The Spanish Crisis Deepens

Has a Spanish bailout become inevitable? Yields on the country’s 10-year bonds spiked above 6 percent on Sept. 26, after Madrid was convulsed by anti-austerity demonstrations and the head of its largest region, Catalonia, called for “self-determination” elections. Adding to the pressure, newly released data showed the economy contracting and budget deficits rising, while the finance ministers of Germany and other “donor” countries suggested Spain might need to pump more money into its troubled banks before getting help from the European bailout fund.

Prime Minister Mariano Rajoy until now has played coy about the question of a sovereign rescue, since in return for a rescue the Spanish would have to accept even harsher austerity measures than they already have. But Rajoy’s office, confirming remarks made in a Wall Street Journal interview, said Rajoy was “100 percent” ready to ask for a bailout if the country’s borrowing costs remained “too high for too long.” Those comments were “like a red rag to a bull in terms of the market needing to strong-arm Spain into accepting aid,” Richard McGuire, a fixed-income strategist at Rabobank International in London, told Bloomberg News.

Rajoy’s options appear to have narrowed sharply. The Bank of Spain reported on Sept. 26 that the economy contracted at a “significant pace” in the third quarter. The budget deficit during the period was almost 4.8 percent of gross domestic product, up from 3.8 percent last year. And on Sept. 25, the finance ministers of Germany, the Netherlands, and Finland said that the European Stability Mechanism—which Spain has been counting on to help recapitalize its banks—might not do so unless the Spanish government kicked in more money.

Violent protests in the capital and the self-determination push by Catalonia, Spain’s richest region, undermine the central government’s efforts to reassure investors. Catalan President Artur Mas has called early elections for Nov. 25.

The malaise in Spain is also weighing on the euro, which fell to $1.28, its lowest level in two weeks. “Markets are reacting to the negative news flow we’ve seen out of Spain,” Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London, told Bloomberg News.

Rajoy, who is spending the week at the United Nations in New York, also has been hit by a report that he and his staff drink heavily during flights on his official jets. The Spanish magazine Interviu reported that Rajoy and five staff members consumed seven bottles of wine and 10 beers with dinner on a flight back from a European championship soccer match, the day after Spain asked its European neighbors for €100 billion to recapitalize Spanish banks. A spokeswoman for Rajoy declined to comment on the report.

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Investing In A Developing Economy - A Possible Solution To Global Financial Crisis

Tallying the Full Cost of the Financial Crisis

To mark the fourth anniversary of the Lehman Brothers bankruptcy, which greeting card would be appropriate? Perhaps a sympathy card? A farewell? If Better Markets, a Washington (D.C.) nonprofit that supports tighter financial regulation, were to design a card, it would probably have a gilded “$12.8 trillion” plastered across the front. That’s the amount Better Markets estimates the 2008 financial crisis cost Americans.

At first blush, the cost of such a colossal crisis seems incalculable. Myriad factors are involved, including such things as the toll of unemployment and lost wages, losses in the stock market and corporate earnings, declining home values, the depletion of retirement savings, and decreased consumer spending.

So Better Markets took a different approach: Instead of trying to calculate the numerous individual costs in different parts of the economy, it looked at the highest level of all economic activity—U.S. gross domestic product. First, Better Markets took estimates from the Congressional Budget Office and the Federal Reserve Bank of St. Louis to calculate actual losses. That’s the difference between the potential GDP the U.S. would have generated without the financial crisis and the actual GDP already created or currently projected to be created. Those “actual” losses total $7.6 trillion from 2008 to 2018.

Then Better Markets tried to take into account the fact that actual GDP would have been even lower if the Treasury Department and the Federal Reserve hadn’t taken extraordinary measures, such as enormous bailouts of such companies as American International Group (AIG), Citigroup (C), and Bank of America (BAC).

To calculate these “avoided” losses, Better Markets updated a 2010 estimate (pdf) by Alan Blinder, an economist at Princeton University, and Mark Zandi, chief economist at Moody’s Analytics (MCO), and determined that fiscal and monetary policies prevented $5.2 trillion in losses from 2008 to 2012, when the Blinder/Zandi exercise ends. So if one adds $7.6 trillion of “actual” losses and $5.2 trillion in “avoided” losses, there’s an estimated grand total of $12.8 trillion in costs for the crisis.

With its tally, Better Markets is hoping to ensure that Americans—especially the politicians and bureaucrats in Washington—will remain attuned to how searing the Lehman collapse and all that followed truly was. As Wall Street complains about the costs of new regulations, Better Markets’ study is a reminder of the losses that come with a crisis. “Only a full accounting of the costs will provide the basis and motivation to take the proper actions to reduce the likelihood that the American people will have to suffer from another financial collapse and economic crisis,” the report says.

In the upcoming issue of the New York Times Magazine, NPR’s Adam Davidson writes about his visit to the current Lehman Brothers offices and said it “appears an awful lot like a normal investment bank … [e]xcept that Lehman’s sole objective is to sell everything it owns so it can repay its lenders and disappear.” He wrote that financial crises end when people forget they ever happened and confidence returns, and that there are signs this is already happening.

Still, at nearly $13 trillion, the 2008 financial bust will be tough for many ever to forget.

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Arizona's New Housing Crisis: No Workers

There’s a whiff of 2005 in the Arizona air. While D.J. Hughes hunts for carpenters to join his team at a Phoenix-area house-framing company, competitors are tracking down his workers at building sites and offering them more money. “Everybody is trying to pull crews from everyone,” says Hughes, a project manager for J.L. Baugh Construction in Gold Canyon, Ariz., who admits to attempted talent raids on rivals. “I’ve been doing this for a quarter of a century, and this is the biggest shortage of skilled laborers I’ve ever seen.”

Cash-wielding investors are driving demand as they snap up properties, and Arizona’s builders are having trouble finding skilled crews. Building permits are at an almost four-year high, creating a dearth of framers, roofers, and masons, many of whom moved elsewhere when work dried up. Laws aimed at curbing illegal immigration added to the shortage by pushing seasoned hands out of state. After declining by more than half since 2006, construction jobs, a category that includes residential, commercial, and government projects, jumped 9.3 percent in May from a year earlier, to 120,300, according to Arizona’s employment statistics office. Nationally, construction employment rose 0.4 percent. The average hourly wage for construction workers in Arizona increased to $20.72 from $19.53 a year earlier.

Arizona was among the areas hit hardest by the U.S. housing crash. Home prices in April were down about 47 percent from the peak in 2006, exceeding the 31 percent decline nationally, data from CoreLogic (CLGX) show. The state ranked second in the rate of foreclosure filings in May, according to RealtyTrac. “The industry is so wound down that it’s hard to flip the switch on and build as many homes as there is demand right now,” says Ben Sage, director of the Arizona region for Metrostudy, a Houston-based firm that tracks new construction. “The subcontractors are scrambling for workers.”

The inventory of previously owned houses for sale in Phoenix dropped 50 percent as of June 1 from a year earlier, according to a report by Michael Orr, director of the Center for Real Estate Theory and Practice at Arizona State University’s W.P. Carey School of Business. The tight supply helped push the median price for single-family homes up 32 percent to $147,000 in May. Purchases of new houses surged 57 percent in May from a year earlier, according to the report. The median price for new homes rose 3.7 percent, to $224,759.

