Wednesday, September 8, 2010

New and Things

Fall in German exports signals slower growth
By Ralph Atkins

Published: September 8 2010 09:32 | Last updated: September 8 2010 09:32

German exports fell in July in the latest sign that growth in Europe’s largest economy is slowing.

News of the 1.5 per cent decline on the previous month, reported by the German statistical office, followed figures earlier this week that showed growth in industrial orders had also cooled more than expected in July.

They added to evidence that after a strong growth spurt in the three months to June, the pace of expansion would moderate over the rest of the year.

Exports powered Germany’s climb out of last year’s deep recession, buoyed especially by demand from China, for instance for luxury German-made cars. Despite the latest month-on-month decline, German exports in July were almost 19 per cent higher than a year before.

Even if German growth slows over the rest of the year, economists generally do not expect a double-dip back into recession. Although worries have grown about the outlook for the US economy, demand for German exports from Asia is expected to remain robust.

Germany’s recovery had also broadened beyond exports. The figures showed imports had risen faster over the past year. In July, imports were almost 25 per cent higher than a year before, although compared with the month before they were down 2.2 per cent. The year-on-year increase was probably the result of a surge in goods and materials imported to manufacture products that were then exported, but it could also have reflected a pick-up in domestic demand.

Germany’s economy will feel the impact of fiscal austerity programmes across the eurozone, compounded by the weakness of the southern European economies worst hit by this year’s crisis over public finances.

But Carsten Brzeski, economist at ING in Brussels, pointed out that Spain, Portugal, Greece and Ireland accounted for only about 5 per cent of German exports in the first half of this year. “German exports are now normalising,” he said, but “even at a slower pace, the export sector should remain an important growth driver”.

ECB steps up eurozone bond buying
By David Oakley and Jennifer Hughes in London and Kerin Hope in Athens

Published: September 8 2010 19:30 | Last updated: September 8 2010 19:30

The European Central Bank has stepped in to shore up the eurozone government bond markets in what appears to be its biggest such intervention since early July. The ECB has bought between €100m and €300m of Greek, Irish and Portuguese bonds so far this week, traders said on Wednesday, as worries over the health of some highly indebted eurozone economies resurfaced.

Yields on Greek bonds rose to levels last seen before the €750bn emergency rescue package was launched to avert the collapse of the eurozone bond markets in May.

Although the amount of bonds bought by the ECB this week has been small, some strategists said the purchases were a sign that the European sovereign debt crisis was not over.

The ECB has bought €61bn in government bonds – mostly of the weaker eurozone economies of Greece, Ireland and Portugal – since it launched its intervention programme on May 10 as part of the multibillion-euro international bailout.

It bought €16.5bn in bonds in the first week of the programme but has since scaled back its buying. In recent weeks, as the eurozone crisis appears to have eased, it has bought only very small amounts of government debt.

The so-called peripheral bond markets of Greece, Ireland and Portugal have come under pressure as doubts over their economies and banks have deepened.

Greek yields for two-year bonds jumped nearly a quarter of a point on Wednesday to 10.33 per cent, while Irish yields edged slightly higher to 3.21 per cent. Portuguese two-year yields were flat at 3.28 per cent.

Portuguese auctions of three-year and 11-year bonds were well subscribed, although traders said the government had to pay high yields to attract investors.

Market confidence in Greece was hit by numbers showing that the country sank deeper into recession in the second quarter and fears that street protests were about to resume.

Domenico Crapanzano, head of euro rates sales and trading at Jefferies, said: “Hopes that the eurozone debt crisis had seen the worst are premature. It is far from over.”

Steven Major, head of global fixed-income research at HSBC, said: “Many investors are still reluctant to buy the bonds of the weaker eurozone economies, even at very high yields.” Across the eurozone as a whole, one of the biggest concerns has been the state of the European banking sector, in Germany as well as in the weaker economies.

The Basel Committee on Banking Supervision and the Group of Governors and Heads of Supervision, are set to finalise on Sunday banks’ minimum level of so-called tier one capital.

ECB: Bank Rules Will Be Eased In

FRANKFURT—Tighter standards for banks' capital and liquidity won't hurt the economy, European Central Bank governing council member Axel Weber said Wednesday.

Mr. Weber told a banking conference the lengthy transition phase foreseen by international regulators working on the new requirements, known as Basel III, will help to ensure that banks don't find themselves too overburdened and unable to lend.

"The real challenge lies in bringing harmonized international rules into line with differing national circumstances," Mr. Weber said.

He said the aim of greater systemic stability wasn't an end in itself, and that the economic costs of the 2007 to 2008 banking crisis had been immense.

