Europe bond auctions crucial test for euro crisis

Jan05, 2012,

Lackluster sale of German government debt offers little relief

By William L. Watts, MarketWatch

FRANKFURT (MarketWatch) — A less-than-thrilling uptake of German government debt on Wednesday put a drag on the euro, kicking off a major theme for the shared currency and other financial markets as Europe’s debt crisis drags into 2012.

Germany sold 4.1 billion euros ($5.3 billion) of 10-year government bonds. The auction, which had aimed to sell up to €5 billion euros of supply, attracted bids totaling €5.3 billion. The Bundesbank, as is standard practice, retained around €900 million of bonds on behalf of Germany’s public debt agency.

“Although today’s auction was an improvement ... it nevertheless highlighted the sense of caution that permeates the European sovereign debt markets as the region faces a massive wave of refinancing over the next few months amid continuing turmoil in its peripheral economies,” said Boris Schlossberg, director of currency research at GFT.

Bids exceeded supply 1.3 times. The yield declined from an already low 1.98% in a November auction to 1.93%.

Technically, November’s auction had been under-subscribed — an outcome that further rattled already panicked European markets as investors feared the debt crisis was beginning to take a toll on the currency’s sturdiest country.

The sale opens a heavy round of funding by European sovereigns in the first quarter, including sales by Spain, the euro-zone’s fourth-largest economy, and Italy, its third largest.

Analysts at RBC Capital Markets last month estimated a total of €220 billion to €230 billion of European government bond supply to be issued in the first quarter alone.

France, which faces worries over the standing of its triple-A rating, is set to issue government bonds on Thursday, while Spain and Italy will tap the market for the first time in 2012 next week.
Read complete article at MarketWatch

Italy seeks bigger euro fund after tough debt sale

Fri,Dec30, 2011

MILAN/ROME (Reuters) - Italian Prime Minister Mario Monti sought reinforcement for the euro zone's bailout fund and pledged new efforts to boost the economy after a disappointing bond auction on Thursday underlined the threat to the country's shaky public finances.

Investors demanded a yield of nearly 7 percent on 10-year paper at the auction of medium- and long-term bonds, down from the record highs seen last month but still unsustainable given the 450 billion euros that Italy needs to raise through debt issuance in 2012.

An unprecedented European Central Bank injection last week of nearly half a trillion euros of cheap funding for banks eased pressure at a short-term Italian debt auction on Wednesday, but longer-dated bonds still pose a challenge.

Monti put a brave face on the auction result, which analysts described as "slightly positive" or "average" at best.

"Auctions held yesterday and today went rather well, this is encouraging but the financial turbulence absolutely isn't over," Monti said during a traditional end-year press conference.

Italy, the euro zone's third largest economy, remains at the centre of the debt crisis that began in Greece two years ago and its borrowing needs could overwhelm the bloc's financial defences if it were forced to seek an international bailout.

"A lot of work remains to be done but from this point on, this work has to be done in Europe above all," Monti said.

He said the European Financial Stability Facility, the bailout fund set up by euro zone governments, needs "significantly greater" resources but refused to quantify how much more was required.

Monti promised to outline a first package of growth measures to European partners next month and said the emphasis would be on liberalising the economy, boosting competition and overhauling the jobs market, though he did not give details.

The measures will follow a 33 billion euro package of cuts and tax hikes aimed at balancing the budget by 2013 which was passed by parliament last week but which has been criticised for weighing too heavily on Italy's already sickly growth prospects.

Monti said he was aware that the austerity package had "many disadvantages" but said budget discipline was needed to restore confidence in Italy's public finances. However he added that European policy had to focus increasingly on growth.

"All mechanisms for making the application of this discipline more secure is welcome, provided it is integrated into a comprehensive European economic policy which has more resources to get the euro zone out of its current difficulties and above all promotes growth more," he said.

RECESSION

Italy's chronically weak economy over the past two decades has been one of the main factors in creating a debt burden that now amounts to around 120 percent of gross domestic product, second only to Greece in the euro zone.

Rigid labour rules - which give some workers iron-clad guarantees while forcing increasing numbers of young people to accept short term jobs with few prospects - an inefficient public sector, low productivity and choking red tape have long weighed on the economy.

Italy is widely considered to be heading for a severe recession next year and data on Thursday showed business confidence at its lowest for two years, with orders falling and the production outlook worsening.

Although he offered no firm timetable, Monti said the government would move quickly under pressure both from international partners and the bond markets.

"The timetable will be rapid. We aren't being permitted to work calmly," he said.

Underlining the pressure he faces, yields on 10-year bonds remained locked above 7 percent on the secondary market on Thursday, near the levels which forced Greece, Ireland and Portugal to seek an international bailout.

Italy sold 7 billion euros of bonds at auction in thin holiday markets, just above the mid-point of its target range, but the yield on benchmark 10 year BTPs was 6.98 percent, not far from a euro lifetime record of 7.56 percent a month ago.

"Buying 10-year Italian bonds is a leap of faith which investors are prepared to take only at very high interest rates," said Nicholas Spiro of Spiro Sovereign Strategy. "There are simply too many risks and uncertainties surrounding Italy."

Its 3-year bonds sold more easily and their yield fell more than two percentage points at auction to 5.62 percent -- far below the euro era record of 7.89 percent that Italy paid to sell the same bond at the end of November.

(sourced Reuters)

S&P’s Adelson Steps Down as Chief Credit Officer, Jacob Leaves in Shuffle

Friday, Dec09, 2011

Standard & Poor’s is replacing its chief credit officer, Mark Adelson, as the world’s largest ratings company winds down a year in which its grades of governments have faced growing scrutiny.

Adelson, 51, who oversaw an overhaul of S&P’s methodologies that was designed to address their failures during the collapse of the mortgage-bond market, will become a “senior research fellow,” the New York-based unit of McGraw-Hill Cos. said yesterday in a statement. Also, David Jacob, global head of structured finance, will depart at the end of the month.

The changes come three months after Douglas Peterson left Citigroup Inc. to become S&P’s president, following its decision to strip the U.S. of its top AAA ranking. This week, the firm warned it may downgrade Germany, France and 13 other European countries. Even as S&P’s moves roil credit markets, McGraw-Hill is planning to separate its financial businesses from its textbook publishing unit under pressure from hedge fund Jana Partners LLC.

“There are a lot of changes going on at McGraw-Hill broadly,” Peter Appert, an analyst who follows the company at Piper Jaffray & Co. in San Francisco, said in a telephone interview. Peterson has been discussing removing layers of management, he said.