Downtimes of a few days at construction sites are becoming more common as builders wait for crews to finish other jobs before starting work, according to Reed Porter, chief executive officer of Trend Homes in Gilbert, Ariz. The average time to complete a house in the area is four months, twice as long as it took in February, says Jim Belfiore, president of market researcher Belfiore Real Estate Consulting in Phoenix. “A lot of builders were caught on their heels,” Belfiore says, surprised by “how rapidly the demand situation turned around.”

Arizona, which depended on workers from Mexico to assemble many of the houses commissioned during the boom, has new laws that will make it more difficult to lure back skilled immigrants, says Magnus Lofstrom, a policy fellow at the San Francisco-based Public Policy Institute of California. Arizona’s population of unauthorized immigrants aged 18 to 64 fell by about 17 percent as a result of the Legal Arizona Workers Act, according to a study Lofstrom co-authored. The law, which took effect in January 2008, requires companies to check employees’ legal status with a national verification database. A provision of a 2010 law makes it a state crime to be in the U.S. illegally. On June 25 the Supreme Court invalidated that part of the law while upholding the provision that requires police officers to check immigration status when they arrest or stop someone and have “reasonable suspicion” that the person is undocumented.

Hughes, the Gold Canyon project manager, last month called three former foremen who returned to Mexico four years ago when local construction activity slowed. He persuaded one of them, who has proper documentation, to come back. The others, who he says also have documentation, are hesitant because they don’t like Arizona’s immigration laws and are worried that the market will fizzle out. Hughes wonders how long the demand for workers will last. “It’s busy,” he says. “But everybody still has their hands behind their back, crossing their fingers that this continues.”

The bottom line: After declining by more than 50 percent since 2006, Arizona construction employment rose 9.3 percent in May.

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A Crisis Cripples South Korea's Savings Banks

On the day in May she was supposed to have appeared before prosecutors for questioning, an executive of a shuttered South Korean savings bank hanged herself with her scarf in a Seoul motel. The woman, identified by the police only as “Kim,” was a credit officer at Mirae Mutual Savings Bank, whose chairman was caught fleeing to China in a fishing boat three weeks earlier. She’s the latest casualty in a scandal hitting the periphery of Korea’s banking industry for more than a year.

Since early 2011, regulators have closed 20 Korean savings banks, where risky real estate bets gone bad have wiped out the savings of many ordinary Koreans. Even the prime minister saw money disappear. Prosecutors’ probes have uncovered cases of illicit lending and lax oversight, leading to the indictments of nearly 200 people and at least two jail sentences. Four bank executives have committed suicide, according to police, while more than 88,000 depositors and bondholders, many of them retirees, saw 1 trillion won ($857 million) vanish. “Everyone’s become a victim,” says Nam Joo Ha, an economics professor at Sogang University in Seoul. “Regulators lost the people’s confidence. The savings bank industry lost trust, a financial company’s most important virtue, and the people lost their money.”

South Korea’s savings bank industry was born in the aftermath of Asia’s 1997-98 financial crisis. Regulators allowed private lenders and rural cooperatives to call themselves “savings banks” in 2001 to boost confidence in the usually tiny, regional lenders. The state then granted deposit protection comparable with the insurance at nationwide lenders. This allowed savings banks to grow. In 2006 the government eased lending rules and the banks expanded their scope to include the property market.

Real estate lending became the banks’ downfall when defaults increased following the global financial crisis in 2008. To survive, savings banks started selling customers subordinated bonds that had low priority for repayment in the event of default. Because of high annual yields—as much as 10 percent, almost double the savings account rates at national banks—the securities became popular, particularly among the elderly living on interest payments.

The most recent round of closings came on May 6, when the Financial Services Commission announced the shutdown of four lenders including Korea Savings Bank, whose more than 10,000 depositors included 50-year-old Je Mi Young. The Seoul housewife sat trembling in her pajamas that Sunday morning, as headlines streamed across her television screen delivering the news that the bank was out of business. Her savings would be protected by state-run Korea Deposit Insurance Corp. (KDIC), which guarantees as much as 50 million won. Still, the additional 40 million won bond investment she made on behalf of her mother would be wiped out. “I always wondered what kind of stupid people put precious money into messy banks,” says Je. “Now I am one of them.”

Prime Minister Kim Hwang Sik was also swept up in the bank closures. He lost 40 million won when the FSC shut down Seoul-based Jeil Savings Bank in September. Like other Jeil depositors, he eventually got his money back from the KDIC, says Choi Hyung Du, a spokesman in Kim’s office.

Jeong Gu Haeng, president of Jeil’s affiliated bank, Jeil 2, was the first to commit suicide. On Sept. 23, he jumped six floors from his downtown Seoul office, according to police. A credit officer at Tomato 2 Savings Bank, and the chairman of Ace Mutual Savings Bank also killed themselves, according to police.

The government is discussing how to raise the money needed to repay an estimated 1 million-plus depositors. The 70,650 customers who had amounts exceeding the 50 million won insurance limit, along with 17,445 bondholders, need to stand in line as debtors in bankruptcies and civil suits.

Customers have pulled their money from savings banks, sending deposits down 23 percent since the end of August to a four-year low of 54.8 trillion won at the end of March, according to Bank of Korea data. Kang Sin Ah, a 43-year-old Seoul office worker, in January moved 20 million won to a state-run lender from a savings bank that had been paying as much as 3 percentage points more in interest. “What’s the advantage, if I have a nightmare every day about losing it?” she says.

The bottom line: More than 88,000 depositors and bondholders saw $857 million of their savings vanish in the failure of 20 savings banks.

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Europe's Crisis Spotlight Shifts to Spain

As Greece prepares for a June 17 election that may determine whether it exits the euro, the attention has shifted to Spain, where the problems are different—and much larger. Greece’s troubles stem from excessive government borrowing; Spain suffers from a property bust and its banks remain crippled by an estimated €184 billion ($230 billion) in troubled real estate assets. The government is struggling to devise a rescue plan as the country grapples with a deepening recession and 24 percent unemployment.

Prime Minister Mariano Rajoy insists his country doesn’t need a bailout, though investors say otherwise. The cost of insuring Spanish sovereign debt rose to a record high on May 30, and yields on Spain’s 10-year bonds climbed close to the 7 percent level that led Greece, Ireland, and Portugal to seek bailouts from the European Union and the International Monetary Fund. Considering that Spain’s economy is almost twice as big as those of Greece, Portugal, and Ireland combined, the country poses the biggest test for European authorities yet. “It’s getting increasingly ugly,” says Georg Grodzki, who helps oversee $515 billion at Legal & General Investment Management in London.

Spain’s bank woes currently center on BFA-Bankia (BKIA), formed in 2010 by the merger of seven troubled savings banks. Its assets are equal to a third of the entire Spanish economy. After Bankia’s share price plummeted 43 percent in less than a year, Spain nationalized the bank on May 9. Bankia then asked for €19 billion of government funding to clean up bad loans. The bank has begun offering Spiderman beach towels to customers between 14 and 25 years old who add €300 to their accounts in a month. On May 30, Bank of Spain Governor Miguel Angel Fernandez Ordonez, who has faced criticism over the handling of the crisis, resigned a month before his term was to expire.