German regulators had expressed reservations about the preliminary agreement reached by international regulators in July on new standards for bank capital and liquidity. The Bank for International Settlements' committee of Governors and Heads of Supervision intends to agree a more detailed version of the requirements next week.

Europe's Bank Stress Tests Minimized Debt Risk

LONDON—Europe's recent "stress tests" of the strength of major banks understated some lenders' holdings of potentially risky government debt, a Wall Street Journal analysis shows.

As part of the tests, 91 of Europe's largest banks were required to reveal how much government debt from European countries they held on their balance sheets. Regulators said the figures showed banks' total holdings of that debt as of March 31.

At the time, worries about banks' government-debt holdings were fanning fears about the health of Europe's banking system as a whole. Release of the bank data was considered the main benefit of the stress tests, which were widely criticized as being lenient overall.

An examination of the banks' disclosures indicates that some banks didn't provide as comprehensive a picture of their government-debt holdings as regulators claimed. Some banks excluded certain bonds, and many reduced the sums to account for "short" positions they held—facts that neither regulators nor most banks disclosed when the test results were published in late July.

Because of the limited nature of most banks' disclosures, it is impossible to gauge the number of banks that excluded portions of their sovereign portfolios from their disclosures, or the overall effect of that practice.

But the exposure to government debt of at least some banks, such as Barclays PLC and Crédit Agricole SA, was reduced by a significant amount, according to industry officials and financial filings made by the banks. Adding to the haziness, the stress tests' reported sovereign-debt levels differed, sometimes widely, from other international tallies and from some banks' own financial statements.

The findings undermine a primary goal of the stress tests—namely, to reassure investors and bankers world-wide the soundness of Europe's financial system. "That would certainly be unhelpful to people's perceptions" of the tests' credibility, said UBS banking analyst Alastair Ryan. Reducing banks' reported holdings of government debt "was clearly helpful for the thing [regulators] were trying to achieve: convincing you that there's not a problem."

Representatives of several banks said they were simply following the guidance provided by the Committee of European Banking Supervisors, the London-based group that coordinated the tests. A CEBS spokeswoman declined to comment.

The stress tests' upbeat results—only seven banks flunked, and were deemed short of just €3.5 billion ($4.51 billion) of capital—initially soothed markets. But fears have flared up again as heavily indebted countries like Ireland and Greece continue to struggle. Among other warning signs, the costs of insuring many bank and government bonds against default in countries such as Portugal, Ireland, Greece and Italy have jumped above their pre-stress-test levels.

There's no established protocol for how banks should report these holdings. Until recently, investors generally didn't worry about government-debt holdings, viewing them as essentially risk-free. So most banks simply lumped the holdings into broader asset categories on balance sheets.

Things changed last spring as fears of government defaults intensified. Greece for a time appeared poised to default on its public debts, until a massive European Union bailout defused that crisis.

The banks based their stress-test disclosures on a template provided by CEBS. The template asked for banks to disclose their "gross" and "net" exposures to sovereign risk in each E.U. country. Most banks' disclosures didn't define "gross" and "net" beyond saying that the latter were "net of collateral held and hedges."

The implication was that the disclosures—particularly the gross exposure figures—were all-encompassing. In a document it published along with the test results, CEBS said "the disclosure of total exposures to sovereign debt by individual banks allows for a full assessment of their respective capital positions."

But some banks' figures didn't represent their total holdings. Barclays, for example, excluded some government bonds it was holding for trading purposes. The rationale, according to Barclays officials, was that the bonds were directly related to transactions the big U.K. bank was performing for corporate or government clients, and that the holdings vary widely from day to day. Barclays didn't disclose that it wasn't listing its full holdings.

Excluding the bonds reduced Barclays' portfolio of Italian sovereign debt—which the bank said was £787 million ($1.22 billion)—by about £4.7 billion, Barclays officials said. The bank's holdings of Spanish government bonds, listed at £4.4 billion, shrank by about £1.6 billion.

Barclays said it excluded the holdings based on guidance from CEBS, which was communicated to the bank via the U.K.'s Financial Services Authority. "We've done exactly what CEBS told us," a Barclays spokesman said.

An FSA spokeswoman declined to comment.

The Barclays officials said they believe other big European banks also excluded significant slices of their trading portfolios from stress-test disclosures.

In its midyear results last month, Barclays reported its sovereign-bond portfolios based on a broader definition than the stress tests used. As a result, Barclays' reported holdings of debt issued by the Italian, Spanish and Irish governments swelled.

