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debt crisis
World Bank’s President Jim Yong Kim has warned that the US is just “days away from a very dangerous moment” because of the government’s borrowing crisis.
Jim Yong Kim urged US policymakers to reach a deal to raise the government’s debt ceiling before Thursday’s deadline.
The US Treasury will start to run short of funds if no agreement is reached for it to borrow on financial markets.
Jim Yong Kim urged US policymakers to reach a deal to raise the government’s debt ceiling before Thursday’s deadline
Jim Yong Kim warned this could be a “disastrous event” for the world.
“The closer we get to the deadline the greater the impact will be for the developing world.
“Inaction could result in interest rates rising, confidence falling and growth slowing,” he said speaking at the World Bank’s annual meeting in Washington.
“If this comes to pass it could be a disastrous event for the developing world and that will in turn greatly hurt the developed economies as well,” Jim Yong Kim added.
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Cyprus officials have announced the country’s banks, which were closed to prevent mass withdrawals, will remain shut until at least Tuesday, March 26th.
The Cypriot government began an emergency meeting this afternoon to discuss alternatives to the EU-IMF bailout deal rejected by parliament on Tuesday.
Reports say the cabinet is considering imposing capital controls when banks are reopened.
Meanwhile, Cyprus’ finance minister is in Moscow to seek help from Russia.
Russia holds multi-billion dollar investments in Cyprus.
Finance Minister Michalis Sarris said after talks with Russian Finance Minister Anton Siluanov: “There were no offers, nothing concrete.”
Talks are expected to continue in Moscow on Thursday.
The banks will remain shut on Thursday and Friday this week and Monday March 25 is a scheduled bank holiday. The stock exchange also remains closed.
Germany has said banks in Cyprus may never reopen if a bailout is not agreed.
Earlier, Cypriot President Nicos Anastasiades met party leaders and the central bank governor in Nicosia to hammer out a Plan B, after a one-off tax on savings failed to get the support of any MPs.
Nicos Anastasiades has also been talking to the European Union, European Central Bank and IMF.
Bank mergers, a bond issue and more Russian funding have all been mentioned as ways to help the country out of the crisis.
The establishment of a “bad bank” which would take on risky assets held by Cypriot banks has also been mentioned by officials.
Cyprus’ banks are still giving out cash through machines – although with limits, and some are running low.
Some businesses are now refusing credit card payments.
Cyprus banks, which were closed to prevent mass withdrawals, will remain shut until at least March 26th
On Wednesday, German Chancellor Angela Merkel said she regretted but respected the Cypriot vote.
Angela Merkel said the eurozone had a duty to find a solution for Cyprus, but added that the country’s current banking system was “not sustainable”.
Cyprus’ banks were left exposed following the debt crisis in Greece and there are fears Cyprus could go bankrupt if they fail.
German Finance Minister Wolfgang Schaeuble warned Cyprus that its banks might never be able to reopen if it rejected the bailout.
The controversial levy had been proposed as the condition for the 10 billion-euro ($13 billion) EU and IMF bailout. Cyprus was expected to raise 5.8 billion euros through the one-off tax on bank savings.
The plan was altered on Tuesday to exempt savers with less than 20,000 euros, but a 6.75% charge on deposits of 20,000-100,000 euros and a 9.9% charge for those above 100,000 euros remained.
However, parliament rejected the deal, with 36 MPs voting against it, 19 abstaining and none in favour.
Protesters outside parliament reacted with joy at the decision.
Cyprus has attracted money through its lower taxes, with Russians holding between a third and half of all Cypriot deposits.
Russian private and corporate deposits are believed to total about $30 billion.
Russian President Vladimir Putin had called the bailout deal “unfair, unprofessional and dangerous”.
Analysts say Russia may provide more funding in return for interests in Cyprus’ offshore energy fields.
One offer of help has come from Cyprus’ Orthodox Church, which is a major shareholder in the third-largest domestic lender, the Hellenic Bank.
Archbishop Chrysostomos I said on Wednesday the Church was willing to mortgage its assets to invest in government bonds.
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European markets follow Asian shares downward on fears that the plan to bailout Cyprus could trigger an escalation of the eurozone debt crisis.
The EU and IMF want all bank customers to pay a levy in return for a bailout worth 10 billion euros ($13 billion).
London’s 100 share index is 1% lower, while France and Italy are down 2%.
The euro was also affected. Against both the pound and the dollar it lost about 1%, leaving it at 85.7 pence and $1.293 repectively.
Earlier, Japan’s Nikkei 225 index fell 2.7%, while Hong Kong’s Hang Seng and Australia’s ASX 200 dipped 2%.
Banking shares were among the hardest-hit, with Italy’s UniCredit losing almost 5%, Intesa Sanpaolo down 4%. Banco Popolare, which announced a bigger-than-expected annual loss on Friday after the market closed, down almost 5%.
France’s BNP Paribas and Credit Agricole were both down more than 3%.