Spain has only about €5.3 billion left in the bank bailout fund it set up in 2009, but with its borrowing costs rising, the government wanted to avoid raising the cash in the markets. So Spanish officials got creative. On May 28, Spain signaled that it was considering giving banks government bonds that they could use as collateral to borrow fresh money from the European Central Bank. The government soon backed away from that plan, with Economy Minister Luis de Guindos saying its bank bailout fund would turn to the public markets to raise money for Bankia after all. At the same time the European Commission, the European Union’s central regulator, proposed that the euro-area permanent bailout fund inject cash directly into banks instead of channeling the money via national governments.

As the debate continues, Spain’s real estate problems are festering. For years the country relied on home and office building activity as a source of growth. At the height of the boom, construction accounted for more than 20 percent of Spanish gross domestic product. That’s the same level it reached in Ireland. While both countries experienced similar real estate booms and busts, their actions post-crash have been strikingly different. Ireland worked quickly to address the solvency of its banks—nationalizing them and removing billions of euros worth of toxic debt from their balance sheets by transferring it to a so-called bad bank.

Photograph by Angel Navarrete/BloombergAt the height of the boom, construction accounted for more than 20% of Spain's GDP

Spanish leaders shunned proposals to create a bad bank like Ireland’s. Instead, they pushed banks to absorb weaker lenders. “In Spain, there seemed to be an effort to smooth out the pace of activity rather than face the shock, as Ireland did,” says Cinzia Alcidi, an analyst at the Center for European Policy Studies in Brussels. “There was kind of a denial of the scale of the problem.”

In Ireland, new building came to a halt in 2008, and property values there have crashed about 60 percent since their peak in 2007. Spain has done everything it can to support property values. To help unload the 329,000 foreclosed homes they own without slashing prices, Spanish banks provide 100 percent financing on easy terms including interest-only payments. No such deals are available to buyers of nonbank-owned properties.

“Banks are employing financing like a weapon of mass destruction to sell their stock and keep prices artificially high,” says Mikel Echavarren, chief executive officer of Irea, a corporate finance company in Madrid that specializes in the real estate industry. Spanish banks report that property values have fallen by only 22 percent, according to Jesus Encinar, CEO of Idealista.com, a Spanish property website. Encinar estimates the decline without supports would be at least twice that.

Inflated real estate prices have also helped prop up Spanish developers, many of which are still building despite a glut of vacant homes. Rather than marking their loans as being in default, Spanish banks give developers new loans to pay off the old ones, says Ruben Manso, an economist at consulting firm Mansolivar & IAX and a former Bank of Spain inspector. “There has been a lot of cheating going on where banks have lent developers new money, classed as new lending, so they can pay off their original loans,” he says.

Whatever the government comes up with to address Bankia’s immediate cash needs, it will still have the larger real estate problem to deal with. “Spain has engaged in a policy of delay and pray,” says Echavarren. “The problem hasn’t been quantified by anyone because there is huge pressure not to tell the truth.”

The bottom line: Less than two weeks after being nationalized, Bankia said it needed €19 billion to resolve bad loans.

With Neil Callanan, Dara Doyle, Charles Penty, Emma Ross-Thomas, and Sharon Smyth

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Record Euro Zone Debt Makes the Crisis Messier

The Keynesian solution for Europe’s crisis is government spending to rev up economic growth. Restoring growth will generate more tax revenue, the thinking goes, so the fiscal pump-priming will eventually pay for itself. But debt makes the Keynesian fix harder to implement. Heavily indebted countries can’t spend more for fear of losing the confidence of investors.

Debt, in short, takes away countries’ fiscal wiggle room.

That’s why the European Union’s report today on rising government debt in the single-currency euro zone is troublesome. The organization announced that the government debt-to-GDP ratio increased from 85.3 percent at the end of 2010 to 87.2 percent at the end of 2011. According to Bloomberg News, the 2011 ratio was the highest since the euro was introduced in 1999.

What’s doubly scary is that it’s not just the well-known problem children of Europe like Greece that are seeing government debt rise as a share of gross domestic product. Even the Netherlands, one of the four remaining AAA-rated countries in the euro zone, had an increase in its debt-to-GDP ratio from 62.9 percent to 65.2 percent, according to the European Union.

The Dutch have been stalwart supporters of Germany’s austerity drive until now, but they may be getting weak in the knees. RTL television reported that Dutch Prime Minister Mark Rutte will resign after losing the support of Geert Wilders’s Freedom Party in his coalition, following disagreement on an austerity package. “There is a danger that we will see a move to more radical, less Europe-friendly policies in the Netherlands,” Elisabeth Afseth, an analyst at Investec Bank in London, told Bloomberg News.

Here’s an excerpt from the European Union’s announcement with all the relevant figures:
At the end of 2011, the lowest ratios of government debt to GDP were recorded in Estonia (6.0%), Bulgaria (16.3%), Luxembourg (18.2%), Romania (33.3%), Sweden (38.4%), Lithuania (38.5%), the Czech Republic (41.2%), Latvia (42.6%), Slovakia (43.3%) and Denmark (46.5%). Fourteen Member States had government debt ratios higher than 60% of GDP in 2011: Greece (165.3%), Italy (120.1%), Ireland (108.2%), Portugal (107.8%), Belgium (98.0%), France (85.8%), the United Kingdom (85.7%), Germany (81.2%), Hungary (80.6%), Austria (72.2%), Malta (72.0%), Cyprus (71.6%), Spain (68.5%) and the Netherlands (65.2%).

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Why Hasn't the Euro Fallen More in the Crisis?

As Europe’s sovereign debt crisis has ground on and the once unthinkable prospect of a breakup of the Continent’s currency union has become a realistic possibility, the euro itself has remained surprisingly resilient, especially against the dollar. With a few exceptions, the euro has traded over $1.30 for the past couple of years. Why, I wondered, hasn’t all of the hemming and hawing among Europe’s leaders taken more of a toll on the common currency? This is a matter of particular importance to me as I plan a move to Berlin, where I might consider buying an apartment—if I could be confident that my investment won’t lose a big chunk of its value due to a strengthening dollar.

So I figured I’d call some experts to find out what gives. The bottom line: It’s not so much a case of a strong euro as it is a weak dollar, and neither is particularly attractive when compared with such superstars as the Swiss franc, Australian dollar, and the Japanese yen. The dollar-euro “market is a battle of ugly currencies,” Neil Mellor, a currency strategist at Bank of New York Mellon (BK) in London, told me. Since the U.S. Federal Reserve shows no signs of tightening monetary policy, there’s not a lot of incentive for traders to buy dollars. “There has been a policy of debasement of the currency by the Fed, and I don’t think that’s going to change any time soon,” Mellor said.

Fair enough, but still worrisome for someone considering a big purchase in euros, so I decided to get a second opinion. Sara Yates from Barclays (BCS) didn’t disagree about the euro’s performance against commodity-based currencies such as Australia’s and Canada’s dollars. But she did note some sensible reasons traders have largely supported the euro for the past year or two. While there has been no shortage of dire headlines out of the euro zone, Yates believes enough news has been positive to keep the currency from collapsing. Despite the dithering and dickering across the Continent, Europe’s leadership has managed to put together a bailout for Greece, and the European Central Bank has propped up commercial banks with €1 trillion in three-year loans. “There are problems remaining,” Yates said, “but in a sense the euro area is better protected against a blowup than it was a couple of years ago.”

