Eurozone crisis explained

The European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF) have been in Athens reviewing Greece's debt reduction programme.

At stake is the next tranche of bailout money, the government needs to pay its bills.

This is money from the 110bn-euro ($148bn, £95bn) bailout agreed last summer. Eurozone leaders have subsequently agreed a further 109bn-euro package, but this has yet to be fully ratified by member states.

And it comes as Greece announced that the 2011 deficit is projected to be 8.5% of GDP - down from 10.5% in 2010 - but short of the 7.6% target set by the EU and IMF.

The wider aim of the bailouts is to shore up Greece's economy, calm the financial markets, and stop contagion spreading to other debt-laden European economies.

However, despite denials from some leading member countries, particularly Germany, there is a growing feeling in the markets that Greece will default on its debts. In fact many observers see it as inevitable.

Why is Greece in trouble?


Greece has been living beyond its means in recent years, and its rising level of debt has placed a huge strain on the country's economy.

The Greek government borrowed heavily and went on something of a spending spree after it adopted the euro.

Public spending soared and public sector wages practically doubled in the past decade.

However, as the money flowed out of the government's coffers, tax income was hit because of widespread tax evasion.

When the global financial downturn hit, Greece was ill-prepared to cope.

It was given 110bn euros of bailout loans to help it get through the crisis - and has now been earmarked to recieve another 109bn euros.

But many fear that will not be enough.

There has been much public opposition to the austerity programme

Why did Greece need another bail out?

Greece received its original bailout in May 2010.

The reason it had to be bailed out was that it had become too expensive for it to borrow money commercially.

It had debts that needed to be paid and as it couldn't afford to borrow money from financial markets to pay them, it turned to the EU and the IMF.

The idea was to give Greece time to sort out its economy so that the cost for it to borrow money commercially would come down.

But that did not happen. Indeed, the ratings agency S&P recently decided that Greece was the least credit-worthy country it monitors.

As a result, Greece has lots of debts that need to be paid, but it cannot afford to borrow commercially and does not have enough money from the first bailout to pay them.

Despite the bailouts, many people think Greece will defaultThey certainly do in the financial markets, which seem to have accepted that Greece is heading for an "orderly default".

In July, eurozone leaders proposed a plan that would see private lenders to Greece writing off about 20% of the money they originally lent, whereas the latest plan is expected to include a 50% write-off.

What continues to worry the markets, however, is fear of a "disorderly default" and the domino effect that might have within the eurozone.

Major eurozone governments have been criticised for a lack of political leadership, and there have been signs of divisions within the ECB.

The concern in the markets is that the eurozone's political structures do not have the authority to deal with the magnitude of the economic problems.

Could the crisis spread?

In graphics: Compare economies

The aim of the last Greece bailout - as with the first bailout - is to contain the crisis.

The bailouts of Portugal and the Irish Republic were designed to tide both countries over until they could borrow commercially again, just as was hoped for Greece.

If that hasn't been possible in Greece, investors may question whether the same solution will work for the other two bail-out recipients.

There are also concerns about the situations in Italy and Spain, both of which have seen their borrowing costs rise.

The Spanish and Italian economies are far bigger than those of Greece, Portugal and the Irish Republic and the European Union would struggle to bail them out if that became necessary.


What would happen if Greece defaulted?
What now for Greece? You decide

Europe's banks are big holders of Greek debt, with perhaps $50bn-$60bn outstanding. An "orderly" default could mean a substantial part of this debt being rescheduled so that repayments are pushed back decades. A "disorderly" default could mean much of this debt not being repaid - ever.

Either way, it would be extremely painful for banks and bondholders.

What's more, Greek banks are exposed to the sovereign debts of their country. They would need new capital, and it is likely some would need nationalising. A crisis of confidence could spark a run on the banks as people withdrew their money, making the problem worse.

That confidence crisis may spread to overseas banks, which could stop lending until the full extent of a default was known.

It might be a repeat of the credit crunch that pushed European and the US into recession three years ago.

What would it mean for the eurozone?

A Greek exit is seen by some as inevitable if the country defaulted. The big question would then be, what about other heavily-indebted nations?

If Greece can force a "haircut" on its creditors, then why not Portugal or the Republic of Ireland?

