NEWS,30.06.2012

Germany agrees to concessions in eurozone pact

 

By the end of a vital two-day summit here, European diplomacy had played out like soccer, with Spain and Italy - the two nations headed to the Euro 2012 finals - emerging victorious and the Germans returning home in shock.After a marathon 14 hours of talks, the deal that came together saw Berlin offer surprise concessions that could aid both Madrid and Rome in their desperate struggle to stave off economic collapse, even as it hinted at new political dynamic in Europe.Amounting to a series of highly technical rule changes, the deal addressed the core of the questions facing Europe: Who will cover the tab for its 2 1/2-year-old debt crisis, and how?Troubled eurozone countries could now have more options for aid, including using a pool of European rescue funds to directly recapitalize ailing banks. That, in turn, could spare governments the humiliation of having to ask for aid themselves to channel to domestic banks, sidestepping the kind of intrusive financial inspections imposed on Greece, Ireland and Portugal.The change could ultimately halt a toxic cycle that, while holding countries accountable for their banks' errors, also saw the balance sheets of indebted nations sink deeper into the red as they took on ever more rescue cash to bail out their financial institutions.The new plan would kick in only once a regional supervisor is established to regulate banks in the 17-nation eurozone - itself a major step that could see regulators based at the European Central Bank override the authority of national governments, bolstering market confidence in the region's financial system. Leaders said they would agree on such a move by the end of the year.In addition, leaders agreed that countries could access bailout funds to buy up their government bonds on open markets - and thus bring down dangerously high borrowing costs - with fewer conditions attached.The compromise reached here Friday fueled new optimism about the region's ability to finally break the diplomatic impasses that have made its debt crisis as much political as economic."We have taken decisions that were unthinkable just some months ago," European Commission President Jose Manuel Barroso said.The breakthrough also signaled a reshaping of Europe's political landscape.German Chancellor Angela Merkel, the frugal East German physicist, had laid down the rules for coping with the crisis through her alliance with Nicolas Sarkozy when he was France's president. But with his successor, the intellectual socialist Francois Hollande, leaning more toward the Italian and Spanish leaders' vision of crisis management, a new three-against-one dynamic took hold here.Backed by the French, Spanish Prime Minister Mariano Rajoy, a conservative who is protective of Spanish pride, and Italian Prime Minister Mario Monti, a sober and highly respected former EU official, resorted to brinksmanship. Both leaders vowed to block a $150 billion growth plan, seen as a centerpiece of the forum, if they did not win major concessions. Against their united front, Merkel blinked."The discussions were hard and tense," Monti said Friday. "But it was worth the effort.""This was not France and Germany arriving with a solution, like in the past," added Hollande. "It was France and Germany, along with others, reaching a solution. That's why it took so long and went so far."

 

Angela Merkel: Big Loser Of Eurozone Showdown

 

Angela Merkel was portrayed across Europe as the big loser of a euro zone showdown in Brussels after the German chancellor was forced to accept the crisis-fighting measures championed by countries struggling with their debts.Newspapers in Spain, Italy and France on Saturday toasted the triumph of their leaders - Mario Monti, Mariano Rajoy and Francois Hollande - in pushing Merkel into a U-turn that would long have been unthinkable.Even German newspapers said Merkel had been made to accept demands for the euro zone rescue fund to be able to inject aid directly into stricken banks from next year and intervene on bond markets to support troubled member states."There's no doubt about it - the chancellor was blindsided at the euro summit," wrote influential columnist Nikolaus Blome of Bild, a daily with 12 million readers.The summit ended on Friday with agreement on new steps to try to prevent a catastrophic breakup of the single currency.Popular at home for insisting on austerity measures and tough conditions for those indebted euro zone states getting help, Merkel was quick to put a positive spin on the summit, telling reporters: "We had an interest in finding solutions."There was no sign that the summit had damaged her reputation on Friday as both houses of parliament voted to back the euro zone's permanent bailout scheme. And Merkel does not face any particular political challenge at the moment.But the concessions of "Frau Nein" were far bigger than earlier compromises in the name of saving the euro."Merkel caves in - money for ailing banks," read the headline on Germany's left-leaning Sueddeutsche Zeitung.Bild wrote: "Italy and Spain got what they wanted: It'll be easier to borrow excessively again... It was the first time in more than two crisis years that euro states didn't follow Germany's orders."Footballing comparisons have been widespread after Italy knocked Germany out of the Euro 2012 tournament in a shock 2-1 victory on Thursday."This time it was worse, the defeat was about the euro," said respected Deutschlandfunk radio.'1-0 TO HOLLANDE'In France, left-leaning daily Liberation had a front page splash showing Hollande and Merkel dressed in their national football shirts with "1-0 to Hollande" over the top. It devoted its first four pages to his summit triumph.Liberation said it was the pressure from Hollande, Monti and Rajoy that made Merkel buckle and accept a growth plan and banking union mechanism. It applauded his negotiating prowess."The night the South made Merkel cave in," was the headline over a Liberation report on the Brussels summit.France's right-leaning daily Le Figaro called Spain and Italy the real winners. "Just like in football, it is thanks to Italy and Spain that the dynamics of the match have changed and that Angela Merkel has been forced back against the wall."Italy's leading daily, Corriere della Sera, captured the euphoric mood in Italy. A front-page cartoon "A super Mario in Brussels too" showed Monti in the triumphant clenched-fists pose of Italy striker Mario Balotelli after his second goal against Germany. The diminutive figures of an annoyed-looking Merkel and a meek-looking Hollande watch him."Italy is not just a great team, it's a great country and it may be good to remember it," the paper wrote, giving credit to Monti for making Italy a leading player in Europe again.Left-leaning daily La Repubblica noted that after four years during which Germany had "dictated both the music and the lyrics" at euro zone summits, three of the four main countries had refused to dance to Merkel's beat."Although the Chancellor retains her undisputed primacy at the heart of the Council, she was forced to listen to them."Spanish newspapers saw a victory too - particularly in the fact that inspectors from the European Union, International Monetary Fund and European Central Bank would not put Spain under the same scrutiny as countries bailed out earlier.But El Mundo noted that as Spain gets support for its troubled banks: "the Men in Black... will be atop the Pyrenees watching over everything we do."In bailed-out Portugal, Publico newspaper mocked Merkel's U-turn, saying: "Nein! Non! No! Yes!".In the northern European countries aligned with Germany in demanding tough measures for indebted countries getting help, Merkel was also identified as the loser with the softening of terms for the most indebted."The southern euro countries are taking the north hostage," wrote Dutch financial daily Het Financieele Dagblad.

NEWS,29.06.2012

European leaders' breakthrough defied expectations

Europe's leaders finally rose to the challenge of a debt crisis that has hobbled economic growth and threatened the global financial system.Markets roared their approval after leaders of the 27 European Union countries backed bold ideas to help weak countries cope with rising debt levels and frail banks.For the first time in 19 summits since the start of the crisis, the EU leaders defied low expectations Friday by announcing plans to:

—    Bail out banks, without putting any financial burden on strapped governments.