It has also probably been getting substantial support from China and the Middle East. While most countries still hold their currency reserves in dollars, there’s little doubt that many would like to diversify their holdings. It’s hard to find figures that show what central banks are up to, but it’s pretty clear that when the euro starts falling, banks around the world start buying. As the price of crude has surged, Middle Eastern countries have found themselves with lots of cash, and “they have to diversify some of the dollars they get from oil sales,” said Chris Walker, a currency strategist with UBS (UBS) in London.

Nick Bennenbroek, head of currency strategy for Wells Fargo (WFC) in New York, pointed out that some of the euro’s resilience this year is because much of the negative sentiment had already been priced into the euro-dollar rate in late 2011. Still, he and the other currency strategists I spoke to all predicted a further weakening of the euro against the dollar in the next six to 12 months, to somewhere between $1.20 and $1.25. (Bloomberg’s survey of 54 traders or strategists is predicting the euro will trade at $1.30 in the fourth quarter.) “Investors are still worried about the longer-term fundamentals of the euro,” Bennenbroek said. “We’re going to see slow growth or even recession in Europe, [which] will cause the euro to weaken over time.”

And what if the euro disintegrates? None of the people I spoke with would rule it out. Richard Franulovich, a strategist at Westpac Banking (WBC) in New York, said his “base case” is that Greece will exit the euro zone within 12 to 18 months. “At some point, the population will say they’re better off outside the euro,” Franulovich said. And after that? “If Greece were to exit, you could easily see the ECB shedding all its conservatism and guaranteeing all euro bonds to keep other weak countries in the currency union.” Of course, he allows, the opposite could also happen and the ECB might say it’s best to let other weak economies go their own way. “If the euro breaks up, there could be an incalculable chain of events,” he said with what sounded like a grimace over the phone. Predicting what might happen “is like trying to unscramble an egg.”

Maybe I’ll hold off on buying that apartment after all.

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Banks Can Go Below Basel Minimum Liquidity Levels in Crisis

January 08, 2012, 6:40 PM EST By Jim Brunsden

(Updates with accounting firm comment in fifth paragraph.)

Jan. 8 (Bloomberg) -- Banks will be allowed go below minimum liquidity levels set by global regulators during a financial crisis so that they can avoid cash-flow difficulties.

“During a period of stress, banks would be expected to use their pool of liquid assets, thereby temporarily falling below the minimum requirement,” the Basel Committee on Banking Supervision’s governing board said in a statement on its website today, following a meeting in the Swiss city.

The aim of the measure, known as a liquidity coverage ratio, is to ensure that lenders hold enough easy-to-sell assets to survive a 30-day credit squeeze. The requirement, one of several measures from the Basel group designed to prevent a repeat of the 2008 financial crisis, is scheduled to enter into force in 2015.

Banks have argued that the rule may curtail loans by forcing them to hoard cash and buy government bonds. Bank supervisors say the standard is needed to prevent a repeat of the collapses of Lehman Brothers Holdings Inc. and Dexia SA, which were blamed in part on the lenders running out of short- term funding. Global regulators said last year that they would amend the rule to address unintended consequences.

“There will be a concern nevertheless that banks won’t want to draw down their liquidity buffers because of how such a move may be received by the markets,” said Patrick Fell, a director at PricewaterhouseCoopers LLP in London. “A bank that is seen to draw on the buffer could feel itself to be weakened and compromised.”

Liquidity Buffers

Regulators must still clarify which assets banks should be allowed to count towards liquidity buffers and how much funding lenders should expect to lose in a crisis, the group said. Work on the main elements of the liquidity rule should be completed by the end of 2012, it said.

The Basel committee will provide further guidance on when lenders will be allowed to breach the minimum rule, and make sure the standard doesn’t interfere with central-bank policies.

“The aim of the liquidity coverage ratio is to ensure that banks, in normal times, have a sound funding structure and hold sufficient liquid assets,” Mervyn King, the governing board’s chairman, said. This should mean that “central banks are asked to perform only as lenders of last resort and not as lenders of first resort,” said King, who is also governor of the Bank of England.

Capital Rules

The liquidity rules were part of a package of measures adopted by global banking regulators in 2010 to strengthen the resilience of banks. The new rules also included tougher capital requirements that more than tripled the core reserves that lenders are required to hold.

Separately, the governing board said that the Basel committee will carry out “detailed” peer reviews of whether nations have correctly implemented capital rules for lenders. The assessments will include whether lenders are correctly valuing their assets, it said. The results of the reviews will be published, with the U.S, Japan and European Union the first to undergo the exams.

Some U.S. bankers, including Jamie Dimon, chief executive officer of JPMorgan, the largest U.S. lender, have called for an overhaul of the current risk-weighting plan, which allows banks to use their own models to assess the safety of assets and how much capital they need to hold. Dimon has said that the way the rules are applied could disadvantage U.S. banks.

The proportion of risk-weighted assets to total assets at European banks is half that of U.S. lenders, according to a report last year by Simon Samuels and Mike Harrison, analysts at Barclays Capital in London.

--Editors: Anthony Aarons, C. Thompson

To contact the reporter on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net

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Treasuries Rise on Europe Crisis

January 02, 2012, 2:12 AM EST By Daniel Kruger

Dec. 30 (Bloomberg) -- Treasuries advanced for a fourth day, capping their biggest annual return since 2008, as investors sought the refuge of U.S. government securities on concern Europe’s sovereign-debt crisis will worsen.

Bonds extended gains as Spain’s new government moved to increase taxes and reduce spending to tackle a larger-than- forecast budget deficit that’s twice the fiscal shortfall in Italy. Treasuries are set to beat stocks, commodities and the dollar for the year, even as reports signal the U.S. economy is recovering.

“On its own, rates would be significantly higher in the U.S., but we are not an island unto ourselves,” said Larry Milstein, managing director in New York of government and agency debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “The exogenous impact from Europe is clearly keeping our rates much lower than they would be otherwise.”

The 10-year note yield fell two basis points, or 0.02 percentage point, to 1.88 percent as of 2:43 p.m. New York time, according to Bloomberg Bond Trader prices. It declined 15 basis points this week and lost 19 basis points in December. The 2 percent securities due in November 2021 rose 6/32 today, or $1.88 per $1,000 face amount, to 101 3/32. Their last four-day winning streak ended Nov. 17.

Thirty-year bond yields decreased one basis point to 2.89 percent today, and five-year note yields dropped five basis points to 0.83 percent.

Lower Volumes

Treasury market volumes have slid amid the Christmas and New Year’s holiday season. About $103 billion of Treasuries changed hands today as of 2:01 p.m. through ICAP Plc, the world’s largest interdealer broker. About $109 billion changed hands yesterday. The 2011 daily average is $285 billion.

The Securities Industry and Financial Markets Association recommended that trading in Treasuries close at 2 p.m. in New York and remain shut on Jan. 2 in observance of New Year’s Eve and New Year’s Day.

The Federal Reserve said today it will purchase about $45 billion of Treasuries in January and sell about $44 billion in its program to lower borrowing costs by replacing $400 billion of shorter-term assets in its holdings with longer-term debt.

U.S. government debt returned 9.6 percent in 2011, according to Bank of America Merrill Lynch data, even after Standard & Poor’s cut the nation’s AAA rating on Aug. 5. German bunds also gained 9.6 percent, while Japanese bonds advanced 2.1 percent and U.S. corporate debt rallied 7.3 percent.

