European bank fears worry money makets

Global stock markets have fallen sharply on renewed concerns over the European banking sector.
European bank fears worry money maketsInvestors are apprehensive ahead of a deadline this week for banks to repay loans taken out a year ago at low interest rates.

As a result, leading European share indexes slumped about 3%, while US stocks fell more than 2% in morning trading.

The concerns also pushed the Pound to a new 19-month high against the euro.

The pound rose almost half a cent to 1.2389 euros, its highest level since the immediate aftermath of the financial crisis in November 2008.

Last summer, the ECB was forced to offer European banks cheap 12-month loans to help them through the financial crisis. This was a longer repayment term than the usual three to six months.

But the ECB has said it will not offer 12-month loans this time around, raising fears that European banks may again face funding difficulties.

So with heightened concerns about which banks still have bad loans on their books, there is a growing fear among investors about the health of the European banking sector.

Squatter Brown’s last bill to UK taxpayers- £13,000,000,000 eu gift

The discredited labour govt has caved in to demands that British taxpayers underwrite at least £13 billion of debt held by other European governments as EU finance ministers agreed an even bigger bail out for the flawed euro.
squatter gordon brown's eu selloutLabour, representing Britain until a new government is formed, was forced to participate in a £95 billion “stabilisation mechanism” aimed at helping European Union countries who face a debt crisis.

The decision followed a crisis meeting in Brussels to discuss the financial turmoil that has raised doubts about the future of the euro.

It exposes the British taxpayer to £9.6 – £13 billion in liabilities should Spain or Portugal go the way of Greece.

Mr Darling had no choice but to surrender because the decision was taken under a Lisbon Treaty “exceptional occurrences” clause that stripped Britain of its veto.

Britain last night succeeded in staying out of an even larger fund solely for the 13 countries using the euro.

The EU agreed a £624 billion rescue package of bilateral “special purpose vehicle” loans for the 16 euro zone states struggling to finance their debts.

As well as the loans, an extra £52 billion of new cash for a “stabilisation mechanism” will be raised by allowing the European Commission to use the EU budget as collateral on international debt markets.

Britain escaped being sucked into the wider bailout loans but was forced to underwrite the “stabilisation mechanism” which, added to an existing “facility” of £43 billion, makes British taxpayers liable for £13 billion of a new £95 billion fund.

Already indebted euro zone states will be on standby with £382 billion of loans, which will be topped up by an IMF contribution of £191 billion).

The measures were rushed through over the weekend to be in place when the markets open today. Yesterday President Barack Obama urged EU leaders to restore confidence in their economies.

European stock markets and the euro have fallen and government bond yields have jumped as investors fear that the large deficits run up by some EU countries will cripple economic growth.

Mr Darling said Britain would not provide support for the single currency, but Sweden, another influential non-euro country, called that stance into question, saying it would “not rule out” being part of the wider fund.

Separately, the European Central Bank is later expected to announce that it will buy up Spanish and Portuguese government bonds at premium rates even if they are junked by markets.

Greece rescued with new austerity plan

Greece agreed a new package of austerity measures with the European Central Bank and the International Monetary Fund at the weekend that cleared the way for the first financial rescue of a member of the 16 nation eurozone.

Finance ministers meeting in Brussels endorsed the draft deal and agreed to provide a €110 billion (£96 billion) bailout loan, of which €80 billion would come from the eurozone member states and the rest from the IMF.

The package is almost certain to trigger more social unrest, of which the mayhem in Athens on Saturday, involving bitter fighting between protesters and police, was only a foretaste.

Militant public sector unions, seething over their biggest loss of power in decades, have scheduled the next general strike for Wednesday. Backed by the Communist Party and other left-wing groups, they have vowed a campaign of civil disruption for the indefinite future.

Angela Merkel, the German Chancellor, praised Greece’s “ambitious” new budget reduction plan yesterday and said that the loan was “the only way to ensure the stability of the euro”.

Her Finance Minister Wolfgang Schäuble said that Germany, which will have to provide the largest slice of the money — €8.4 billion in the first year — hoped to have legislation ready to enable its support by Friday.

George Papandreou, the Greek Prime Minister, announcing budget cuts of €30 billion for the next three years on top of reductions already agreed, told the Greek people that they would need to make big sacrifices but that “if we do not finance this debt Greece will go bankrupt”.

Andreas Papaconstantinou, the Greek Finance Minister, said: “The choice is between collapse or salvation.” He also warned that the bailout was necessary to prevent a financial “firestorm” spreading across Europe and destroying confidence in the euro.

Greece must redeem €8.5 billion of government bonds by May 19 but fears that the country will default has driven a sell-off of its bonds, effectively shutting the country out of bond markets.

Mr Papandreou said: “We have been able to convince our partners that the problem of Greece is not solely our problem — it also concerns the functioning of the markets. It concerns the protection of the euro.” His budget cuts are designed to bring the country’s huge budget deficit — 13.6 per cent of GDP last year — back to 2.6 per cent, below the 3 per cent EU limit, by 2014, two years later than originally promised. “These sacrifices will give us breathing space and the time we need to make great changes,” Mr Papandreou said. “I want to tell Greeks that we have a big trial ahead of us.”

Despite approval from the finance ministers, eurozone leaders must also give it their blessing, expected at a summit on Friday or Saturday. Parliaments of some member nations must also give their approval. European diplomats said that they expected the emergency funding to be unlocked by the second half of next week.

Salaries and pensions in the public sector in Greece will be frozen during the three-year programme and a fund backed by the IMF and the EU is to be set up to help Greek banks. VAT will rise from 21 per cent to 23 per cent and duties on fuel, cigarettes and alcohol will rise by 10 per cent. Early retirement will be curtailed.