—    Ease borrowing costs on Italy and Spain, the euro region's third and fourth largest economies.

—    Seek stronger, centralized regulation to European banks.

—    Rescue floundering countries, without forcing them to make painful budget cuts if they've already made economic reforms.

—    Tie their budgets, currency and governments more tightly.

Europe's leaders trumpeted the agreement. The prime minister of Ireland  one of the five euro countries that has required emergency funds  said the plans marked a "seismic shift in European policy." British Prime Minister David Cameron said that "for the first time in some time we have actually seen steps ... to get ahead of the game."The Dow Jones industrial average recorded one of its biggest gains of the year, and stocks advanced even further in Europe  in strong and weak countries alike. The benchmark stock index in Germany rose 4.3 percent, by far its best performance this year. Germany has the healthiest economy in Europe, and a warm reaction there was a crucial sign of approval for the plan. Prices for oil and other commodities shot higher.The decisions made at the European Union summit in Brussels won't end the crisis that has gripped Europe for nearly three years. Plenty of questions remain about how the bank bailouts would work, whether there's enough money committed to rescue banks and governments and whether impoverished, indebted Greece will be forced out of the euro club.But for EU leaders who have consistently underwhelmed their exasperated publics and nervous financial markets, Friday's plans marked a breakthrough.At first it looked like the summit would produce little more than a modest plan to stimulate growth in Europe. But Italy and Spain, whose borrowing costs have soared to dangerous levels, refused to sign off on a $150 billion spending plan unless something was done to ease their financial burdens.So the leaders signaled a willingness to expand the use of Europe's two rescue funds. The money could be used to buy bonds to drive down a country's borrowing costs. Or it could be loaned directly to troubled banks, which would EU leaders said would help break "the vicious cycle" in which weak banks and weak governments threaten to drag each other down.Before the summit, European leaders insisted that bailout funds be used only to rescue governments  like Ireland, Portugal and Greece. If money was going to be used for banks, it had to first go to a government, which then funneled it to the troubled banks. But that added to the debt on a government's books because it was responsible for repaying the money.So efforts to help the banks ended up raising fears about governments. That is why Spain's borrowing costs rose dramatically after the eurozone countries agreed to lend it $125 billion to rescue its banks.The EU plans also call for a single regulator probably the European Central Bank to oversee Europe's banks. Currently, banks are regulated by their national governments such as Spain's, which have been slow to recognize loan problems and shut down the worst banks.As part of a broad "banking union" the new regulator will likely get power to close failing banks if their national regulators won't do it. The plan is also expected to include deposit insurance across Europe. Individual European countries now insure bank deposits within their borders. But bank failures could overwhelm those national funds.The bank overhaul is supposed to be completed by the end of the year.The leaders said they were committed to linking their countries closer together economically and politically. But they put off the hard work of closer integration, which is likely to require countries to give up some of their taxing and spending powers to a European budget authority.Most analysts cheered the EU plans but worried about the questions left unanswered. And they said the bailout funds are too small to handle the tasks that could be thrown at them.Europe's two bailout funds have a combined $625 billion in lending power; up to $125 billion of that is already committed to helping Spain bail out its banks. The remaining $500 billion looks small compared to $3.1 trillion in Spanish and Italian bonds outstanding.The solution hovering in the background, say some economists, is the European Central Bank. The ECB could buy any necessary amount of government bonds, backed if need be by the bank's theoretically limitless power to create new money. So far the bank has been unwilling to take this step, which could risk running afoul of its mandate to fight inflation and a ban on central bank financing governments. The ECB's next policy meeting is Thursday in Frankfurt.The summit deal leaves out crucial details of just how any bank bailouts would work. Would bank creditors have to take a loss on their investments, or would taxpayers foot the whole bill? The deal didn't specify.If the banking regulator and a rescue fund take ownership stakes in failed banks, manage those stakes in the taxpayer interest while forcing losses on shareholders and creditors, it could be positive, said Clemens Fuest, an expert in public finance at Oxford University's Said Business School.Otherwise, simply charging taxpayers could be "a huge burden on growth in Europe for a very long time," Clemens said.

German lawmakers OKs fiscal pact, euro fund

German lawmakers on Friday approved Europe's new budget-discipline pact as well as the eurozone's permanent €500 billion ($623 billion) rescue fund, hours after Chancellor Angela Merkel defended concessions she made to financially troubled European nations at a summit.A solid majority of more than two-thirds of all lawmakers of Parliament's lower house endorsed the two sets of legislations in a late night session, following urgent calls by Merkel to back the projects deemed crucial to stabilizing the 17-nation currency zone.Merkel said supporting the fiscal pact and rescue fund sent "a signal of unity and determination, domestically and abroad; a signal toward overcoming the European government debt crisis sustainably, and a signal that for us Europe means our future.""With these agreements, we are taking irreversible steps toward a sustainable stability union," she said.The plans had support from Germany's two main opposition parties. A two-thirds majority was needed for the fiscal pact because it involves an internationally binding commitment to keep Germany's deficit low.Parliament's upper house, which represents Germany's 16 states, is expected to approve both plans later in the evening, but its approval doesn't mean that the legislation will take effect immediately.Germany's Federal Constitutional Court has asked President Joachim Gauck not to sign it into law immediately after Friday's parliamentary votes so that it has time to decide on expected calls for injunctions blocking the legislation. A decision could take as much as a few weeks.Lawmakers voted 491-111 Friday with six abstentions to back the discipline pact  the so-called fiscal compact to which 25 of the European Union's 27 members have signed up.Lawmakers also voted 493-106 in favor of the rescue fund, the European Stability Mechanism, with five abstentions.The fund is meant to be operational next month, which required lawmakers to pass the legislation at the latest on Friday. Germany must pay about €22 billion in capital to underwrite the fund, and it guarantees about a third of its lending capacity.Merkel noted that, in the future, countries will have to implement the fiscal pact to be eligible for aid from the ESM. "There is a legal link between solidity and solidarity, and I consider that very important," she said.In her speech a few hours after returning from the summit in Brussels, Merkel defended concessions she had made there. She assured lawmakers that help to struggling countries and banks will still come with strings attached and insisted that some decisions were misunderstood.Merkel had been opposed, at least in the near term, to some of the measures that she and the other 16 leaders of the euro countries agreed upon Friday. They include allowing Europe's bailout fund in the future to give money directly to a country's banks, without imposing strict austerity conditions on the government.German media headlines immediately after the summit portrayed the outcome as a political defeat, but Merkel said her tough-love approach was intact.Merkel told Parliament it was a "sensible decision" to allow countries that pledge to implement reforms demanded by the EU's executive Commission to tap rescue funds without having to go through the kind of tough austerity measures demanded of Greece, Portugal and Ireland. It was a concession to Italy and Spain in particular.Merkel insisted it was only about helping countries whose financial stability is threatened by high interest rates but don't need to be taken off markets all together.She said there will always be conditions and a time frame, which will be supervised, and told lawmakers they should read the EU Commission's current economic policy recommendations for Italyand Spain  "they are tough conditions.Heading in to the Thursday-Friday summit in Brussels, Merkel had appeared thoroughly uncompromising  insisting on the importance of getting budgets in order and improving eurozone strugglers' competitiveness while brushing aside talk of shared debt liability in Europe.But in a victory for Spain and Italy, she agreed that funds set up to bail out indebted governments could be allowed to funnel money directly to stressed banks, once an "effective single supervisory mechanism" for banks is set up.Merkel said that it was a matter of "several months or perhaps a year" but that having an effective supervisor that could set and enforce conditions "changes the conditions for the question of how we can deal with banks in the eurozone."