In Germany, Deutsche Bank was down 3.5% while Commerzbank was 1.5% lower.
Analysts said that investors were divided about whether the developments in Cyprus would affect other bigger eurozone economies, which may also need bailout funds in the future.
Some fear that, if approved, the plan may set a precedent for those countries.
Asian shares fall on fears that the plan to bailout Cyprus could trigger an escalation of the eurozone debt crisis
“There will certainly be confusion in Cyprus, and investors looking just at headlines may fret about its case becoming a model,” said Yuji Saito, director of foreign exchange at Credit Agricole in Tokyo.Analysts said the fresh concerns over the fate of some of the eurozone weaker members, triggered by the developments in Cyprus, had resulted in investors looking to ditch relatively riskier assets.
This is the first time the 17-nation eurozone has sanctioned dipping into people’s savings to finance a bailout.
The plan is yet to be finalized, but the news of the deal caused a rush to the cash machines in Cyprus as people tried to withdraw money.
Under the levy, bank customers with less than 100,000 euros would have to pay 6.75%, while those with more than 100,000 euros would pay 9.9%.
However, depositors in Cypriot banks outside the country, including in Greece, are unaffected by the levy.
But the plan is yet to be finalized and Cyprus’s leaders have said they want to ensure protection for small investors.
Meanwhile, an emergency session of the Cypriot parliament has been postponed until later on Monday.
Also, Germany must approve the plan, but is not due to vote until next month.
Following eurozone finance ministers’ negotiations last week, Cyprus became the fifth euro-area country to get a bailout to save its banks, which suffered significant losses because of their exposure to Greek debt.
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German Chancellor Angela Merkel has warned that her country’s economic climate in 2013 will be “even more difficult”.
In her New Year message, Angela Merkel also cautioned that the eurozone debt crisis was far from over.
However, she did say that reforms designed to address the roots of the problem were beginning to bear fruit.
Angela Merkel’s comments appeared to contradict German Finance Minister Wolfgang Schaeuble who said last week that the worst of the crisis was over.
In a taped interview to be broadcast later on Monday, Angela Merkel urged Germans to be more patient.
“I know that many people are naturally concerned going into the new year,” she said.
“The economic environment will not in fact be easier but rather more difficult next year. But we shouldn’t let that get us down; rather it should spur us on.”
German Chancellor Angela Merkel has warned that her country’s economic climate in 2013 will be even more difficult
She linked future German prosperity to a prosperous European Union.
“For our prosperity and our solidarity, we need to strike the right balance,” Angela Merkel said.
“The European sovereign debt crisis shows how important this balance is.
“The reforms that we’ve introduced are beginning to have an impact. Nevertheless we need to have further continued patience. The crisis is far from over.”
In an interview with the German newspaper Bild last week, Wolfgang Schaeuble cited positive developments in Greece and France, saying: “I think the worst is behind us.”
Germany – Europe’s largest economy – has been the paymaster in the eurozone crisis, a move unpopular with many German voters and some conservative MPs in Angela Merkel’s coalition.
Analysts say most Germans remain wary of eurozone bailouts but generally approve of Angela Merkel’s handling of the crisis.
In October, the German government slashed its forecast for economic output in 2013 to 1.0%, compared to 1.6% previously anticipated.
The country’s central bank has said Germany may even come close to recession early in the new year.
Nevertheless, Angela Merkel underlined that Germany in 2012 had the lowest unemployment since reunification in 1990.
South Korea has decided to cut its growth forecast for this year and for 2013, underlining the effect of a slowdown in its key export markets on its growth.
The finance ministry has forecast a growth of 3% for 2013, down from its earlier projection of 4.3%.
Meanwhile, the growth forecast for 2012 was lowered to 2.1% from 3.3%.
South Korea’s exports, which account for almost half of its overall economy, have been hit by slowing demand from markets such as the US and eurozone.
“Growth next year will be better than this year, although there are significant downside risks,” said the finance ministry’s Choi Sang-mok.
“Nevertheless, the strength of the recovery won’t be strong enough for the economy to catch up to its potential growth rate.”
South Korea has decided to cut its growth forecast for this year and for 2013, underlining the effect of a slowdown in its key export markets on its growth
The sovereign debt crisis in the eurozone has hurt demand for South Korean exports from the region.
Meanwhile, the economic recovery in the US – another key market for its exports – has also remained fragile and consumer demand there has not picked up drastically.
The slowdown in demand for exports has hurt growth in Asia’s fourth largest economy.
South Korea’s economy grew at its slowest pace in three years in the July to September quarter, expanding at an annual rate of 1.6%.
Prompted by slowing demand for exports, policymakers have taken some steps to try and spur domestic consumption.
In September it announced a $5.2 billion stimulus package, which included tax breaks on personal incomes and purchases of homes and cars.
The Bank of Korea has also cut interest rates twice in the past few months to try and ease the burden of businesses and households.
On Thursday, the central bank said it would continue to take measures to spur growth to ensure the economy’s “growth potential is not eroded due to its continued low growth”.
