Loans flow from Europe’s central bank, but analysts debate if they’re a cure or a crutch

Throughout his waning months in office, European Central Bank President Jean-Claude Trichet boasted that he had avoided the excesses of his counterparts at the U.S. Federal Reserve and kept the ECB’s response to his continent’s financial crisis relatively modest.
It has taken his successor, Italian central banker Mario Draghi, less than three months to upend that approach, triggering a debate about whether the ECB has quietly solved the euro-zone debt crisis or simply postponed a reckoning by shuffling hundreds of billions of dollars among banks, governments and the central bank’s own coffers.

As it did in December, the ECB this week is again offering inexpensive three-year loans to euro-region banks. Market analysts expect the central bank to provide new loans worth a trillion dollars or more, putting the ECB on a fast track to catch the Fed.
The policy has stabilized European finances in recent weeks, contributing in a roundabout way to a decline in the exorbitant interest rates that some heavily indebted governments had to pay. After the first round of ECB loans, banks spent some of the money on government bonds, and Italy and Spain as a result saw a drop in the cost they had to pay to attract bond investors.
The banks also began to retire their own bonds, reducing the competition for money on private markets. And bank lending to households and businesses ticked up.
These were all reassuring developments after an autumn consumed by fears that the region’s debt crisis would lead to a breakup of the euro zone.
“There are tentative signs of stabilization,” Draghi said at a recent news conference on ECB policy.
But some analysts and bankers are warning that the policies under Draghi could leave the European financial industry addicted to cheap ECB loans that will be difficult to replace if the region’s economy remains stagnant.
For a variety of reasons, the euro zone remains in trouble. The region is heading into recession, and governments are scrambling to restructure economies ill-suited to compete globally or support the costs of aging populations.
Greece, the region’s hardest-hit country, is in the midst of a bond restructuring that will shape its future. If all goes smoothly, the exchange of new, less-expensive bonds for older ones will greatly reduce the country’s outstanding debts and pave the way for a large package of new international loans. But the debt restructuring has left the country in technical default on its bonds, possibly triggering the insurance payments to bond holders — a development that some analysts worry could stigmatize the euro region for years.
If nothing else, the ECB loans have bought time and helped the currency union through a bulge of borrowing required by governments and financial companies in the first months of the year.
The ECB lending program was launched at a critical moment, when borrowing costs for Spain and Italy were at such a high level that they might have needed a bailout that the rest of Europe and the International Monetary Fund could ill afford. As those rates have dropped, Spain has actually accelerated its borrowing for the year to take advantage.
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Banks to grab share of ECB’s €500bn loans

The European Central Bank is set to flood banking markets with €500bn (£424bn) of cheap loans this week, taking its financial support of the European Union to €1trn in just three months.

On Wednesday, the ECB will hold its second allotment of three-year loans to private banks and other institutions, known as the longer-term refinancing operations (LTRO). Analysts are expecting banks to apply for between €200bn and €750bn in total, with most forecasts around the €500bn mark.
In December, 523 banks borrowed €489bn from the first LTRO. The loans carried an interest rate of around 1 per cent a year. The new loans will be just as cheap, but the collateral requirements have been loosened. Banks will be able to pledge corporate and consumer loans, rather than just government bonds, in return for the borrowing.
The new LTRO will be conducted through national central banks, not the ECB, so governments will take the losses should their banks be unable to repay the loans.
The first unprecedented provision of liquidity has been credited by the ECB president, Mario Draghi, with helping Europe to avoid a banking crisis this year. Some banks had found it increasingly difficult to borrow in the second half of last year. These institutions used the ECB’s cheap funds to meet their liabilities.
The liquidity injection also seems to have helped bring down the borrowing costs of some distressed eurozone states, as banks, particularly in Spain and Italy, have used the money to invest in bonds issued by their governments. Italian 10-year yields have come down from above 7 per cent to 5.5 per cent. Spanish 10-year yields have fallen from 5.7 to 5 per cent.
Sony Kapoor of the Re-Define think tank said: “The bigger the LTRO next week, the more the short-term relief for the banking sector, but at the cost of making a sustainable exit from life-support even harder.”
Jens Larsen of RBC Capital Markets, argued that the LTRO would be beneficial as long as banks restructure. “If the euro banks spend the time wisely by reducing their balance sheets and raising the necessary capital that’s not so bad,” he said. “But if they’re not doing that, it’s dangerous.”