The political and economic structures that have bound the 17-nation bloc together could begin to unravel.

German public opinion is already tiring of the government's lead role in bailing out the eurozone in a bid to hold the bloc together.

What does all this mean to the UK?

According to figures from the Bank for International Settlements, UK banks hold a relatively small $3.4bn (£2.1bn) worth of Greek sovereign debt, compared with banks in Germany, which hold $22.6bn, and France, which hold $15bn.

When you add in other forms of Greek debt, such as lending to private banks, those figures rise to $14.6bn for the UK, $34bn for Germany and $56.7bn for France.

However, knock-on from Greece's troubles would exacerbate the UK's exposure to Irish debt, which is larger.

The UK's direct contribution to any Greek bailout is limited to its participation as an IMF member. But the indirect effect of a Greek default on the UK would be incalculable.

BBC

Markets roiled as European banking meltdown widens

Markets tumbled around the world for most of Tuesday on concern that the debt crisis had spun out of control, but staged a dramatic late recovery on reports that European governments are working on a plan to refloat the worst-hit lenders.

What analysts have been warning about for more than a year has come to pass: troubles sparked by Greece and indebted Mediterranean countries have spilled over into other sectors, triggering another crisis potentially as bad as the one that began in 2008.

Financial services giant Dexia on Tuesday became the first victim of a widening banking meltdown in Europe as the struggling Brussels-based lender confirmed it is considering a plan to sell off operations to cope with massive losses from exposure to Greek sovereign debt.

“I think this is just the beginning,” said Brad Smith, an analyst at Stonecap Securities in Toronto. “There are plenty of other banks with exposure to Greece [and some of them are next in line].

The dramatic reversal — a 4% turnaround in some of the major North American stocks indexes in a matter of minutes — was spurred by a Financial Times report that said European leaders were urgently looking at co-ordinated action to sink money into some of the continent’s banks.

“There is a sense of urgency among ministers and we need to move on,” Olli Rehn, European Union commissioner for economic affairs, told the Financial Times.

Meanwhile, the Greek finance minister said the country, which seems almost certain to default, has enough cash to operate for another six weeks, after European ministers delayed a decision on the country’s next emergency loan instalment.

But Greece is a relatively small player in the scheme of things compared with other troubled countries. The rating agency Moody’s Investors Service delivered another shock to the market late yesterday, announcing it downgraded Italy’s government bonds by three notches, citing growing risk that indebted countries such as Italy face increased challenges convincing investors to buy their bonds.

At the core of the sovereign debt crisis is uncertainty and confusion over the ability of countries to meet their obligations and avoid default. Most of the concern at first centred on peripheral nations like Greece and Ireland but as governments disclosed further information it became apparent that the problem is far greater than was at first realized, with much larger economies already under pressure.

The troubles quickly spread to the financial system as European banks are among the biggest holders of risky sovereign bonds. European regulators had plenty of warning and even put their lenders through extensive stress tests meant to pinpoint potential problems before they started.

But from the beginning critics warned the tests were not tough enough. They’ve been vindicated as many of the lenders that are now under water passed their tests with flying colours.

Now three of Europe’s banks with the biggest exposure to Greece — Dexia, Paribas SA and Societe Generale SA — are opposing pressure from regulators to write down the value of their Greek bonds to reflect the market value, according to Bloomberg News.

While most other lenders have cut the value of their holdings in half, the three lenders have cut their Greek holdings by only 21%.

Under current accounting rules there’s nothing wrong with the practice, and that’s part of the problem. By not taking the full writedown, the lenders avoid about 3-billion euros of losses that they would otherwise have to acknowledge, which only add to a lack of clarity in the European banking system.

Unlike the last financial crisis, the potential consequences of the current debacle are unlikely to include failure of the global financial system. But it comes as the global economy is weakening, and analysts say there is a real risk that it could turn what might have been a mild recession into something much worse.

Canada, however, is in a strong position. Having made it through the last crisis with minimal losses, Canadian banks are well capitalized and unlike many of their peers on Wall Street, they are in a position to benefit from the problems at European lenders.

For example Dexia has a joint venture with Royal Bank of Canada, and it may be forced to sell its share of the business if it ends up taking a government bailout.

RBC Dexia, one of the world’s largest custody banks, has operations in more than a dozen countries.