The European Union is due to begin a two-day summit in Brussels that will focus on issues surrounding the eurozone crisis.
High on the agenda will be controversial plans for a eurozone banking union, seen as a key element in restoring confidence in the euro.
In the run-up to the summit, Germany has been urging EU states to consider pooling more economic sovereignty.
Meanwhile Greece, which is at the centre of the European debt crisis, is braced for another general strike.
It will be its 20th since the debt crisis erupted in the country two years ago.
Talks in Brussels are also expected to focus on banking supervision, stricter fiscal oversight and direct recapitalization of banks from rescue funds.
The summit will take place amid calmer European stock markets than in previous meetings and with less concern over the debt crises in Spain and Greece, analysts say.
Speaking on Wednesday, French President Francois Hollande said an end to the eurozone crisis was “very close” and he wanted a deal agreed on the first stage of a banking union.
German Finance Minister Wolfgang Schaeuble has proposed a full fiscal union – control at European level of tax and spending.
On Wednesday, Wolfgang Schaeuble said that eurozone countries “need to tackle problems themselves”, adding that the eurozone bailout fund was there to help countries do just that.
But he reiterated his view that further steps towards political integration would strengthen the bloc.
The meeting in Brussels will be the fourth time that leaders of the EU’s 27 nations have met this year.
Borrowing costs for struggling eurozone economies have fallen sharply since the European Central Bank (ECB) announced last month that it was prepared to buy their bonds in unlimited amounts under strict conditions.
The calmer economic climate is being used to discuss buttressing economic and monetary union, and little will be agreed at this summit.
On Wednesday, Greece and its international creditors are said to have reached a deal on austerity measures needed before its next bailout installment.
Nevertheless, large demonstrations are planned across the country against the next package of spending cuts.
Taxi drivers, ferry workers, doctors, teachers and air traffic controllers are among those taking part in a general strike across the public and private sectors.
Chinese economy has slowed for a seventh quarter as problems in Europe and the US hurt demand for its goods.
The annual rate of growth was 7.4% in the third quarter, down from 7.6% in the previous three months.
However, there were signs that the world’s second-biggest economy was now stabilizing and rebounding.
That would be good news for China, which is facing a leadership change, and the rest of the world, which has benefited from its recent boom.
“Clearly, concerns over continued slowdown can now be put to rest,” said Dariusz Kowalczyk, senior economist as Credit Agricole-CIB.
“The last month of the quarter brought acceleration of industrial output, retail sales and fixed asset investment in year-on-year terms, highlighting the fact that improvement of momentum of the economy was particularly strong in September.”
In Hong Kong, the main Hang Seng stock index rose 0.7% on the news, while in Shanghai, shares climbed by 1.2%.
China’s growth over the past few years has been led by the success of its export and manufacturing sector, as well as by a credit-fuelled investment boom directed by the government.
But a number of issues have recently hurt demand for China’s exports, not least the debt crisis in the eurozone and a sluggish rebound in the US.
This had increased worries that China’s economic growth would slow further in coming months, and may even dip below the 7% mark, leading to a longer economic slump both inside and outside of the country.
That is something that China was keen to avoid as it prepares for a once-in-a-decade leadership change. China’s ruling communist party is about to unveil its next generation of leaders in November.
The fears had been that a sharp slowdown in the economy may result in business cutting jobs, leading to higher unemployment.
There had also been concerns that a significant slowdown may prompt a big drop in property prices – eroding the value of assets of many people.
However, on Thursday, China also released other key economic indicators alongside its gross domestic product (GDP) data, and these indicated that things may be starting to pick up again.
China’s industrial production rose by a more-than-expected 9.2% in September from a year earlier. That was up from 8.9% growth in August.
Retail sales, meanwhile, during the same month were 14.2% higher than a year earlier, signalling that domestic consumption was growing.
“The September data indicates economic momentum has picked up strongly compared with July and August,” said Zhang Zhiwei, chief China economist at Nomura in Hong Kong.
The latest numbers added to the optimism that followed trade figures which were released over the weekend. They showed a 9.9% year-on-year growth in exports during September, a big jump from the 2.7% growth recorded in the previous month.
Zhang Zhiwei added the latest data “helps reinforce our view that growth will rebound visibly in the fourth quarter”.
China has announced various stimulus measures in recent months aimed at boosting domestic consumption and sustaining growth.
The central bank has lowered the amount of money that banks need to keep in reserve three times in the past few months in order to increase bank lending.
It has cut interest rates twice since June to reduce the burden on businesses and other borrowers.
Beijing has also approved infrastructure projects worth more than $150 billion, aimed at spurring a fresh wave of economic development.
There had been hopes that China’s policymakers may take further measures to spur growth. But with September’s positive set of economic data analysts say they may now see Beijing delay a major move.
“There is no room, or need, for any further major stimulus, especially a rate cut,” said Dariusz Kowalczyk of Credit Agricole-CIB.
