- Posted July 21, 2012 by
This iReport is part of an assignment:
Eye On Europe - Overnight Edition - July 20/21
Europe continues to be the boiling cauldron which may affect the US presidential election and plunge the world into another financial meltdown. European leaders continue to try and work through the troubling fiscal issues and squabble over austerity versus spending.
The Markets: Concerns about Europe's debt crisis resurfaced on Friday, weighing heavily on the region's stock markets and pushing the euro to a two-year low.
Just as eurozone finance ministers approved a bailout for Spain's banks, one of the country's regions, Valencia, said it would become the first to tap a new fund designed to provide liquidity to the country's 17 semi-autonomous regions.
The government also predicted that the recession would continue into 2013.
Spanish markets slumped, with the Ibex stock index down 5.82 percent. The yield on Spanish 10-year bonds shot up 0.25 percentage points to 7.22 percent on the news.
Britain's FTSE 100 was down 1.09 percent at 5,651.77 while Germany's DAX lost 1.9 percent to 6,630.02. France's CAC 40 shed 2.14 percent to 3,193.89.
In Milan, the main Italian stock index fell 4.4 percent after Premier Mario Monti said the debt crisis had spread to Italy and that the country would try to avoid requesting a bailout. Italy's 10-year bond yield rose by a sharp 0.25 percentage points, to 6.16 percent.
The euro fell sharply, trading 0.9 percent lower on the day to $1.2163, the lowest level in two years.
Take This Job & Shove It: A senior economist at the institution spearheading the bailouts of three eurozone countries has lambasted its lack of leadership and said its first female chief is not fit for the job.
In a letter obtained exclusively by CNN and addressed to Shakour Shaalan, dean of the executive board of the International Monetary Fund, 20-year veteran Peter Doyle says he is "ashamed to have had any association with the Fund at all."
Doyle, a former advisor to the IMF's European Department, which runs its programs for Greece, Portugal and Ireland, argues the body's failure to deliver timely and sustained warnings to the region's dithering politicians had led to widespread suffering for those living in stricken countries and the risk of worse to come.
The institution's lack of decisive action, Doyle says, has left "the second global reserve currency (the euro) on the brink."
"The fund for the past two years has been playing catch-up and reactive roles in the last ditch efforts to save it," he writes.
Less Risk In Change: Why has the European Central Bank changed its mind? As The Wall Street Journal reported this week, the ECB—once an implacable opponent to forcing losses on senior bondholders even in the weakest banks—now thinks it might be a good idea.
In his only public comments on the matter this week, ECB President Mario Draghi noted that "the question of burden sharing with senior bondholders is evolving at the European level."
He was more explicit in private at last week's meeting of euro-zone finance ministers, where he made plain in a discussion about terms of a euro-zone bailout of up to €100 billion (about $123 billion) for Spanish banks that the ECB had dropped its opposition to such burden sharing. This was a 180-degree shift from the stance of his predecessor, Jean-Claude Trichet, when Ireland needed to bail out its banks in 2010.
ECB presidents change and times change too. The ECB is now preparing for a role as the overarching supervisor of the euro zone's banks, part of a broader shift in the euro zone on how best to handle bank failures.
Spain: On Friday the Euro Zone members agreed to bail out Spain, but that hasn't quelled any fears in the country, Europe or the world.
The Bailout - Here is a glance at the aid package's main points:
_The EU will provide up to (EURO)100 billion ($122.87 billion) for Spanish banks struggling under a mountain of non-performing loans, foreclosed property and other unwanted assets resulting from the collapse of the country's real estate market. The precise figure will depend on how much each bank needs, and this will be determined after detailed portfolio assessments and stress tests due to be completed in September. Leading Spanish banks, such as Banco Santander SA, are not expected to need any help.
_Money from the bailout will be used to help the banks recapitalize and shore up their balance sheets against the prospect of further shocks in the Spanish economy. Spain is currently in its second recession in three years and saddled with a nearly 25 percent unemployment rate.
_The money will be available until the end of next year, and most recapitalization operations are expected to be completed in June of 2013.
_Funds will initially come from the EU's existing bailout mechanism, known as the EFSF _ the same one used in the bailouts of Greece, Ireland and Portugal. The goal is for the money eventually to flow from a planned permanent mechanism, the ESM, directly to the needy banks, rather than to the Spanish government as will be the case at the outset. Under both arrangements, when it comes to repaying, the EU's loans will not take precedence over debt owed to other creditors _ a crucial point for private investors worried that they might not be paid back.
_Toxic assets will be segregated from Spanish banks into an Asset Management Agency, essentially a `bad bank.' Spain's toxic assets are expected to total about (EURO)200 billion euros.
_The EU has not said what interest rate it will charge. Spain says the rate will be variable and depend on conditions in the money market. Spanish Economy Minister Luis de Guindos has said it would be under 4 percent.
_The average term of the loans will be 12.5 years, and the maximum 15.
_A first tranche of (EURO)30 billion euros will be made available by July 31. But it will be held in reserve by the bailout fund and disbursed only in the event of emergency. The size of the other tranches will be determined depending on the needs of the Spanish banks.