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Draghi Slams Bankers’ Shunning ECB Three-Year Loans

February 10, 2012, 4:47 AM EST
By Aaron Kirchfeld and Liam Vaughan
(Corrects statement on internal discussions on loans to show it was made by ING CEO, not UBS, in fourth paragraph.)
Feb. 10 (Bloomberg) — European Central Bank President Mario Draghi lashed out at bankers who said tapping the ECB’s three-year-loan program carries a stigma, after executives including Deutsche Bank AG’s Josef Ackermann said they shunned the loans.
“There is no stigma whatsoever on these facilities,” Draghi said at a press conference in Frankfurt yesterday. “Some have made some sort of statements that I would call statements of virility, namely it would be undignified for a bank, a serious bank, to access these facilities. Now let me say that the very same banks that made these statements access facilities of different kinds — but still government facilities.”
The statements by Draghi, who didn’t identify any banks by name, came a week after Deutsche Bank Chief Executive Officer Ackermann said Germany’s biggest lender didn’t tap the ECB in December because it could damage its reputation with customers. The ECB awarded 489 billion euros ($650 billion) in loans to 523 banks on Dec. 21 to keep credit flowing to the economy as Europe’s debt crisis drove up banks’ borrowing costs. The ECB will offer a second batch of the loans this month.
ING Groep NV CEO Jan Hommen told reporters on a conference call yesterday that the biggest Dutch financial-services company didn’t take the loans in December, partly because of reputational risk. It’s discussing internally whether to take loans in the second program, he said.
Credit Suisse Group AG, Switzerland’s second-biggest bank, didn’t access the ECB’s lending program in December and won’t in the future, CEO Brady Dougan said yesterday in a Bloomberg Television interview.
‘Careless at Best’
Sergio Ermotti, the CEO of UBS AG, told analysts and journalists on Feb. 7 that the largest Swiss bank didn’t borrow from the ECB because its funding and financial position didn’t make it necessary.
Some analysts said avoiding the loans is self-defeating.
The last offering “has removed any stigma, making managements who do not exploit the value on offer arguably careless at best,” Credit Suisse analysts led by William Porter wrote in a Jan. 16 report to clients.
Banks in peripheral European countries such as Greece, Spain and Italy have been harder hit by the sovereign-debt crisis, driving up their funding costs in lockstep with the countries’, while lenders in Germany and Switzerland have been less affected.
‘Virtuous’ Governments
The banking and funding crisis “originates from a sovereign crisis, and so the banks that happen to be located in governments that have no fiscal crisis, that have always done the right reforms, should give more credit to their governments really for having been virtuous all along,” Draghi said.
Intesa Sanpaolo SpA, Italy’s second-biggest bank, took 12 billion euros from the ECB in December and expects to participate in the February auction, CEO Enrico Tommaso Cucchiani told reporters in Milan on Feb. 7. The loans were “essential for some banks” and “useful for other banks, including Intesa,” Cucchiani said. In Spain, Banco Bilbao Vizcaya Argentaria SA, the country’s second-biggest lender, announced it borrowed 11 billion euros from the ECB in December.
In the U.K., Royal Bank of Scotland Group Plc borrowed 5 billion pounds ($7.9 billion) in the December auction, a person familiar with the matter said, while HSBC Holdings Plc took an undisclosed sum, said a person at the bank. Spokesmen at the companies declined to comment.
Societe Generale SA, BNP Paribas SA and Credit Agricole SA, France’s three largest banks, also participated for an undisclosed amount, according to a Morgan Stanley note published Jan. 18 based on conversations with the lenders. Spokesmen at the banks declined to comment.
Lesson Learned
Ackermann told analysts on Feb. 2 that Frankfurt-based Deutsche Bank may consider participating in the next round of ECB loans if it is “very attractive from an economic point of view.” The German lender has impressed customers by not requiring direct government aid during the financial crisis, Ackermann said.
“The fact that we have never taken any money from the government has made us from a reputational point of view so attractive to so many clients in the world that we would be very reluctant to give that up,” said Ackermann, 64.
Deutsche Bank’s decision to avoid the loans follows the disclosure of its borrowings from the U.S. Federal Reserve’s emergency-loan program during the credit crunch in 2008.
“We learned our lesson during the Fed activity, where we were encouraged to borrow money from the Fed on a confidential level and later on the list was disclosed, and we heard that we had to accept help from the government,” Ackermann said. “We just don’t want to do that, and that’s why we have not participated.”
–Editor: Frank Connelly, James Hertling
To contact the reporters on this story: Aaron Kirchfeld in Frankfurt at akirchfeld@bloomberg.net; To contact the reporters on this story: Liam Vaughan in London at lvaughan6@bloomberg.net
To contact the editors responsible for this story: Frank Connelly at fconnelly@bloomberg.net; Edward Evans at eevans3@bloomberg.net