NEWS,28.6.2012

Europe's greatest threat

Financial markets slide towards disaster, scarcely pausing to celebrate the "success" of the Greek election or the deal to recapitalise Spanish banks, the euro project is finally revealing its fatal flaw. One country poses an existential threat to Europe – and it is not Greece, Italy or Spain. Every serious proposal to resolve the euro crisis since 2009 – haircuts for bank bondholders, more realistic fiscal consolidation targets, jointly guaranteed eurobonds, a pan-European bailout fund, quantitative easing by the European Central Bank (ECB) – has been vetoed by Germany, and this pattern looks likely to be repeated next week. Nobody should be surprised that Germany has become the greatest threat to Europe. After all, this has happened twice before since 1914. To state this unmentionable fact is not to impugn Germans with original sin, but merely to note Germany's unusual geopolitical situation. Germany is too big and powerful to coexist comfortably with its European neighbours in any political structure ruled purely by national interests. Yet it isn't big and powerful enough to dominate its neighbours decisively, as the US dominates North America or China will dominate the Far East. Wise German politicians recognised this inherent instability after 1945 and abandoned the realpolitik of national interest in favour of the idealism of European unification. Instead of trying to create a "German Europe" the new national goal was to build a "European Germany". Unfortunately, this lesson seems to have been forgotten by Angela Merkel. Whatever the intellectual arguments for or against German-imposed austerity or the German-designed fiscal compact, there can be no dispute about their political import. Merkel's stated goal is now to create a "German Europe", with every nation living, working and running its government according to German rules. Merkel doubtless believes that she is helping Europe when she maternally instructs the Greeks, Italians and Spaniards to "do their homework" and so become good little Germans. But like its less benign predecessors, this effort to impose German hegemony is guaranteed to fail. Europe's leaders must therefore sart considering a previously unmentionable question, perhaps as soon as the current summit, if the euro crisis intensifies. This question is not whether Europe will agree to live under German leadership, but whether Germany will agree to live under EU leadership – or whether the other nations must form a united front against Germany to prevent the destruction of Europe, as they have repeatedly in the past. To be specific, the euro's only chance of survival now depends on a decisive move towards political and fiscal union. Angela Merkel plays lip service to such political union, even claiming that democratic accountability is her main condition for financial rescues; but what she means is accountability to German voters, German newspapers and German constitutional judges. She promises to "do whatever it takes to save the euro" but vetoes anything that might actually work, claiming deference to German public opinion or national interests. Europe must now call this bluff. At the summit, France, Italy and Spain can turn the tables on Merkel by presenting her with an ultimatum. Led by President Hollande, who has abandoned president Sarkozy's Gaullist pretensions of parity with Germany, the big three Mediterranean countries could agree on a programme that really might save the euro: a banking union, followed by jointly issued eurobonds and backed by ECB quantitative easing. If Merkel tried to block these policies, the others could politely invite her to leave the euro, since Germany's political pressures evidently made membership impossible on terms its partners could accept – essentially the proposition Merkel put last month to Greece. Without Germany, the eurozone would have much smaller internal imbalances and much more political coherence, with a much weaker currency and higher inflation, both of which would make debts easier to resolve. Merkel would probably insist on Germany's legal right to remain within the euro, ironically echoing the Greek position. At this point the other nations could play their trump card: to reduce interest rates and make their economies more competitive by weakening the euro, the debtor nations could vote for unlimited bond purchases by the ECB. The Germans on the ECB council would doubtless oppose this, but even with support from Finland, Slovakia, and perhaps Austria and Holland, Germany could command no more than seven votes out of 23. Germany would then face the very same existential choice about its relations with Europe that Merkel has inflicted on Greece and other debtor nations. Germans will almost certainly support the political concessions that might give the euro a chance of survival, including fiscal transfers and some mutualisation of debts, once they realise that their only alternative is isolation from the rest of Europe. But before they agree to a European Germany, voters may need to be reminded that trying to create a German Europe always leads to disaster. 

NEWS,27.06.2012

Europe's leaders at odds before summit

 

