Cameron Veto: Britain's Position 'Would Have Threatened Single Market' Barroso Says
European Commission President Jose Manuel Barroso has said Britain's position on a future EU treaty on financial regulation posed a "risk to the integrity of the single market". He was speaking at a meeting of the European Parliament on Tuesday morning, the first meeting of the Parliament to discuss the failure of talks last week to secure an EU-wide treaty.
Describing David Cameron's veto of the treaty as "unfortunate", Mr. Barroso warned that Europe faced a long road ahead to reach a deal which would satisfy all the Eurozone countries.
"Personally, I made every possible effort to agree this fiscal compact fully within the current treaties," he said. "This approach required that all 27 member states played their part. As you know, one member state was opposed to amending the Lisbon treaty."
Some MEPs have given more harsh criticism of David Cameron's position. One French MEP said "26 of the 27 states have shown responsibility", adding that the Prime Minister should be reminded that he has "obligations" to introduce greater financial regulation.
However some MEPs criticised the European Commission for trying to push for a treaty across the whole EU to rescue the Euro in the first place, and UKIP leader Nigel Farage told the EU Parliament that Europe was the Titanic, and Britain's was in a lifeboat.
"Britain is going to make the great escape", he told MEPs, to scattered applause. "Cameron does not know what he has unleashed," he added, suggesting that a process had now started which would lead to a referendum on whether Britain should leave the European Union.
Huffpost UK is following what looks like being a stormy session of the European Parliament with live updates below. The meeting comes as British cabinet ministers are meeting for the first time since Cameron vetoed the EU-wide treaty, a day after Nick Clegg decided to skip a Commons statement and debate on the failure of the talks last week.
Jose Manuel Barroso, president of the European Commission, condemned the United Kingdom's veto of a European Union treaty change as self-serving because Prime Minister David Cameron had sought protections from regulations for the United Kingdom's financial industry, according to The New York Times.
"This made compromise impossible," Mr. Barroso told the European Parliament in Strasbourg, France, according to The New York Times. "All other heads of government were left with the choice between paying this price or moving ahead without the U.K.'s participation and accepting an internal agreement among them."
The Spanish government successfully sold $6.51 billion in Treasury bills on Tuesday, above its target range, according to The Wall Street Journal. Bids for Spanish government debt totaled $23.8 billion, or 3.66 times more than the amount of debt sold. Borrowing costs for Spain fell as a result.
Eurozone banks, which once flocked to Eastern Europe for revenue opportunities, now are fleeing the region to focus on their domestic economies, according to The Wall Street Journal.
Experts fear that Eastern Europe, even though it has mostly avoided the euro, still will go through a recession because of the pullback in lending, according to the WSJ. Germany's Commerzbank and Italy's UniCredit, two of Europe's largest banks, said they plan to scale back their Eastern European operations, which previously were a priority.
"At the very least, this means that credit growth in Eastern Europe will remain very weak," Neil Shearing, chief emerging-markets economist at Capital Economics in London, told the WSJ. "But I think there's a sizable and underappreciated risk of a new credit crunch."
The National Bank of Greece, the country's leading quality lender, said on Tuesday that it will seek approval from its shareholders to ask for a $1.3 billion bailout from the Greek government, according to Dow Jones Newswires.
It appears that the crisis may be resulting in a vicious cycle: As the Greek government has its debt written down, banks lose money and need a government bailout, which further devalues the government's debt and hurts bank balance sheets even more.
From Dow Jones Newswires:
Already reeling from a slumping economy, rising non-performing loans and steady outflow of deposits, Greece's banks are facing huge losses from a planned debt write down the government is negotiating with its private sector creditors.
In a report issued earlier Tuesday, the IMF estimated Greece's top six lenders will require a total capital boost of up to EUR17 billion to cope with the debt write-down.
Researchers at the Organization for Economic Cooperation and Development (OECD) have called on European leaders to invest in jobs for young people and economic growth as a whole in order to prevent a long-term drag on growth, according to Reuters. Youth unemployment across the European Union averages 20 percent, ranging as high as 45 percent in Spain to 7 percent in the Netherlands, according to Reuters.
