Global Business 
News Analysis
A Trillion for Europe, With Doubts Attached
By LANDON THOMAS Jr. and JACK EWING
Published: May 11, 2010
Like the giant financial bailout announced by the United States in 2008, the sweeping rescue package announced by Europe eased fears of a market collapse but left a big question: will it work long term?
Petros Giannakouris/Associated Press
An employee of the Greek Parliament carries copies of proposed pension reforms at a cabinet meeting in Athens on Monday.
Sebastien Bozon/Agence France-Presse — Getty Images
Jean-Claude Trichet, president of the European Central Bank, spoke to reporters Monday, following a two-day meeting of central bankers.
Stung by criticism that it was slow and weak, the European Union surpassed expectations in arranging a nearly $1 trillion financial commitment for its ailing members over the weekend and paved the way for the European Central Bank to begin purchases of European debt on Monday.
Markets rallied around the world in response to the concerted defense of the euro, a package that exceeded in size the United States bank bailout two years ago.
Major stock indexes in the United States rose about 4 percent on Monday, while a leading index of blue-chip stocks in the euro zone rose more than 10 percent. The premium that investors had been demanding to buy Greek bonds plunged. But by Tuesday, that rally appeared to have sputtered out, with many Asian markets down slightly.
And as details crystallized of the package’s main component — a promise by the European Union’s member states to back 440 billion euros, or $560 billion, in new loans to bail out European economies — the wisdom of solving a debt crisis by taking on more debt was challenged by some analysts.
“Lending more money to already overborrowed governments does not solve their problems,” Carl Weinberg, chief economist of High Frequency Economics in Valhalla, N.Y., said in a note. “Had we any Greek bonds in our portfolio, we would not feel rescued this morning.”
Such concerns may be part of the reason the euro fell back when American markets opened, after surging in Asian and European trading, to end the day at about $1.28.
Another big issue is whether bailing out economies creates moral hazard. Other countries may continue to skirt the kinds of actions that would lower their budget deficits and debt loads — steps painful to the public and dangerous to politicians — because they too can expect to be rescued.
It is clear that Europe’s fund will require the sustained support of the 27 nations that form the European Union — not to mention its richest member, Germany, which has until now deeply opposed a bailout.
Indeed, for all the excitement about the scale of the effort, it is important to remember that the core fund does not now exist. The fund, known as a special purpose vehicle, would raise money by issuing debt and making loans to support ailing economies. The European countries would guarantee that fund.
So the package is merely a commitment for the vehicle to borrow money if a large economy like Spain, which represents 12 percent of the output in the euro zone, asks for assistance. The International Monetary Fund is pledging 250 billion euros to support the effort. Sixty billion euros under an existing lending program pushes the total to near $1 trillion.
The fund is therefore more a theoretical construct than the Troubled Asset Relief Program that was created in the United States, and that is where things get tricky.
By definition, if Spain came to a point where it could no longer finance itself, interest rates would be on the rise. The several hundred billion euros for the fund would not only come at a high cost, but would bring additional pain to already indebted countries like Portugal, France, Italy and the United Kingdom, which back the special purpose entity, thus compounding the region’s debt woes.
For Dominique Strauss Kahn, the I.M.F.’s ambitious managing director, the program is a hard-earned victory that allows the fund to assume a central role in pushing for economic reform in Europe.
Greece’s cabinet on Monday approved major changes in its pension system, including an increase in the early retirement age to 60 and the broader retirement age to 65, as part of a three-year package of reforms imposed by the fund and the European Union.
Yet some fund staff members have pointed out that, if anything, the rescue package and the I.M.F. commitment to support it might give countries like Spain an excuse to retreat a bit from the tough measures that have distinguished Ireland’s and Greece’s austerity efforts.
“It shows that Europe can come together,” said a banker with close ties to the fund who was not authorized to speak on the record. Though it takes the pressure off Spain, “it does not address structural pressure in Europe.”
In effect, Germany and other wealthier European countries are assuming responsibility for the creditworthiness of Greece, Portugal and the other debt delinquents.
But the European central government is weak and must invent new structures to administer the promised aid.
“The debt crisis will change the nature of European monetary union,” Jörg Krämer, chief economist at Commerzbank, wrote in a note on Monday. “The euro zone has moved away from a monetary union and towards a transfer union.”