Even so, other analysts reckon that any rebound is in its early stages and if anything, it needs a further boost to take hold and continue.
The worry is that should China stop helping consumers and businesses, then growth could stagnate or start to retreat again.
Latin America will grow at a slower pace than 2011, primarily due to weaker growth in Argentina and Brazil, a United Nations report has suggested.
The Economic Commission for Latin America and the Caribbean (ECLAC) forecast the whole area would slow to 3.2% in 2012, down from 4.3% last year.
It is also less than the 3.7% that ECLAC predicted in June.
ECLAC blamed the global economy, which has been hit by the eurozone debt crisis and slowing Chinese growth.
The report, the Economic Survey of Latin America and the Caribbean, identified private consumption as “the main driver of regional growth, thanks to the growth in labor markets, increased credit and – in some cases – remittances”.
Brazil and Argentina are forecast to grow less than their neighbors. Argentina’s economy will grow 2% and Brazil will grow 1.6%, ECLAC suggested.
That is less than predicted by Brazil’s finance ministry, which cut its growth forecast for 2012 to 2% this year, down from its previous forecast of 3%.
President Dilma Rousseff recently launched the first in a series of measures that could inject up to $50 billion into the economy over the next five years.
ECLAC said that regional growth this year would be led by Panama – at 9.5% – and Haiti, which is expected to expand by 6% this year.
Bolivia, Chile, Costa Rica, Nicaragua and Venezuela are expected to grow by about 5%. Mexico will expand by 4%.
Paraguay will be the only country to shrink, by 2%, it predicted.
ECLAC said the Caribbean sub-region would grow by 1.6%.
Asian markets have risen, following gains on Wall Street, after the US Federal Reserve unveiled its latest stimulus plan.
The US central bank said it would buy $40 billion of mortgage debt a month and kept interest rates at below 0.25%.
It said it would also continue its programme to reduce long-term borrowing costs for firms and households.
Japan’s Nikkei 225 index rose 1.8%, South Korea’s Kospi gained 2.6% and Hong Kong’s Hang Seng added 2.5%.
This followed gains of 1.6% rise in the Dow Jones and S&P 500 indexes on Thursday.
Asian markets have risen, following gains on Wall Street, after the US Federal Reserve unveiled its latest stimulus plan
Investors are hoping the measures will revive growth in the US economy, the world’s biggest, and a key market for Asian exports.
“They’re saying that the punch bowl, the fuel for the economy, isn’t going away – it’s going to be here as long as you need it,” said Tony Fratto, managing partner at Hamilton Place Strategies, a policy consulting firm.
There have been growing fears about the global economy with a weak recovery in the US and the ongoing debt crisis in the eurozone.
The slowdown in China’s economy, the world’s second-largest, and one of its biggest drivers of growth after the global financial crisis, has fanned those fears.
Prompted by these concerns, policymakers in these regions have been taking measures to try to spur a fresh wave of growth.
The Federal Reserve’s announcement came days after the European Central Bank (ECB) announced its latest plan.
Last week, the ECB said that it would buy bonds from the bloc’s debt-ridden nations in an attempt to bring down their borrowing costs.
Meanwhile, China has cut its interest rates twice since June to bring down borrowing costs for businesses and consumers. Beijing has also lowered the amount of money that banks need to keep in reserve three times in the past few months to further encourage lending.
This week South Korea has also unveiled two stimulus measures aimed at boosting domestic demand and helping small businesses.
Analysts said the moves had helped reassure investors and markets that policymakers were doing all they could to ensure growth in the global economy.
“You’re witnessing global economic stimulus across the board,” said Quincy Krosby, a market strategist at Prudential Financial.
“The Fed’s actions are occurring in conjunction with the European Central Bank’s commitments to support the euro and amid talk that China could also deliver a stimulus package.”
Asian stock markets have risen, joining a global rally, after European Central Bank’s president, Mario Draghi, unveiled a plan targeted at easing the region’s debt crisis.
The ECB said it would buy bonds of the bloc’s debt-ridden nations in a bid to bring down their borrowing costs.
The implied borrowing costs for Spain and Italy fell after the announcement.
Japan’s Nikkei 225 index rose 2.2%, Korea’s Kospi gained 2.6% and Hong Kong’s Hang Seng added 2.4%.
Asian stock markets have risen after ECB unveiled a plan targeted at easing the region's debt crisis
“We think this is a credible plan to addressing the issue, and while there are still political hurdles, we expect those will be addressed,” said Alec Young, global equity strategist at S&P Equity Research.
The borrowing costs for some of the eurozone’s larger economies, such as Spain and Italy, had risen to levels considered unsustainable earlier this year.
That led to concerns that these nations would no longer be able to borrow money from international investors and, therefore, would not be able to repay their debts, further escalating the region’s debt crisis.
Many investors feared such developments would not only hurt the eurozone’s growth, but could also derail the global economic recovery.
That would have had a knock-on effect on Asia’s export-dependent economies, which rely heavily on global demand.
