NEWS,21.07.2012

Spain's economy wobbles amid bailout

Concerns about Spain's crippling financial problems flared again Friday as even news that the country had been given the final go-ahead for a bank bailout loan of up to $122.9 billion failed to take the sting out of a further round of bad economic news.Earlier Friday, finance ministers from the 17 countries that use the euro unanimously approved the terms for a bailout loan for Spain's banks, which have been struggling under the weight of toxic loans and assets from the collapse of the country's property market. Investors have been shying away from Spain for months, worried that the country could not keep control of its deficit during a recession while supporting its stricken financial sector.Spain is the 17-country eurozone's fourth-biggest economy, and many market watchers fear that if it asked for a bailout, the rest of the region could not afford to foot the bill. The country and its banks were also locked in a vicious debt spiral, where the shaky banking system has been propped up by the indebted government so that the banks could buy more government debt. The loan facility agreed to on Friday was designed to break that spiral.The bank agreement came as Spain cut its growth forecast and the heavily indebted Valencia region asked for financial help. The news sent the country's borrowing costs soaring and its stock prices plummeting. In afternoon trading, Spain's main IBEX index was down almost 6 percent, while the interest rate on the country's 10-year bond - an indicator of investor confidence in a country's ability to manage its debt - was at 7.2 percent. This is a rate that many market watchers consider too high a price for a country to pay in the long term.Treasury Minister Cristobal Montoro on Friday forecast Spain's recession will drag on into 2013.Unemployment, now at 24.4 percent, will remain about the same next year, Montoro said.Meanwhile, the economy will shrink 1.5 percent this year, a slight improvement from the 1.7 percent drop previously predicted, he added.The government this week passed painful austerity measures - tax increases and cuts to benefits, salaries and pensions - to reduce state debt and strengthen confidence in its finances.Spaniards staged huge anti-austerity protests in 80 cities and towns across the country Thursday.

After PFGBest, 'Crisis' In Commodities Trading Could Impact Everyday Consumers

Experts warn of a crisis in the commodities trade that could impact everyday consumers. First, there was a banking crisis. Now, after the collapse of Peregrine Financial Group, commodities markets may be on the brink of their own emergency, which could reach consumers at the gas pump or the grocery store.The high-profile failure of two commodities brokerage firms in less than a year led to a crisis of confidence among traders of commodity futures agreements to buy and sell basic goods like corn, wheat and oil. If this market stops functioning properly, experts warn, consumer prices could fluctuate wildly.“The futures industry had long been considered a very strong place to put your money,” said John Lothian, a registered futures adviser who runs an industry news and analysis service. The collapse of Peregrine, which does business as PFGBest, has “absolutely caused a crisis,” he said. “It’s going to take a while for the industry to restore its own confidence.”The crisis took root last October with the well-publicized collapse of commodities brokerage MF Global, which lost $1.6 billion in customer funds. That was followed, earlier this month, with the failure of Peregrine, which imploded just before the firm’s founder, Russell Wasendorf, admitted to taking more than $100 million in customer cash over two decades.The failures have caused some traders to lose faith in both of the industry’s regulatory bodies -- the Commodity Futures Trading Commission and the National Futures Association -- and the brokerage firms themselves. “I don’t know where to put my money to trade,” George Papagiannis, a lawyer and futures trader who lost money with Peregrine and MF Global, told The Huffington Post shortly after the PFG collapse. “I love to trade, but I don’t trust any broker now. So I’m not going to until I’m sure there’s good oversight."This sentiment could be bad news for regular consumers of basic commodities like oil and corn. Brokerages like Peregrine provide a platform for trading futures contracts, agreements to buy or sell a commodity like oil or corn at a set price in the future. Often farmers will trade futures to protect crop prices from unforeseeable fluctuations for example, a glut of commodities that causes prices to fall.“A collapse of a firm means that those commercial market participants who have to intelligently hedge their purchases have less and less faith in [the firms] with whom they’re investing,” said Gene Guilford, president of the Independent Connecticut Petroleum Association, a nonprofit association of gas and fuel oil dealers. “What ends up happening with a lack of faith is retailers end up hedging less of their purchases and leaving them open to the vicissitudes of the marketplace.”If farmers or oil dealers pull out of the markets, then there’s nothing to buffer commodity prices against unexpected fluctuations, meaning the everyday price of oil or corn could dip or spike wildly for average consumers, according to Guilford. Futures-trading volume in the first half of 2012 was down nearly 10 percent from the same period last year, according to data from the Futures Industry Association, the industry’s main lobbying group. In June trading volume was down more than 15 percent from June 2011. “We’re not on the cusp of a problem, we’re in a problem,” said Michael Greenberger, former director of trading and markets at the CFTC and current professor at the University of Maryland School of Law. “Nobody wants to trade.”Since the Peregrine collapse, blame also also fallen on regulators for failing to spot that fraud, despite years of audits and the collapse of MF Global only months before. On Wednesday, CFTC chair Gary Gensler told the Senate Agriculture Committee that "the system failed to protect the customers of Peregrine," only days after the CFTC rushed approval of new rules designed to protect brokerage customers. Those rules include a requirement that brokers file daily reports on the state of segregated customer accounts.But the reforms might not address the root of the problem. According to Greenberger, federal regulators simply don’t have the resources to keep up with the brokerage firms, leaving the door wide open to fraud. “The system is weak because it’s not adequately supervised by the CFTC,” he said, adding that the CFTC is being “starved” for cash. In June, congressional Republicans voted to slash the CFTC budget by about 12 percent, or $25 million. Experts warn that without proper regulatory oversight, there’s little chance that confidence will return to the commodities markets. “It would be one thing if it were just one firm, MF Global," said Lynn Turner, former chief accountant at the Securities and Exchange Commission, now managing director at consulting firm LitiNomics. “Now we've had a couple [of brokerage failures], and I can't help but feel there are others out there. But for the grace of God, this could happen again.”

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.