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Spain reforms banks to revive economy

Click photo to enlarge
Spain’s Economy Minister Luis de Guindos pauses during a news conference at the Moncloa Palace in Madrid Friday after a government cabinet meeting.

MADRID — Spain’s new conservative government on Friday imposed sweeping new rules it hopes will flush out bad property loans and foreclosed property from the financial system, restore confidence in banks and set the ailing economy back on track toward recovery.
The regulations approved by the Cabinet require banks to set aside an estimated (euro) 50 billion $65 billion (50 billion euro) more in provisions to cover toxic real estate assets by the end of the year.
Those unable to do so can present merger plans by the end of May and get government assistance from an existing bailout fund that will be strengthened with an addition 6 billion euro.
To avoid being forced to raise so much money for the real estate provisions, banks will face enormous pressure to sell assets like land and foreclosed or unsold homes at lower market prices.
The aim is to keep them from hoarding the loans and property on their balance sheets, a practice which has already sapped strength from the banking system and the country’s finances overall for years.
“With this set of measures, the fundamental idea is to boost confidence in our economy, strengthen the banking sector and its credibility in the national and international realm,” Deputy Prime Minister Soraya Saenz de Santamaria told reporters after the Cabinet meeting.
Spain rode an unprecedented building boom from the 1990s until the financial crisis hit in 2008, but the real estate bubble that burst left it with an
unemployment rate of 22.8 percent — the highest among the 17 nations using the euro — and increasingly tight credit for business and individuals.
Bailed-out Portugal is suffering from an even deeper credit crisis, and its leader appealed Friday for Portuguese banks to be given more leeway to meet capital requirements because the credit crunch is driving viable companies out of business
The country’s bailout terms require Portugal’s banks to improve their reserve cushion of high-quality capital to help them weather Europe’s prolonged sovereign debt crisis.
That debt-reduction process, called deleveraging, has compelled them to reduce the number of loans they grant.
If the deleveraging process is too intense, it can be counterproductive in the medium term. That’s the fine-tuning we’re looking for,” Prime Minister Pedro Passos Coelho told weekly newspaper Sol in comments published Friday.
Spain’s development ministry now estimates there are 687,000 unsold new homes on the national market, but other studies put the number as high as 1.6 million in the nation of 47 million. There is no government figure for used homes for sale, but estimates range into the millions.
The move to clean up the banking sector and force property sales “is a good plan but it should have been done before because credit has been frozen here for such a long time,” said Carles Vergara, a Financial Management professor at Madrid’s IESE business school.
While home prices have declined more than 20 percent over the last several years to levels not seen since 2005, Spanish banks still hold about (euro) 175 billion in real estate holdings that the Bank of Spain classifies as “problematic.”
The government plan should spur banks to reduce prices by double digits and send down prices of homes not held by banks as well, said Fernando Encinar, head of research at the popular Idealisto.com real estate web site.
“Prices will go down more, and at a faster rate,” he said.
The book value of property on Spanish banks’ balance sheets is widely seen as inflated, and that has spooked foreign investors, making it hard for the banks to tap capital markets for money to lend.
Some economists warned that the bank reforms won’t work overnight miracles in restructuring the banking sector or getting credit flowing again to the eurozone’s fourth largest economy, which is expected to slip into recession this quarter.
The government, elected in November, is working desperately to chip away at a bloated deficit and keep Spain from having to request a bailout like those taken by Greece, Ireland and Portugal.
Its first big step was a (euro) 15 billion ($20 billion) deficit reduction package of spending cuts and tax hikes in January.
Coming up next week is a controversial package of reforms to shake up a labor market seen as one of Europe’s most rigid and encourage business to hire. Prime Minister Mariano Rajoy was heard saying at an EU summit on Monday that the reform will “cost me a general strike.”
Under the current system, people who are laid off or fired must be paid between 20 to 33 days of salary per year worked, and companies can’t negotiate directly with their unionized workers because they must adopt wage deals set for entire sectors.
Unions are expected to rally against the changes, and investors are wary about the possibility of social unrest if union members are joined in protests by droves of discontented Spaniards — including young adults under 25 hit by a jobless rate of nearly 50 percent.
But Antonio Barroso, an London-based analysts at the Eurasia Group consulting firm, said Rajoy’s government will almost certainly follow through with the labor reform.
“Unless the protests get out of control and get really nasty I don’t think the government will backtrack,” he said.
The bank reforms require institutions to increase provisions for troubled assets from 30 percent to 80 percent of book value, creating the incentive for them to sell them off.
Larger Spain banks should be able to set aside money to meet the new provisions, but experts say the rules will set off another round of mergers among ‘cajas,’ or savings bank chains more heavily exposed to real estate. The number of cajas dropped from 45 to 15 in a previous bout of mergers.
Spain could end up with as few as three to five cajas, said Oscar Moreno of Madrid brokerage Renta 4. Bank layoffs and branch closings are inevitable, added Rafael Pampillon, an economist at Madrid’s IE Business School.
“Clearly, we are going to downsize,” Pampillon said.
————
Ciaran Giles in Madrid contributed to this report.
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PRESS DIGEST – Financial Times – Feb 3