Record Low

Benchmark 10-year yields dropped to a record 1.67 percent on Sept. 23 amid the European debt turmoil. Two years of summits have failed to contain a crisis that has led to bailouts of Greece, Ireland and Portugal and now threatens Spain and Italy.

Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers, said economic growth in the 17- nation region “isn’t good.” He spoke on RTL Luxembourg radio.

Spain’s deficit this year will reach 8 percent of gross domestic product, requiring tax boosts of 6 billion euros and spending cuts of 8.9 billion euros, spokeswoman Soraya Saenz de Santamaria said at a press conference in Madrid.

“A year ago there was probably a greater expectation that rates would start to creep higher,” said Adam Brown, director of Treasury trading at Barclays Plc in New York, one of 21 primary dealers that trade with the Fed. “The economy, although it seems better and we’ve had some decent growth, is not growing strong enough that there’s no fear that it dips back down, especially with something like the European issue affecting it.”

A four-week bill sale on Dec. 20 drew bids for a record 9.07 times the amount offered even though rates on the securities were below zero in New York trading.

Foreign Central Banks

U.S. government securities rose in December even as Treasuries held in custody at the Fed for foreign central banks and other official investors fell by $68.9 billion, the biggest four-week drop on record, according to Fed data. The reduction came as the dollar strengthened, with the Dollar Index increasing 2.3 percent in December.

“It’s not unlikely they are repatriating assets to shore up their own economies,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut.

S&P Downgrade

S&P downgraded the U.S. rating this year for the first time, criticizing lawmakers for failing to cut spending enough to reduce budget deficits that exceed $1 trillion a year.

Treasuries still were some of the best assets to own in 2011. U.S. 30-year bonds returned 35 percent, the most since 2008, and Treasury Inflation Protected Securities gained 14 percent, the most since 2002, the Bank of America indexes show.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was 1.95 percentage points today. The average over the past decade is 2.13 percentage points.

Stocks have lost 6.8 percent this year after accounting for reinvested dividends, based on the MSCI All Country World Index. The Dollar Index tracking the U.S. currency against six major counterparts rose 1.5 percent in 2011. The Standard & Poor’s GSCI Total Return Index of commodities slipped 1 percent.

Growth in the world’s biggest economy will quicken to 2.1 percent in 2012 from 1.8 percent in 2011, a Bloomberg survey of banks and securities companies shows. U.S. jobless-benefit applications over the past month fell to a three-year low, data showed yesterday. The Institute for Supply Management-Chicago Inc. said its business barometer was at 62.5 this month, compared with a Bloomberg poll forecast of 61. Readings above 50 signal growth.

U.S. payrolls added 150,000 workers in December, after gaining 120,000 in November, according to another Bloomberg survey before the government reports the data on Jan. 6.

Treasury 10-year yields will advance to 2.66 percent by the end of 2012, according to a Bloomberg survey with the most recent forecasts given the heaviest weightings.

--With assistance from Anchalee Worrachate in London. Editors: Greg Storey, Paul Cox

To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net

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Asian Stocks Edge Higher on Signs U.S. Weathering Europe Crisis

December 30, 2011, 12:37 AM EST By Yoshiaki Nohara and Norie Kuboyama

Dec. 30 (Bloomberg) -- Asian stocks edged higher on the last trading day of 2011, with the region’s benchmark index set for its first yearly drop since 2008, as rising U.S. home sales signaled the world’s largest economy is weathering Europe’s debt crisis.

Sony Corp., Japan’s biggest exporter of consumer electronics, gained 1.6 percent. Techtronic Industries Company Ltd., a maker of industrial products that gets about 73 percent of its revenue in North America, added 1.5 percent in Hong Kong. Cnooc Ltd., China’s largest offshore energy explorer, rose 0.9 percent after oil gained. Chiyoda Corp. gained 2.7 percent after a report operating profit may top the Japanese engineering company’s forecast.

The MSCI Asia Pacific Index added 0.2 percent to 113.02 as of 11:23 a.m. in Tokyo. The measure has lost 0.5 percent this month and is set for an 18 percent drop this year. For the week, the gauge is down 0.6 percent.

“Investors increasingly feel the U.S. economy is firmer than they had expected,” said Toshiyuki Kanayama, a market analyst at Tokyo-based Monex Inc. “The economic data is looking good and that will boost stock markets, especially when concern about Europe’s debt issues aren’t in the forefront.”

The Asia Pacific gauge has lost about $1.78 trillion this year amid concern Europe’s three-year debt crisis will drag the global economy into recession. Stocks on Asia’s benchmark are valued at 12.6 times estimated earnings on average, compared with 12.6 times for Standard & Poor’s 500 Index and 10.5 times for the Stoxx Europe 600 Index.

Fukushima Dai-Ichi

Utilities have fallen 27 percent this year, dropping the most among the 10 industry groups on the Asian gauge. Japanese power producers tumbled amid a nuclear crisis at Tokyo Electric Power Co.’s Fukushima Dai-Ichi plant. The utility has lost 91 percent this year, the biggest drop on the MSCI All Country World Index.

Japan’s Nikkei 225 Stock Average gained 0.3 percent today. Trading volume was about half the 100-day average ahead of a four-day weekend. Hong Kong’s Hang Seng Index rose 0.4 percent. Australia’s S&P/ASX 200 lost 0.3 percent. South Korea’s market is closed today for a holiday.

Futures on the S&P 500 Index slid 0.1 percent The gauge advanced 1.1 percent yesterday in New York after a report showed a jump in pending sales of existing homes that exceeded economist estimates by almost five times.

Sony, James Hardie

Exporters to the U.S rose. Sony added 1.6 percent to 1,376 yen in Tokyo, Techtronic Industries rose 1.5 percent to HK$8.04.

Gains in stocks may be limited after Italy yesterday fell short of its target in a debt auction. Prime Minister Mario Monti said his government won’t “rule out” more aggressive efforts to reduce debt.

“Markets will continue to be unstable for the first quarter of next year,” said Masaru Hamasaki, Tokyo-based chief strategist at Toyota Asset Management Co., which oversees the equivalent of $24 billion. “European nations will need to unite as they debate how to rehabilitate the region’s finances. The leadership will be tested.”

Cnooc rose 0.9 percent to HK$13.70. Crude oil for February delivery gained as much 0.2 percent on the New York Mercantile Exchange amid potential supply disruptions by Iran around the Strait of Hormuz and on optimism about the U.S. economy.

--Editors: Jason Clenfield, Jim Powell.

To contact the reporters on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net; Norie Kuboyama in Tokyo at nkuboyama@bloomberg.net

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net.

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Asia Crisis Haunts Thailand With Clash Over $35 Billion Debt

December 30, 2011, 12:15 AM EST By Daniel Ten Kate and Suttinee Yuvejwattana

(Updates baht in fifth paragraph.)

Dec. 30 (Bloomberg) -- Thailand’s government will today press the central bank chief to take on $35 billion of legacy debt from bank bailouts as Prime Minister Yingluck Shinawatra looks for fiscal scope to finance flood defenses.