European leaders sound unusually divided before a high-stakes summit, with Germany's Angela Merkel saying total debt liability would not be shared in her lifetime and giving little support to Italian and Spanish pleas for immediate crisis action. Rome and Madrid have seen their borrowing costs spiral to a level which for Spain at least would not be sustainable as it battles to recapitalise banks ravaged by a burst property bubble and cut a towering government deficit. Spanish Prime Minister Mariano Rajoy said on Wednesday he would ask other European Union leaders to allow the bloc's bailout funds or the European Central Bank (ECB) to stabilise financial markets. Speaking in parliament before a meeting of European heads in Brussels on Thursday and Friday, Rajoy warned that Spain would not be able to finance itself indefinitely with 10-year bond yields near 7%. "The most urgent issue is the one of financing. We can’t keep funding ourselves for a long time at the prices we’re currently funding ourselves,” he told parliament. Even when there are profound disagreements, EU leaders have been burned by the markets enough times to generally make sure they sound united before major gatherings. But divisions have been exposed by the ousting of Nicolas Sarkozy by socialist Francois Hollande as French president and the fact that Rome and Madrid have muscled into the traditional Franco-German axis. The leaders held an unusually discordant news conference in Rome on Friday. Hollande said there must be more solidarity in Europe before countries hand over more sovereignty over their national budgets, while Merkel said she would not accept extra liabilities without overarching budget control. The pair will have a working dinner in Paris on Thursday evening, an opportunity to repair the damage. An initial attempt to smooth over differences came at a meeting of the four countries' finance ministers late on Tuesday after which nothing was said. In Rome, Italian Prime Minister Mario Monti said he would not simply rubber stamp conclusions at the EU summit and said he was ready to go on negotiating into Sunday evening if necessary to agree on measures to calm markets. With Hollande's support, Monti is pushing for the eurozone’s rescue funds to be used to help limit the spreads over German Bunds on bonds issued by countries that respect EU budget rules. Rajoy would settle for that or the ECB doing the same job by reviving its bond-buying programme. The proposal has run into stiff opposition from Germany, the largest economy in the EU and the bloc’s effective paymaster, and has been rejected by Jens Weidmann, the powerful head of the German central bank, the Bundesbank. Stock markets perked up last week on the hope that the 20th EU summit since the bloc’s debt crisis exploded into the open in Greece would come up with dramatic measures. Investors have since thought better of that view. European shares edged up on Wednesday and the euro was flat, with many investors out of the markets before the Brussels meeting. “People are waiting for the inevitable - which is that policymakers will probably fail to do what is necessary,” said Neil Mellor, currency analyst at Bank of New York Mellon.Borrowing costs Merkel stomped on the idea of mutualising debt - favoured by France, Italy and Spain - at a meeting of lawmakers from her Free Democratic coalition partners in Berlin on Tuesday, according to people who attended the closed-door session. “I don’t see total debt liability as long as I live,” she was quoted as saying, a day after branding the idea of euro bonds “economically wrong and counterproductive”. The words may have been carefully chosen and do not at face value rule out mutualising some portion of eurozone members’ debts as the end point of a drive towards fiscal union. Merkel finds herself in a dwindling minority but holds the eurozone’s purse strings and therefore nearly all the cards. German opposition SPD leader Sigmar Gabriel told the Financial Times that urgent measures were needed to lower eurozone sovereign borrowing costs, otherwise the currency bloc could “simply explode”. Italy and Spain argue that they are stretching every sinew to cut their debt mountains and need some support from their currency area peers to keep the markets at bay. Monti won the first two of four confidence votes on Tuesday called to accelerate the passage of his labour reform that has been criticised by both by labour unions and the business establishment. The final two votes, and definitive approval, are due on Wednesday. Spain which has been offered loans of up to €100bn to recapitalise its banks but is determined not to ask for a sovereign bailout - is considering raising consumer, energy and property taxes. Spanish Economy Minister Luis de Guindos said he had talked with the finance ministers of Germany, France and Italy already on Wednesday with further discussions planned. Eurozone finance ministers will also hold a conference call on the bailout of Spanish banks and this week’s request for aid from Cyprus, EU officials said. The request made Cyprus the fifth of the eurozone’s 17 states to seek aid from EU rescue funds after Greece, Ireland, Portugal and Spain. Underlining the parlous state of Spanish finances, figures showed the central government’s deficit had already reached 3.41% of annual gross domestic product through just the first five months of the year, close to its target for the whole year of 3.5%. Spain’s central bank said on Wednesday it expected recession to deepen in the second quarter of the year. The Brussels summit is expected to agree on a growth package pushed by France worth around €130bn in infrastructure project bonds, reallocated regional aid funds and European Investment Bank loans. Leaders will also discuss proposals for a banking union, but while they are likely to agree to give the ECB power to supervise big cross-border banks, Merkel is resisting any joint deposit guarantee or common bank resolution fund.

Italy to pass new labour laws ahead of EU forum

Italy’s Parliament is on Thursday set to approve a controversial labour market reform so Prime Minister Mario Monti can go to a key Brussels summit with it in hand to reassure his EU partners.The reform, which Mr Monti’s government says is key to restarting growth in the recession-hit economy, was to get final approval the day before the summit, as Italy races to prove it is doing what it takes to stave off the debt crisis. The summit starts on Thursday, June 28.Rome had called on Parliament to make sure the reform is approved in time, but Prime Minister Monti whose technocratic government depends on the support of bickering coalition parties has had to compromise on the details.Addressing Parliament on Wednesday, he said it was “important that Italy arrives at the summit with the force of a parliament-government tandem.”The project, which was unveiled in March after months of bitter disputes with trade unions, is based on the Danish “flexicurity” model, which aims to ensure both flexibility and security in the labour market.It includes incentives for employers to hire workers but also eases the procedure for letting them go in case of a downturn, and will help young people get jobs though apprenticeships, in a country hit by high youth unemployment. Workers will also all be eligible for a modernised welfare scheme from 2017.Greater labour flexibility is one of the so-called structural reforms that the European Commission, International Monetary Fund and Organisation for Economic Cooperation and Development have long advised Italy to adopt to invigorate its economy.Watered downBut Mr Monti’s original package was watered down as parties, trade unions and employer groups fought to defend their turf, leaving many economists fearing the reform is too timid to shake up the labour market.The centre-right insisted businesses be left wiggle room to give people shorter-term contracts, while the left demanded greater measures be included to protect workers.The country’s biggest union, the left-wing CGIL, says the reform risks increasing unemployment, while the Confindustria association says it does not go far enough in strengthening employers’ rights.

NEWS,26.06.2012

British economy in the 'middle of a deep crisis'

 

Britain's economic outlook has worsened markedly in the space of just six weeks due to the deepening euro zone crisis and signs that a global slowdown is taking root in the United States and emerging markets, the Bank of England said today.BoE Governor Mervyn King told legislators the world is not yet halfway through the financial crisis that began in 2008, and that Britain risked a downward spiral as businesses continue to put off investment due to the turmoil in the euro zone.His comments bolster expectations that the BoE will launch a new round of asset purchases next month under its quantitative easing programme, and suggested the central bank and British government may need to come up with further measures.Evoking the depression-ridden 1930s, King said it would be difficult to overcome the hit to confidence from the "black cloud" of uncertainty with consumer and business spending alone."We are in the middle of a deep crisis, with enormous challenges to put our own banking system right and challenges for the rest of the world that they are struggling with," King told parliament's Treasury Committee.Britain's economy slipped into its second recession since the start of the financial crisis around the turn of the year and fears of a longer slump have been rising as companies hold back investment and exports suffer from the euro zone crisis.The government and BoE announced two schemes on June 14 to get credit flowing through the economy, but finance minister George Osborne remains under pressure to increase spending to jump-start growth.Osborne announced on Tuesday that he would cancel a planned rise in fuel duty, providing some relief for hard-pressed consumers and businesses.An unexpected leap in borrowing in May, however, highlighted the constraints for the government, which has pledged to erase a budget deficit still at around 8 percent of GDP.Speaking two days before a European Union summit at which measures to spur growth will be a focus, King called on euro zone countries to finally accept that some of the huge debt pile will never be paid back."I am pessimistic (about the euro zone outlook). I am particularly concerned because over two years now we have seen the situation in the euro area get worse and the problem being pushed down the road," King said."In the last six weeks ... I am very struck by how much has changed since we produced our May Inflation Report," he added.Global worries Earlier this month, the central bank's Monetary Policy Committee voted 5-4 against buying more government bonds with newly created money to boost the economy.King was one of those favouring buying another 50 billion pounds of gilts, to take the total to 375 billion pounds."The remarks of Sir Mervyn King and other MPC members are pretty grim, and fan belief that the Bank of England is likely to pull the Quantitative Easing lever again in July," said IHS Global Insight economist Howard Archer.Policymakers Ben Broadbent and Spencer Dale who both voted against more stimulus in June and David Miles all identified the euro zone debt crisis as the main threat to Britain's economy in their annual reports to parliament.Chief economist Dale said he thought easing credit costs might be a better option to help the economy, while Broadbent also said he would take new schemes designed to do so into account when deciding how to vote next month.The new 'funding for lending' scheme - designed to lower banks' funding costs in return for more lending to companies and households by allowing them to swap illiquid assets for more liquid ones should be up and running within weeks, King said.Lasting damage? Britain has not recovered from the 2008/2009 slump, which left many Britons worse off. Now, fears are rising that a prolonged recession will do lasting damage to the economy."What has particularly concerned me in the last several months - why I have voted for more easing policy was my concern about the worsening I see in the position in Asia and other emerging markets," King said."And my colleagues in the United States are more concerned than they were at the beginning of the year about what is happening to the American economy," he added.The central bank governor remained adamant that QE cash injections could still stimulate the economy."We haven't run out of road in terms of our basic policy weapon, asset purchases, and we are prepared to use that if necessary," King said.But he agreed with the view of the Bank for International Settlements - published in its annual report on Sunday - that ultra-low interest rates pose dangers in the long run, and said monetary policy alone would not end the crisis.

