be far more complex than the fiscally stable European countries putting enough cash in a fund to save whatever debt-burdened countries falter. Instead, the approximately $600 billion envisaged for the so-called European Financial Security Facility would be used to lure foreign sovereign and private investors, mainly Chinese and Middle Eastern, to buy bonds of troubled euro zone countries. European presidents and prime minsters, though, haven’t yet figured out exactly how. One model would provide first-loss guarantees on sovereign bonds issued by troubled euro-zone members. So if a country became insolvent and couldn’t pay 50 percent of what it owed, the loss to investors might be just 30 percent instead of the entire 50 percent—the EFSF would cover the other 20 per cent. But would that partial cushion be enough to attract outside investment? Some observers doubt it. The German magazine Der Spiegel’s online English edition surveys the complicated arrangements being contemplated, and suggests they are similar to the use of repackaged subprime mortgages and other weird investment products before the 2008 global market meltdown—the investment smoke and mirrors that amounted to “finance tricks to transform questionable debt into sure-fire investments.”

Der Spiegel

Reuters