National Post

Moody’s cuts Italy ratings by 3 notches

NEW YORK – Moody’s Investors Service Tuesday cut Italy’s bond ratings by three notches, saying it sees a “material increase” in funding conditions for eurozone countries with high levels of debt.

Moody’s downgraded Italy’s ratings to A2 from Aa2 and kept a negative outlook on the rating, a sign that further downgrades are possible in the couple of years.

Financial Post

Assad: Syria will shower Tel Aviv with rockets if attacked by foreign powers

Syria will strike Israel and "set fire" to the Middle East if foreign forces choose to launch a military strike on the protest-ridden country, the Iranian news agency Fars quoted Syrian President Bashar Assad as saying on Tuesday, referring to remarks made by the Syrian leader during a meeting with Turkish Foreign Minister Ahmet Davutoglu last August.

During a meeting with the Turkish FM, the Fars report claimed, Assad indicated that Syria would not hesitate to strike major Israeli cities if it was attacked.


Syrian President Bashar Assad delivering a speech in Damascus, Syria, on June 20, 2011.
Photo by: AP

"If a crazy measure is taken against Damascus, I will need not more than 6 hours to transfer hundreds of rockets and missiles to the Golan Heights to fire them at Tel Aviv," Assad said.

In addition, Fars reported that the Syrian president told the Turkish FM that he would also call on Hezbollah in Lebanon to launch a rocket attack on Israel, adding: "All these events will happen in three hours, but in the second three hours, Iran will attack the U.S. warships in the Persian Gulf and the U.S. and European interests will be targeted simultaneously."

Assad's comments to the Turkish FM came after Turkish Prime Minister Recep Tayyip Erdogan said earlier Tuesday he would set out his country's plans for sanctions against Syria after he visits a Syrian refugee camp near the border in the coming days.

The move heralds a further deterioration in previously friendly relations between Ankara and Damascus since the start of Assad's crackdown on protesters.

"Regarding sanctions, we will make an assessment and announce our road map after the visit to Hatay in southern Turkey, setting out the steps," Erdogan told reporters, adding he expected to visit the region at the weekend or the start of next week.

Some 7,000 Syrians have taken refuge in camps established in Hatay, in flight from President Assad's security forces.

Haaretz

prophecy of upcoming conflict between Pakistan and India

hostgator coupon 2011

Some thoughts about the rapture

hostgator coupon 2011

EU Flags Bigger Losses for Greece Bondholders

European governments hinted that bondholders may be saddled with bigger losses on Greek debt, intensifying market jitters that a second aid package designed to quell the fiscal crisis might unravel.

Finance ministers in Luxembourg considered recrafting a July deal that foresaw investors contributing 50 billion euros ($66 billion) to a 159 billion-euro rescue. The debt exchanges and rollovers targeted bondholder losses of 21 percent.

“We have to recalculate what that will actually cost and how to deal with it, but that is not being discussed now because we haven’t had the report from Greece yet,” Austrian Finance Minister Maria Fekter told reporters today at a meeting of European officials.

Together with plans to get more firepower out of the region’s 440 billion-euro rescue fund, the review of Greece’s aid package was a response to growing international frustration with Europe’s inability to get to grips with the crisis after 18 months of incremental steps marked by clashes between Germany, France and the European Central Bank.

European stocks fell for a third day and investors shunned riskier countries’ bonds amid concern that the crisis is careening out of control. The euro has dropped about 8 percent since the end of August, trading at $1.3182 as of 1:30 p.m. in London.

Insulating Italy

Europe’s financial leaders are fighting on multiple fronts, trying to repair Greece’s recession-struck economy while insulating Italy and Spainand shoring up banks that the International Monetary Fund says face as much as 300 billion euros in credit risks.

The stress on banks in Europe’s better-off economies was in the spotlight today with shares in Dexia SA, a French-Belgian lender, plunging on concern it will require a second bailout. The French and Belgian governments vowed “all necessary measures” to protect clients and will guarantee all Dexia’s loans.

A seven-hour meeting of euro-area finance chiefs yesterday yielded an agreement to pursue “technical revisions” to the July accord on private sector burden-sharing, Luxembourg Prime Minister Jean-Claude Juncker told reporters early today. He spoke of “changes” to the Greek outlook that spurred the reassessment.