Financial Times
GLENCORE AND XSTRATA CLOSE TO MERGER DEAL
Glencore and Xstrata (Dusseldorf: XTR.DU – news) have launched merger talks to create a $88 billion commodities trading and mining giant with the financial muscle to sweep up some of its biggest rivals. http://www.ft.com/cms/s/0/a672e172-4d6c-11e1-b96c-00144feabdc0.html#axzz1ksWapJt6
BT SET TO LAUNCH ‘ULTRA-FAST’ INTERNET
“Ultra-fast” broadband using direct fibre-optic connections will become available to most British homes and businesses next year, after a significant technological breakthrough by BT , the UK telecoms group. http://www.ft.com/cms/s/0/f7cad70c-4da6-11e1-b96c-00144feabdc0.html#axzz1ksWapJt6
SNB STANDS FIRM ON SWISS FRANC CAP
The independence of the Swiss National Bank risks being compromised due to political pressure following the departure of Philipp Hildebrand as chairman, the central bank’s acting chairman has warned. http://www.ft.com/cms/s/0/4109d3c8-4dbb-11e1-b96c-00144feabdc0.html#axzz1ksWapJt6
DEUTSCHE BANK CONCERNED BY ECB LOANS
Deutsche Bank (Xetra: 514000 – news) has risked a clash with the European Central Bank by indicating it sees a stigma attached to the long-term help offered to banks to try to ease the euro zone’s funding crisis. http://www.ft.com/cms/s/0/ad4e2782-4cda-11e1-8b08-00144feabdc0.html#axzz1ksWapJt6
SPANISH BANKS TOLD TO FIND BILLIONS
Spanish banks must find 50 billion euros ($65.86 billion)from profits and capital this year to finance a clean-up of their balance sheets or agree to merge with another bank by May to gain an extra year’s grace, according to Spain’s economy minister Luis de Guindos. http://www.ft.com/cms/s/0/34a3a576-4dc7-11e1-a66e-00144feabdc0.html#axzz1ksWapJt6
RECESSION PREDICTED TO RETURN TO UK
The British economy will suffer a modest contraction this year, according to an influential academic institute that is the first to forecast a return to outright recession for the UK. http://www.ft.com/cms/s/0/a891b292-4dc3-11e1-b96c-00144feabdc0.html#axzz1ksWapJt6
CHINA’S STATE GRID TO TAKE 25 PERCENT IN REN
State Grid Corporation of China is to acquire 25 percent of Portugal’s national power grid in the second large-scale Portuguese acquisition by a Chinese energy group in six weeks. http://www.ft.com/cms/s/0/41a0c572-4dba-11e1-b96c-00144feabdc0.html#axzz1ksWapJt6
CHINA CONSIDERING DEEPER INVOLVEMENT IN EFSF
China is considering how to get “more deeply involved” in resolving Europe (Chicago Options: ^REURUSD – news) ‘s debt crisis by co-operating more closely with European rescue funds, Chinese premier Wen Jiabao said on Thursday. http://www.ft.com/cms/s/0/7b5870fa-4d63-11e1-b96c-00144feabdc0.html#axzz1ksWapJt6
($1 = 0.6321 British pounds) (Reporting by Stephen Mangan)
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Spain tries again to clean up troubled banks