 

'Mr Euro' named Greek finance minister

 

Yannis Stournaras, a well-respected liberal economist, was appointed Greece's new finance minister today after the sudden resignation of the first choice for the job at a crucial moment for the debt-laden country.The new conservative-led government scrambled to make a quick decision on the post after banker Vassilis Rapanos quit yesterday on the advice of doctors after spending four days in hospital with dizziness and abdominal pains.His sudden resignation threw the government into confusion at a time when it faces the daunting task of trying to persuade sceptical international lenders to ease the harsh terms of a bailout that has enraged the population.With Greece weeks away from running out of cash and in desperate need of a minister to lead negotiations with lenders, party officials said the three ruling coalition leaders quickly agreed on Samaras's choice of Stournaras, 55, who is nicknamed "Mr Euro" in Greece.He faces a difficult juggling act pushing for more time and money from sceptical foreign lenders while coaxing reluctan officials at home to push through unpopular reforms."Stournaras is a serious, respected person who will inspire some confidence in the markets.But he is entering a bad government, where many old-style, spendthrift politicians are occupying key positions," said political analyst John Loulis."He will have to wage a hard battle against them. He is entering the wolf's lair and he won't survive without the prime minister's solid support."The Samaras government has been in place less than a week but already looks accident prone after deputy Shipping Minister George Vernikos also resigned yesterdayHe had been attacked by the media and opposition for using offshore companies.Ministers are banned from using such companies, which are a common tactic by wealthy Greeks to avoid taxes.Stournaras is an economics professor at the University of Athens and the head of the influential IOBE think-tank. Most recently he was development minister in the caretaker government that led Greece to elections on June 17.Described by colleagues as affable, he is considered an ardent supporter of structural reforms to make the economy more competitive - ideas that are likely to win him favour with international lenders exasperated with the slow pace of reform.

NEWS,25.6.2012

Greek finance minister resigns, crisis deepens

Greece's new finance minister resigned because of ill health today, throwing the government's drive to soften the terms of an international bailout into confusion days before a European summit.Vassilis Rapanos, 64, chairman of the National Bank of Greece, was rushed to hospital on Friday, before he could be sworn in, complaining of abdominal pain, nausea and dizziness.Greek media said he had a history of ill-health.The office of Prime Minister Antonis Samaras, who himself only took office last Wednesday following a June 17 election, said Rapanos had sent a letter of resignation because of his health problems and it had been accepted.Samaras himself has only just emerged from hospital after undergoing eye surgery to repair a damaged retina.Both he and Rapanos had already said they would not be able to attend the June 28-29 European summit.It was a worryingly chaotic start for the new government, formed after the second election in a month, which faces a rocky road in responding to huge domestic opposition to a harsh international bailout in the face of steadfast European opposition to any watering down of its terms.Only hours before Rapanos's resignation, a hospital bulletin said he would be discharged tomorrow.He had undergone a gastroscopy and colonoscopy, an official at the Hygeia Hospital on condition of anonymity.The tests "showed everything is completely normal", it said.According to a source from one of the three parties in the new coalition government, Rapanos had been under heavy pressure from his family to turn down the stressful job because of his health problems.Earlier on Monday the three party leaders had announced a trans-Atlantic roadshow to try to persuade sceptical lenders to give them more time to repay the country's massive debt.Troika visit postponed The medical problems of Samaras and Rapanos had also forced a postponement of the first meeting between the new government and Greece's "troika" of international lenders, originally slated for Monday.Samaras's government, an unlikely alliance of right and left that emerged from the June 17 election, has promised angry Greeks it will soften the punishing terms of a bailout saving them from bankruptcy in exchange for deep economic pain.But euro zone paymaster Germany has strongly rejected major concessions.Berlin signalled on Monday that Europe would wait for the troika's report on Greece before taking any decisions on how to make adjustments to the bailout package to compensate for weeks of political paralysis and a deeper than expected recession.A new date for the troika visit has not been set.Samaras, 61, emerged from hospital on Monday with a bandage over one eye. He was under orders not to fly or make the long road trip to Brussels, doctors said.Speaking to Mega TV earlier, government spokesman Simos Kedikoglou had said Rapanos had told Samaras on Friday, after being offered the job, that he had a "chronic situation" that he had learned to live with and that it would not effect his ability to do the demanding and stressful job.Kedikoglou later said the government was not expected to name a replacement for Rapanos before Tuesday.The government said Samaras and the leaders of his two coalition allies - the Socialist PASOK and smaller Democratic Left would take their case for renegotiating the bailout conditions to Europe and the United States as soon as the prime minister was well enough.

Cyprus applies for EU bailout

Cyprus became today the fifth euro zone country to seek financial assistance from the EU's rescue funds, announcing it was applying for a bailout for its banking sector hit by exposure to the crisis in Greece.Tiny Cyprus needs to raise at least 1.8 billion euros - equivalent to about 10% of its domestic output - by June 30 to satisfy European regulators about the health of Cyprus Popular Bank, which saw its balance sheet hurt by bad Greek debt. It may seek more."The purpose of the required assistance is to contain the risks to the Cypriot economy, notably those arising from the negative spill over effects through its financial sector, due to its large exposure in the Greek economy," a government announcement said.With its coffers emptying rapidly and hurtling towards an immovable deadline, the island suffered a further fiscal sovereign credit rating cut to non-investment, or junk, status by Fitch at BB .With a bailout widely viewed as all but inevitable, Cyprus has for weeks been trying to juggle its options between a bailout from Europe's rescue funds, the temporary EFSF and the permanent ESM, or a bilateral loan from either Russia or China.Cypriot President Demetris Christofias was scheduled to brief political leaders this afternoon, a statement from the presidency said.If Cyprus signs up for the EU rescue programme it will join the ranks of Greece, Ireland, Portugal and Spain.Christofias, the EU's only Communist leader, has been reluctant to accept the fiscal and regulatory conditions that might be attached to a European rescue.Weekend trips by government officials to China suggested Cyprus was still holding out hope for a bilateral loan from a third country.Commerce, Industry and Tourism Minister Neoklis Sylikiotis confirmed discussions in China were focused on a loan or a Chinese investment in the troubled Cyprus Popular Bank."We have had some contacts... We have requested an answer in coming days," Sylikiotis said in comments to the state broadcaster.Cyprus is fiercely protective of a corporate tax rate that is one of the lowest in the EU and eight months before a general election shows no appetite for the stringent spending cuts that any EU funding would tie it to."I think they want to avoid it (the EFSF) at least as the sole provider simply because they are afraid of the strings attached," said political analyst Hubert Faustman.Officials say any aid via the EFSF would likely be restricted to the banking sector and not to broader budgetary requirements.Cyprus, with just 1 million people, has a disproportionately large off shore financial sector that is heavily exposed to Greece, the larger neighbour with which it has close political links.Cyprus Popular needs a capital infusion urgently to satisfy regulators after writing off the value of Greek government bonds in a sovereign debt swap earlier this year.In its report, Fitch said the recapitalisation bill for Cypriot banks could potentially reach 4 billion euros. That amount, equivalent to 23% of GDP, would also take into account rising non-performing loans from the domestic market.Fitch said it saw a heightened possibility of the Republic needing both an EFSF bailout to recapitalise its banks and a bilateral loan from Moscow to cover gross budgetary financing requirements until the end of 2013.Moscow already provided Cyprus with 2.5 billion euros in a bilateral loan last year and has an interest in maintaining Cyprus as an offshore financial centre with low tax rates for Russian businessmen, who use it as a base to reinvest in Russia.However, seeking such large sums from Moscow or Beijing is controversial in Cyprus, where EU membership is a matter of national pride. It could be embarrassing for Brussels as well, as Cyprus assumes the bloc's rotating presidency on July 1.