"It's an investment for the present, an investment for the future," said Stefano Scarpetta, deputy director of the OECD's employment division, in Paris, according to Reuters.
Credit Agricole, one of France's largest banks, plans to cut up to 2,000 jobs, according to a French newspaper article cited by Reuters.
Credit Agricole, which is emulating similar moves by BNP Paribas (BNPP.PA) and Societe Generale (SOGN.PA), is in the early stages of an overhaul under new Chief Executive Jean-Paul Chifflet, who has espoused a back-to-basics retail banking strategy at odds with his predecessor's ambitions to make the bank a major global player in financial markets...
With credit markets virtually closed to euro zone banks, all French lenders have announced cutbacks in lending to slash debt and wean themselves off once-cheap wholesale funding, especially in U.S. dollars.
The crisis in the eurozone could cause a credit crunch in the United Kingdom, said Spencer Dale, the Bank of England's chief economist, in an interview with Bloomberg TV on Tuesday.
"U.K. banks haven't been able to issue unsecured term debt for most of the second half of this year," he said. Dale added that if funding markets do not open again, "there’s a real risk that credit conditions in our economy could tighten further."
That means it could become 2008 all over again, Bloomberg TV noted.
After the Federal Reserve announced no major new moves, U.S. stock markets plunged and closed lower on Tuesday, Reuters reports.
The S&P 500 fell 0.87 percent, and the Dow Jones Industrial Average fell 0.55 percent, or 66.45 points. The NASDAQ closed 1.26 percent lower.
A credit crunch is beginning to materialize in Europe.
Eurozone banks had deposited $453.5 billion at the European Central Bank by Monday night, the highest level since June of 2010, highlighting that eurozone banks are shunning lending to each other, according to The Financial Times.
European banks also are relying more heavily on the ECB's emergency funding system, according to the FT.
"The financial system is no longer functioning properly. Very few banks can get short-term loans in the private markets. It is only a handful of the very biggest and strongest banks that can," one trader told the FT.
Negotiations between the Greek government and private holders of Greek government debt have delayed their talks on reducing the value of their holdings in Greek debt by 50 percent, which is delaying a $170 billion European bailout package for Greece, The Financial Times reports.
The article said that private bondholders, which are largely European banks, are demanding that government bondholders take the same haircut on their Greek debt, that the interest rates be high, and that the new Greek government bonds be governed by British law so that the Greek government cannot unilaterally reduce their payments in the future. Both sides are using delays to the talks as a strategy to strengthen their negotiating position.
From The Financial Times article:
“We expected to complete on the bonds in December, now it’s looking like February,” said one official....
“If that is true about February, we are headed for a bad end. Markets need confirmation of an agreement by early January,“ the person said, pointing to another visit to Athens by EU and IMF officials in mid-January.
An IMF staff report published on Tuesday said that the protracted negotiations over restructuring sovereign debt had worsened market conditions.
"The drawn-out debt restructuring discussions have taken a toll on market sentiment and ratcheted up pressure on the banking system (which is heavily exposed to sovereign bonds)," the report said.
Martin Wolf, chief economics commentator for The Financial Times, wrote in a column Tuesday that last week's European summit was a "disastrous failure," since the debt limits will force many eurozone economies to endure a protracted recession.
From his column:
This leaves much the most plausible outcome of the orgy of fiscal austerity: long-term structural recessions in vulnerable countries. To put it bluntly, the single currency will come to stand for wage falls, debt deflation and prolonged economic slumps. Can this stand, however big the costs of a break-up?
The eurozone has no credible plan to fix the flaws of the eurozone, apart from greater fiscal austerity: there is to be no fiscal, financial or political union; and there is to be no balanced mechanism for economic adjustment on both sides of the creditor-debtor divide. The decision is, instead, to try still harder with a stability and growth pact whose failures have been both predictable and persistent.
The Federal Reserve said that the European crisis poses a risk to the U.S. economy, Reuters reports:
The Federal Reserve on Tuesday pointed to turmoil in Europe as a big risk to the economy, leaving the door open to a further easing of monetary policy even as it noted some improvement in the labor market.
Another sign emerged on Tuesday that investors who have become increasingly worried about European bonds are buying up U.S. government debt instead.