However, the ECB’s announcement, and the drop in borrowing costs of Spain and Italy thereafter, has helped allay those fears.
Markets in the US rose, with the Dow Jones index hitting it highest level in almost five years.
In Europe, Germany’s Dax index closed 2.9% higher, while France’s Cac 40 jumped 3% and the UK’s FTSE 100 rose 2.1%.
“The markets were looking for a strong decisive action and a commitment from the central bank that they are ready to act if any issues blow up in the region’s bigger economies,” said Justin Harper of IG Markets.
“Last night they got that.”
The ECB announcement also provided a boost to the euro currency, which rose against the US dollar and the Japanese yen.
The euro was trading at $1.263 in Asian trading. It also rallied against the Japanese currency to 99.63 yen.
Analysts said that the ECB’s plan had boosted investor morale and that they were more confident of investing in riskier assets.
“The ECB’s actions afford time, allowing risk appetite to stage a comeback, for now,” said Vincent Chaigneau, a strategist at Societe Generale.
However, they warned that while the ECB’s plan had helped allay market fears, the crisis was far from over.
“Mr. Draghi has won a battle, but cannot win the euro area crisis war by himself,” Vincent Chaigneau said.
“The hardest task of all – getting governments to drop posturing in return for leadership and deep reforms – still awaits us.”
Ratings agency Moody’s has lowered its outlook for the European Union’s AAA credit rating to “negative” and warned that the bloc’s rating could be downgraded.
Moody’s said the move reflected the negative outlook for the ratings of the EU’s key budget contributors.
Earlier this year, Moody’s put ratings of Germany, France, Netherlands and the UK on a negative outlook.
It said that these nations were all exposed to the region’s debt crisis, hurting their creditworthiness.
Ratings agency Moody's has lowered its outlook for the European Union's AAA credit rating to "negative" and warned that the bloc's rating could be downgraded
The ratings agency said that in case of “extreme stress”, the AAA-rated member states were more likely to service their own debt obligations rather than “prioritize their commitment to backstop the EU debt obligations”.
It added that if the AAA-rated member states were to default on their debt obligations, there were likely to be defaults on the loans that back the EU’s debt and the bloc’s cash reserve was also likely be stressed.
“Hence, it is reasonable to assume that the EU’s creditworthiness should move in line with the creditworthiness of its strongest key member states,” the agency said.
Germany, France, Netherlands and the UK together account for about 45% of the EU’s budget revenue.
Moody’s warned that if the credit ratings of these member states were downgraded, it could have a knock-on effect on the EU’s rating.
“Additionally, a weakening of the commitment of the member states to the EU and changes to the EU’s fiscal framework that led to less conservative budget management would be credit-negative,” it added.
German government has criticized leading conservative politician Alexander Dobrindt for suggesting that Greece will have to leave the eurozone.
Foreign Minister Guido Westerwelle said “bullying” of Greece must stop.
And in a TV interview Chancellor Angela Merkel said: “Everyone should weigh their words very carefully.”
Earlier, Christian Social Union leader Alexander Dobrindt, an ally of Angela Merkel, said he expected Greece to leave the eurozone in 2013.
He said he saw “no way round” a Greek exit. He also called the European Central Bank (ECB) chief Mario Draghi “Europe’s currency forger”.
His party, a junior coalition partner of Angela Merkel’s Christian Democrats (CDU), is preparing for an election in Bavaria and Germany’s general elections next year.
German government has criticized leading conservative politician Alexander Dobrindt for suggesting that Greece will have to leave the eurozone
Last week Angela Merkel reiterated that she wanted Greece to stay in the eurozone. And on Sunday she told German ARD television that “we are in a very decisive phase in combating the euro debt crisis”.
Greece is under pressure to speed up far-reaching reforms, including privatization and civil service job cuts, in order to continue receiving installments of its 130 billion-euro ($163 billion) international bailout.
It is the second massive bailout agreed for Greece since the 2008 debt crisis shook the global economy and German politicians have made it clear they will not stomach a third.
Guido Westerwelle warned that remarks like Alexander Dobrindt’s could harm Germany’s reputation as the eurozone tackles the debt crisis.
Comments by the head of Germany’s Bundesbank, Jens Weidmann, also signaled divisions at the top over the ECB’s handling of the crisis.
In early August Mario Draghi announced plans for the ECB to buy the bonds of countries like Italy and Spain, whose borrowing costs have reached levels widely regarded as unsustainable.
He is expected to give details after a 6 September meeting of the ECB’s governing council.
But Jens Weidmann, one of 17 eurozone central bank chiefs involved in ECB policy, said the plans risked making central bank financing “addictive like a drug” for struggling eurozone governments.
He warned that it was “close to state financing via the printing press” and could be a violation of EU rules preventing government-to-government subsidies.
Traditionally the ECB has been reluctant to undertake large-scale bond-buying because it is seen as inflationary, and the ECB’s priority is to keep inflation under control.