Ian Thompson, who was previously responsible for the Asia- Pacific region, will replace Adelson, S&P said in the statement. Peterson, the former chief operating officer of Citibank NA, replaced Deven Sharma, who had led the unit since 2007.
Worked Together

Jacob and Adelson joined S&P in 2008 from Adelson & Jacob Consulting, where they worked together. Jacob took over a structured-finance business that was blamed by congressional investigators for contributing to the worst financial crisis since the Great Depression by assigning top grades to risky real-estate bonds.

Under Adelson, S&P revised the way it graded governments, banks and bonds backed by assets such as mortgages. The new criteria for structured finance were designed to be “tougher,” Adelson said in an undated video on S&P’s website. Any bonds carrying AAA ratings should be able to withstand stress similar to the Great Depression, Adelson wrote in a paper in 2009.

S&P downgraded the U.S. one step to AA+ on Aug. 5, saying that gridlock in Washington and the rising national debt were making it riskier to invest in government bonds. The cut was questioned by President Barack Obama, who said in a speech on Aug. 8 that the ratings company was basing its judgment on politics, not on the government’s ability to pay its debts.
Europe Warning

On Dec. 5, S&P warned that it may cut 15 euro nations as policy makers prepared to meet in Brussels to end a crisis that led to bailouts of Greece, Ireland and Portugal, and now threatens to engulf Italy.

European Central Bank governing council member Christian Noyer lambasted S&P.

“They changed their methodology and it’s now more linked to political factors and less to fundamentals,” Noyer said on Dec. 5 at a conference in Paris. “The rating agencies fueled the crisis in 2008 and we can question whether they’re not doing the same thing in the current crisis.”

Moritz Kraemer, S&P’s head of European sovereign ratings, denied that the company was trying to influence politics.
Deal Scuttled

In July, S&P withdrew grades it had assigned to a $1.5 billion offering of bonds backed by commercial mortgages from Goldman Sachs Group Inc. and Citigroup Inc., forcing the banks to scuttle the deal after it was placed with investors.

“The manner in which S&P took its action has severely eroded investor and issuer confidence in its ratings,” Morgan Stanley analysts led by Richard Parkus in New York wrote in a note on July 28.

Last month, after revising its bank criteria, S&P lowered its ratings of Goldman Sachs Group Inc., Bank of America Corp. and UBS AG.

Prior to consulting, Adelson was head of structured finance research at Nomura Securities International, according to a statement announcing his hiring.

S&P also said that it was looking to hire a new chief economist and chief risk officer. McGraw-Hill said on Dec. 7 it would eliminate 550 jobs at its education unit.

(sourced Bloomberg)

S&P cuts Italy ratings one notch, outlook negative

Tue Sep 20,2011

REUTERS - Standard and Poor's downgraded its unsolicited ratings on Italy by one notch to A/A-1 and kept its outlook on negative, a major surprise that threatens to add to concerns of contagion in the debt-stressed euro zone.

The single currency skidded over half a cent to $1.3606 after S&P said the cut reflected its view of Italy's weakening economic growth prospects.

Italy's fragile governing coalition and policy differences within parliament will likely limit the government's ability to respond decisively to the challenging domestic and external macroeconomic environment, the agency said.

"In our opinion, the measures included in and the implementation timeline of Italy's National Reform Plan will likely do little to boost Italy's economic performance, particularly against the backdrop of tightening financial conditions and the government's fiscal austerity program," said S&P.

The move from S&P came as a surprise as the market had thought Moody's was more likely to downgrade Italy first. Moody's last week said it would take another month to decide on its action.

The downgrade came as Greece struggles to meet demands from lenders for yet more austerity measures.

"It's just more of the same negative news," said Stephen Roberts, a senior economist at Nomura in Sydney.

"It only adds to the contagion risk over Greece and has encouraged the flight to safety in markets here," he added, pointing to a sharp fall in the Australian dollar on the news.

S&P 500 futures also dropped 0.7 percent and early hopes for a bounce in Asian shares on Tuesday looked to be still-born now.

European stocks had already slid on Monday, while yields on Italian and Spanish bonds rose sharply on fears of a Greek default, compounded by the failure of EU finance ministers to agree new steps to resolve Europe's debt crisis at weekend talks.

International lenders told Greece on Monday it must shrink its public sector and improve tax collection to avoid running out of money within weeks as investors spooked by political setbacks in Europe dumped risky euro zone assets.

Finance Minister Evangelos Venizelos held what Greece termed "productive and substantive" talks by telephone with senior officials of the European Union and International Monetary Fund after promising as much austerity as necessary to win a vital next instalment of aid.

Before the talks, which will resume on Tuesday evening after meetings of experts through the day, the IMF representative in Greece spelled out steps Athens must take to secure the 8 billion euro loan payment it needs to pay salaries and pensions next month.

Irish, Portuguese Downgrade to Spark Rally

Thu, Jul 7, 2011 4:31
By Kevin Crowley & Anchalee Worrachate

Europe’s best-performing sovereign debt fund manager over the last decade, Sandor Steverink, correctly predicted Portugal’s downgrade this week and says Ireland will soon follow. Then it’s time to buy, he says.

Steverink, who is co-head of a team managing 26 billion euros ($37.3 billion) at Dutch insurer Delta Lloyd NV (DL), plans to buy Irish bonds once the ratings companies cut the debt to junk as Moody’s Investors Service did with Portugal on July 5. The extra yield investors demand for holding 10-year Portuguese bonds instead of the equivalent German bund surged yesterday to 10.13 percentage points, the most since at least 1997.

“What we’ve learned from emerging markets is that you get only a full recovery after a proper restructuring,” Steverink, 40, said in a telephone interview. “We think that’s necessary for Greece and, in the end, probably for Ireland and Portugal, too. We prefer Ireland above Portugal.”

Holders of Greek debt reaped the best returns of any sovereign-debt market in the two weeks after the government approved austerity policies and secured more European Union aid to pay creditors. Steverink’s Delta Lloyd Instl Obligatie LT fund has returned 5.8 percent a year since 2001, making it Europe’s best-performing euro-denominated government bond fund with more than 500 million euros of assets over the past three, five and 10 years, according to Morningstar Inc. Competitors at Aegon NV and Natixis SA say there are less risky ways to profit from Europe’s sovereign debt crisis.
Greek Rebound

Greek bonds returned 12 percent in a month after Standard & Poor’s slashed the country’s rating three steps to BB+, the top non-investment grade, on April 27, 2010, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. Greek debt is today rated CCC, the lowest rating of any government in Europe. To read more article visit Bloomberg

Moody's cuts Portugal to junk, warns of 2nd bailout

Wed, Jul 6, 2011
By Andrei Khalip and Walter Brandimarte

LISBON/NEW YORK (Reuters) - Moody's became the first ratings agency to cut Portugal's credit standing to junk, warning the country may need a second round of rescue funds before it can return to capital markets.