Bank of Thailand Governor Prasarn Trairatvorakul meets with cabinet members in Bangkok over the proposal to shift the debt to the BOT’s balance sheet. Deputy Prime Minister Kittiratt Na- Ranong said yesterday the step would save the government as much as 65 billion baht ($2 billion) in annual interest costs that could be used to fund anti-flood measures.

The push risks deepening concern that Yingluck’s administration is infringing on the central bank’s independence, after Kittiratt in October said the BOT should lower interest rates to help businesses cope with the country’s worst flooding since 1942. The government itself lacks unanimity on the move, with Finance Minister Thirachai Phuvanatnaranubala warning it could hurt investor confidence and stoke inflation.

“The weakening of the baht in the last few days may come from this concern about inflation,” said Somprawin Manprasert, an economist at Tisco Securities in Bangkok. “It’s not a good thing to do at all and will hurt both fiscal and monetary discipline. People will start to think that if the government can do it one time, they can do it again when debts pile up.”

The baht yesterday fell the most in two months to 31.75 per dollar, the weakest level since Aug. 16, 2010, according to data compiled by Bloomberg. It was unchanged today as of 8:46 a.m. in Bangkok, set for its biggest annual loss since 2005. The benchmark SET Index has dropped 1.8 percent over the past six days, the worst performer in Asia after Vietnam in that time.

‘Quite Strange’

Thailand’s Cabinet resolved earlier this week to study moving 1.1 trillion baht in debt incurred bailing out financial institutions 14 years ago onto the central bank’s balance sheet. Prasarn said this week it was “quite strange” that the government didn’t discuss the debt transfer officially with the central bank before bringing the issue to the Cabinet.

“Our losses on the balance sheet will be higher and that may affect confidence,” Prasarn told reporters on Dec. 28.

The Financial Institutions Development Fund racked up a 1.4 trillion baht debt during the 1997 Asian financial crisis on loans aimed at rescuing struggling lenders. The government closed more than 60 non-bank financial companies and seized half of the nation’s 14 commercial banks that received help from the fund.

Under a repayment agreement in 2002, the finance ministry makes interest payments while the central bank pays down the principal whenever it earns a yearly profit. The Bank of Thailand has reported annual net income once since 2004 and last year reported a net loss of 117 billion baht, mostly due to losses on foreign exchange.

Proud to Repay

Since 1997, the principal on the debt has fallen by 300 billion baht, or about 21 billion baht per year. During that time the government has paid as much as 65 billion baht in interest annually, according to Kittiratt, who said yesterday the central bank would report a “record high profit” for 2011.

“The central bank should be proud that they can take care of part of the nation’s debts,” he told reporters in Bangkok yesterday. “If we transfer the debt to the Bank of Thailand, it will help reduce the government’s concerns.”

The move would reduce the public debt-to-gross domestic product ratio by 10 percentage points from 40 percent now, providing room for more government borrowing, Kittiratt said. Thailand’s Cabinet this week approved a proposal to borrow 350 billion baht to set up a fund for long-term water-management projects following the floods.

‘Amend the Bible’

The government’s move has more to do with sidestepping restrictions on budget deficits than its ability to borrow, said Sethaput Suthiwart-Narueput, managing partner of Advisor Co., a Bangkok-based corporate advisory, and former executive vice president of Siam Commercial Bank Pcl. Yingluck’s government could spend more by passing a stimulus bill as the previous administration did in 2009, he said.

Thailand’s Budget Procedures Act passed in 1959 prevents the government from borrowing more than 20 percent of approved annual budget expenditures plus 80 percent of expenses allocated to government debt payments.

The government is “trying to get more spending out without having to issue a new law,” he said. “They certainly don’t want to amend the budget law because to do that it would be seen as ‘Oh my God, they are undermining the fiscal discipline our forefathers put in place.’ It’s like trying to amend the Bible.”

Printing Money

Thirachai, the finance minister, suggested allowing the use of interest from the country’s $167 billion in foreign reserves, amounting to 25 billion baht this year, for debt payments. His predecessor under the previous government, Korn Chatikavanij, said such a move would “retain the prudency and accountability and transparency of the current structure.”

The debt “is a burden for sure, but what would be worse is trying to push it off the government balance sheet and pretend it doesn’t exist,” Korn said in a telephone interview. “It would also be detrimental to the central bank, which would have no way to repay the debt except printing fresh money.”

--Editors: Tony Jordan, Chris Anstey

To contact the reporters on this story: Daniel Ten Kate in Bangkok at dtenkate@bloomberg.net; Suttinee Yuvejwattana in Bangkok at suttinee1@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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Takeovers Slump to Lowest in Year as Debt Crisis Saps Confidence

December 29, 2011, 6:34 AM EST By Serena Saitto

Dec. 29 (Bloomberg) -- The value of global takeovers dropped to the lowest level in more than a year this quarter, and dealmakers say Europe’s debt crisis may hamper a recovery in 2012 as cash-rich companies hold off on major purchases.

Mergers and acquisitions have slumped 16 percent from the previous three months to $457.1 billion, putting the fourth quarter on course to be the slowest since at least mid-2010, according to data compiled by Bloomberg. For the year to date, announced takeover volume has risen less than 3 percent to $2.25 trillion after regulatory hurdles scuttled AT&T Inc.’s bid for T-Mobile USA, which would have been 2011’s biggest deal.

Tightening credit markets, the risk of a euro-zone collapse and stock-market swings have deterred companies from pursuing transformational deals that would spur sales growth, M&A bankers said. Earlier in 2011, more favorable conditions emboldened acquirers to part with stockpiled cash, such as Johnson & Johnson’s $21.3 billion bid for Synthes Inc. and Express Scripts Inc.’s $29.1 billion offer for Medco Health Solutions Inc.

“There’s definitely pent-up demand for M&A as well- capitalized companies continue to focus on opportunities for strategic acquisitions,” said Yoel Zaoui, co-head of global M&A at Goldman Sachs Group Inc. “The key driver for M&A, however, is confidence, and in Europe, at the moment, that is lacking.”

Seven of the year’s 10 biggest deals were announced before August, when European markets fell the most since October 2008 amid a global stock rout and Standard & Poor’s cut the U.S. credit rating. Goldman Sachs is the top adviser on global takeovers for 2011, with $537 billion of deals this year, followed by JPMorgan Chase & Co. and Morgan Stanley, Bloomberg data show. This year’s growth in M&A volume compares with a 24 percent jump in 2010.

‘Wait and See’

Europe’s financial crisis will stifle lending, push the region into recession and weigh on the U.S. economy through early 2012, Jan Hatzius, Goldman Sachs’s chief economist, said on a Nov. 30 conference call. The euro zone’s unemployment rose to 10.3 percent in October, the highest since the currency began in 1999.

As the European crisis deepened, “dealmakers entered a wait-and-see mode, and that’s where we are now,” said Paul Parker, global head of M&A at Barclays Plc in New York. “Offsetting forces such as companies’ cash piles and low valuations should drive the recovery of M&A activity in the second half of the year.”

The MSCI World Index of about 1,600 companies trades for 12.6 times reported earnings, showing equities in developed economies are cheaper than they’ve been more than 95 percent of the time since 1995, according to data compiled by Bloomberg. Those companies are also sitting on $5.3 trillion in cash, the data show.

Antitrust Hurdles

Companies that did tap funds this year may not be able to complete their purchases as regulatory scrutiny threatens to derail more takeovers. Express Scripts’s offer for Medco, which would create the largest U.S. manager of pharmacy benefits for employers, insurers and union health plans, has prompted state inquiries over whether the combination would command too much market power.