NEWS,24.06.2012

Greece outlines plan to ease bailout burden

 

Greece wants tax cuts, extra help for the poor and unemployed, a freeze on public sector lay-offs and more time to cut its deficit under a plan likely to run into strong opposition at a European Union summit next week.The new coalition government's programme, reflected public pressure to ease the terms of a 130 billion euro bailout saving Greece from bankruptcy but only at the cost of harsh economic suffering.If implemented in full, the new programme would undo many austerity measures the country agreed in February to clinch the bailout package, its second since 2010.Euro zone partners have offered adjustments but no radical rewrite of the bailout conditions, with paymaster Germany particularly resistant to Greek calls for leniency.Greece's programme includes a call for the recapitalisation of the country's fifth-largest lender, ATEbank - a state-owned agricultural bank that EU sources said this month was among several lenders the European Commission wanted to be wound down. The finance ministry has denied that report.The programme, agreed by leaders of the three-party coalition after a June 17 election, faces its first test at a two-day EU summit starting next Thursday and sure to be dominated by the debt crisis that started in Greece and is now threatening to engulf Italy and Spain, the euro zone's third and fourth-largest economies, respectively.Inspectors from Greece's "troika" of lenders  the EU, European Central Bank and International Monetary Fund  were due in Athens on Monday Tuesday  to review the country's progress.Euro zone officials have said the bailout package should be revised only to reflect time lost on two elections since early May and a deeper than expected recession."The general target is for there to be no further reductions in wages or pensions and no more taxes," the Greek government programme said.It called for a cut in the 23-percent value-added tax (sales tax) rate for restaurants and farmers, a freeze on lay-offs in the bloated public sector and for unemployment benefit to be paid for two years rather than one.The government will also ask for two more years, until 2016, to cut its budget deficit to 2.1% of national economic output from 9.3% in 2011, an extension that would require extra foreign funding.The lowest income tax threshold should be raised, the document said, and the minimum wage  cut by 22 percent in February  revised in line with agreements between employers and workers.The programme also calls for the accelerated payment of 6 billion euros of government debt to suppliers.The coalition brings together the conservative New Democracy, Socialist PASOK and Democratic Left in an alliance that will face constant pressure from an opposition led by the radical leftist Syriza bloc.Led by charismatic ex-communist Alexis Tsipras, Syriza surged into second place in the election on a vow to tear up the terms of the bailout.Conservative Prime Minister Antonis Samaras, a Harvard-educated economist who switched from opposing the first bailout to reluctantly supporting the second, has promised to soften the terms without jeopardising Greece's place in the euro zone."Though the troika will be in Athens on Tuesday, the crunch test will be Thursday's EU summit," the centre-left Ethnos daily wrote in an editorial on Saturday.

Greece aims to stem layoffs - policy plan

 

Greece's new coalition government will seek to stem layoffs and extend by two years the application period of a tough recovery plan imposed in return for EU-IMF loans, an official document said on Saturday.The policy document released by the conservative-led coalition government said an upcoming effort to "revise" Greece's EU-IMF bailout deal in talks with creditors includes "the extension of the fiscal adjustment by at least two years" to 2016.The aim would be to meet fiscal goals "without further cuts to salaries, pensions and public investment," it said, announcing a freeze on further civil service layoffs and a boost to unemployment benefits."The aim is to avoid layoffs of permanent staff, but to economise a serious amount through non-salary operational costs and less bureaucracy," the document said.The new government said it wanted to review minimum wage cuts and measures taken earlier this year to facilitate private-sector layoffs, arguing that collective labour agreements would "return to the level defined by European social law" and what Europeans have agreed on.It said employers and unions should be allowed to set the private sector minimum wage, which was cut by 22 percent to 586 euros ($736) in February among additional austerity measures taken to clinch a new rescue deal.Greece remains under intense international pressure to implement the terms of the EU-IMF bailout package that has kept the indebted country's economy afloat for two years.European Commission, IMF and European Central Bank inspectors return to Athens on Monday to resume discussions suspended because of Greece's two-month political deadlock brought to an end by elections last Sunday.