The downgrade on Tuesday was not entirely unexpected and served as a reminder that Europe's debt troubles extend beyond Greece, which has dominated news headlines over its second financial bailout.

Some economists think Ireland may also need additional support, and investors worry Spain and Italy could be next in line for aid.

"It goes to show that this whole crisis isn't over just yet," said Jay Bryson, global economist for Wells Fargo Securities in Cape Hatteras, North Carolina. "Even if they cough up some more money for Greece, and that looks like it's a done deal, it's not over."

The protracted sovereign debt struggle has darkened the global economic outlook, cooling demand for Asia's exports and leaving financial markets on edge.

Mohamed El-Erian, co-chief investment officer for bond fund PIMCO, said it was unlikely that Europe's troubles would constitute a "Lehman moment" that paralyses the U.S. economy, but it was a drag on an already disappointing recovery.

The debt troubles add another wrinkle to the European Central Bank's interest rate decision on Thursday. Economists widely expect the ECB to raise its benchmark rate, which would be the second hike this year, to try to cool inflation.

But the move could raise already high borrowing costs for Portugal and other so-called "peripheral" European countries. Yields on long-term Portuguese government bonds are well above 10 percent, more than three times higher than those of Germany.

MISSING TARGETS

Moody's Investors Service slashed Portugal's credit rating by four levels, to Ba2, causing the debt-laden Iberian country to follow Greece into junk territory below investment grade. Greece is rated much lower, at Caa1.

Portugal in April became the third euro zone country to request a bailout, after Greece and Ireland.

Moody's cited heightened concerns that Portugal will not be able to fully meet deficit reduction and debt stabilization targets set out in its loan agreement with the European Union and International Monetary Fund.

Portugal is receiving funds from a three-year, 78-billion-euro EU/IMF bailout programme and does not need to issue long-term debt in the market until 2013.

But Moody's said there is an increasing probability Portugal will not be able to borrow at sustainable rates in capital markets in the second half of 2013 and for some time thereafter.

There was a "growing risk that Portugal will require a second round of official financing before it can return to the private market, and the increasing possibility that private sector creditor participation will be required as a pre-condition," Moody's said.

Of the three major ratings agencies, Standard & Poor's and Fitch Ratings both have Portugal at BBB-minus, the bottom of the investment grade range.

The first repercussions of the downgrade could come as early as Wednesday, when Portugal is due to place up to 1 billion euros in a 3-month Treasury bills auction. It may have to pay a higher premium to entice buyers.

Portugal's new centre-right government said in a statement that Moody's did not take into account strong political backing for austerity after a June 5 election, and an extraordinary tax announced last week.

"BIT EXTREME"

Unlike the previous minority Socialist government, the new ruling coalition has a comfortable majority in parliament to pass austerity measures and reforms. It did acknowledge, though, that the rating cut "shows the vulnerability of the country's economy amid a debt crisis."

It also reaffirmed commitment to deepening and speeding up austerity measures that the country vowed to implement under its bailout pact, saying a strong macroeconomic adjustment was "the only way to reverse the course and restore confidence."

The country has to slash its budget deficit to 5.9 percent of gross domestic product this year after overshooting its target last year, when the gap was 9.2 percent, and then reduce it to 3 percent by the end of 2013.

Anthony Thomas, Moody's analyst for Portugal, told Reuters "evidence that Portugal is meeting or indeed exceeding its deficit reduction targets" could be a positive that may lead the agency to change its outlook on the country's credit rating to stable from negative.

But he also said the outlook depends a great deal on whether euro zone officials will require private-sector participation when extending new financing to the region's troubled countries. Right now, such participation is planned to be only voluntary so as not to cause ratings agencies declaring it a "credit event."

Filipe Garcia, head of Informacao de Mercados Financeiros consultants in Porto, said Moody's move was "a bit extreme" and was likely to exacerbate concerns over Portugal's debt.

"The capacity to return to the markets after a while depends on a more global, structural solution by Europe rather than on what each troubled country does. I think it's too early to think of a second bailout for Portugal right now, not this year at least," he said.

Garcia said the ratings agencies were not taking into account the European Union's political determination to avoid a euro zone member's default, despite the union's strong support for Greece, which is in a far worse shape than Portugal.

"Either they don't believe in the power of the political will by the European Union to avoid default, or they are underestimating this political union," he said. (Reuters)

GLOBAL MARKETS-Euro firms as Greek drama grinds on; stocks dip

Mon Jun 13, 2011 3:19am GMT

* Shares extend a seven-week losing streak
* Euro's bounce seen short-lived after falling nearly 2% last week
* Banks warming to Greek debt rescue, EU and Berlin at odds
* China stocks lead laggards on policy tightening worries
By Saikat Chatterjee

HONG KONG, June 13 (Reuters) - The euro bounced on Monday, though its gains appeared short-lived as major European powers continue to haggle over a fresh rescue package for Greece, while Asian stocks extended a seven-week losing streak on fears the global recovery is losing steam.

Asian stocks outside Japan fell 0.6 percent to a 2-1/2 month low as weak global economic data and fresh worries about Greece weighed on investor confidence.

With the Federal Reserve's $600 billion bond purchase program set to expire by the end of June, investors have sought refuge in safe-haven assets like U.S. Treasuries even as politicians in Washington wrangle over extending its debt ceiling and the world's biggest economy lurches towards a technical default.

That kept the dollar near a one-week high against a basket of currencies and supported around 80 versus the yen , a day before a Bank of Japan meeting where it will consider expanding a loan program aimed at supporting certain industries, according to sources.

The euro edged higher after falling by nearly 2 percent last week, its worst weekly performance since mid-May, but its gains are expected to be limited by disputes among policymakers ahead of a meeting next week at which euro zone leaders are due to finalise a new rescue package for Greece.

It was up slightly at $1.4347 after dropping as far as $1.4285 on EBS in very early Asia trade and down from a one-month peak of $1.46966. Traders cited broad short-covering kicking in after players failed to chase the euro's early drop.

Ironically, the single currency's latest bout of weakness comes after ECB President Jean-Claude Trichet last week signaled a July rate hike, an indication that market players are expecting fewer rate increases after that.

BEYOND QE2

As the Fed's bond purchase plan winds down to a close with its last purchase of $50 billion of Treasuries this week, investors expect stocks, bonds, gold and the euro to weaken subsequently, according to a Reuters poll of 64 analysts and fund managers last month.

The end of "Quantitative Easing 2", or "QE2" as it is more popularly known, could reduce the flood of money that has travelled to Asia in recent months searching for higher yields and forcing the region's central banks to tighten monetary policy.