Other banking companies excluded bonds held by subsidiaries. France's Crédit Agricole didn't count sovereign debt held by its insurance unit. A Crédit Agricole spokeswoman said the company followed guidance from regulators.

Some banks' figures also were whittled down by accounting for "short" positions they held in various countries' debt. For example, if a bank held €100 million of Greek debt and €25 million of short positions in Greek debt, the gross figure was listed as €75 million.

CEBS didn't disclose that the banks were calculating the figures in that way.

It was unclear how much that practice reduced the gross exposures that banks reported. A few banks, including Barclays, opted to provide investors with more comprehensive figures—in which short positions were not netted out—as part of their midyear results.

There are other signs that banks' disclosures understated the actual government-debt exposure in the European banking system. Jacques Cailloux, chief European economist at Royal Bank of Scotland, compared banks' stress-test disclosures with figures compiled by the Bank for International Settlements. His conclusion: The BIS data shows banks in some countries holding far more sovereign debt than was picked up in the stress tests.

BIS data from March 31 indicates that French banks were holding about €20 billion of Greek sovereign debt and €35 billion of Spanish sovereign debt. In the stress tests, four French banks, which represent nearly 80% of the assets in France's banking system, reported holding a total of €11.6 billion of Greek government debt and €6.6 billion of Spanish debt.

Spanish Bonds

Investors are putting European governments under renewed scrutiny. The extra yield that investors demand to hold Spanish 10-year debt over German bunds has surged 36 basis points since July 27, touching 185 points yesterday. It hit a euro-era high of 221 points on June 16.

The spreads on Irish and Portuguese debt this week climbed to 373 basis points and 354 basis points respectively, the highest since at least 1997. In Belgium, which still doesn’t have a government 2 1/2 months after inconclusive elections, the spread on its 10-year bonds was the highest since July.

On the budget, Zapatero’s room for maneuver has narrowed since August, when borrowing costs were falling so fast that he said the government could reverse some spending cuts. The spread widened 35 basis points in the four days after his comments.

Portugal's borrowing costs jump in bond sale

LISBON, Portugal

Portugal raised euro1.04 billion ($1.3 billion) in a debt auction Wednesday that drew strong investor interest, but the sharply higher borrowing cost reflected market concerns that Europe's debt crisis may be flaring up again.

Portugal, which in recent years has generated little wealth and piled up heavy debts, is regarded as one of the most financially vulnerable countries in the 16-nation eurozone.

Portugal's Public Debt Management Agency said it sold euro378 million in 11-year bonds and euro661 million in 3-year bonds. However, the average interest yield on the longer bonds was 5.973 percent, up from 5.312 percent on 10-year bonds at an auction last month. The 3-year bond yield was 4.086 percent, up from 3.62 percent in a 4-year bond auction in July.

"Portugal is seen to some extent as the eurozone's weakest link" after Greece and Ireland, said Filipe Silva, a debt manager at Banco Carregosa in Porto, Portugal. "Investors are ready to take a risk but they will only do it at a higher price."

Portugal's financial difficulties could aggravate international fears about the continent's broader financial problems.

The Wall Street Journal reported on Tuesday that EU stress tests of 91 banks in July understated some of their holdings of potentially risky debt. That fueled market concerns about underlying weaknesses in the bloc and wider fears about the strength of the global economic recovery.

Despite its fragile economy Portugal has had no difficulty raising funds on international markets this year, and the agency said there was demand for more than twice the amount available. But the success has come at the price of steadily rising borrowing costs.

Moody's Investor Service in July downgraded Portuguese bonds to A1 from Aa2, citing sluggish growth prospects.

Portugal, along with Spain and Ireland, is widely seen as a potential candidate for a bailout like the one provided to Greece to keep it from defaulting on its debts.

That has pushed up the government's borrowing costs just as it is trying to cut spending.

The center-left Socialist government has adopted an austerity plan which seeks to reduce to budget deficit to 7.3 percent this year from 9.3 percent in 2009.

Its record has been patchy so far. The Finance Ministry reported last month that although tax revenue this year was up almost 6 percent through July, primary current spending also jumped 5.7 percent. The increase stemmed from larger welfare payouts amid a jobless rate that has risen to 11 percent, according to EU figures.

Ireland, Portugal Probably Won't Tap EU Fund, Coalition's Dautzenberg Says

Portugal, Spain and Ireland, all of which saw their bond-yield spreads over Germany rise this week, probably won’t need support from the euro-region rescue fund, a senior lawmaker from Chancellor Angela Merkel’s party said.