Demand for 10-year U.S. Treasury notes outstripped supply 3.53 times at a bond auction on Tuesday: higher than the average of 3.04 over the last eight auctions, the Associated Press reported. Foreign investors bought 61 percent of the bonds, in contrast to 42.8 percent in recent auctions.
The interest rate on 10-year Treasury notes fell to 1.95 percent from 2.02 percent on late Monday, according to the Associated Press.
Greece and Germany will start talks next week to establish a development bank modeled after the German reconstruction bank that was founded in 1948 as part of the Marshall Plan to rebuild Germany after World War II, Dow Jones Newswires reported on Tuesday.
From Dow Jones Newswires:
"It is a new step in order to [provide] liquidity and finance the Greek market," Greece's Economy Minister, Michalis Chrysochoidis, told reporters. "This lack of liquidity is a vital problem of Greece and so we need this liquidity."
Germany's Economy Minister Philipp Roesler stressed that Germany's role was to "provide know-how to establish [the bank's] infrastructure," not to provide monetary support.
German Chancellor Angela Merkel acknowledged in a speech on Tuesday that European economies need to grow, in a slight shift away from her emphasis on budget discipline and price stability, which critics say will keep growth anemic in the eurozone.
“Stability culture and budget discipline is an important facet of the entire package, but we also have to focus on growth impulses as well as employment,” Merkel said, according to Bloomberg News.
"Joblessness is still very high in great parts of Europe," Merkel acknowledged, according to Dow Jones Newswires.
The International Monetary Fund said in a country review on Tuesday that the Greek economy will shrink up to 6 percent in 2012, higher than Greece's official estimate of 5.5 percent, according to Dow Jones Newswires.
"The economy is trending notably lower than what was expected," the IMF said, according to Dow Jones. "Greece is still well away from the critical mass of reforms needed to transform the investment climate."
IMF mission chief Poul Thomsen said on Tuesday that Greece had reached the limit of revenue that it could achieve by raising taxes and that now it needs to focus on spending cuts, according to the Associated Press.
IHS Global Insight forecasts that the eurozone is going to experience a double-dip recession in 2012. They wrote on Tuesday:
All indications are that the Eurozone will suffer through a recession in 2012—a mild one if the region’s sovereign-debt problems are resolved, or a deep one if they are not. Fiscal austerity is in full swing, bank credit is tightening, and confidence is plummeting. With few exceptions, the Eurozone economies will see negative growth next year, with the region as a whole contracting by about 0.7%—at best. Possible, though unlikely, is a much worse recession triggered by messy sovereign defaults and/or euro exits.
European banks are selling some of their fastest-growing businesses in order to raise capital to meet the European Banking Authority's capital requirements by June, Bloomberg News reported on Tuesday.
Spain’s Banco Santander SA (SAN), Belgium’s KBC Groep NV (KBC) and Germany’s Deutsche Bank AG are accelerating plans to exit profitable operations outside their home markets. Santander, which said in October it needs to plug a 5.2 billion-euro ($6.9 billion) capital gap, sold its Colombian unit last week to Chile’s Corpbanca for $1.16 billion. Deutsche Bank is weighing options including a sale of most of its asset-management unit, while KBC may dispose of businesses in Poland.
Such sales risk hurting long-term profit, just as Europe enters recession, investors say. It’s the unintended consequence of the decision by European regulators to make banks increase core capital to 9 percent by June instead of 2019. Unwilling to raise equity because their share prices are too low, lenders are selling profitable assets because they’re struggling to find buyers willing to pay enough for their troubled loans to avoid a loss that would erode capital. Investors say the sales risk leaving banks focused on a stagnant economy and deprive them of economic growth from outside the region.
Alan Blinder, a Princeton economics professor and former vice chairman of the Federal Reserve, wrote in an op-ed in The Wall Street Journal on Tuesday that Europe has a "German problem," since Germany has outpaced other eurozone members in productivity, exports, and economic growth, and because the country is not likely to volunteer for higher inflation in its own borders through a stimulus. He added that structural economic reforms are unlikely to jumpstart struggling eurozone economies since they take years to have an impact.