Data from fund tracker EPFR Global showed emerging market bond funds received new weekly money totaling $1.4 billion up to June 8, an eight-month high. Hard currency bond funds attracted $726 million, the highest in over three years.

Anticipating a slowdown in incremental flows, credit spreads widened slightly on Monday and Asian stocks traded on a weaker note though volume is expected to be subdued with holidays in Australia and before a slew of U.S. economic data this week.

The end of the final series of government bond purchases that marks the last phase of the U.S. plan launched in November 2010 does not mean the stimulus will come to a complete stop.

The Fed will reinvest maturing securities, mainly mortgage-related debt, which analysts predict will run at $12 billion to $16 billion per month.

Shares in Tokyo fell 0.8 percent, hurt by weak machinery data for April in a sign that reconstruction-related demand after Japan's massive March 11 earthquake has been slow to materialise.

Among the principal laggards on Monday were Chinese shares , which fell by more than 1 percent on concerns over the restructuring of local government debt and fears of further policy tightening to curb inflation.

The MSCI index of Asia Pacific shares outside Japan extended losses by 0.6 percent after falling for seven consecutive weeks.

The weakness in stocks helped bonds with yields on U.S. 10-year notes holding below 3 percent.

U.S. crude's front month futures was steady around $99 a barrel CLc1 and Brent was near $119 per barrel LCOc1.

Spot gold steadied around $1,530 per ounce after slipping almost 1 percent in the previous session while silver was held above the $36 line. (sourced Thomson Reuters)

Euro volatile on Greek aid reports

Tue May 10, 2011 5:42pm IST
By Neal Armstrong

LONDON (Reuters) - The euro was steady versus the dollar in volatile trade on Tuesday as conflicting reports emerged of a potential new aid deal for debt-laden Greece to help it meet its funding requirements in the next two years.

The euro briefly gained, hitting the day's high at $1.4379 after Dow Jones News reported that Greece could receive aid totaling 60 billion euros as soon as June, but pulled back after Greece denied the report.

However, it stayed above Monday's three-week low of $1.4254 and short-term was well supported above its 55-day moving average, now at $1.4245, but analysts said it was still vulnerable to escalating concerns about euro zone debt.

The euro was flat at $1.4361. Traders said a semi-official name was seen selling around the day's highs.

"There is a lot of uncertainty over the longer-term outlook, which is why we are seeing such volatile moves," said Lee Hardman, currency strategist at BTM-UFJ.

"There is not sufficient risk premium priced into the euro at the moment. Continued peripheral troubles, plus moderating euro zone growth could pull back European Central Bank rate hike expectations, taking away the euro's main support."

Adding to the uncertainty over the situation in Greece, a German MP questioned whether Greece had met the terms for its next aid tranche, while a source said EU and IMF inspectors have not yet concluded whether Greece is meeting its targets.

"This seems a bit early to come up with something concrete. I think we'll get more posturing before a deal can be agreed on Greece," said Gavin Friend, currency strategist at nabCapital.

On Monday, Standard and Poor's cut Greece's rating to B from BB-, saying its projections suggest that debt reductions, or haircuts, of between 50 and 70 percent of the bonds' original value could be needed to make Greece's debt burden sustainable.

Coupled with a media report last week -- later emphatically denied by European policymakers -- that Greece may be considering exiting the euro, it highlighted the dilemma of how best to extricate the country from its debt quagmire.

PROFIT TAKING

Traders said macro accounts had started to take profit on their euro short positions, with other market players also thinking selling was becoming overdone in the near term after the euro tumbled from a 17-month high of $1.4939 hit last week.

"We need a fresh trigger to go lower in the euro from here. I think we're in a $1.43/1.46 range for now," said Geoffrey Yu, currency strategist at UBS.

But Hardman at BTM-UFJ said it was "quite likely" the euro had formed a medium-term top and any move back into the high $1.40s could result in heavy selling by longer-term investors.

The euro's 55-day moving average is seen as major support as it has not traded below that measure since mid-January. But a break there could put it on course to test support around $1.4150 -- near its April 18 low of $1.4156 and a 38.2 percent retracement of the January-May rise at around $1.4145.

Recent euro weakness, initially triggered by disappointment over a lack of hints on a rate hike next month from the European Central Bank last week, accelerated as panic selling in the commodities market prompted investors to shun risk.

Because rising oil and commodities have been at the root of inflation that has pushed the ECB to tighten policy, declines in oil prices could make investors scale back their expectations of more rate hikes.

The euro was up around 0.3 percent against the yen at 115.63 yen after sliding to a 6-week low in Asian trade at 114.77 yen.

The dollar was up 0.4 percent at 80.59 yen, well above a seven-week trough of 79.57 yen hit last week. Versus a currency basket the dollar was steady at 74.713. .DXY

The Swiss franc fell to session lows against the dollar and the euro after Swiss CPI inflation rose 0.1 percent month-on-month in April, well below forecasts and denting the chance of a Swiss rate hike in June.

(Additional reporting by Jessica Mortimer; Editing by Ron Askew, sourced Reuters)

ANALYSIS - Costs of any Greek euro exit may be prohibitive

Sat May 7, 2011 2:42am IST
By Noah Barkin and Paul Taylor

BERLIN (Reuters) - The costs to a country of leaving the euro zone would be so high that many analysts think the bloc will do everything in its power to prevent an exit, even if that requires the richest members to keep bailing out weak states.

German magazine Spiegel reported on Friday that the Greek government had raised the possibility of breaking away from the 12-year-old euro area and reintroducing its own currency in talks with the European Commission and other member states in recent days.

The report was vigorously denied by the Greek finance ministry and officials from other member states. Sources did confirm that a small group of euro zone finance ministers were meeting in Luxembourg on Friday to discuss Greece and other pressing matters.

Leaving the currency union would carry huge economic, social, reputational and strategic costs for Greece or any other country. Greece would have to hive off its bank deposits from the rest of the euro zone banking system as it introduced a new currency, risking a run on its banks and huge disruption for its companies.

Banks across Europe would face losses on their Greek debt.

For the bloc as a whole, it would represent a humiliating setback because the common currency is broadly viewed as the culmination of half a century of European integration.

"To me the euro zone is a one-way street," said Gilles Moec, senior European economist at Deutsche Bank. "A breakup would have catastrophic consequences for the country that left. It would precipitate a run on the banks. I can't see how you do it in an orderly way."

Speculation about a possible euro zone breakup reached fever pitch in November of last year, but predictions that the bloc will fracture have come mainly from Anglo-Saxon sceptics.