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MADRID (Reuters) – Spain’s government will force its banks to recognize some 50 billion euros (41.3 billion pounds) in losses on bad loans to builders in a fresh financial sector reform on Friday, but doubts will still linger over the worthless property on the banks’ books.
The aim is to trigger a fresh wave of mergers to create stronger new banks four years after a property boom went bust and restore confidence to Spain, which has yet to shake off the euro zone debt crisis.
The new centre-right government has pledged to straighten out the banks once and for all, but officials are worried the reform will put great strain on Bankia, Spain’s fourth-biggest bank by market value, which is particularly exposed to real estate.
The reform will give newly merged banks up to two years to write down toxic assets by setting aside provisions on their books, other banks will get one year, said several sources close to the negotiations on the new rules.
The government will also lend funds to banks that struggle to meet the steep new provisions, through 5-year preferential shares bearing an 8 percent coupon in exchange for curbs on bank executives’ pay and bonuses, the sources said.
Spanish banks underwent a round of mergers and recapitalization under the former Socialist government. At that time banks boosted provisions against problem loans and property losses to about 30 percent. That will rise to 50 percent or higher with another 50 billion euros in coverage.
With the deeper reform the new government hopes to revive international interbank lending, mostly closed to Spain’s banks since the first Greek bailout in 2010, so that they can restart lending at home.
Bank lending continues to be stagnant as Spain heads into a second recession in four years and unemployment soars to 23 percent. The bank reform, as well as labour market reform and austerity measures are all part of Prime Minister Mariano Rajoy’s efforts to prove to investors that Spain is solvent.
But the banks’ potential losses are so deep — total exposure is some 176 billion euros or 18 percent of Spain’s economic output — markets may still be wary.
“We’ve got to be aware that investors could still ask for more provisioning after this. You can’t say categorically that doubling provisions means the uncertainty is over,” said a source in the financial sector.
BOOKING LOSSES
The new measures to be decreed by the cabinet on Friday will break down what losses banks must recognize on assets linked to real estate — foreclosed property, unrecoverable loans and substandard loans.
“What is key is what assets are priced and how they are priced,” said Carmen Munoz, senior director at Fitch Ratings.
The system will need an additional 64 billion euros if foreclosed property assets are marked down by 65 percent, bad loans with housebuilders at 80 percent and substandard loans at 50 percent, says Bank of America Merrill Lynch.
Total potential additional capital needed is equivalent to 79 percent of the system’s two-year pre-provision profit, the bank says. However, this rises to 248 percent if profits from Spain’s two biggest banks Santander and BBVA are removed.
INDISCRIMINATE LENDING
Spanish lenders lent indiscriminately to developers over a decade-long property bubble. When developers went bust, many creditor banks took on their land and unfinished housing blocks, booking them on their balance sheets at unrealistic prices.
Land classified for building has practically no resale value in Spain since there are between 700,000 and a million unsold homes and no appetite to build more.
The government hopes the most highly exposed banks get folded into stronger ones.
Particularly in focus is Bankia, the result of a merger between seven regional banks. Bankia has more customers than any other bank in Spain and is defined as a systemic bank that could drag down other lenders if it had trouble.
“The real problem they have is Bankia. The rest is minor,” said one Madrid-based banker.
Nomura estimates Bankia will need 5 billion euros in extra provisions — 12 times its estimated 2011 pre-tax profit. This compares with 4 billion for Santander at 0.3 times 2011 pre-tax profit and 3.3 billion euros for BBVA at 0.5 times profit.
Bankia, which has already received 4.5 billion euros in public money, has 41 billion euros in developer loans and 11 billion euros in foreclosed property on its books.
Finding a partner to take it on could be difficult, seeing as a stronger bank would only take it on if given generous guarantees by the government.
“At the end of the day, it will cost the government more to pay a private bank to take over Bankia than bail it out themselves, because buyers are only going to step in if it comes with a whopping big cheque from the state,” said one banking analyst.
WHERE WILL THE MONEY COME FROM?
Spain’s government, unwilling to swell state debt as the euro zone crisis has forced up borrowing costs, will probably have to raise some 10 billion to 12 billion euros to loan to the most troubled banks.
One source close to the deal said that since the loans will be at a market rate they will not count towards the public deficit, which Spain must reduce this year under European Union rules.
European help looks unlikely, as it will come attached with conditions and will be politically negative for the government.
“I don’t think appealing to the European rescue fund will be an option for bank restructuring in Spain,” said Santander Chief Executive Alfredo Saenz on Tuesday.
(Additional reporting by Andres Gonzalez, Carlos Ruano and Jesus Aguado; Editing by Mike Nesbit)