But during the eurozone crisis the ECB has been buying up sovereign debt to help ease the market pressure on struggling, debt-laden eurozone countries.
At the weekend the German and French governments indicated that Greece’s plea for a two-year “breathing space” in meeting its bailout obligations was unacceptable.
Eurozone leaders are waiting for a crucial report on Greece’s finances, due in late September. It will be delivered by the troika supervising Greece’s fulfillment of the bailout conditions – the ECB, International Monetary Fund (IMF) and European Commission.
Greece’s continued access to the bailout lifeline depends on a favorable report from the troika.
Athens is trying to finalize a package of 11.5 billion euros of spending cuts over the next two years.
Fears that other Spanish regions may follow Valencia in seeking a bailout from Madrid have rattled markets.
A local newspaper in Murcia, one of Spain’s smallest regions, quoted the regional government’s head as saying it would ask for funding help of up to 300 million Euros.
On Friday Valencia asked the central government for a financial lifeline.
The yield on Spain’s 10-year bond jumped to 7.4%, while the euro fell to an 11-year low against the yen.
On Friday the bond yield – which implies the interest rate the government would have to pay to borrow new money, and acts as a measure of investor confidence in Spain’s creditworthiness – was at 7.28%.
Fears that other Spanish regions may follow Valencia in seeking a bailout from Madrid have rattled markets
Many of Spain’s regions have high borrowing needs, and speculation is growing that a number of them will follow Valencia and ask formally money from Madrid at a time when the central government itself is having trouble borrowing money.
In Asian trading overnight, the euro fell to an 11-year low against the Japanese yen – which has acted as a safe haven currency since the 2008 financial crisis – amid fears that debt problems in Spain are worsening.
The euro fell to 94.37 yen, its lowest level since November 2000.
Analysts said the developments in Spain had raised fears that the eurozone debt crisis was worsening and spreading to the region’s biggest economies.
Asian stock markets also fell on Monday amid fears that the ongoing debt problems in eurozone will hurt the region’s growth.
Japan’s Nikkei 225 index fell 1.9%, South Korea’s Kospi dropped 1.8% and Australia’s ASX 200 index shed 1.7%.
The eurozone is a key market for Asian exports and there are concerns that demand from the region may decline in the near term.
At the same time, a weaker euro has also added to the woes of Asian exporters, as it makes their goods more expensive for buyers from the region.
EU leaders at Brussels summit are examining how to ease the eurozone debt crisis amid competing visions about how to revive the worst-hit economies.
As the Brussels summit opened, French President Francois Hollande made a new plea for EU solidarity and Spain warned that its borrowing costs were too high.
German Chancellor Angela Merkel scorned talk of pooling eurozone debt, saying it would require more budget rigor.
But there appears to be broad agreement on new measures to stimulate growth.
On arrival at the summit, UK Prime Minister David Cameron said “these are hard decisions for the eurozone countries to make and we should be encouraging them to go ahead”.
But when asked about plans for transferring more budgetary powers to the EU level David Cameron said: “I… in many ways share people’s concerns about Brussels getting too much power.”
European authorities have unveiled proposals such as the creation of a European treasury, which would have powers over national budgets.
The 10-year plan is designed to strengthen the eurozone and prevent future crises, but critics say it will not address current debt problems.
EU leaders at Brussels summit are examining how to ease the eurozone debt crisis amid competing visions about how to revive the worst-hit economies
Spanish 10-year government bonds were trading at yields above 6.9% on Thursday morning, coming close to the 7% considered unaffordable.
Spain’s Prime Minister Mariano Rajoy said debt sustainability was a pressing problem.
“We are paying rates that are too high to finance ourselves and there are many Spanish public institutions that cannot finance themselves.”
Spanish and Italian leaders are worried that their countries could soon – in effect – be shut out of international markets and forced to seek assistance.
The debate about short-term fixes could become very bitter indeed.
Angela Merkel has warned there is no “magic formula” to solve the crisis.
Several EU leaders want individual countries’ debts guaranteed by the whole eurozone, for instance in the form of centrally issued eurobonds.
But Angela Merkel told the German parliament on Wednesday that eurobonds were “the wrong way” and “counter-productive”, adding: “We are working to breach the vicious circle of piling up debt and breaking [EU] rules.”
She said to loud applause: “Joint liability can only happen when sufficient controls are in place.”
Stronger competitiveness was the condition for sustained growth, the chancellor said.
Francois Hollande believes eurobonds should be a eurozone priority for helping countries like Italy and Spain bring their borrowing costs down.
But Angela Merkel continues to insist that before anything is done to increase the burden on German taxpayers, building blocks towards greater fiscal, banking and, eventually, political union must be put in place.
There is certainly a chance that the summit will take a small step on a path that would partly deal with the fundamental weaknesses in the eurozone.
But in the absence of major short-term action, he explains, borrowing costs for countries such as Spain and Italy are likely to remain painfully high, making the eurozone’s financial situation strained for a long time to come.
