Thread: Euro Crisis Worries Spread - US Sending Envoy

Europe pins hopes on ECB as crisis fears spread

By Luke Baker and John O'Donnell

BRUSSELS | Wed Dec 1, 2010 11:21pm GMT

BRUSSELS (Reuters) - The European Central Bank is under pressure to unveil new steps to stabilise the euro zone when it meets on Thursday as the currency bloc battles a crippling debt crisis that has stoked contagion fears in the United States and Asia.

Germany struggled to sell its government debt on Wednesday and Portugal's borrowing costs soared in further signs that an 85-billion-euro ($110.7-billion) EU/IMF rescue of Ireland last weekend and public assurances from leaders that the euro will be defended at any cost have failed to impress investors.

European Union leaders appeared to pass the baton to the ECB, which holds its monthly meeting on Thursday. Economic and Monetary Affairs Commissioner Olli Rehn said recent EU actions provided a sound basis for further stabilisation measures by the central bank, and European Commission President Jose Manuel Barroso said he was confident the ECB would take whatever action was needed.

"I'm sure the ECB is analysing the current situation and that it will take the decisions necessary to guarantee the financial stability of the euro zone," he said.

In Washington, the White House said President Barack Obama was receiving regular updates during his daily economic briefings, while a senior Treasury official was heading to Berlin for talks on the economic situation after meetings on Wednesday in Madrid.

"It's important to the global economy and to our economic recovery," said White House spokesman Robert Gibbs. A senior G20 source in Asia also told Reuters deputy finance ministers discussed the situation on Monday.

A U.S. official also told Reuters that Washington would support boosting an EU rescue facility via IMF funds, news that bolstered the euro currency. "It is up to the Europeans," the U.S. official said. "We will certainly support using the IMF in these circumstances."

A Treasury Department spokesman later said an "extra commitment is not something we're discussing right now.

HIGHLY CONTROVERSIAL

Markets were focussing on ECB President Jean-Claude Trichet's news conference due at 1330 GMT on Thursday where the central bank could announce an expansion of its government bond purchase program, launched in May after Greece was bailed out.

But it has been highly controversial within the bank and used erratically. Influential Bundesbank head Axel Weber has called for the program to be scrapped, and fellow ECB members have criticised the U.S. Federal Reserve's decision to buy $600 billion of U.S. debt in a policy known as quantitative easing.

Any sense from fiercely independent central bankers that they were being bullied by EU politicians into making bond purchases could further deepen opposition to such a step.

With the euro under threat, however, they may decide they have no other choice.

In recent days, economists have urged the ECB to throw out its rule book and do all it can to save the euro, particularly since governments seem to be running out of ideas for restoring confidence in their monetary union.

"There is a feeling that things have got to a point where the ECB has to do more," said Gilles Moec, an economist at Deutsche Bank.

http://uk.reuters.com/article/idUKTRE6AO1NY20101201

Euro slide gathers pace on debt crisis fears

The euro has dropped below the $1.30 mark for the first time since the middle of September, as fears over the eurozone’s debt crisis continue.


Agreeing a rescue package for Ireland has not calmed markets as some hoped Photo: REUTERS

By Emma Rowley
3:32PM GMT 30 Nov 2010
75 Comments

The currency fell to $1.2997 against the dollar during trading on Tuesday morning, its lowest point in two months although it later clawed back losses after US consumer confidence brightened in November to the highest level in five months.

The brighter outlook suggested US consumers may be more willing to open their wallets further, despite high unemployment.

The agreement of a €85bn emergency aid package for Ireland, felled by the costs of bailing out its banks, has failed to allay market fears over the health of the eurozone.

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Concerns are now focusing on other debt-laden countries, with Spain and Portugal under the most scrutiny.

Their governments have seen the cost of their borrowing soar in recent weeks and bond yields – the rewards investors demand to take on the risk – are rising still.

The spreads between 10-year Spanish and Italian bond yields over the German benchmarks, which have a solid status, have now reached their highest levels since the euro was launched in 1999.

