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by Euro Reporter
2012-06-19 09:16:37
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Market relief fades at Greek election results

Reaction to the Greek elections in financial markets followed a familiar, disconcerting pattern on Monday as early relief gave way to renewed anxiety about the future of the euro zone, pushing Spain’s borrowing costs above the 7 percent barrier that many consider unsustainable. European and Asian markets opened higher Monday after the Greek legislative election on Sunday handed victory to a centre-right party, New Democracy that supports the broad outline of an international bailout designed to keep Greece in the currency union. That had eased fears that the country would leave the euro and unleash further turmoil on the beleaguered single currency. But by midmorning, Europe had given up those gains, with major indexes down from Friday’s close, and the focus shifting back to the problems of Spain, whose banks are heavily exposed to loans that have lost much of their value because of the country’s real estate crash.

Analysts said the rise in Spanish borrowing costs reflected investors’ scepticism about the euro zone’s willingness to address its fundamental problems, even if a new crisis had been averted in Greece. “The market positioned itself last week for a good result in Greece,” said Lefteris Farmakis, an interest rate strategist in London for Nomura International. “They got the result and the follow-through is brief. Then attention turns to the fundamental issues.” Although Spain’s cost of borrowing is now about the level that caused Greece and Ireland to consider themselves locked out of the markets and ask for international bailouts, Spain has a much lower overall debt load than those two countries. And as a bigger country, it can probably sustain higher interest rates for a longer period than smaller countries can, since any one bond auction will make up a relatively small percentage of its debt portfolio.

Nevertheless, Spain and its central role in the euro crisis will be much on the minds of the leaders of the Group of 20 nations, who are meeting Monday and Tuesday in Los Cabos, Mexico. Comments made there Sunday by the World Bank president, Robert B. Zoellick, may have led markets to penalize Spain, said one European Union official speaking on condition of anonymity because of the sensitivity of the issue. Mr. Zoellick said European leaders had increased market uncertainty by taking “incremental” steps to end the crisis, and by fumbling the announcement of a €100 billion, or $126 billion, rescue for Spanish banks at the beginning of last week. They “took a very big bullet, and wasted it,” Mr. Zoellick said. On Monday, the Spanish Treasury minister, Cristóbal Montoro, urged the European Central Bank to act to support the markets. Last week the president of the bank, Mario Draghi, said it stood ready to react to market turbulence if necessary. Mr. Montoro told the Spanish Senate during a budget hearing Monday, “The E.C.B. must respond firmly, with reliability, to these market pressures that are still trying to derail the joint euro project.”

There was no immediate response from the E.C.B. in Frankfurt. But, often, pressure from politicians can cause the E.C.B. to hold back, rather than appear to be influenced. The yield on the Spanish 10-year government bond was up 0.15 percentage point to 7.076 percent. The yield on the comparable debt of Italy, a country that is also on many financial analysts’ watch lists, rose 0.27 percentage point to 6.052 percent. Spain is set to test the markets further this week by auctioning about €5 billion of debt. On Tuesday, the Treasury plans to sell as much as €3 billion of bills, followed by a bond sale Thursday intended to raise up to €2 billion. The Euro Stoxx 50 index, which tracks euro zone blue chips, was down 1.17 percent. Spanish shares dropped 2.96 percent. French stocks fell 0.69 percent, while German and British benchmarks were up less than 1 percent.


Cameron at G-20 urges stronger ECB action to quell euro crisis

U.K. Prime Minister David Cameron urged the European Central Bank and the euro area’s strongest economies to do more to stamp out the region’s financial and economic crisis. Speaking at an event today in Los Cabos, Mexico before a meeting of Group of 20 leaders, Cameron said nations need to sustain their push for banking and fiscal reform because they can’t spend their way out of the economic crisis. He urged policy makers to address instability in the euro area and government indebtedness by combining short-term monetary “activism” with long-term reforms aimed at boosting competitiveness, all the while avoiding protectionist trade barriers that slow global growth.

It “won’t be easy” for Greece to take the steps required to stay in the 17-nation euro zone even after the nation yesterday elected a party that promises to keep bailout aid flowing, Cameron said. “The euro zone has two choices,” Cameron said. “Either they try to force down wages and prices in the periphery as fast as they can to restore competitiveness, with all the political and economic tensions that will entail, or the core of the euro zone has to do more to support the periphery through greater fiscal burden sharing.”

Amid the U.K.’s first double-dip recession since the 1970s, Cameron’s government is pushing ahead with the largest budget cuts since World War II, pointing to Greece as a reason. Cameron and Chancellor of the Exchequer George Osborne have staked their reputations on creating jobs and investment in the private sector to replace public spending. The Labour opposition says the policy has failed and has urged the government to switch course. Budget cuts, a squeeze on households as inflation outpaces wages and turmoil in the euro region -- the biggest market for British goods -- are weighing on a U.K. economy that has recovered barely half of the output lost in the recession of 2008 and 2009.