AT&T abandoned efforts to buy T-Mobile USA from Deutsche Telekom AG this month after the U.S. Justice Department sued the companies in August, saying a combination would substantially reduce competition. Companies contemplating similar deals may hold off until the next presidential election in the hope that a Republican White House would make it easier to win approval for big transactions, said Jeffrey Silva, a Washington-based policy analyst with Medley Global Advisors.

European Deals

Deutsche Boerse AG and NYSE Euronext this week delayed the deadline for completing their merger until March 31 as the exchange operators try to persuade European Union regulators to approve the deal. While the U.S. cleared the combination, the EU has told the companies that concessions they offered to allay antitrust concerns don’t go far enough, two people familiar with the talks said this month.

Dealmaking involving European companies rose 2.2 percent this year, bolstered by the first half. For the fourth quarter, announced volume sank 14 percent from the previous three months to $161.4 billion. Valuations have also dropped, making the MSCI Europe Index even cheaper than the MSCI World Index at 10.8 times earnings. That may create opportunities for buyers from nations such as China.

“Chinese companies have been very successful at buying natural resources in emerging markets, and they are now very supportive of buying industrial assets in Europe,” said Thierry d’Argent, global head of M&A at Societe Generale SA in Paris.

Asia Pacific

French dairy-product maker Yoplait and the aviation unit of Royal Bank of Scotland Group Plc both attracted interest from Chinese bidders this year, according to people with knowledge of those negotiations.

The value of acquisitions involving Asia Pacific companies rose 3.8 percent to $698.4 billion this year, according to Bloomberg data. The biggest deal was Nippon Steel Corp.’s proposed takeover of Sumitomo Metal Industries for about $22 billion, including debt. That was followed by BHP Billiton Ltd.’s purchase of Houston-based oil and gas explorer Petrohawk Energy Corp.

Foreign buyers also spent more on Asia Pacific in 2011 than any year since 2007, according to the data. The largest overseas bid was SABMiller Plc’s $10 billion takeover of Australian beer maker Fosters Group Ltd., the data show. Among Asian countries, Japan overtook China as the biggest acquirer of foreign assets for the first time since 2008 after the March 11 earthquake spurred companies to retrench.

Japan’s Takeovers

“Japanese industries had been shrinking, and companies needed growth drivers,” said Kenji Fujita, head of M&A advisory at Mitsubishi UFJ Morgan Stanley Securities Co., the Tokyo-based investment banking venture of Morgan Stanley and Mitsubishi UFJ Financial Group Inc. “The earthquake raised the urgency for that.”

Japan’s Kirin Holdings Co. bought Brazilian beermaker Schincariol Participacoes e Representacoes, and China Petrochemical Corp., or Sinopec, agreed to purchase a 30 percent stake in Galp Energia SGPS SA’s Brazilian unit.

Still, after a record-high volume of $161 billion in 2010, the volume of announced deals involving Brazilian companies tumbled to $98.3 billion this year as the Brazilian real strengthened while the country’s economy slowed.

“I’m glad to leave 2011 behind,” said Flavio Tavares Valadao, head of corporate finance at Banco Santander do Brasil SA, based in Sao Paulo. “Deals are difficult to make and companies are worried for the future.”

Brazilian Deals

Santander worked on Telefonica SA’s merger of its Brazilian fixed line unit, Telecomunicacoes de Sao Paulo SA’s with its mobile unit, Vivo Participacoes SA. The Spanish bank also advised Spain’s Iberdrola SA on the acquisition of Brazil’s Elektro Eletricidade & Servicos SA for 1.77 billion euros ($2.3 billion).

Dealmakers predict that technology, industrials, natural resources and health care will continue to be the sectors most actively consolidating, especially if European policy makers can prevent financial turmoil from spreading to more countries.

“Companies need to have more confidence that we aren’t going to have a break-up of the euro,” said Mark Shafir, global head of M&A at Citigroup Inc. “If you got that cleared up, then the first half of next year could be a lot better than the second half of 2011 has been.”

--With assistance from Aaron Kirchfeld in Frankfurt, Jeffrey McCracken in New York, Takahiko Hyuga in Tokyo, and Jacqueline Simmons and Matthew Campbell in Paris. Editors: Julie Alnwick, Jennifer Sondag.

To contact the reporter on this story: Serena Saitto in New York at ssaitto@bloomberg.net

To contact the editor responsible for this story: Jennifer Sondag at jsondag@bloomberg.net

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King Says Debt Crisis Threatens to Hurt Europe’s Real Economy

December 27, 2011, 3:03 AM EST By Scott Hamilton and Gabi Thesing

(For more on the euro crisis, see EXT4.)

Dec. 23 (Bloomberg) -- Mervyn King, vice chairman of the European Systemic Risk Board, said Europe’s sovereign debt crisis is threatening to hurt the real economy and the outlook for financial stability has worsened.

Growth prospects “have deteriorated” since September, King, who is also governor of the Bank of England, said at a briefing hosted by the European Central Bank in Frankfurt yesterday. “Investors lack confidence to continue to provide normal levels of funding. Dependence on central banks has risen.”

The ECB loaned banks a record 489 billion euros ($636 billion) for three years on Dec. 21 to avert a credit crunch from the sovereign debt crisis. The central bank said earlier this week that the turmoil has taken on systemic proportions not seen since the 2008 collapse of Lehman Brothers Holdings Inc.

King said the outlook for financial stability has “worsened” since the last ESRB meeting in September, and while intervention by the ECB is expected to “assuage funding problems in the near term, in the longer term private funding markets must be revitalized.”

Bank shares have suffered this year as borrowing costs surged in the euro region. The Stoxx 600 Banks Index has fallen 28 percent since the end of June, compared with a 12 percent decline by the Stoxx Europe 600.

Capital Plea

King also appealed to banks not to “reduce lending to the real economy” as they increase their capital levels to meet new standards set by regulators.

“We are very conscious there is extreme risk aversion in private financial markets,” he said. “We want a more robust banking system so that whatever risks crystallize, whatever their source, the banking system is in a better position than 2008.”

There was “no discussion” at the ESRB meeting of any country leaving the euro area, King said. Still, “all financial institutions are advised to prepare for a wide range of contingencies,” he said.

Andrea Enria, the second ESRB vice chair who is also the chairman of the European Banking Authority, said he is “disappointed” by European leaders dithering over putting rescue measures in place, effectively delaying Europe’s bank recapitalization.

“We have always been quite adamant in all occasions, also in the debate running up to the decision, that this should have been a comprehensive package,” Enria said. This includes “recapitalization, some measures -- funding guarantees -- addressing the funding problems and strengthening of the European Financial Stability Facility and of the tools to deal with the sovereign crisis.”

The ESRB, which aims to warn of brewing risks in the financial system, was set up in January as part of a new European architecture designed to ward off another financial crisis such as that which followed the Lehman collapse. Its 65- member board is headed by ECB President Mario Draghi.