Last summer, British economist Christopher Smallwood of consultants Capital Economics produced a 20-page paper entitled "Why the euro zone needs to break up" and U.S. economist Nouriel Roubini, nicknamed Dr. Doom, has said euro members will be forced to abandon the shared currency.

DEBT RESTRUCTURING RISK

Greece has struggled to meet the fiscal targets set out for it as part of its 110 billion euro ($160 billion) bailout from the European Union and International Monetary Fund.

Over the past month, markets have priced in the sort of default risk that was once unthinkable for a euro zone state and expectations have risen that Greece will have to restructure its 327 billion euro debt load while other countries will have to provide more aid.

Political opposition in northern Europe to giving Greece more money and rising anger within the country at the tough austerity measures the government has put in place have created a dangerous new dynamic that has convinced more experts an exit may conceivably happen, although probably not for years.

By reintroducing the drachma, the argument goes, Greece could sharply devalue its currency against the euro and keep official interest rates ultra-low, regain competitiveness, and tackle its debt problem without the political and social upheaval associated with years of austerity-fuelled recession.

"I'm not suggesting that these stories are right," said Jonathan Loynes, chief European economist at Capital Economics. "But we have said that we think it's quite likely that there will be some change to the membership of the euro area over the next four to five years and that one possible form will be the exit of a small economy like Greece.

"I don't think the idea is implausible at all."

But U.S. economist Barry Eichengreen, who authored a 2007 paper arguing that the single currency could not be undone, reaffirmed that belief last year as the Greek crisis deepened.

"Adopting the euro is effectively irreversible," he wrote in an article on the economics website Vox.

"Leaving would require lengthy preparations, which, given the anticipated devaluation, would trigger the mother of all financial crises," said Eichengreen, a professor at the University of California, Berkeley.

LEGAL NIGHTMARE

There is no legal procedure for leaving the euro zone and some economists argue that treaty changes would have to take place before an exit could happen.

"You would have to make it legal in order to leave," said Moec of Deutsche Bank. "You would probably have years of litigation on all the debt held outside the country."

Trade flows would probably be severely disrupted. Business costs would become unpredictable, inhibiting investment. Labour unrest and social strife would likely result as citizens faced mass unemployment, inflation and brutal public spending cuts.

That would far outweigh any potential boost to exports or tourism revenues from a devaluation.

"But what if the bank runs and financial crisis happen anyway?" Nobel prize-winning economist Paul Krugman asked on his blog last November.

An exit that is neither planned nor chosen but imposed by irresistible market forces would dramatically reduce the marginal cost of leaving the euro, Krugman contended.

But that economic logic may underestimate the political will that has driven European monetary union since its inception.

(Additional reporting by Emelia Sithole in London; Writing by Noah Barkin; Editing by Ruth Pitchford, sourced Reuters)

Greece denies may quit euro, European ministers meet

Sat May 7, 2011 5:58am IST
By Michele Sinner and Dina Kyriakidou

LUXEMBOURG/ATHENS (Reuters) - Top finance officials of the euro zone's biggest economies met to discuss Greece's debt crisis on Friday and Athens denied a media report that it was considering whether to leave the bloc.

Jean-Claude Juncker, head of the group of euro zone finance ministers, said the meeting in Luxembourg was attended by ministers from Germany, France, Italy and Spain. He said there was a broad discussion of Greece and other international economic issues.

Juncker denied a report in Germany's Spiegel Online magazine that the talks were held to discuss the possibility, raised by Athens, of Greece withdrawing from the 17-member euro zone, as well as the idea of restructuring Greece's 327 billion euro ($470 billion) sovereign debt.

"We have not been discussing the exit of Greece from the euro area. This is a stupid idea. It is in no way -- it is an avenue we would never take," he told reporters.

"We don't want to have the euro area exploding without reason. We were excluding the restructuring option, which is discussed heavily in certain quarters of the financial markets..."

But Juncker said a meeting of all euro zone finance ministers on May 16 would discuss whether Greece needed a further economic plan, beyond the 110 billion euro bailout which it obtained from the European Union and the International Monetary Fund in May last year. He did not elaborate.

Greek Finance Minister George Papaconstantinou attended the Luxembourg talks, his finance ministry said. It added that Greece remained committed to repairing its finances and returning to economic growth.

"The minister was invited to exchange views (on issues including) economic developments in Greece," the ministry said. "It is clear that during this meeting it was never discussed or posed as an issue whether Greece would remain in the euro zone."

The Luxembourg talks were also attended by European Central Bank President Jean-Claude Trichet and Olli Rehn, the European commissioner for economic and monetary affairs, Juncker said.

EURO FALL

Earlier in the day, the euro fell nearly 1 percent against the dollar and the cost of insuring Greek debt against default was quoted at a record high in response to the Spiegel report.

"The government has raised the possibility of leaving the euro zone and reintroducing its own currency," Spiegel said without citing its sources.

Despite its international bailout Greece, which joined the euro zone in 2001, has been unable to cut its budget deficit as fast as planned amid a deep recession. It has been raising taxes and slashing spending but is still plagued by tax evasion, corruption and the economy's lack of competitiveness.

Financial markets have been speculating for months that Athens will eventually have to restructure its debt and with the political will for more austerity starting to flag, some Greek politicians have been suggesting a "soft" restructuring which might involve lengthening maturities on the country's bonds.

An exit from the euro zone could help the economy in the long term; Greece would be able to cut interest rates and having its own, weak currency would boost exports and tourism.

But there is no legal procedure for leaving the zone, and the risks and immediate costs of the process -- Greece could face bank runs, and banks around the region could be damaged -- mean the government is likely to fight hard to avoid that option.

Although taxpayers in rich euro zone states such as Germany are becoming increasingly reluctant to fund weak euro zone states, their governments prize the currency union as one of Europe's great political achievements. The EU is currently negotiating a bailout with Portugal, the third state it is rescuing after Greece and Ireland.

A German government official told Reuters on Friday that a Greek exit from the euro zone "is not planned and was not planned", while a spokesman for the Austrian finance ministry said a breakup of the bloc would be "absolutely unthinkable".

Spiegel quoted from what it said was an internal German finance ministry paper that German Finance Minister Wolfgang Schaeuble was taking with him to Luxembourg, which warned that a Greek exit "would lead to a significant depreciation of the domestic currency versus the euro" and increase Greece's debt levels to 200 percent of gross domestic product. Its debt is officially projected to climb to 153 percent of GDP this year.