Angela Merkel said progress had been made on a pact for growth and she hoped European leaders would adopt a 130 billion-euro ($162 billion) stimulus package.
Francois Hollande, who was elected French president on an anti-austerity ticket, said on Thursday there were “points in common on growth”.
“Merkel has moved in the direction I wanted,” he told French TV channel France 2.
Adding that he and the German leader had also agreed on the financial transaction tax, he said they still needed to find agreement “on stability”.
“There are ongoing discussions, it’s normal,” he said.
“We need to act in support of the countries which need it: Spain and Italy.”
A new report by the aid watchdog Data shows that European debt crisis has led to cuts in government development aid to poor countries.
It is the first significant reduction in Europe-wide aid budgets for a decade.
The biggest percentage cuts in the year 2010/11 were made by two of the states worst affected by the debt crisis – Spain and Greece.
But overall European development aid was also down by 1.5%.
The report says the new figures “reveal that those bearing the brunt of Europe’s economic crisis include some of the world’s poorest people”.
“As austerity bites across Europe, we can now see the impact it is having on life-saving aid programmes,” it adds.
In the year 2010-11, Spain cut its aid budget – the sixth largest in Europe – by nearly a third.
Greece cut its much smaller programme by 40%, the Data study says.
A new report by the aid watchdog Data shows that European debt crisis has led to cuts in government development aid to poor countries
The report is published as part of a lobbying campaign by aid agencies as EU leaders begin negotiating the next seven year European budget.
Over the last decade the trend has been for aid cash to rise.
European countries account for just over half of all global official development assistance.
Many of them have been slowly nudging towards a United Nations anti-poverty target of 0.7% of national income spent on aid.
The Netherlands and some Scandinavian countries have exceeded this proportion.
By far the biggest three donors are Germany ($14 billion – 0.39% of national income), UK ($13.5 billion – 0.55%) and France ($12 billion – 0.42%)
One of the authors of the Data report, Adrian Lovett, said the countries that would be worst affected by any prolonged aid cuts were poor African states.
He said: “The countries we’re worried about are mostly in Africa – for example Mozambique, Tanzania and Malawi.
“At the moment they need aid and its saving lives on a daily basis.”
There’s a broad official consensus among aid agencies – and the western governments that often finance them – that development aid works.
But aid is not without its critics.
Some say it is wastefully distributed and can discourage poorly performing developing country governments from accepting their responsibilities.
The argument goes that if Medecins Sans Frontieres run the best hospitals in Haiti, for example, or Oxfam successfully digs the best water wells in Chad, why should the governments there bother?
Such critics would also argue that countries such as China and India – and the many African states which currently have strong economic growth rates – are not getting richer because of aid.
In many of these cases, the aid critics say, infrastructure investment, commodities exports or liberalization have been far more significant than aid.
Adrian Lovett counters these arguments with the example of Ghana.
“Ghana has in the past had a substantial amount of aid. That assistance has been well used through smart leadership at the national level and better coordination by the various donors.
“So Ghana is now on the brink of ending its dependence on development cash. That’s exactly the route we see many African countries potentially taking.”
But Adrian Lovett drew a distinction between emergency aid – for famine victims, for example – and longer term development assistance.
He said aid advocates such as himself wanted, ultimately, to do themselves out of a job.
“There’s always going to be international action around humanitarian crises. That is a natural human impulse.
“But we do want to see a day when we will help some countries and they will also help us in return in a relationship of equals.
“We want that rather than the donor client relationship we have seen in the past.”
US President Barack Obama says European leaders must make difficult decisions to steer the eurozone away from crisis.
Speaking at the White House, Barack Obama said the US would support Europe implement the hard solutions needed to solve the ongoing debt crisis.
He said a deep new recession in Europe would have an impact on the US economy.
Greece’s future in the eurozone was a matter for the Greek people, he said, but “further hardship” must be expected if it choose to leave the euro.
Barack Obama says European leaders must make difficult decisions to steer the eurozone away from crisis
Outlining a series of “specific steps” Europe needed to take to ensure stability within the eurozone, the president was at pains to say he would not “scold” Europe.
Barack Obama said European leaders needed to stabilize the continent’s financial system and inject capital into weak banks “as soon as possible”.
“The solutions are hard, but there are solutions,” Barack Obama said, saying the US was offering advice, but that “these decisions are fundamentally in the hands of Europe’s leaders”.
Barack Obama also reprised his calls for the US Congress to pass the remaining parts of his own jobs plan, in order to strengthen the US economy against possible shocks from Europe.
Signs of economic weakness around the globe and Europe’s intensifying debt crisis are unnerving investors, who have been piling out of riskier investments like commodities and equities for the perceived safety of higher-rated government bonds.
U.S. banking stocks are heading into a bear market as Europe’s debt crisis pressures the sector. The KBW Bank index , which measures the performance of 24 U.S. banks, is down 16 percent from a peak in March. The index was down 1.2 percent just after the open on Monday.