Mr. Krämer warned that the shift could “undermine political support for the euro zone in the long run. After all, it is unlikely that the countries receiving support will let others permanently dictate their economic policies. Moreover, voters in the countries giving support will not be willing to permanently give financial support to other countries.”
On Monday, Jean-Claude Trichet, president of the European Central Bank, warned European governments, all of which will probably miss the budget deficit goals they agreed to when they created the euro, that they must continue to cut government spending.
At a time when economies, from Romania and Hungary to Britain and Spain, are struggling to meet their deficit goals, Mr. Trichet’s warning took on extra resonance.
Romania and Hungary are operating under I.M.F. programs, while Britain and Spain are trying desperately to persuade markets that they will not experience the financing problems that have forced so many countries in Europe to seek assistance.
“For us, what is absolutely decisive is the commitment of governments of the euro area to take all measures needed to meet their fiscal targets this year and in the years ahead,” Mr. Trichet told reporters at a press conference in Basel, Switzerland.
But after 10 years of mostly missing fiscal guidelines during a worldwide economic boom, it remains uncertain if more finger-wagging by Mr. Trichet and a new fund backed by the I.M.F. will be enough to return European nations to fiscal health as their economies stagnate and social pressures build.
James Kanter, David Jolly and Sewell Chan contributed reporting.
http://www.nytimes.com/2010/05/11/business/global/11reconstruct.html
Global Business
Debt Aid Package for Europe Took Nudge From Washington
Among those at one weekend meeting in Brussels were France’s finance minister, Christine Lagarde, and Greece’s, George Papaconstantinou, third from right.
By STEVEN ERLANGER, KATRIN BENNHOLD and DAVID E. SANGER
Published: May 10, 2010
PARIS — President Obama had just flown into Hampton, Va., Sunday morning to deliver a commencement address. But before he donned his silky academic robes, he was on the phone with Chancellor Angela Merkel of Germany, offering urgent advice — and some not so subtle prodding — that Europe needed to try something big.
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Weeks of hesitant half-steps to address Greece’s debt problems had only worsened market worries about the euro, and were threatening the still-fragile economic recoveries in the United States and Asia. Now, Mr. Obama told Mrs. Merkel that the Europeans needed an overwhelming financial rescue to end speculation that the euro — and European unity — could crumble.
“He was trying to convey that he knew these were politically difficult steps that the leaders there had to take, that he had gone through them as well,” said one senior administration official familiar with the conversation. “And that, from his experience, trying to get out ahead as much as possible was the right way to go.”
That call was part of what a senior Treasury Department official called “one long conversation” with European leaders, who over an extraordinary weekend of late nights and early mornings overcame German resistance and agreed to a wholesale expansion of the bloc’s political and financial mission. Bending the rules, they backed the stability of all 16 countries that use the euro with loan guarantees adding up to nearly $1 trillion.
In the process, the European Union, under crisis conditions, moved fitfully toward more centralization, toward a French vision of an economic government for the region. It is a role not totally unlike the one that the federal government in the United States played during the early stages of the financial crisis in 2008.
But to get there involved intense bargaining among leaders, especially the French president, Nicolas Sarkozy, who was in Brussels, and Mrs. Merkel, who was in Moscow, but also the Italian prime minister, Silvio Berlusconi; Group of 7 finance ministers; the Japanese; and the Americans, according to interviews with numerous participants in the talks in Europe and the United States.
The deal also required a contentious telephone vote by the members of the board of the European Central Bank, who agreed, though not unanimously, to do what the bank said last week it had not even considered — buying up the sovereign debt of the weakest members of the euro zone, those nations using the euro currency, effectively guaranteeing their debt to protect them from anxious investors.
After the 16 leaders of the euro zone met Friday evening into early Saturday to confirm their previous deal for Greece, which the markets had considered inadequate, they agreed they had to do more. Their finance ministers gathered Sunday in Brussels, under a deadline to act before financial markets opened in Asia on Monday morning, to hammer out the details.
It was another of the all-night sessions that have come to epitomize the challenge of making decisions in Brussels, where 27 sovereign states with more than 450 million people sometimes painfully decide to share their sovereignty. The crisis most directly touches the 16 nations that use the euro. But it may also affect the fate of the single currency — a main symbol of the new European unity — and thus touches the entire European Union.
But the states that share the euro, which is controlled by the independent European Central Bank, do not share a single treasury, tax system or budgetary authority. The euro’s lack of coordinated financial backing had become excruciatingly evident after Greece admitted that its level of debt was much higher than previously reported, due to bad management and prevarication.