(Additional reporting by Jan Strupczewski and Luke Baker in Brussels, Andreas Rinke, Matthias Sobolewski and Noah Barkin in Berlin, Lefteris Papadimas in Athens and euro zone bureaux; Writing by Andrew Torchia; editing by Tim Pearce, sourced Reuters)

Euro zone crisis escalates on Greek debt fears

By Matthias Sobolewski and George Georgiopoulos

Mon Apr 18, 2011 8:03pm IST

BERLIN/ATHENS (Reuters) - Rising expectations that Greece will have to restructure its mountain of debt, possibly as early as the summer, sent the euro and the bonds of weak euro zone members tumbling on Monday in a dramatic escalation of the bloc's debt crisis.

German government sources told Reuters in Berlin that they did not believe Greece, which sealed a 110 billion euro ($157.7 billion) bailout from the EU and IMF last year, would make it through the summer without restructuring.

That development, combined with a new threat to Portugal's pending bailout from the success of an anti-euro party in Finnish elections, hammered market faith in the bloc's ability to avert a new wave of contagion to bigger countries like Spain.

After a brief lull in the crisis at the start of 2011, it has blown up again with full force and some analysts are now openly speculating that Greece and possibly other countries could eventually be forced to exit the bloc.

"You may see some countries deciding to leave the euro because they can't deal with the fiscal straitjacket that it imposes on them," Andrew Lynch, a fund manager at Schroders, told Reuters Insider.

A restructuring of Greek debt would be the first by a west European nation in over half a century and represents a challenge of epic proportions for EU policymakers struggling to reconcile the interests of their citizens with the costly steps needed to preserve the integrity of the 17-nation currency area.

The Greek government, saddled with a debt burden that is expected to swell to 160 percent of gross domestic product by 2013, has denied repeatedly that it plans to restructure and a government spokesman in Athens reiterated that stance on Monday, saying "we fully rule out" such a step.

"It would have catastrophic consequences," Bank of Greece Governor George Provopoulos said.

But government sources in Berlin told Reuters that this now looked unavoidable and suggested Greece should move fast, rather than wait until its funding situation gets critical next year.

"Decisive voices within the federal government expect that Greece will not make it through the summer without a restructuring," a high-ranking German coalition source told Reuters.

The euro , which has remained strong through the latest bout of turbulence, fell to its lowest level against the dollar in 11 days and the cost of insuring Greek debt against default shot higher.

Pressure on other so-called peripheral countries mounted as well, with Spanish 10-year bond yields pushing towards record highs near 5.6 percent and Portuguese yields at a new peak above 9.3 percent.

European officials have been at pains to stress that Spain can avoid the contagion that has forced Greece, Ireland and Portugal to seek rescues. Its much larger economy could strain the bloc's resources to breaking point if it did succumb.

But data on Monday showing an accelerated drop in Spanish housing prices in the first quarter and a treasury bill auction which saw yields spike higher will ring alarm bells across the currency area.

In neighbouring Portugal, representatives of the European Commission, European Central Bank and International Monetary Fund were meeting government officials to set the terms for the bloc's third rescue in a year following multi-billion euro deals for Greece and Ireland.

After an election in Finland, however, that bailout could come under threat.

The anti-euro True Finns party scored big gains in the Sunday vote and vowed immediately to push for changes to a Portuguese rescue that is expected to total 80 billion euros when it is finalised by a mid-May deadline.

It may take weeks to find out whether True Finns will become part of a new government in Helsinki and be able to deliver on that threat.

The party that won the most votes in Finland is pro-European and seems unlikely to compromise its stance even if it does end up in a coalition with True Finns.

But the result underscored the extent of public anger in northern Europe at the seemingly unrelenting series of new aid deals for stricken euro zone countries that mismanaged their economies and finances.

Any delay in approving the bailout deal for Portugal beyond May could leave the country scrambling for new sources of funding. It faces an election on June 5 and has warned it will run out of money around the same time.

"It is extremely difficult for politicians in Europe to ignore the strong signal from Finland," said Steen Jakobsen, chief economist at Saxo Bank.

"Ultimately this could mean a move away from bailouts with no burden sharing by private investors and banks," he added, saying the risks of a Greek restructuring before 2013 had increased sharply.

LEHMAN SPECTRE

Greece's debt load of 325 billion euros is nearly double the level most economists see as sustainable and far bigger than that of Argentina when it defaulted in late 2001.

In order to return the country to a sustainable path, most economists agree that it needs to wipe away roughly half the value of its outstanding debt, hitting private creditors with significant "haircuts" on their holdings.

But EU leaders have promised not to make private debt holders pay before 2013.

Doing so in the near-term, when the bloc remains vulnerable, could set off a contagion tsunami that engulfs Greek, German and French banks, raises pressure on Portugal and Ireland to restructure, and infects bigger euro zone members like Spain.

ECB Executive Board member Lorenzo Bini-Smaghi has likened the potential impact to the Lehman Brothers bankruptcy in 2008.

Winning creditor agreement for a milder form of restructuring, like a voluntary extension of debt maturities, will be difficult.

And even if it is achieved, it is unlikely to make enough of a dent in Greece's debt burden to ensure sustainability over the longer-term. Markets may view the "restructuring lite" option as merely the first step in a two-stage restructuring, with the real pain yet to come.

(Reporting and writing by Noah Barkin, editing by Mike Peacock, sourced Reuters)

EURO GOVT-Portuguese yields hit records as bailout chance grows

Thu Mar 24, 2011 6:11am EDT
* Irish margin hike, Spain bank downgrade add to periphery woes * Wider contagion limited for now; Spain, Italy hold up

By Kirsten Donovan

LONDON, March 24 (Reuters) - Portugal's government bond yields hit new highs on Thursday after parliament rejected new austerity measures and the prime minister resigned, increasing expectations that Lisbon will need a bailout sooner rather than later. Heaping more misery on the euro zone's periphery, Moody's cut the ratings of 30 Spanish Banks and clearing house LCH.Clearnet raised the margin it charges on Irish government bonds.

All this comes before a European Union summit on Thursday and Friday that had been expected to draw a line under the region's woes but now looks increasingly unlikely to make major progress.

Portuguese PM Jose Socrates quit after Parliament rejected his government's latest austerity measures, adding to uncertainty with the country already widely expected to need financial assistance.

"The wild card here is the European Central Bank. If they don't get involved then you want to be short Portuguese bonds, but if they do start buying bonds in the current thin market then you're going to get hurt very quickly if you're short," said Nomura rate strategist Sean Maloney.

Portuguese borrowing costs -- with 10-year yields now above 7.9 percent and 5-year yields at 8.5 percent -- are seen as unsustainable, but the country faces 4.8 billion euros of bond repayments in April followed by 6.95 billion euros in June, according to Reuters data.

Rabobank strategist Richard McGuire calculates that Lisbon must still raise a further 1.45 billion euros to meet the first redemptions and almost 10 billion euros to fund itself through to the end of June.

