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Europe's Markets Slump

European stocks plunged Wednesday, reversing earlier gains in a second day of volatility, as ongoing concerns about euro-zone debt contagion and a weak U.S. growth outlook outweighed the prospect of continued low interest rates in the world's largest economy.

Market chatter of credit rating downgrades in Europe, France in particular, late in the session made investors more jittery still and sent equities deep into the red.

Investors said they were concerned that while the U.S. has resolved its budgetary crisis, albeit through an uncomfortable compromise, the debt crisis in Europe is more demonstrative of fundamental issues. Read more at professional.wsj.com

 

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Italy Renews Push to Soothe Wary Investors

In Reversal, Berlusconi Vows to Balance Budget; EU Leaders Place Flurry of Calls

Europe's leaders mounted a frantic joint effort Friday to show markets they are tackling the latest fears over the Continent's debt crisis—with Italian Prime Minister Silvio Berlusconi reversing course and making a late-day pledge to balance his country's budget earlier than planned.

Mr. Berlusconi's comments came as Europe's central bank indicated it was open to purchasing government bonds of Italy and Spain as a way to ease mounting market pressure on two of the euro-zone's largest economies, according to people familiar with the matter.

The anxiety is such that many euro-zone leaders have reluctantly canceled or delayed their summer holidays to deal with the crisis.

Mr. Berlusconi and Spanish premier José Luis Rodríguez Zapatero discussed recent developments in debt markets, noting that recent "fluctuations and speculative movements in sovereign-debt markets were incomprehensible," according to Mr. Zapatero's office.

President Barack Obama, meanwhile, spoke separately Friday with French President Nicolas Sarkozy and German Chancellor Angela Merkel.

U.S. Treasury Secretary Timothy Geithner is increasingly irritated at the Europeans for reacting too slowly to stem the escalating crises.

Market "speculation is now aimed at us," Mr. Berlusconi said during his news conference, adding that Italy and fellow euro-zone nations must take action to block it. Read more at professional.wsj.com

 

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What is wrong with the month of August ?

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Beware the guns of August

By the time this column is published I will be on holiday in France, and the US might finally have stepped back from the abyss of debt default.

Viewed from Europe, the American financial uproar is baffling. It is not just the entirely avoidable nature of the crisis. It is also its timing. The entire European political calendar is constructed around the idea that nothing ever happens – or should be allowed to happen – in August.

The drama that surrounded the emergency eurozone summit in Brussels in late July was partly caused by the threat of financial chaos, if Greece was not lent more money. But an unstated reason for the sense of urgency of the leaders around the conference table was a desperate desire to get a deal wrapped up – before the holiday season began in earnest.

When something really drastic happens in the month of August, European leaders are often caught on the hop. In August 2008, when Russian tanks rolled into Georgia, David Miliband, Britain’s foreign secretary at the time, had to deal with the crisis on a mobile phone from a holiday villa in Spain.

in August 1939, Europe was once again hurtling towards war. On August 21, the Molotov-Ribbentrop pact between the Soviet Union and Nazi Germany was announced to a shocked world – making the invasion of Poland and a general war inevitable. On the night of August 31, Adolf Hitler ordered the German army to attack Poland.

The tendency for international crises to break out in August has persisted into the modern age. The Prague Spring in Czechoslovakia was crushed when the Soviet Union and its Warsaw Pact allies invaded in August 1968.

In August 1989, the first breach in the Iron Curtain was made when Hungary opened its borders to Austria, starting off the train of events that led to the fall of the Berlin Wall a few months later.

In August 1990, Saddam Hussein’s Iraq invaded Kuwait – and within weeks President Bush was rallying a coalition to wage the first Gulf wa

in August 1991, Mr Bush was informed that a coup was under way in the Soviet Union – and that Mikhail Gorbachev had been arrested.

What is it about August?

the democratic world tends to be half-asleep, or at the beach, in August makes it the ideal month for dictators and autocrats to make their move. It may be no coincidence that Nazi tanks in 1939, Soviet tanks in 1968, Iraqi tanks in 1991 and Russian tanks in 2008, all got rolling during August.

in the western world, the big financial crises have tended to wait until the autumn. The Wall Street crash of 1929, and its miniature version in 1987, both took place in October. True, the first sign of current crisis came via an injection of liquidy from the European Central Bank in August 2007. But the collapse of Lehman Brothers – lest you have forgotten – did not follow until September 2008. Read more at www.ft.com

 

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No U.S. debt deal or at least not yet!

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No U.S. debt deal as Republicans, Democrats clash

Chance of technical default 20%, investor says

WASHINGTON (MarketWatch) — Efforts to conclude a plan to increase the debt ceiling showed little progress Sunday night as lawmakers still haven’t agreed a path forward to avoiding a potential default despite a weekend of talks.

Sunday night President Barack Obama met two lawmakers from his own party, House Democratic Leader Nancy Pelosi and Senate Majority Leader Harry Reid.

“In the meeting the president received an update on the state of negotiations on the Hill from Leader Pelosi and Leader Reid, and the Leaders and the President reiterated our opposition to a short-term debt limit increase,” the White House said in a statement.