Europe woes won’t stall trade finance in Asia

By V. Phani Kumar, MarketWatch
HONG KONG(MarketWatch) — Lessons from the global financial crisis and relatively stronger U.S. banks will likely protect Asian businesses from a repeat of the 2008 horror show, even as European debt troubles make trade loans more expensive and difficult to access.
A full-blown euro-zone crisis could still hit demand for Asian products and services harder than it has so far. But unlike the turmoil they faced in the aftermath of Lehman Brothers’ collapse, the region’s exporters are unlikely to suffocate this time around, gasping for credit like fish out of water, say bankers and analysts.
“The importance of trade finance to the global economy is better understood now than in 2008,” said Mark Williams, chief economist for Asia at Capital Economics. “One of the factors that contributed to the recovery in 2009 was the $250 billion of trade-finance guarantees announced by the [Group of 20 major economies]. In the event of a second global financial crisis, future guarantees are likely to be forthcoming.”

Asia’s Week Ahead: Central banks in focus

Asia’s spotlight is on monetary policy, including decisions from the Reserve Bank of India, the Bank of Japan and the Bank of Thailand. MarketWatch’s Rex Crum reports. (Photo: Getty Images)

Trade finance is often compared to the oil that greases the moving parts of a machine. A simple and frequently used form of trade finance is a letter of credit, which is provided by an importer’s bank to pay for goods shipped by an exporter. As the U.S. dollar is the currency of transaction in most cases, trade is affected whenever there is a scarcity of dollars.
According to Dealogic figures, several European banks have consistently ranked among the top 30 providers of trade finance in the Asia-Pacific region, excluding Japan, between 2007 and 2011.
BBVA S.A.

, which has a major presence in Spain and Latin American markets, was the largest provider of such loans in 4 of the last 5 years. BBVA lost the top spot to China Development Bank Corp. only in 2009, when mainland Chinese banks opened their lending taps to fashion a recovery from the financial crisis.
/quotes/zigman/254684/quotes/nls/bbva BBVA
+1.03%

European banks’ exposure to trade finance in Asia is disproportionately large to their overall loans in the region.
But Capital Economics’ Williams cited the latest data from Bank of International Settlements as showing that euro-zone banks account for only 2.3% of total credit in emerging Asia. That is meager compared to their 47.3% share of lending in emerging Europe and 17.1% in Latin America.
One consequence of the ongoing sovereign-debt crisis in Europe is that it has effectively shut out several major European banks from U.S. money markets. Many of the European lenders that have historically been the big providers of trade finance in Asia are now scaling back their dollar-loan books.

Increased funding costs

That is in turn forcing an increase in the interest rates banks charge on trade finance.

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“The reality is spreads have gone up fairly significantly — almost to the 2008 peak levels — over the last six weeks. I think that, in general, there will be some tapering off, but the higher spreads are here to stay,” said Ravi Saxena, managing director and Asia trade head at Citibank

.
/quotes/zigman/5065548/quotes/nls/c C
+1.06%

Saxena said that in the past, exporters could easily convert a letter of credit into money on presentation at a bank. But a scarcity of dollars is making that more difficult.
Edward George, a London-based soft-commodities specialist at Africa-focused Ecobank, said the cost of trade finance has risen by as much as 5 percentage points in some cases over the past year.
“Short-term trade finance has been the worst affected, whereas project finance is mostly protected by long-term agreements,” said George.
The impact is being felt, even after the U.S. Federal Reserve agreed late last year to lower the interest rates on currency swaps with five other major central banks from around the world.
Under such swaps, the Fed provides dollar liquidity to its counterparts, including the European Central Bank and the Bank of Japan. Those central banks can then inject dollars into their respective jurisdictions, when required.
Read full story on the currency swaps.