An EU source said on Thursday that Portugal was unlikely to ask for a financial bailout package during the summit although it could not be ruled out.

RBS analysts said accessing emergency funding would see Portugal's ratings cut to the triple-B level, while bond yields would likely converge to Irish levels.

"Countries at the begging bowl of the IMF/EFSF over many years cannot be assumed to remain compliant (with requirements), and so the default risk assessment will remain surprisingly high for a surprisingly long time."

The uncertainty gave German Bunds an early bid with June futures FGBLc1 at one point up as much as 44 ticks at 122.74 but emerging buyers of Spanish and Italian paper -- suggesting a wider peripheral blowout was unlikely -- calmed the safe-haven bid leaving Bund futures flat on the day around 122.30.

"People were bearish at the open on the Portugal story but the reality is that that's been touted for the last few days and the fact they need a bailout isn't new, so maybe some people look to take profit on the initial knee-jerk reaction," a trader said.

Two-year German bond yields DE2YT=TWEB were 3 basis points lower at 1.668 percent, with 10-year yields DE10YT=TWEB down half a basis point at 3.23 percent.

Irish bonds also remained under pressure ahead of an EU summit which is unlikely to renegotiate the terms of the country's international bailout.

But Spanish and Italian paper held up well on Wednesday and outperformed other peripherals on Thursday, suggesting wider contagion remains limited for now.

The Credit default swap curves show how investors are currently pricing in different scenarios for Spain and Portugal, with the Spanish curve retaining a "normal" shape but the Portuguese curve peaking around the 3-year mark.

Commerzbank strategist Marcel Bross said the crucial issue for Spain, Italy and Belgium now is whether the EU will take decisions that will keep the risks in Greece, Ireland and Portugal from spilling over.

"We feel that the spread tightening leg in large peripherals is still intact and expect the de-coupling trend of Greece, Ireland and Portugal from large peripherals to continue."

However, EU leaders also look set to disappoint investors by delaying any approval of a beefed-up euro zone rescue fund till June. (sourced :Reuters)

Tags : German Bunds, debt crisis, RBS analysts, triple-B, EU summit, Rabobank

GLOBAL MARKETS-Euro, crude ease on Portugal debt worries

Thu Mar 24, 2011 6:50am GMT

* Portugal bailout appears likely after PM resigns

* Nikkei down 0.2 percent, MSCI Asia ex-Japan up 0.9 percent

* U.S. stocks rise modestly on back of base metals gains

* Euro falls below $1.41, yen sits around 81 per dollar

* Oil eases 0.2-0.3 percent, gold steady near record (Fixes format of bullet point)

By Alex Richardson

SINGAPORE, March 24 (Reuters) - The euro fell and oil eased on Thursday after Portugal's prime minister resigned following parliament's rejection of his minority government's austerity programme, renewing worries about the scale of the euro zone's sovereign debt crisis.

Asian stocks outside Japan rose as higher commodities prices lifted materials shares, but Tokyo shares weakened as concerns over radiation leaks from an earthquake-damaged nuclear power plant continued to sap investor confidence.

European shares were expected to open little changed as uncertainty over Portugal, Japan and the Middle East gave investors little incentive to stake out fresh positions, while U.S. S&P 500 futures barely budged, pointing to a cautious start on Wall Street as well.

The resignation of Prime Minister Jose Socrates was seen as increasing the likelihood that Portugal will join Greece and Ireland in requiring a bailout from the European Union.

An official euro zone source estimated in January that if Portugal asked for international aid, it might need between 60 billion to 80 billion euros (up to $113 billion).

"Whether there will be a bailout for Portugal or not has some consequences on how things will pan out in Europe. Risks in the euro-zone seem to be increasing," said Serene Lim, a Singapore-based oil analyst at ANZ Bank.

Tokyo's Nikkei fell 0.2 percent. It remains 8 percent below its close on March 11, when a 9.0 magnitude earthquake and tsunami hit northeastern Japan, leaving around 25,600 people dead or missing and cutting power to millions of homes as well as factories, many of which are still struggling to come back online.

The estimated $300 billion in damage makes it the costliest natural disaster in history, and Japan is still grappling with the worst nuclear crisis since Chernobyl after the quake and tsunami crippled a power plant 240 km (150 miles) north of Tokyo.

"We are unlikely to see further gains in the near future, unless there's an end to the nuclear crisis in sight," said Takashi Hiroki, chief strategist at Monex Securities.

Disruptions in the global supply chain after the Japan quake continue to be felt around the world, most notably for auto makers and electronics firms. Toyota Motor said overnight it will slow some North American production because of parts shortages.

MSCI's measure of Asia Pacific shares outside Japan rose 0.9 percent, with Australia's resources-heavy index gaining 1 percent after a rally in prices of base metals such as copper the previous day.

Gains for materials shares lifted Wall Street on Wednesday, with the Dow Jones industrial average rising 0.6 percent and the broader S&P 500 gaining 0.3 percent.

DEBT CRISIS

The political upheaval in Portugal, along with looming elections elsewhere, was expected to deter European leaders from taking tough decisions to address the region's sovereign debt crisis when they meet at a summit this week.

They are unlikely to come up with a plan to strengthen the euro zone's bailout fund until June, which may also undermine the single currency.

"If the EU leaders fail to come up with measures to enhance the safety net that markets have wanted in their summit meeting, the euro could face further pressure down the road," said Sumino Kamei, senior currency analyst at Bank of Tokyo-Mitsubishi UFJ.

The euro bought around $1.4085 , having dropped as far as $1.4075 on electronic trading platform EBS in late New York trade on Wednesday.

The yen sat near 81 per dollar, a level it has hugged tightly in recent days with markets still wary of further central bank intervention to curb the Japanese currency if it strengthens past 80.50.

Leading central banks launched the first coordinated market intervention in more than a decade last week to reverse a run that had seen the yen hit a record 76.25 on expectations Japan -- a net creditor to the rest of the world -- would see a wave of funds being repatriated to pay for earthquake reconstruction.

Japanese government bonds rose, with benchmark 10-year futures up 0.19 point, while the 10-year yield eased 1.5 basis points to 1.2 percent.

Oil eased as the euro zone concerns rekindled worries about economic growth -- and hence energy demand -- in the bloc, although traders said continued political unrest in parts of the Middle East would prevent it from falling far.

U.S. crude fell 0.3 percent to $105.48 a barrel and Brent crude was off 0.2 percent at $115.35.