The Luxembourg-based 440 billion-euro ($558 billion) European Financial Stability Facility, headed by former European Commission official Klaus Regling, was set up in May as the Greek debt crisis threatened to spill over to other euro states.

“I see -- and Mr. Regling stressed that as well in the past days -- that the stabilization fund is probably not going to be used,” Leo Dautzenberg, parliamentary Finance Committee spokesman for Merkel’s Christian Democratic Union, said today in an interview.

Irish and Portuguese government bonds fell yesterday, pushing the yields on 10-year securities to records versus benchmark German bunds. In a speech in Riga the same day, Merkel said that debt-laden governments must stick to their deficit- cutting programs because Germany won’t agree to have the euro fund turned into a permanent facility to provide aid.

“The crisis mechanisms now in place are temporary,” Merkel said in the Latvian capital. “Germany won’t agree to an indefinite prolongation. Otherwise, people would say ‘we’ve got such a nice rescue package in place that this can go on forever.’”

European central banks bought Greek, Irish and Portuguese bonds today, according to a trader involved in the transactions, as the securities’ premiums to German debt surged for a third day.

The Portuguese-German 10-year bond spread widened as much as 18 basis points to 372 basis points today, and was at 363 points as of 12:23 p.m. in London. The Irish-German spread was 8 basis points wider at 381 basis points.

The rescue fund, which is limited to three years, is the main part of a 750 billion-euro aid package hammered out by European Union finance ministers to combat a sovereign debt crisis. Another 60 billion euros will come from the commission - - the EU’s executive arm -- and 250 billion euros from the International Monetary Fund.

ECB chief needs to be much bolder

ANALYSIS : Trichet has the power to calm market fears – he should exercise it, writes DAN O'BRIEN, Economics Editor

IF THE massive rescue package agreed by the European countries in early May was about calming market fears, it is clearly not working.

Yesterday’s developments in the government debt market saw yields on Irish government bonds soar past the peaks reached at the height of the crisis in late April and early May. Other peripheral countries also experienced big increases. This is alarming.

The EU rescue package brought the situation back from the brink in May, but within weeks, yields on the weaker countries’ debt began to rise, sometime in leaps, sometimes in baby steps, but almost always in a ratchet-like fashion.

Apart from Greece, Ireland and Portugal have been the most seriously affected. Spain is in the firing line, but to a lesser extent.

The latest ratcheting up of yields for the peripheral euro-area countries appears to have been caused by a number of factors, including a continued weakening of sentiment towards Ireland. Negative comments on European banks in the Wall Street Journal and a downgrading of AIB and Bank of Ireland by Dublin stockbrokers Davys added to fears yesterday.

The euro area can be likened to 16 climbers roped together on a mountain in appalling weather conditions. Greece has gone over the edge. The other 15 can easily take the strain of keeping the Greeks dangling, however uncomfortable it may be for them. Ireland is now closest to the edge, and moved even closer yesterday. Just behind it is Portugal, and a good bit further back is Spain. If all three go over, 12 countries will be supporting four, something that the May bailout package anticipates as a worst-case scenario.

Thankfully, the mountaineering metaphor is less applicable since the European Central Bank was given new powers as part of the rescue package in May. These powers allow it to go into the market where government bonds are traded and, using the money it prints, buy up bonds.

There is, in theory, no limit to the amount it can print. This means there is no limit to the amount it can buy. This is a formidable weapon. It has been timid in deploying it.

Whereas it bought tens of billions worth of bonds in the weeks after it was first given this power, in July and August it effectively ceased doing so. Over the past three weeks, it has been more active, buying more than €650 million worth. But this is a small amount relative to the size of the market, and it has clearly not stemmed the panic.

The future of the euro is not in question yet, but if the slide is allowed to continue, it could be.

This is now the European sovereign debt crisis, Mark II. Jean Claude Trichet needs to be much bolder. He has the power to calm the panic. He should exercise it.


Credit default swaps (CDS) for Portugal, Spain, Italy, and Belgium have all surged this week. Markit's stress gauge for the group is now higher than during the debt crisis, when the EU launched its €440bn bail-out fund and the European Central Bank began buying eurozone bonds.

Joachim Fels, chief global economist at Morgan Stanley, said strains had reached a point where "one or several governments" may soon have to tap soon the rescue mechanism.

"Neither the European sovereign debt crisis nor the banking sector crisis has been resolved and both continue to mutually reinforce each other," he said, adding that the EU's stress tests for banks had failed to restore confidence.

Investors are bracing for a flood of fresh bond issuance, while concern is mounting that austerity measures in Ireland, Greece, and Spain have left these countries trapped in a downward spiral.

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