Morgan Stanley has come under pressure as bond markets treat the bank as a junk-rated company, and the higher borrowing costs could already be putting it at a disadvantage even before an expected ratings downgrade. The bank’s stock is off 40 percent since late March.
“We may well have a snap back rally on the equity side but I don’t think it will be a big one, there is still a lot of caution out there,” said Frank Lesh, a futures analyst and broker at FuturePath Trading LLC in Chicago.
“All we’ve really done is seen some short covering here in the stock indexes and we are just stable, bonds are still very elevated.”
With little on the economic or corporate calendar Monday, investors are taking most of their cues from any comments out of Europe.
“Europe is front and center, back, left and right,” said Dan Greenhaus, chief global strategist at BTIG.
Germany’s DAX lost 0.9% to 5,993 and Switzerland’s SMI shed 0.6% to 5,741, though France’s CAC-40 managed to rise 0.5% to 2,968.49. Markets in Britain were closed for a holiday.
Peter Cardillo, chief market economist at Rockwell Global Capital in New York said he was watching 1,275 as a support level on the S&P 500 after the index broke through its 200-day moving average on Friday following the worst decline for the index in 7 months.
“If we close under that tonight, then the market is headed lower in the short-term, possibly by 3 or 4 percent,” he said.
In a potential boost for markets looking for measures to end the debt crisis, German Chancellor Angela Merkel is pressing for much more ambitious measures, including a central authority to manage euro-area finances, and major new powers for the European Commission, European Parliament and European Court of Justice.
Three leading Portuguese banks said on Monday they would draw on funds provided under the country’s 78 billion-euro ($96-billion) international bailout to meet tough new capital requirements as they struggle with the country’s debt crisis.
Stock trends
Investors sold shares in Asia as well, including stock in Sony, which fell below 1,000 yen for the first time since 1980 — the year after it introduced the iconic Walkman portable cassette player.
Japan’s Nikkei 224 index dropped 1.7% to close at 8,295.63, its lowest finish since Nov. 28, 2011. The broader Topix index ended below the 700 mark for the first time since December 1983, Kyodo News Agency said.
Japan’s shares fell sharply on Monday, with the broader Topix index hitting a 28-year low as investors reacted to the disappointing Friday U.S. jobs data.
“While we are not down 20 percent and in official bear market territory, we believe that we have entered a bear market,” wrote Wayne Kaufman, chief market analyst at John Thomas Financial in a note on Monday.
“Equities have not responded to oversold conditions or to very attractive valuations versus bonds, and we must take that as a warning,” he said.
There are also worries about slowing growth in emerging markets such as China and India. Recent reports out of China last week showed the manufacturing sector contracted more than expected in May.
The S&P 500 (SPX) lost 3 points, or 0.1%. The Nasdaq (COMP) moved down 3 points, or 0.1%. The Dow Jones industrial average (INDU) dropped 24 points, or 0.2%.
Facebook IPO aftermath
Companies: Shares of Facebook (FB), which have gotten hammered since the company’s IPO, edged slightly lower.
Groupon (GRPN) shares added 0.6% after dropping sharply Friday. The online discount service, which has been dogged with questions about its accounting practices since its initial public offering in November, ended its lock-up period Friday, meaning that insiders who own shares are now able to sell them.
Currencies and commodities
The dollar rose against the euro and Japanese yen, but fell versus the British pound.
Oil for July delivery lost 23 cents to $83.47 a barrel.
Gold futures for August delivery lost $2.60 to $1,614.60 an ounce.
Deutsche Bank reports a sharp fall in profits, in part due to weaker performance in investment banking during the eurozone debt crisis.
Net income for the first three months of the year was 1.4 billion Euros ($1.9 billion), down 35% on the 2.1 billion Euros the bank made a year earlier.
Revenue was down 12% at 9.2 billion Euros.
The bank said although the business environment was “more stable” than at the end of last year, it was “far less favorable” than a year earlier.
Deutsche Bank reports a sharp fall in profits, in part due to weaker performance in investment banking during the eurozone debt crisis
Germany’s biggest bank also took a 257 million Euro hit after writing off its holding in pharmaceutical company Actavis.
Revenues at the bank’s investment banking division fell 8% to 6.2 billion Euros, while those at the asset management arm dipped 17% to $3.4 billion.
Postbank, Deutsche’s retail arm, also reported lower revenues due to low interest rates and a move to reduce risk across its operations.
“This is a strong result which reflects good performance across most businesses, despite continued risk discipline and lower client activity than in the prior year,” the company said.
Investors, however, appeared to disagree, with Deutsche shares closing down 3.7% in Frankfurt.
The bank said it had focused on consolidating its position and building up its reserves.
“We continue to pursue our strategy of reducing legacy risks and strengthening our capital position, as evidenced by our disposal of Actavis,” said chief executive Josef Ackermann.
Europe’s top banks have been hit hard by the eurozone debt crisis, which has undermined investor confidence and hit trading volumes, which has knocked investment banks’ revenues and, therefore, profits.