Spot gold traded around $1,437.90 an ounce, in sight of its record $1,444.40 set earlier in the month. ($1 = 0.707 Euros) (Editing by Kim Coghill,sourced:Reuters)

EU finance ministers discuss crisis measures

Tuesday 15 March 2011, 13:31

BRUSSELS (Reuters) - European Union officials and finance ministers met on Tuesday to discuss details of an agreement on strengthening the euro zone bailout fund and resolving a year-long debt crisis.

Following are some comments from their meeting.

GREEK FINANCE MINISTER GEORGE PAPACONSTANTINOU

ON EUROPEAN STABILITY MECHANISM (ESM):

"The issue of seniority is one that is being discussed at the moment to clarify issues, and to make sure that it does not penalise countries such as Greece which are in a programme and want to re-enter the market."

EU ECONOMIC AND MONETARY AFFAIRS COMMISSIONER OLLI REHN

ON IRISH BAILOUT LOANS AND APPROACH TO TAXATION:

"Changing the corporate tax rate was not part of the programme agreed between the EU, IMF (Berlin: MXG1.BE - news) and the Republic of Ireland (Berlin: IIK.BE - news) ."

"We are both aware that it was a subject of discussion, and one can even say controversy, in the euro zone summit, and there was some relation made between this and the reduction of the interest rate."

"I see that it is very important that the European Union moves further on tax coordination on the basis of the current treaty, and therefore my colleague (EU tax commissioner) Algirdas Semeta is tomorrow presenting a proposal of the Commission on the Common Consolidated Corporate Tax Base (CCCTB), which is a very reasonable and gradual way forward in terms of rationalising the tax systems in the euro zone and more probably in the European Union."

"Therefore I would only encourage a constructive approach by Ireland on policies related to taxation, especially on the Commission proposal on a Common Consolidated Corporate Tax Base -- the CCCTB -- which will be presented tomorrow."

ON PORTUGUESE ECONOMIC REFORMS:

"These measures are intended to ensure fiscal sustainability of Portugal and to stimulate economic growth and job-creation through structural reforms ... It is not going to be easy."

ON THE EUROPEAN STABILITY MECHANISM (ESM):

"Concrete details are still being discussed in the Eurogroup. There is going to be a case-by-case assessment of any country and a programme is required to qualify for this kind of flexibility."

GERMAN FINANCE MINISTER WOLFGANG SCHAEUBLE

ON THE EUROPEAN STABILITY MECHANISM (ESM):

"We will pay in a part in capital, a part in callable capital and use guarantees. Particulars still have to be cleared up with the rating agencies so we have AAA."

ON THE EUROPEAN FINANCIAL STABILITY FACILITY (EFSF):

"Nobody doubts anymore that the 440 billion euros (381.8 billion pounds) will be made available and they will be available as long as the EFSF exists. Largely, we will have to increase the guarantees.

"Whether we will also add other elements ... remains to be seen."

"Even a temporary exit of one country would be a failure and would be connected to unpredictable consequences for Germany."

"To say there will be problems in the Bundestag is a premature judgement. I have not heard much criticism, not even from the opposition."

ON CHANGING TERMS OF IRISH EU BAILOUT LOANS:

"Therefore we had to tell the new Irish colleague, with all due respect, maybe you need more time, but if Ireland wants to renegotiate, the problems in the banking sector also emerged due to the corporate tax rate. If the Irish want additional concessions from us, we say maybe you do want to change something about your tax rate."

IRISH FINANCE MINISTER MICHAEL NOONAN

"When you add the requirements of the banks onto sovereign debt, you can reach an unsustainable position."

AUSTRIAN FINANCE MINISTER JOSEF PROELL

ON CHANGING TERMS OF IRISH EU BAILOUT LOANS:

"If Ireland wants anything, it has to deliver something. Greece showed that.

"Ireland must say now what it wants and ... what it can give."

ON FINALISING CHANGES TO THE EUROPEAN FINANCIAL STABILITY

FACILITY (EFSF) AND EUROPEAN STABILITY MECHANISM (ESM):

"I am very, very optimistic we will close a deal with the heads of government."

SPANISH ECONOMY MINISTER ELENA SALGADO

ON SANCTIONS FOR BUDGET SINNERS:

"The application of reverse majorities will be used for all fiscal issues."

"With regard to macroeconomic imbalances, as we have always said in Spain, they have diverse causes, which are not always easy for nations to avoid, so the responsibility of states is not the same as with fiscal imbalances."

ON TARGETS FOR SURPLUSES AND DEFICITS:

"Disequilibriums in both senses are contemplated, including macroeconomic disequilibriums."

"'Penalise' is not the right word, because what we are trying to achieve is the competitiveness of the European Union, but what is certain is that it is contemplated that disequilibriums can have different signs." (Reporting by Charlie Dunmore, Annika Breidthardt, Daniel Flynn, John O'Donnell, courtsey news by Reuters)

Economic Survey fears European debt crisis could hit Indian economy

Friday February 25, 2011

New Delhi: The continuing debt turmoil in the euro zone area could have an adverse fallout on the Indian economy, hurting its capital flows as well as exports, the Economic Survey said today.

Further, it noted that rising international oil prices could aggravate the current account deficit, which is already at high levels.

Many countries like Greece and Portugal that are part of the euro zone -- a grouping of 16 nations that share a common currency euro -- are grappling with severe debt crisis that has even threatened to derail the fragile global economic recovery.

"The continuing sovereign debt risk in peripheral euro zone countries and fears that it could spread to the financial sector, together with the high fiscal and public debt in several advanced countries, pose a risk to global recovery.

"In the event of the crisis spreading, it could have fallout for the Indian economy through reversal of capital flows and slowdown in exports," said the Survey tabled in the Parliament today.

It says the fragile global recovery and robust domestic growth have led to higher current account deficit in 2009-10 and 2010-11 (April-September), "which is a matter of some concern".

"The problem may be further aggravated by the rising international oil prices," it noted.

Current account deficit happens when the total imports of goods, services and transfers is higher than total export of goods, services and transfers.

Official preliminary estimates show that current account deficit stood at USD 27.88 billion in April-September period of the current fiscal year.

During the same period last financial year, current account deficit was at USD 13.34 billion.

Global oil prices has been climbing in recent weeks due to the political unrest in the Middle East, especially in Libya, which has one of the largest crude reserves in Africa.

The Survey said that majority of the capital inflows are in the form of FIIs, which are volatile in nature. FIIs have pumped in about USD 24 billion in the April-September 2010 period.

"Periodic surge in capital flows could lead to problem of absorptive capacity in the economy, fuelling asset price bubbles, currency appreciation and stoking inflation. The challenge is in managing such surge in capital flows," it added.

On the other hand, FDI inflows stood at just USD 19 billion till November in the current fiscal.

-PTI