The other countries can experience deflation, meaning a prolonged decline in both wages and prices, which is incredibly difficult and painful—and generally happens only in protracted recessions. Sadly, this may be the most likely way out.
Thus the euro zone has a big, visible Greek problem, which is a result of failure. But it also has a far bigger, though less visible, German problem, which is a result of success.
Wish them well.
A volatile day's trading in Europe saw mainland Europe's markets finally close slightly down, with trade very thin as investors wait for clarity on the details of an EU plan to shore up the limping single currency. The German DAX ended down 0.35% and the CAC-40 lost 0.19%.
In the UK, volume was much higher, and the FTSE-100 gained 1.15%.
The euro had a bad day, falling to 11 month lows against the dollar after Angela Merkel reiterated that the European Stability Mechanism, a €500bn bailout facility, would not be scaled up.Tuesday's main developments include:
- The "six pack" of measures designed to bring countries back on track towards fiscal stability came into force. Crucially, these include sanctions for countries that fail to keep their public deficit below 3% of gross domestic product (GDP), and an "excessive deficit procedure" - a readjustment programme - for governments with debt of more than 60% of GDP.
- Markets have slid back slightly, but volumes have been small as investors keep their powder dry.
- A Spanish short term bond auction went fairly well, with good cover and more moderate yields, but 10-year debt from both Spain and Italy have seen their yields drifting upwards again.
- The European Financial Stability Facility (EFSF) sold short term debt with strong cover, despite fears that it may see its debt downgraded.
- David Cameron has been warned by senior EU officials that his veto on Friday won't protect the banks, and that his proposals would have damaged the single market.
The markets believe that Greece has almost a 100 percent chance of defaulting on its debt sometime in the next five years, according to a Bank of England analysis cited by Carl Emmerson, deputy director of the Institute for Fiscal Studies, in BBC News.
Other countries do not fare well. The markets believe that Portugal has about a 60 percent chance of defaulting sometime in the next five years, Ireland has about a 47 percent chance of default, Spain has more than a 30 percent chance of default, and that Italy -- Europe's third largest economy -- has more than a 35 percent chance of default, according to the Bank of England analysis. If Italy or Spain default on their debt, a breakup of the eurozone would be highly likely, according to some economists.
Italy is paying more for three-year government bonds than ten-year bonds, suggesting that the markets are losing confidence in Italy's ability to repay its debt, according to data from the Bank of Italy cited by BBC News.
Richard Portes, economics professor at London Business School, outlined the implications:
Italian debt yields have risen to unsustainable levels. Recognising this, the markets could overnight refuse to roll over Italy’s maturing debt at any price. Italy would be forced to default. No Italian banks could survive the write-down on their Italian public debt holdings, and the sovereign could not bail them out. Banks in many other countries would be compromised because of direct exposure and interbank exposures to Italian institutions. A generalised, global financial crisis would follow, far worse than after Lehman's failure.
The euro has fallen to its lowest level against the dollar since January - with $1.3122 to every €1.00.
The single currency has been relatively buoyant despite the crisis, in part because of a deficit of options. The dollar itself has been fairly weak as concerns over the US debt reduction plan have worried investors. The Yen and the Swiss franc have seen big inflows, but investors have kept hold of their euros.
As confidence in the crisis plan wanes, it seems they are reassessing that decision.
In the stock markets, French and German indices have turned around and are now broadly flat.
Greece would face a host of economic difficulties if it left the euro, though ultimately it may be an effective way for Greece to pull its way out of its current depression, The New York Times reported on Tuesday.
Already many Greeks are preparing for the possible event of a euro exit. Greeks have withdrawn about $53 billion in deposits -- equal to about 17 percent of Greece's gross domestic product -- from the banking system, out of concern that a Greek exit could severely devalue their deposits, the NYT reported.
If Greece left the euro, according to the NYT, then the new currency, the drachma, would lose more than 60 percent of its value against the euro, and there would likely be a freeze on bank deposits in order to prevent people from pulling their deposits from the Greek banking system. Greece would be forced to default on its debt, since investors would not want their debt repaid in devalued drachmas. No one else would be willing to lend to Greece. It would be extremely expensive for Greeks to travel elsewhere, because of the low value of the drachma. There could even be hyperinflation.