Shares Slump - SPAIN’S stock market yesterday suffered its worst day in more than two years despite eurozone finance ministers giving the green light for a €100 billion (£78bn) bail-out of the country’s banks.
The agreement came as investor concerns on the stability of Spain’s economy, and that the government itself might need rescuing, sent the country’s borrowing costs soaring and stock prices plummeting.
Spain’s main Ibex index closed down 5.8 per cent – its biggest one-day percentage drop since May 2010 – while the interest rate on the country’s ten-year bond moved further above the 7 per cent rate seen as unsustainable. In London, the FTSE 100 dropped 1 per cent and the pan-European DJ Eurostoxx 50 fell almost 3 per cent.
Bond Yield - Yields on Spanish 10-year government bonds soared to euro-era highs as concerns over the impact of the banking-sector bailout on public debt as well as new signs of trouble in regional finances sparked a selloff across markets.
Stocks tumbled, pushing the euro to a two-year low against the dollar.
The Main Act - The resurfacing of euro zone debt problems in the headlines was a reminder that the bloc's problems are far from over. Spain's government also cut its economic growth forecast, indicating the country would stay mired in recession well into next year.
"It looks as if Europe is taking center stage again, with Spain as the main act," said Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey.
Fueling Global Fears - Concerns that Spain won't be able to meet its funding needs helped to spark a global selloff in financial markets Friday, as the government warned the country's economic contraction would drag into next year, and one of its most indebted regional administrations asked the central government for help refinancing its debt.
The market slump underscored fears that Spain's finances are spiraling out of control and could require the country to seek a full rescue from the European Union.
People Not Happy - Spain may soon be getting aid for its troubled banking sector, but that appears to be of no comfort to the Spaniards. After Madrid passed another round of tough austerity measures on Thursday, tens of thousands took to the streets in some 80 cities around the country.
The protests, which reportedly saw some 100,000 demonstrators in Madrid alone, were called by the CCOO and UGT trade unions, which reject the government's planned belt-tightening efforts. The two unions have threatened to call a general strike in September. Dozens of injuries and a handful of arrests were reported following scuffles with police.
Greece: The European Central Bank said it would reject Greek government bonds as collateral for its normal lending operations beginning Wednesday, raising pressure on Athens to comply with demands of its international creditors for deep budget cuts.
Government bonds and other debt securities backed by Greece "will become for the time being ineligible for use as collateral" in the ECB's monetary policy operations, the bank said in a statement.
Privatization Chief Resigns - The head of Greece's privatization agency said on Friday he was forced to resign because its new government blocked his effort to sell off assets, in the latest blow to a program central to Greek hopes of regaining credibility with lenders.
The acrimonious departure of Costas Mitropoulos risks further delays to Greece's stalled privatization drive and raises uncomfortable questions for the new administration just days before IMF, EU and ECB inspectors arrive to assess compliance with reforms.
"The newly elected government did not give the agency the support it needs," Mitropoulos, privatization chief since August 2011, wrote in his resignation letter made public on Friday.
France: President Francois Hollande's plan for tens of thousands of state subsidized jobs will not fix France's stagnant economy but it may be enough to keep angry unions and jobless youths off the streets as layoffs mount after the summer.
Two months into his presidency, Hollande faces a gathering storm as unemployment climbs past 10 percent and threatens to jump even higher this autumn.
Worsening prospects for many jobless youths have fed frustration in the poor suburbs that ring major French cities, which saw riots in 2005. France's militant unions, alarmed by mounting factory closures, are bristling for a fight.
United Kingdom: The pace of decline in the UK manufacturing sector eased in June but the sector remained in recession as export orders continued to fall.
The closely-watched Purchasing Managers' Index (PMI), compiled by Markit, rose to 48.6 last month from May's three-year low of 45.9.
Despite the improvement, the sector remains below the 50-mark that indicates contraction.
The data showed overseas demand fell for the third straight month.
Economists said the weak data heightened pressure on the Bank of England (BoE) to act to boost growth when its nine-strong committee meets on Wednesday. The Bank will announce its decision on Thursday.
Olympic Tourists Warned - Tourists be warned: The Olympics crush has begun in London — and so has the scramble for cold, hard cash in the pricey British capital.
Lines are getting longer at ATMs, visitors are in sticker shock over British prices and some befuddled tourists are wondering what currency to use. Stores in the Olympic Park only accept certain credit cards and a British financial authority is even recommending that tourists make sure to bring British pounds with them.
Euro Zone Loses: Europe's highest court on Thursday handed a victory to Chinese firms seeking to defend themselves against charges of unfair trade practices in a case that has raised tensions between Brussels and Beijing.
The decision could embolden more Chinese companies to challenge claims by the European Commission, the EU executive body and lead trade enforcer, that they are selling goods in Europe at unfairly low prices, lawyers say.
From the Cornfield, we must remain vigilant less we get caught with our pants down in the event the Euro Zone crumbles.