Mr Papaconstantinou said that Greece’s public debt would soar to nearly 150 per cent of GDP — higher than forecast earlier — but would start falling from 2014. Athens would return to commercial borrowing when “appropriate”, he said.

Greece and its international backers hope that the deal can prevent the crisis from spreading to other troubled eurozone members, such as the Irish Republic, Portugal and Spain.

All three have had their debt downgraded recently by ratings agencies and could become targets for the market unless they swiftly implement tough new cuts agreed with the EU.

Ireland’s budget deficit last year, 14.3 per cent of GDP, was worse than that of Greece. Spain’s was 11.2 per cent and Portugal’s 9.4 per cent.

In Germany there is deep resentment about rescuing Greece, which hid the true size of its debts to enter the eurozone in 2001.

Contagon spreads across the eurozone

Greek bonds rose yesterday to a 12 year high as Germany and the IMF demanded a clear plan to how the country will reduce its overall deficit.

This plan would involve severe public spending cuts, tax hikes and the sale of state owned assets and will do nothing to improve the industrial unrest between the Greek government and its work force with further riots and strikes expected.

The yield itself rose to an eye popping 13.7% and 9.7%, for two year and ten year bonds respectively and placed the euro near a three month low against Sterling.

The fear now is that despite the €45 billion package this will not prevent the deficit from spreading across other EU countries such as Portugal- who were themselves downgraded by credit rating agencies yesterday.

That sentiment was evident yesterday as Portuguese bonds rose to 5.3% from 4.28% a fortnight ago. The overall unrest has caused similar scenes to Greece with one in four rail workers striking during the Monday morning rush hour.

Back to the UK and with a fortnight to go before the General Election and the hung parliament issue will not go away.

The latest YouGov poll’s place the Tory’s in pole position with an increase in their share of the vote to 34% who claim that they will reduce the UK’s overall debt quicker than both of its rivals.

Quantitative Easing QE- are we done?

Today the markets are be focused upon the interest rate decisions from the Bank Of England and the European Central Banks. 
First up is the BoE- the markets will be waiting to see what the MPC do with QE- the UK asset purchase scheme. Will they hold firm at the current level of £200 billion? Will they expand by a further £25 billion? Or will they signal the completion of the asset purchase- or at least pause? 
There are valid arguments for all scenarios, however I feel that the most likely scenario is that the Bank will not extend now but leave the door open for future extension if deemed necessary. For sterling any signal on further extension would be negative and any closure or pause should be positive.

For the ECB the statement after the meeting will be all important and the situation in Greece, Spain and Portugal will be scrutinized. Trichet usually dances through tough questions without giving too much away so we are not likely to get any major surprises here. 

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Pre budget nerves for sterling

The Pre Budget Report will set out government plans for tackling the UK deficit and also define growth forecasts. 
A big factor will be how the government plans to reduce the deficit which is a major issue for the UK economy and the next government- expect lots of political sabre rattling as Darling attempts to set out a fiscal election strategy. 
The labour government has promised to cut the deficit in half within 4 years and the market will want to see a viable plan for this to give comfort to sterling. 
Other items could include a change in the growth forecasts, cuts in spending and increased taxes- possibly on bankers bonuses or even banking institutions…Darling says his plan will maintain credibility with investors, while protecting people most vulnerable to the recession- it needs to.

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Dubai still grabbing the headlines

The Dubai furore continues and undoubtedly will do so for some time; the market seems to have contained the news with a rally in Asian stocks and US stocks steady yesterday. 
What we do know is that if Dubai World defaults then lenders will have to take the hit, however the market feels this is unlikely. As UK banks will be the hardest hit in this eventuality, then sterling has remained soft as the USD gives up its gains. Let us see if the pound can start to play catch up today- it is certainly out of the blocks well.

There were other things happening in the world although they all took a bit of a back seat. Most important was the result of and action that followed the Monetary Policy meeting in Japan this morning. Interest rates were, as expected, left unanimously at 0.1% but the market was surprised by the announcement of a Yen 10 trillion injection of funds into the economy to attempt to stave off the ongoing deflation in the country. 

The cash would be introduced to lenders and be backed by JGBs, Corporate Bonds and Commercial Paper. The Yen dipped initially, recovered a tad and then eased again- nothing substantial but a move in the right direction as far as the Government is concerned.

The Reserve Bank of Australia, as predicted, raised their official rate by 25 basis points to 3 3/4% completing a hat-trick of interest rate rises- a first for the central bank. 
The Aussie remained very quiet with both the decision and the comments that followed widely anticipated. The Nationwide BS in the UK this morning released data that indicated house prices had risen by 0.5% in November and a slightly more sustainable 2.7% on the year. 
No real reaction from the FX markets although this data will help consolidate the Pound.

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What will the impact of the situation in Dubai be?

Well so far, nobody is really sure. Given that both Abu Dhabi and the UAE Central Bank have quickly come forward to assure markets of their support for the beleaguered Emirates State, then the financial impact should be quite minor. 
Certainly, there will be repercussions for Western lenders and there is no guarantee that Dubai’s ‘fairy godmother’ will stand behind its liabilities carte-blanche but equity markets are viewing the situation as containable.

The potential problem is any growth in concern over global Sovereign stability and the fact that CDS spreads have continued to widen suggests that even though things look calm on the surface, there is a lot of thrashing about below the surface. 

If things do begin to look a little dire, then expect the Dollar to come back into focus as risk aversion trades re-emerge.

Despite markets starting to draw their horns in for the run up to Christmas, there might be just time for one more spate of trading especially if the support for Dubai offered from the UAE Central Bank is less rather than more. 

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