Euro crisis shifts to Spain as Merkel faces G-20 pressure

Europe’s financial crisis deepened and enveloped Spain, raising pressure on German Chancellor Angela Merkel at a meeting of world leaders to shift her stance on measures to shield the global economy. President Barack Obama, who has blamed the crisis for a slowdown in U.S. employment growth, is due to hold talks with Merkel in the Mexican resort of Los Cabos at 1:30 p.m. today local time, a White House official said. Merkel and her fellow euro-area leaders will then hold more talks with Obama this evening at the president’s request.

Group of 20 chiefs began a two-day meeting in Mexico today as Spanish borrowing costs soared to a euro-era record. With elections in Greece failing to damp the threat of contagion, policy makers are discussing ways to stimulate the world economy if necessary, a Canadian official said. Merkel, who last week criticized U.S. debt levels, said June 15 she’ll press the G-20 to hold to prudent government spending.

“It’s not a complete beating up session, but Germany is the recipient of fairly caustic criticism from other members of the G-20,” Rob Carnell, chief international economist at ING Bank NV in London, said by telephone. “The pressure will be on Germany to give more ground and behind closed doors Merkel may well be more accommodative. There is ground for the euro zone to move, but just what it does depends on how much Germany digs its heels in.”


Central banks stand at ready to fortify Euro

With an election looming in Greece that could determine the future of the euro, central bankers overseas signalled Friday that they were prepared to take action to shore up nervous financial markets after Sunday’s vote. The head of the European Central Bank, Mario Draghi, hinted that he would be ready to pump cash into banks there to head off turmoil. His counterpart in Tokyo, Masaaki Shirakawa, promised that the Bank of Japan was ready to “to take all possible measures to ensure the financial system does not come under threat.”  The statements underscored just how anxious policy makers are ahead of the vote, which they fear could result in a victory by left-wing parties that oppose the deep austerity Greece agreed to in exchange for financial help. If the anti-austerity Syriza party wins, it could eventually force an exit by Greece from the euro zone and feed fears of a broader financial crisis.

Authorities hope that a large infusion of cash into the financial system, if needed next week, could act as a financial firewall to help protect shakier banks in Southern Europe. Depositors have been fleeing not only Greek banks, but Spanish banks as well, rising concerns that these institutions could run short of the funds necessary to conduct normal business. As worries have spread, banks on the Continent have sharply curtailed short-term loans to each other out of concern that they may not be repaid if things start spinning out of control. That fear has further dried up the flow of money in many European economies. It is unclear whether authorities can pump enough money into the system to stave off troubles if the Greek election results scare investors. But investors welcomed Mr. Draghi’s pledge as a sign that after years of half-steps that repeatedly failed to halt the momentum of the crisis in Europe, leaders were finally facing up to the severity of Europe’s distress and acting before investors forced their hand. The Standard & Poor’s 500-stock index rose more than 1 percent Friday, a sign that investors were confident central bankers and governments would act quickly if need be.

European markets also rallied Friday, with German stocks rising nearly 1.5 percent and French shares up 1.8 percent. But in the past, these kinds of upward moves have quickly faded amid doubts over whether long-term fixes will be found. “Markets and people need to be reassured we are still travelling together,” Mr. Draghi told a group of economists in Frankfurt. “The euro system will continue to supply liquidity to solvent banks where needed.” The Federal Reserve in Washington has taken a wait-and-see attitude toward the vote, but Obama administration officials have made it plain just how high the stakes are for the United States in Europe’s debt crisis. “Euro-area fragility remains the key risk to our recovery and the global economy,” Lael Brainard, the Treasury under secretary for international affairs, said Friday. After more than two years of tension, the coming days are seen as a turning point that could determine whether Europe’s fiscal ties grow closer or fray. On the heels of the Greek vote, leaders of the Group of 20 nations will gather in Mexico on Monday and Tuesday, with European leaders set to hold a summit meeting of their own later this month.

Any move by the European Central Bank in response to the Greek election would fall short of the kind of structural changes investors want to see Europe make, most notably the ability to issue euro zone bonds to relieve pressure on riskier borrowers like Spain and Italy and a Continent wide guarantee for bank deposits to halt capital flight. A broader, more concrete blueprint to remake the structure of the euro zone would be made public “in a matter of days,” Mr. Draghi said, so that it can be considered by European leaders when they gather in late June. “We need a credible vision for the long-term stability of the euro zone,” said Markus Krygier, a money manager in London who is betting on more trouble ahead for the euro. “If you don’t have that, traders will keep coming back and try to test the euro zone.” In Switzerland and Britain, central bankers had already announced contingency plans ahead of a weekend that recalled the tension that preceded the collapse of Lehman Brothers in September 2008.

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