A sovereign debt crisis — compounded by a recession that had cut tax receipts and prompted extra government stimulus spending all over Europe — began to gnaw at those countries most exposed and least competitive: Greece, Portugal and Spain.
American officials became worried about the European response as early as February, a senior administration official in Washington said on Monday, when European leaders repeatedly stated that the Greece problem was well contained. They believed that mere expressions of support would be enough to calm the markets — and that they did not need to put in real commitments of emergency funds.
The Americans were less persuaded, telling their counterparts that they had to eradicate “the risk of default.” The Europeans debated this internally and, in the mind of one senior American official, who would not speak on the record, the Europeans “waited too long.”
“Had they acted sooner,” he said, “They might have gotten away with less.”
The United States officials began talking to their counterparts about an American concept: overwhelming force. “It’s all about psychology,” said the senior official. “You have to convince people that the government will get its act together.”
But it was not until Sunday, one official noted, that the meltdown spreading across Europe was regarded as “an existential threat.”
Aware that the “wolf pack” markets, as the Swedish finance minister called them, had dismissed their every move so far as too little, too late, some of Europe’s leaders knew they had to act in a big way — to “shock and awe” the markets. To encourage them, Mr. Obama made his calls, first to Mrs. Merkel, who was losing a key state election in North Rhine-Westphalia, and, three hours later, to Mr. Sarkozy.
Washington was also ready to help, in a limited but crucial way. The Federal Reserve offered to swap euros for dollars, easing pressure on European central banks, which were bleeding dollars.
European finance ministers arrived in Brussels on Sunday with broad agreement on the need for a fiscal contribution from the European Union budget and some kind of fund to stabilize the most troubled markets. By several accounts in Europe, a 500 billion-euro figure first emerged Sunday afternoon, when Mr. Sarkozy called Mrs. Merkel after each had spoken with Mr. Obama.
But how was that huge sum to be raised with the agreement of the politicians who wanted to keep control of their hastily devised rescue?
Germany was insisting on a solution that involved bilateral loans from European member states, similar to the much smaller Greek bailout agreed to a week earlier. But countries like Italy and Spain feared that they would be unable to raise the amounts required and lobbied for loan guarantees on funds raised by the European Commission.
As the evening unfolded, Germany, Britain and the Netherlands all opposed the commission’s proposal to raise money on capital markets guaranteed by member states. The British and Dutch said the proposal was tantamount to giving a “blank check” to the European Union’s governing commission, according to a European diplomat who spoke on condition of anonymity.
Near midnight Sunday night, the talks appeared deadlocked, these participants said. “The deal is exploding,” read the text message of one French official to Paris, where Mr. Sarkozy was demanding regular updates and was pushing for a bigger agreement.
Then came the deal-making idea — put together, according to different officials from different countries, by the French, the Italians, the Dutch and a crucial German banker.
Axel Weber, the president of the conservative Bundesbank, who is favored to succeed Jean-Claude Trichet as the next president of the European Central Bank, suggested a mechanism for Europewide loan guarantees that finally won support from a reluctant German government during a midnight call, participants said.
The idea was for a new mechanism euphemistically called “a special purpose vehicle” — essentially eurobonds created by intergovernmental agreement among euro zone countries. That vehicle, supposedly to last only three years, would raise up to 440 billion euros on the markets with loans and loan guarantees, depending on the need.
The Germans, together with other northern Europeans like the Dutch, British and Austrians, insisted that the European Commission not control the vehicle but only manage it — in conjunction, as with the Greek deal, with the International Monetary Fund. The fund would provide discipline, as well as roughly one euro for every two from Europe.
The “special purpose vehicle” finally broke the French-German deadlock. José Manuel Barroso, the president of the European Commission, said Monday that agreement came at 2:15 a.m.
“Now Europe is finally getting noticed,” noted one French official late Monday. “I just wish it was under different circumstances.”
Steven Erlanger and Katrin Bennhold reported from Paris, and David E. Sanger from Washington. Reporting was contributed by James Kanter from Brussels, Sewell Chan and Brian Knowlton from Washington, and Judy Dempsey from Berlin.
http://www.nytimes.com/2010/05/11/business/global/11bets.html
Money Managers Remain Hesitant on Euro Bailout
By NELSON D. SCHWARTZ and ERIC DASH
Published: May 10, 2010
Markus Krygier is betting against the euro — still. Not even $1 trillion was enough to change his mind.