Debt Swap

Juncker gave no details about a possible recalibration of the “voluntary” debt exchange, the new element in the follow- up package hammered out after last year’s 110 billion-euro lifeline failed to stabilize Greece. The Institute of International Finance industry group estimates that the debt swap, still being negotiated, will amount to a writedown of 21 percent.

“No, no,” Spanish Economy Minister Elena Salgado told reporters today when asked about deeper writedowns. “I insist: no.”

European leaders have gone back and forth over the sanctity of bond contracts as the crisis escalated. A November 2010 pledge to rule out writedowns unravelled a month later, only to be reaffirmed in July. The latest about-face came after seven countries including Germany, Europe’s dominant economy, weighed calling for Greek writedowns of as much as 50 percent, two European officials said.

Credibility ‘Dent’

“The reopening is probably going to be quite bad for the markets,” said Peter Schaffrik, head of European interest-rate strategy at Royal Bank of Canada’s RBC Capital Markets in London. “There is a big dent to European credibility.”

The ministers also pushed back a decision on the release of Greece’s next 8 billion-euro loan installment until after Oct. 13. It was the second postponement of a vote originally slated for yesterday as part of the 110 billion-euro lifeline granted to Greece last year.

Scrounging for savings, the Greek cabinet on Oct. 2 announced 6.6 billion euros of cuts, mostly by slashing public payrolls. Greece will “very likely” have to make extra reductions for 2013 and 2014, a two-year phase that will be the focus of the rest of the review by European Union,European Central Bank and IMF officials, EU Economic and Monetary Commissioner Olli Rehn said.

Deficit Goal

Greece’s revised 2011 deficit goal may be 8.5 percent of gross domestic product compared with a previous target of 7.6 percent, Rehn said. He called the new target “plausible” and lauded Greece’s “important steps” toward further savings next year.

While an Oct. 13 meeting to decide on the next payout was canceled, Juncker said he is “nevertheless optimistic when it comes to the issue of the disbursement” by the end of October. The decision now dovetails with an Oct. 17-18 summit of European government leaders to address the crisis. Juncker said Greece can pay its bills in the meantime.

“Greece is not the scapegoat of the euro zone,” Greek Finance Minister Evangelos Venizelos said yesterday. “Greece is a country with structural difficulties.”

Finance ministers held a first discussion over how to further enhance the region’s rescue fund, setting aside a plea by German Finance Minister Wolfgang Schaeuble to postpone that debate until the remaining countries have endorsed the fund’s latest upgrade.

Fourteen of the 17 euro countries have approved the reinforcement, which will empower the European Financial Stability Facility to buy bonds on the primary and secondary markets, offer precautionary credit lines and enable capital infusions for banks.

Credit Lines

Juncker announced “good progress” on the credit lines and bank-recapitalization tools. Avoiding the word “leveraging,” he said work is under way to scale up the fund’s capacity without requiring each country to chip in more.

“We are checking if yes or no we could increase the efficiency of the different instruments,” Juncker said. Asked whether the ECB would be tapped to boost the fund’s clout, he said: “I don’t think that this will be the main avenue of our considerations.”

The ministers also smoothed a snag en route to a second Greek package by settling the terms under which collateral will be offered to AAA rated Finland, home to a euro-skeptic movement that catapulted to third place in April elections by opposing further bailouts.

Finnish Mood

While the party now known as “The Finns” didn’t make it into the ruling coalition, it captured the Finnish mood and hardened the stance of new Prime Minister Jyrki Katainen in the euro-rescue bartering.

Under the accord, Greek bonds will be transferred from Greek banks to a trustee, which will sell them and invest the proceeds in AAA rated bonds with maturities of 15 to 30 years.

In exchange for the special treatment, Finland will speed its payments into a planned permanent rescue fund and forego a share of profits from EFSF emergency loans. Collateral wouldn’t cover its entire Greek exposure. In the event of default, it couldn’t cash in on the collateral until Greece’s official loans mature, a wait that might last 30 years.

“It’s a complicated financial structure,” said EFSF Chief Executive Officer Klaus Regling, who brokered the collateral arrangement. He and Juncker said Finland is the only country likely to take advantage of it.

Bloomberg

hostgator coupon 2011