The crisis started last year in Greece, which has since had a €110bn EU/IMF rescue, and deepened this month amid fears bondholders will have to share the costs of future bailouts.

One area of concern is that Spain’s economy is twice as big as that of Greece, Ireland and Portugal combined, prompting fears the euro region’s €750bn safety net may not be big enough if the country requires aid.

Similarly, although most analysts view Italy as at less risk, the country is now being referred to as "too big to fail" and "too big to bail".

The cost of safeguarding most eurozone government debt is also rising, with five-year credit default swaps (CDS) – instruments which act as insurance against a country defaulting – on Irish debt up by 13 basis points to 6.25pc, meaning it now costs €625,000 to insure €10m worth of Irish bonds.

Even France, which is seen, along with Germany, as one of the eurozone’s most stable members, is affected, with 5-year CDSs rising 6 basis points to 1.05pc, reflecting worries over the toll of bailing out weaker economies.

Latest figures show unemployment in Germany fell again in November, confirming its status as the powerhouse of the eurozone.

The pound is gaining as investors look for a safer alternative to the eurozone. Sterling has jumped to its strongest level since September 20 and was headed for its biggest monthly gain since January 2009 against the euro.

http://www.telegraph.co.uk/finance/fina ... fears.html

Eurozone Debt Crisis: Portugal's Borrowing Costs Jump

Buyers at today's auction of government debt demanded a much higher rate of return – 5.3% from 4.8% two weeks ago

Graeme Wearden guardian.co.uk,
Wednesday 1 December 2010 12.00 GMT
Comments 119



Portuguese unions went on general strike last week to protest against planned austerity measures. Photograph: Armando Franca/AP

Portugal saw its cost of borrowing jump significantly this morning as it paid the price for the ongoing eurozone debt crisis.

Although there was relief that Portugal found buyers for the €500m (£418m) of 12-month bonds on the table, buyers at this morning's auction demanded a much higher rate of return. The debt was sold at an average yield – or effective interest rate – of 5.281%, up from 4.813% at a similar auction two weeks ago.

The auction was held just hours after Standard & Poor's ratcheted up the pressure on the Lisbon government by warning that it may cut Portugal's credit rating. Analysts had predicted that Portugal would have to pay a steep premium to find buyers for its debt today. Traders were very unwilling yesterday to buy the bonds of peripheral eurozone members, reflecting fears that Portugal, Spain or even Italy could need to tap the EU's rescue funds.

Last night, S&P announced that it had put Portugal's debt on negative credit watch, and may downgrade its A- rating in three months. The agency said there were "increased risks" to the Portuguese government's creditworthiness, and warned that its austerity cutbacks would harm economic growth.

"In 2011, Portugal's minority government is set to implement an ambitious fiscal austerity programme with an emphasis on reducing expenditures. However, we see the government as having made little progress on any growth-enhancing reforms to offset the fiscal drag from these scheduled 2011 budgetary cuts," said S&P's credit analyst Frank Gill.

"As a consequence of the Portuguese economy's structural rigidities and the volatile external conditions, we project that the economy will contract by at least 2% in 2011 in real terms."

Portugal's central bank warned yesterday that the country's financial sector faced "intolerable" risk unless the government's planned austerity measures were implemented. Last week, a general strike shut down much of the country's transport network.

The eurozone's weaker members were given some early respite from the financial markets this morning, after Jean-Claude Trichet – head of the European Central Bank – hinted at closer European harmonisation to address the crisis.

The yield, or rate of return demanded by investors, on Portuguese 10-year bonds fell slightly to 6.90% this morning, from 6.93% yesterday. The spread between the yields on Italian and Spanish bonds and their German equivalent, which hit an all-time high yesterday, also fell this morning.

It also emerged last night that the US is sending a special envoy to Europe to discuss the crisis.

Lael Brainard, the undersecretary for international affairs, will hold meetings with senior government officials in Madrid, Berlin and Paris over the next few days to "discuss economic developments in Europe as well as our longer-term work to advance our shared agenda on strong and sustainable global growth," the Treasury said in a statement yesterday.

http://www.guardian.co.uk/business/2010 ... wing-costs