Minh Uong/The New York Times
Jason Alden/Bloomberg News
A trader in London on Monday. Hours after the announcement of a debt crisis bailout, the euro rallied, but it later dropped.
Only hours after European leaders devised a sweeping rescue package to defuse the debt crisis that has threatened the euro, Mr. Krygier, a money manager in London, arrived at his desk Monday morning confident that Europe’s beleaguered currency would keep falling.
“We think the euro will go down still further,” said Mr. Krygier, deputy chief investment officer at Amundi Asset Management, which oversees $40 billion in global fixed-income and currency assets.
He has plenty of company. Despite the nearly $1 trillion aid package assembled by the European Union, euro doubters on both sides of the Atlantic were unbowed on Monday — and preparing to make new wagers against the currency.
From hedge fund managers on the Connecticut Gold Coast to investment pros who quietly tend fortunes in Geneva and London, die-hards betting that the euro will weaken brushed aside the news of Europe’s audacious bailout plan. Even as the euro briefly rallied and stock markets soared, these investors predicted that Europe’s financial markets would soon come under renewed pressure. The rescue plan, they said, does not fix Europe’s deeper problems.
Their skepticism was reflected in the currency markets, where, after an initial surge, the euro quickly fell back. After rising against the dollar from just under $1.28 to nearly $1.31 in the early hours after the package was announced, the currency slipped back to close not far from where it started.
The initial increase was spurred as investors who sold the euro short, wagering that it would fall, rushed to cover those positions and lock in profits.
“We expected a short-lived bounce,” Mr. Krygier said. “There was definitely an element of a short squeeze in the rebound.”
Indeed, by the time markets opened in the United States, and American hedge funds entered the market, the euro’s rally began to flag.
Traders said many of the big hedge funds that have been bearish on the euro saw Monday’s initial move higher as a blip, and are counting on further euro weakness. Since hitting a high of $1.51 late last year, the euro has been in a steady decline.
Central banks and sovereign wealth funds, which have actually been diversifying their holdings and adding euros recently, remain a strong counterweight to those who expect more weakness.
But the volume of negative bets against the euro has mounted sharply in the last few weeks. The selling pressure intensified last Thursday and Friday amid fear that the European Central Bank would fail to ride to the rescue.
As of last Friday, investors had built up record short positions in the euro, according to public data from the Commodity Futures Trading Commission.
Euro bears argue that the huge budget deficits most European governments are groaning under will not be fixed by the package, and could actually get worse because of the hundreds of billions of dollars governments will have to borrow to finance the rescue.
Nor does the new plan address more fundamental structural problems like rigid labor markets and low productivity, said Marco Annunziata, chief economist for UniCredit.
“It was crucial to stop the panic, and this package has done it, but it doesn’t solve the longer-term problems which are slowly undermining the value of the euro,” Mr. Annunziata said. “If you’re not competitive, you can’t generate economic growth.”
The crisis in Greece, which was sparked by fears that the country would be unable to borrow the money it needed to pay its bills and cover its deficit, threatened to spread to Portugal and Spain last week.
All three countries have borrowed heavily but are either in recession or growing very slowly, which leaves them little maneuvering room to cut spending or raise taxes.
For the moment, the fear of contagion, a mass exodus from assets across borders, seems to have passed.
“This is not an unambiguous positive signal for the euro, but it does limit the risk for contagion,” said Todd Elmer, a Citigroup currency strategist.
In any case, a weak euro does bring some benefits to the 16 countries on the Continent that use it.
Most significant, it makes exports more affordable on world markets, enhancing the ability of European companies to sell their goods in major markets like North America and Asia.
It is also a boon for tourism, because European vacations become cheaper for visitors from the United States and elsewhere. Tourism is a crucial economic sector in several of the more troubled countries on the Mediterranean rim, like Spain and Greece.
One worry that is likely to get more attention in the coming days is the still-yawning spread between bonds from Germany, Europe’s strongest economy, and those of Greece, Portugal and other shaky markets in the euro zone.
As of Monday’s close, Greek bonds yielded nearly 7 percent more than comparable German securities, while Portuguese debt was 2.35 percent higher.
“We have a tremendous amount of debt outstanding, a tremendous amount on the way, and some pretty bad-looking fiscal deficits out there,” said Bill Prophet, a Deutsche Bank rates strategist. “The market is not completely convinced that the bailout is going to solve all these problems.”
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