--With assistance from Rainer Buergin in Berlin. Editors: Fergal O’Brien, Craig Stirling

To contact the reporters on this story: Scott Hamilton in London at shamilton8@bloomberg.net; Gabi Thesing in London at gthesing@bloomberg.net

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net; James Hertling at jhertling@bloomberg.net

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Trichet Calls for Euro Finance Ministry as Crisis Deepens

June 02, 2011, 6:46 AM EDT By Christian Vits and Gabi Thesing

(Updates with bonds, euro in fifth paragraph.)

June 2 (Bloomberg) -- European Central Bank President Jean- Claude Trichet said governments should consider setting up a finance ministry for the 17-nation currency region as the bloc struggles to contain a region-wide sovereign debt crisis.

“Would it be too bold, in the economic field, with a single market, a single currency and a single central bank, to envisage a ministry of finance of the union?” Trichet said in a speech today in Aachen, Germany. He also favors giving the European Union powers to veto the budget measures of countries that go “harmfully astray,” though that would require a change to EU Treaties.

Trichet, one of the architects of the Maastricht Treaty that founded the euro, is setting out his vision for how the currency can be better managed just months before he retires and as European officials rush to put together a second bailout plan for Greece. Last year’s 110 billion-euro ($159 billion) rescue failed to prevent an investor exodus from Greece, which has been saddled with Europe’s highest debt load amid a three-year economic slump.

Ireland and Portugal also had to ask for European aid as borrowing costs soared on concern the countries wouldn’t be able to tame their budget deficits.

Ministry Functions

German government bonds fell, pushing the 10-year yield two basis-points higher to 3.01 percent, while Greek two-year notes erased a decline to leave the yield little changed at 24.54 percent. The euro rose more than a quarter cent to as high as $1.4486.

While any single finance ministry would “not necessarily” administer “a large federal budget,” it would “exert direct responsibilities in at least three domains,” said Trichet, whose eight-year term ends in October.

They would include “first, the surveillance of both fiscal policies and competitiveness policies” and “direct responsibilities” for countries in fiscal distress, he said.

It would also carry out “all the typical responsibilities of the executive branches as regards the union’s integrated financial sector, so as to accompany the full integration of financial services, and third, the representation of the union confederation in international financial institutions.”

Trichet has no formal power over government decision making and hasn’t said what he plans to do when he leaves the ECB.

He signaled that any new form of fiscal governance would need to be “decided by the people of Europe.” The EU president, the European Commission and the finance ministries of Germany and other countries are sure to have their own views, he said.

--Editors: Fergal O’Brien, John Fraher

To contact the reporters on this story: Christian Vits in Frankfurt at cvits@bloomberg.net; Gabi Thesing in London at gthesing@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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U.S. Facing Deficit Crisis

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Strauss-Kahn Arrest Overshadows Greek Crisis Discussions

May 15, 2011, 12:42 PM EDT By Jennifer Ryan

(Updates with German finance minister comment in 10th paragraph.)

May 15 (Bloomberg) -- International Monetary Fund Managing Director Dominique Strauss-Kahn’s arrest is an embarrassment that won’t derail attempts to bolster aid for Greece as officials head to Brussels for crisis talks, economists said.

Strauss-Kahn, 62, had been scheduled to meet German Chancellor Angela Merkel today and then attend discussions with euro-area finance ministers in Brussels tomorrow as officials consider further support to stave off a Greek default. He has been charged with attempted rape and a criminal sex act on a woman in a New York hotel. Strauss-Kahn denies the charges.

“Its incredibly embarrassing, and not the IMF’s or Dominique Strauss-Kahn’s finest hour, but I don’t think this ought to undermine what’s going on,” Peter Westaway, chief European economist at Nomura International Plc in London, said in an interview. “I don’t think it will affect negotiations on Greece. In the end, issues for Greece and policy making are more important than that and they’ll carry on.”

European officials are working to prevent the region’s first default as Greek ministers plead for terms to be relaxed on 110 billion-euros ($155 billion) of aid from the IMF and European Union in a debt crisis that has also engulfed Ireland and Portugal. Economists said that talks to reconsider Greece’s aid terms are taking place between institutions rather than individuals and so can endure such turmoil.

“It’s not a fatal blow to the Greek situation,” James Nixon, chief European economist at Societe Generale in London, said in an interview. “Any of these negotiations are larger than a single person.”

EU-Led Aid

The Greek government said in a statement that it “operates institutionally and continues without interruption implementing the program for the country to exit the crisis.” The EU has led efforts to aid Greece and has contributed two-thirds of the funds committed to the rescue of the nation’s economy.

“The IMF will have high level representation at tomorrow’s eurogroup meeting, independently of Dominique Strauss-Kahn,” Guy Schuller, spokesman of Luxembourg Prime Minister Jean-Claude Juncker, who heads the group of finance ministers of the 17 nations that share the euro, said in a statement.

Greece is seeking an extension to the loans and has argued Europe should issue common bonds to stem the region’s fiscal crisis. Eighty-five percent of those surveyed last week in a Bloomberg Global Poll said the country won’t honor its debts, with majorities predicting the same fate for Portugal and Ireland.

Greek Position

Greek Prime Minister George Papandreou on May 13 opposed a debt restructuring, appealing to claims made by the IMF that the country’s debt “is sustainable.” Germany opposes a common-bond issue, saying such a move would weaken member states’ incentives to cut their deficits.

It’s too early to say whether Greece needs more help with its debt crisis, though “extra measures” may be needed if the country can’t return to financial markets next year as planned under the European-led aid program agreed last year, German Finance Minister Wolfgang Schaeuble said in an interview with ARD television in Berlin.

It’s “disappointing” that Strauss-Kahn’s meeting with Merkel is cancelled because the IMF had been pressing for stronger measures that may involve the possibility of a restructuring of Greek debt, Societe General’s Nixon said.

“The meeting could have been quite important in injecting some realism in the discussions and presumably now that voice won’t be heard,” he said. “The IMF have been pushing for a more realistic position, and presumably the gravity of that voice has been lost.”

‘Leadership Vacuum’

Eswar Prasad, a senior fellow at the Brookings Institution in Washington, said that Strauss-Kahn’s arrest may still unsettle investors at a time of tension because of the region’s debt crisis.

“Just the perception that DSK’s departure could create a leadership vacuum at the IMF and shift the institution’s attitude towards Greece and other weak European countries may be enough to roil markets and raise uncertainty at a vulnerable time for the euro zone,” he said.

Hotel Incident

The charges against Strauss-Kahn stem from an incident that allegedly occurred yesterday against a 32-year-old female at a Sofitel hotel in midtown Manhattan, the New York Police Department said in an e-mailed statement early today. He will appear in a Manhattan court later today, police Deputy Commissioner Paul Browne told BBC television in an interview.

Strauss-Kahn played a key role in efforts to stem the European debt crisis which started last year in Greece, with a pledge to contribute about a third of future bailouts in the region by the EU. His term at the IMF is scheduled to expire next year. Speculation in France had mounted that he would leave early to stand for president.

The charges against him won’t affect moves to extend aid to Portugal, which is implementing austerity measures to qualify for an international aid package of as much as 78 billion euros from the EU and IMF, said Gilles Moec, European economist at Deutsche Bank AG.

“The progress can continue and there should not be a change in its dynamics,” he said in an interview.

--With assistance from Marta Marino in London, Sandrine Rastello in Washington, Stephanie Bodoni in Luxembourg, Tony Czuczka in Berlin and Maria Petrakis in Athens. Editors: Craig Stirling, John Fraher

To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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