NEWS,23.06.2012

EU ministers focus on banking unioN

European finance ministers examined ways to strengthen their banking sectors and break the link between troubled banks and indebted countries on Friday, with concerns about Spain’s stricken banking system top of their minds. IMF managing director Christine Lagarde has urged the eurozone to channel aid directly to struggling banks rather than via governments, but Germany and others are opposed to such direct lending, which is not possible under current rules. The discussion is part of a broader debate about how the European Union can move towards a so-called banking union, including a Pan-EU deposit guarantee scheme and a fund to resolve bad banks, to try to get on top of the two-and-a-half year sovereign debt crisis. Lagarde said on Thursday that allowing the eurozone’s rescue scheme - the European Stability Mechanism (ESM) - to aid stricken lenders directly rather than using a programme of aid to a government would stop bank problems from exacerbating the difficulties of countries. Arriving at Friday’s meeting Spain’s Economy Minister Luis de Guindos said such a possibility may be open to Spain, which is set to receive up to €100bn of aid from the eurozone for its troubled banks. “I think (direct bank recapitalisation) is a possibility,” he told reporters. “It is one of the fundamental elements to break the link between bank risk and sovereign risk.” “This possibility is absolutely open to Spain if there is progress in the next few months (on the issue). The process of recapitalisation is not instantaneous,” he said. Throughout the crisis, countries in the eurozone have been left to resolve problems at their banks themselves. For those for whom the burden was too great, such as Ireland, the government received aid from the IMF and the EU to do it. But after years in crisis, the problems in banks show no sign of abating and Europe’s leaders are under pressure to form a united front to shield struggling lenders rather than leave countries to cope with such problems alone. At a summit in Brussels next week, EU leaders will examine establishing a banking union that envisages a single supervisor for big banks, a fund to wind down cross-border lenders in trouble and the deposit guarantee scheme to protect savers. "Poisonous link" Central to this is the idea is that stronger countries in the eurozone such as Germany ultimately stand behind the lenders of countries too weak to manage alone, although Berlin does not want any such step in the short term because it is opposed to bearing any liability for other countries. “We need to break the poisonous link between sovereigns and banks,” said one EU diplomat close to discussions. “It’s about solidarity. It can’t happen overnight. It is difficult stuff." A banking union is also contentious because it will likely shift power from national regulators to a higher authority, such as the European Central Bank (ECB). France and Germany want the ECB to take charge of major systemic banks, rather than leaving oversight with the European Banking Authority. One of the biggest divisions in the debate about such a union is whether it will apply only to countries in the eurozone, or to all 27 member states in the European Union. Britain has said it will not join such a scheme, which it believes should be limited to the single currency area. The European Commission, the EU's executive, wants the union to apply to all countries, because of concerns that scaling it back would undermine the bloc's borderless single market. Michel Barnier, the EU commissioner in charge of financial regulation, will attend Friday’s meeting to appeal again for all countries to join. In Luxembourg, ministers will also discuss warnings issued to countries by the European Commission to countries on improving the management of their economies to reach spending goals laid down in EU law. Spain may receive more time to reach the goal of cutting its budget deficit to 3% of economic output, although one senior diplomat said this would only be discussed next week at an EU leaders' summit in Brussels. Germany will also push for the introduction of a tax on financial transactions, a move demanded by the country’s opposition socialists in order to secure their backing in parliament to sign off on the ESM.

NEWS,22.06.2012

Extra cash needed to bailout Spanish banks

 

Independent auditors said Spanish banks may need up to 62 billion euros in extra capital, to be filled mostly by a euro zone bailout, after Spain's medium-term borrowing costs spiralled to a euro-era record on Friday.Euro zone finance ministers met in Luxembourg to discuss how to channel up to 100 billion euros in aid to Spanish lenders weighed down by bad debts from a burst property bubble. Madrid's economy minister said a formal request would be made in days for the bailout, which was agreed two weeks ago.Many in the markets see the package as a mere prelude to a full programme for the Spanish state, which Madrid vehemently denies it will need.Spain's financial plight took centre stage a week before a European Union summit tackles long-term plans for closer fiscal and banking union in a bid to strengthen the euro's foundations, after bailouts for Greece, Ireland and Portugal failed to end a 2-1/2-year old debt crisis.To pave the way, the leaders of Germany, Italy, France and Spain will meet in Rome."We are clearly seeing additional tension and acute stress applying to both banks and sovereigns in the euro area," International Monetary Fund chief Christine Lagarde, who attended the Luxembourg meeting, told reporters."With that in mind, the IMF believes that a determined and forceful move towards complete European monetary union should be reaffirmed."Two independent audits by consultants Roland Berger and Oliver Wyman found that Spanish banks would need between 51 and 62 billion euros in extra capital to weather a serious downturn in the economy and new losses on their books.The Bank of Spain said the 100 billion euros offered to Madrid two weeks ago would give a wide margin of error. Spain's three biggest banks would not need extra capital even in a stressed scenario, it said. The government said it did not expect to shut any banks and would restructure those in trouble.In Luxembourg, the finance ministers decided Spain should initially apply to the euro zone's temporary rescue fund, the European Financial Stability Facility, with the loan taken over by the permanent bailout fund the European Stability Mechanism (ESM) once it is up and running after July 9."The financial assistance will be provided by the EFSF until the ESM becomes available, and then it will be transferred to the ESM," Jean-Claude Juncker, who chairs the Eurogroup of finance ministers, told a news conference."We would expect the Spanish authorities to put forward a formal request for financial assistance by next Monday," he said.Such a solution should avert a problem which had scared investors: debt issued by the ESM must be paid back first in case of a Spanish default, relegating private creditors lower in the pecking order. Because the new bailout debt will originate from the EFSF it will be issued without that requirement.Earlier on Thursday, Madrid sold 2.2 billion euros in medium-term bonds, drawing strong demand almost entirely from domestic banks. Yields on 5-year paper rose to a 15-year high of 6.07%, a level regarded by analysts as unaffordable for any prolonged period."They raised 2.2 billion versus a 2 billion target, so they can raise the money," said Achilleas Georgolopoulos, a strategist at Lloyds in London."Then the (question is), are the yields threatening for the medium term? And yes, clearly they are much higher than the previous auction ... But still they can continue for a few months to fund at these levels."The finance ministers also signalled there may be some leeway for Greece, following the formation of a coalition of mainstream parties committed to the country's 130 billion euro EU/IMF bailout but determined to renegotiate some of its terms.Athens will ask lenders for two more years to hit fiscal targets and an extension to unemployment benefits as it seeks to soften the punishing terms of the bailout that saved the country from bankruptcy.Greece's euro zone partners, in particular paymaster Germany, have offered modifications but no radical re-write of the conditions attached to the lifeline agreed in March.Juncker said nothing would be decided until the troika of EU, IMF and European Central Bankers had returned to Athens for a look at the books, starting on Monday."We will have a look into the findings of the troika and then we will discuss in detail the different means and instruments which can be used," he said. "It doesn't make sense for the time being to give more precise indications on the content of the programme."

Fuel companies should justify pump prices - AA

 

Fuel companies need to tell the public why their margins are creeping higher though oil costs are dropping, the AA says.AA petrol watch spokesperson Mark Stockdale told  there is a lag between what fuel companies pay for petrol and what consumers pay at the pump."Over time margins are certainly increasing," he said."If the fuel companies are saying historically margins haven't been high enough, then they need to go to the public and explain why they think margins should be rising."Stockdale's comments follow BP's claim that the company gets bad press even though prices have fallen back under $2 for the first time in nearly a year.BP's External Affairs manager Jonty Mills told  yesterday that "there's a bit of scepticism out there and it's hard for us to get a good rap in the media"."However I think we've shown, we've dropped the price six times consecutively in the last month and a half. BP have led four of those," he said.One of BP's rivals, Gull, further cut prices for regular 91 Octane petrol to $1.959 today.But Stockdale said the rise in margin of three to four cents in the last couple of months is "too much too soon" and he does not understand what has happened over that period to justify it.Though petrol cuts have been coming "thick and fast"be paying too much at the pump."We're basing it on the margin as it was in March, and based on those numbers we think there could be a cut of about three cents per litre," he said.Stockdale thinks there should be another price cut within the next week.

