Ominous countdown starts for euro area as IMF help sought
BRUSSELS/LONDON - Reuters
Germany’s Finance Minister Wolfgang Schaeuble answers questions from journalists as he arrives at the European Union council headquarters ahead of a critical Eurogroup meeting in Brussels on Nov 29. REUTERS photoEurope faces a crucial 10 days to save the eurozone after agreeing to ramp up the firepower of its bailout fund, but acknowledging it may have to turn to the International Monetary Fund (IMF) for more help.
“We are now entering the critical period of 10 days to complete and conclude the crisis response of the European Union,” Economic and Monetary Affairs Commissioner Olli Rehn said yesterday as EU finance ministers met.
Eurozone ministers agreed Tuesday night on detailed plans to leverage the European Financial Stability Mechanism (EFSF), but could not say by how much because of rapidly worsening market conditions, prompting them to look to the IMF.
Italian and Spanish bond yields resumed their inexorable climb towards unsustainable levels yesterday, as markets assessed the rescue fund boost as inadequate.
Stocks fell and the euro weakened after ratings agency Standard & Poor’s hit some of the world’s leading banks with a credit downgrade.
“It must also be remembered that the EFSF is already funding at very wide (borrowing) levels over Germany, struggled in its last auction to raise the required funds and would have its rating put under severe pressure by any rating downgrade of France,” Rabobank strategists said in a note. “This must call into question any plans related to the EFSF. It is yesterday’s solution and the market has simply moved on.”
“We are now looking at a true financial crisis - that is a broad-based disruption in financial markets,” Christian Noyer, France’s central bank governor and a governing council member of the European Central Bank (ECB), told a conference in Singapore.
The 17-nation Eurogroup adopted detailed plans to insure the first 20-30 percent of new bond issues for countries having funding difficulties and to create co-investment funds to attract foreign investors to buy euro zone government bonds.
Both schemes would be operational by January with about 250 billion euros from the EFSF bailout fund available to leverage after funding a second rescue program for Greece, Eurogroup chairman Jean-Claude Juncker said. The aim was for the IMF to match and support the new firepower of the EFSF, he said.
But with China and other major sovereign funds cautious about investing more in eurozone debt, EFSF chief Klaus Regling said he did not expect investors to commit major amounts to the leveraging options in the next days or weeks, and he could not put a figure on the final size of the leveraged fund.
“It is really not possible to give one number for leveraging because it is a process. We will not give out a hundred billion next month, we will need money as we go along,” he said.
The prospects of drawing the IMF more deeply into supporting the eurozone are uncertain. Several big economies are sceptical of European calls for more resources for the global lender. The United States, Japan and other Asian states are hesitant to chip in unless Europe commits to first use its own resources to fix the problem and peripheral eurozone states map out more concrete steps on economic reforms.
S&P cuts ratings of big banks
NEW YORK - Reuters
Standard & Poor’s on Tuesday reduced its credit ratings on 15 big banks, mostly in the Europe and United States, as the result of a sweeping overhaul of its ratings criteria.
JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs Group, Morgan Stanley, Barclays, HSBC Holdings and UBS were among the banks that had their ratings reduced by one notch each.
A notch is one third of a letter rating.
S&P also left the ratings of 20 banks as they were and raised the ratings of two in announcing results from its new ratings criteria to 37 of the world’s biggest banking companies. The agency also updated ratings for dozens of bank subsidiaries of the companies.
Although S&P began warning the markets more than a year ago that it was revising its ratings, the announcement comes at a time when the markets for bank debts are fragile.