Nonetheless, since the currency would be cheaper and Greece would have regained control of its monetary policy, "Greece’s chances of returning to growth might improve drastically," the NYT wrote.
The European Financial Stability Facility (EFSF), the eurozone's bailout fund, held its first short-dated bond sale on Tuesday, seeing strong demand. The auction was covered more than three times over, as investors saw the opportunity to buy some highly-rated short-term debt.
How the EFSF fares in its longer-term debt auctions remains to be seen. The threat of a downgrade is still hanging over the fund, as Standard and Poors (S&P) put the entire eurozone and its bailout mechanism on its watch list.
Markets around the world reversed their downward streak and rose slightly on Tuesday, indicating that not all investors are panicking about the crisis in Europe. In Europe, the DAX in Germany rose 0.65 percent, and the CAC 40 in France rose 0.02 percent as of 9:21 a.m. ET, according to Thomson Reuters. Meanwhile, stock markets in the United States also opened higher, with the S&P 500 rising 0.77 percent during the first eight minutes of trading and the Dow Jones Industrial Average rising 96.5 points, or 0.80 percent.
An element of stating the obvious in the Association of Investment Companies (AIC) annual poll results, but managers in the UK are worried that the eurozone crisis is going to keep the heat on stock markets into next year.
At first reading, what is most surprising is that only 62% think that the eurozone crisis is the biggest threat to stocks next year, but then, most of the balance (33%) say that their major fear is a full-blown global recession.
In a comment accompanying the AIC's release, Slim Feriani, who manages two funds, summed up the doomsday scenario:
“If Germany and/or the ECB don’t draw a line in the sand regarding the European debt crisis sooner rather than later, then a plunge in the Eurozone will lead the whole EU into a recession; the hit on confidence can easily drive a struggling US into a double-dip; and the slowdown in China will accelerate as recession in the external sector will hit small and medium enterprises particularly hard and the loss of confidence will drive housing prices to fall more than otherwise. Under this scenario all bets are off!"
Outside of the European Union for a moment - the Swiss government downgraded its forecasts on Tuesday, saying that the country would slip back to just 0.7% GDP growth in 2012.
Switzerland has suffered from its own status as a safe haven. The Swiss franc appreciated sharply over the summer, and the government was compelled to intervene in the currency markets in order to try to keep the heat off.
That didn't exactly work, the franc has run ahead of the euro and the upshot is that Switzerland's exports of high grade machinery have been seriously hit.
The euro has been weakening this week, and if it falls further there could be yet more pressure on the "Swissy" and the country's economy.
Isolation, coupled with huge export exposure to a struggling single market without any ability to influence the politics? The UK should perhaps take note.
Here's a piece from the Huffington Post in the US noting that as the eurozone crisis drags on, American banks and markets are increasingly concerned about being drawn into the morass.
Bonnie Kavoussi and Catherine New write:
Though most U.S. banks said that they have limited exposure to Europe's troubles, economists and analysts counter that financial institutions are substantially vulnerable. At issue is not just how exposed each bank is to Europe, but how exposed their financial partners are.
The issue of counterparty risk, as well as the lack of transparency about who owns what in relation to European debt and the fact that liquidity globally could well be restricted in the event of a default in the Old World makes these fears real and credible.
Newt Gingrich seems to be channeling Sarah Palin's claim that she understood foreign affairs because she could see Russia from her house.
The Boston Globe reports that Gingrich has, for the second time, referenced a cruise he took around Greece as a valuable experience in understanding the unfolding European sovereign debt crisis.
Gingrich got a chance to "talk to folks in Greece" during his holiday, according to the Globe.
This might not be as mad as it sounds. After all, a major source of Greece's crisis and the political paralysis that has hampered attempts to resolve it has been the growing divide between the Greek elite - who pay little tax, keep their money offshore and benefit from tangled property rights - and the ordinary man on the street.
This divide is well highlighted by the enormous differences between the satellite ports of Athens Glyfada and Piraeus - the first a St Tropez-esque forest of yacht masts and polished nightclubs, the other a swamp of rust, dive bars and shoddy motels.
We're sure that's what Gingrich meant.