NEWS,21.06.2012

Auditors: Spanish banks need up to $78BN

Spain's troubled banks could need as much as (EURO)62 billion ($78.76 billion) in new capital to protect themselves from economic shocks, according to independent auditors hired by the government to assess the country's struggling financial sector.The Spanish government will use the auditors' report as the basis for their application for a bailout loan from the 17 countries that use the euro.Announcing the reports' findings Thursday, Deputy Bank of Spain Governor Fernando Restoy noted that this worst-case scenario was far below the (EURO)100 billion ($127.04 billion) loan offered by eurozone finance ministers two weeks ago.Spain's banking sector is struggling under toxic loans and assets from the collapse of the country's property market in 2008. Concerns that Spain's economy is so weak that it could not afford the cost of propping up its banks has sent its borrowing costs soaring to levels not seen since it joined the European single currency in 1999. The worry is that Spain could soon find itself unable to finance its debts by itself and join Greece, Ireland and Portugal in seeking a rescue loan for not just the banks but the whole country.The stakes are huge: Spain is the eurozone's fourth-largest economy and would seriously hit the bloc's finances should it need bailing out. The country is struggling through a recession with a 24.4 percent jobless rate. On top of this, government's main customers at its debt auctions are Spanish banks  the sector now being bailed out. In a sign of how reluctant the markets are to invest in Spain, the country had to pay sharply higher interest rates to raise (EURO)2.2 billion ($2.8 billion) in a bond auction Thursday.The audits of Spain's lenders, carried out by consultancies Roland Berger and Oliver Wyman, covered 14 banking groups that account for 90 percent of the sector in Spain. The country will use the reports' findings to decide how big a bailout loan to ask for.Restoy and Deputy Economy Minister Fernando Jimenez Latorre declined to outline individual banks' needs.In the auditors' stress test for the worst-case economic scenario  a fall in gross domestic product of 6.5 percent over the period 2012-2014  most of the banks were deemed to be in a "comfortable" position, Restoy said."We're not talking about the imperative capital necessities of the banks. We're not talking about someone urgently needing such and such an amount of capital to deal with their obligations," said Restoy. "We're talking about the capital that would be needed if we were to see a situation of extreme tension which is very unlikely to come about.""We should keep in mind we are not talking about how much capital an entity needs to survive. We're talking about how much capital an entity will need to confront a situation of extreme stress," he added.Economy Minister Luis de Guindos, in Luxembourg with eurozone colleagues to discuss Spain's aid request, said a formal petition would be made within few days. Eurozone finance ministers offered Spain a bailout loan of up to (EURO)100 billion on June 9. The terms of the loan  for which Spain, rather than banks, will ultimately be responsible for  still have to be negotiated.A more thorough series of audits by four other companies is scheduled to be completed by the end of July.Oliver Wyman Inc, gave a worst-case range of (EURO)51 billion-(EURO)62 billion in new capital needs while Roland Berger Strategy Consultants GmbH gave a single figure of (EURO)51 billion.The release of the audits Thursday will probably not eliminate market nervousness about Spain because more thorough audits of the nation's banks are now being conducted and those results are not expected until September, said Mark Miller, an analyst with Capital Economics in London."At face value it looks as if there is a reasonable safety margin given that up to (EURO)100 billion is potentially available," he said. "Having said that, the extent of the economic situation in Spain could even deteriorate beyond what is being described as an adverse scenario."Some investors will likely still be nervous over whether the auditors' reports discovered most if not all of the toxic assets on the balance sheets of Spain's banks, Miller said. And their fears are compounded by concerns that Greece might still end up having to leave the single currency, further destabilizing the eurozone and especially Spain.The results of the audits are good news for Spain because both companies came up with similar numbers and the overall figures were lower than some estimates of the banking sector's recapitalization needs, said Gayle Allard, an economist with Madrid's IE Business School."I think it's a fantastic result because there was talk of needs of (EURO)70 billion to (EURO)80 billion and that the loan could have been for (EURO)100 billion," she said.Investors could still easily find something to scare them about the results, Allard said, "but I don't think there's any reason to do so."She added: "The audits have come in better than anyone has expected, there's still some uncertainty, but if both of them are coming to the conclusion of those numbers we've got to be in the ballpark."

Eurozone Crisis Causing 'Deeper And More Broad-Based' Economic Downturn

The downturn in the euro zone's private sector is becoming entrenched, business surveys showed on Thursday, as falling new orders and employment levels dent confidence.June is the fifth consecutive month activity across the 17-nation bloc has declined, dragging down heavyweights Germany and France and likely increasing calls for the European Central Bank to take action to support the economy.Markit's Eurozone Composite Purchasing Managers' Index, a combination of the services and manufacturing sectors and seen as a guide to growth, held steady at 46.0 this month, the lowest since June 2009 when the bloc was mired in a deep recession.That was better than a slide to 45.5 predicted by economists but the index has been below the 50 mark that divides growth from contraction in all but one of the last 10 months."It is a worryingly steep downturn we are seeing and it is spreading from the periphery, which has been falling at an increased rate, through to Germany. It is becoming deeper and more broad-based," said Chris Williamson, chief economist at Markit.The data pointed towards a second quarter contraction of around 0.6 percent, Markit said.Having held steady at the start of the year, the bloc's economy will contract 0.2 percent in the current quarter and narrowly escape recession by stagnating again in the next, according to economists.While the ECB is not seen cutting interest rates from their record low of 1.0 percent anytime soon, a growing and significant minority are saying the bank will be forced to act as the outlook worsens.The danger of Greece crashing out of the euro zone eased after pro-bailout parties won weekend elections, but risks are mounting that Spain, the euro zone's fourth-largest economy, will need a full-blown international rescue.The two-and-a-half year old crisis has hobbled the global economy, and world leaders meeting in Mexico piled pressure on the euro zone to move towards a fiscal and banking union to fix the crisis that now threatens to engulf Spain.With uncertainty reigning, optimism among survey participants dwindled to its lowest level since March 2009. The business expectations index for services firms slumped to 50.8 from May's 57.4, the biggest one month drop since the aftermath of the Lehman Brothers collapse in late 2008."Companies are getting increasingly rattled by the crisis that is engulfing the region, and there are clear knock-on effects for the real economy," Williamson said.COUNTING THE COSTThe PMI for the dominant service sector nudged up to 46.8 from May's 46.7, beating expectations for 46.4, but chalking up a fifth straight sub-50 reading.It was a similar picture in the manufacturing sector, which drove a large part of the bloc's recovery from the last recession, where activity declined for the 11th straight month.Its 44.8 reading was the lowest since June 2009 and missed the 44.9 forecast. The output index for the sector fell to 44.4 from 44.6, the lowest since May 2009.And things are unlikely to improve anytime soon as composite new business declined for the 11th month, with the index coming in at 45.2, just up from May's 44.6. The survey also showed that firms have been running down old orders for a year.To reduce costs, and giving an indication of their prospects, factories reduced headcount for the fifth month, with the employment sub-index falling to 46.5 from 47.1, its lowest since January 2010."It's a sign that companies are expecting things to get worse and not better," Williamson said.Earlier data from Germany, Europe's largest economy, showed its manufacturing sector contracted at its fastest pace since June 2009 while its service sector barely expanded, posting its lowest reading in seven months.In neighbouring France activity declined in both sectors, albeit it at a more moderate pace than last month.