Republican Sen. Tom Coburn, one on the Gang of Six who outlined their own deficit-cutting plan, told NBC on Sunday that opposition to a short-term deal was a “ridiculous” position “because that’s what he’s going to get presented with.”

Boehner and Obama talked over the phone twice, the Associated Press reported citing a Congressional source.

Face the Nation” that the lack of an agreement could be “stressful” for global investors.

“We may have a few stressful days coming up, and stressful for the markets of the world and the American people,” he said.

The market reaction was negative. S&P 500 futures /quotes/zigman/1277190 SP1U -0.84%  fell by 0.8%. Benchmark gold futures /quotes/zigman/700181 GC1Q +0.59%   climbed into record territory. The contract was recently up $16.30, or 1.0%, to $1,617.70 an ounce.

Michael Turner, a Sydney-based strategist for RBC Capital Markets, said the Boehner plan may not be good for saving the AAA debt rating of the U.S.

“This is unlikely to please ratings agencies, particularly S&P who have been the most vocal in expressing a need to see a longer term deficit reduction plan sooner rather than later,” Turner said in a note to clients. Read more at www.marketwatch.com

 

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Another Stressful week expected in Global Markets

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White House Warns of Stress in Global Markets

White House chief of staff Bill Daley said the U.S. government's creditworthiness has already been damaged by the prolonged debate over how to raise the debt ceiling, with the Obama administration girding for volatility in global financial markets as soon as Sunday evening.

Treasury Department officials have said the U.S. must have a deal in place by Aug. 2 to raise the debt ceiling or the country could begin defaulting on its obligations. Numerous proposals to raise the debt ceiling in the past few months have fallen apart or been blocked.

Administration officials would like to make significant progress toward a deal by Sunday evening to ensure that Asian markets open calmly.

Treasury Secretary Timothy Geithner said on "Fox News Sunday" it was difficult to predict how markets would react on Monday but that "the longer the politicians take," the more investors will "wonder whether this place can work again."

Speaker of the House John Boehner (R., Ohio) said on Fox News Sunday, when asked about trying to get a deal by the open of Asian markets Sunday, that "while Asia may be important, this is about American jobs and the American economy."

Another rising risk is that the U.S.'s credit rating could be lowered soon by Standard & Poor's. S&P has said there was a 50% chance it could reduce its AAA rating on U.S. debt to AA+ within 90 days, putting in jeopardy the top-notch rating the U.S. government has had for 70 years. A downgrade could have a variety of consequences, such as making it more expensive for the U.S. to borrow money and creating turmoil in the banking system. Read more at professional.wsj.com

 

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July 24, 2011

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Slim Fallout Seen for Europe Banks

LONDON—Top European banks will face relatively modest losses under the new Greek bailout plan agreed to Thursday, according to a Wall Street Journal analysis of bank stress-test disclosures.

The 90 large European banks that were subjected to European Union stress tests could face total losses ranging from €7 billion to €14 billion ($10 billion to $20 billion), the analysis found. Those losses stem from a provision of the €109 billion bailout that would swap Greek government bonds that come due between now and 2020 in exchange for new securities that don't mature for decades.

The expected losses, nearly two-thirds of which are concentrated among Greek banks, are far smaller than many analysts and investors had feared. Concerns about banks suffering severe losses if Greek defaulted on its debt have been ricocheting around the Continent for more than a year. But the losses likely to be realized under Thursday's bailout will hardly dent most banks' capital buffers.

The smaller scale of losses is partly because the expected hits to the bonds' face values—ranging from losses of 10% to 21%, depending on how they are calculated—are mild compared with the so-called haircuts of 50% or more reflected in trading prices of Greek bonds that analysts had built into their projections.

They warned that Thursday's bailout deal might simply be the first in a string of sovereign restructurings that could saddle holders of European government debt with increasingly hefty losses.

The surprisingly modest bank losses in Thursday's Greek bailout also are because of the way the deal was structured.

Bonds that mature after 2020 won't be exchanged. That allowed a handful of giant banks, which are holding billions of euros of Greek bonds that mature in more than 10 years, to dodge a potentially costly bullet, according to the Journal analysis. Banks, including Germany's Commerzbank AG, Belgium's Dexia SA and France's BNP Paribas SA, could have seen their likely losses swell by hundreds of millions of euros apiece if later-maturing bonds were included.

The losses on bonds that will be exchanged under the bailout are likely to start showing up when banks report their midyear financial results in coming weeks, analysts say.

In Greece, the six banks subjected to the EU's recent stress tests are collectively holding a total of about €43 billion of Greek government debt that matures in the next 10 years, according to the Journal's analysis. That could translate into losses of more than €9 billion.

Outside Greece, French and German banks are among the biggest holders of Greek sovereign debt and therefore appear likely to absorb the greatest losses under Thursday's bailout agreement, according to the Journal's analysis and independent analysts. French banks could face a total of up to €1.4 billion in losses, while German lenders could see €843 million. Read more at professional.wsj.com

 

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