Dollar hoarding

The situation is aggravated by hoarding of U.S. dollars, even when they are available.
“Demand for U.S. dollars remains high, but the supply has dried up, and many banks are hoarding U.S. dollars for their preferred clients,” said George.

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Volume: 634,167
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For euro zone, the heat is on again

BERLIN (Reuters) – The euro zone crisis seemed to vanish from the headlines for a brief moment as 2011 ticked over into 2012, but it is about to return with a vengeance.
The coming months will be decisive in determining whether European leaders can hold their increasingly fragile currency bloc together or will stumble in the face of a daunting set of political, economic and financial obstacles lined up in their path at the start of the new year.
In Greece, where the crisis started over two years ago, the government is in a race against time to agree a bond-swap deal with banks that is crucial to a new 130 billion euro bailout package from European partners and the International Monetary Fund (IMF).
Without that package, Athens faces the threat of a debt default in March.
But talks with the banks and investment funds that are being asked to accept 50 percent losses on their Greek bonds to help pay for the bailout have dragged on for weeks, sowing doubts about whether Athens can really deliver.
“The risk of a disorderly Greek default is once again on the rise, with the threat of contagion to Italy and others,” economists at Barclays Capital said last week.
Compounding the challenge, both Greece and France face elections within months that could complicate decision-making at the national level in two key states and thwart the broader bloc’s ability to act swiftly at a time when pressure is high to bed down agreements sealed at an EU summit last month.
A key element of the summit package was a deal to funnel 200 billion euros to the IMF, money that could be used to offer precautionary credit programmes to Italy and possibly Spain.
But the euro zone is struggling to get the 50 billion euros it needs from nations outside the currency bloc to meet its goal. A senior German official told Reuters on condition of anonymity that securing the participation of Britain, which has shown no inclination to contribute, was absolutely crucial.
Even if those funds are secured, neither Italy nor Spain have shown any willingness to accept aid — and the stigma and greater fiscal oversight that would come with it.
Italian 10-year bond yields have pushed back above the 7 percent mark over the past week, approaching record euro-era highs, and both Rome and Madrid must sell bonds this week in the first major market tests of 2012 for the euro zone’s third and fourth biggest economies.
END OF MERKOZY
The Greek election, expected by the end of March, seems unlikely to produce an outright winner, meaning coalition talks could drag out and prolong uncertainty.
In France, polls suggest there is a good chance President Nicolas Sarkozy, who has steered Europe‘s crisis response along with German Chancellor Angela Merkel, could be pushed out of office by his Socialist challenger Francois Hollande.
While Merkel and Sarkozy have polar-opposite temperaments and clashed frequently when the Frenchman first took power in 2007, they are both conservatives, born just half a year apart, and have developed an effective, even close, partnership after years of high-pressure crisis summits.
And after years of frustration with the French president’s shoot-from-the-hip style, government officials in Berlin say they are now worried about the end of “Merkozy”, the most important relationship in Europe, in the middle of the crisis.
A cut in France’s triple-A credit rating in the weeks ahead could also upset the delicate Franco-German balance, although some economists believe it could force the French to accept more far-reaching fiscal reforms, regardless of who wins the two-round election in April and May.
“It won’t be Merkozy anymore. It will be Angela Merkel and (IMF chief) Christine Lagarde dictating policy in Europe,” said French economist Jacques Delpla.
“The next French president, whether its Hollande or Sarkozy, won’t have many options. The deficit will need to be cut, taxes increased and spending cut.”
RECESSION RISK
Fittingly, Merkel and Sarkozy kick off 2012 with a Monday meeting in Berlin to prepare an EU summit scheduled for January 30 that is expected to focus on efforts to boost growth.
That is perhaps the biggest challenge of all for the bloc. After several years of fiscal consolidation to push down debts and deficits swollen by the global financial crisis of 2008/09, the euro zone is headed for recession — a factor that has pushed the euro down to 16-month lows against the dollar.
Even the bloc’s economic powerhouse Germany is at risk of recession. Greece is entering its fifth straight year of contraction, with no hope of paying down its massive debt.
But restoring market confidence in the finances of struggling euro area countries and getting their economies working again seem like contradictory goals at this point.
“In the current market environment there is no room for using a Keynesian-type expansionary fiscal policy to boost demand in countries with low growth – the markets will simply not accept such a strategy,” Deutsche Bank said in a confidential note on the crisis prepared for the German government late last year.
One bright spot is the European Central Bank (ECB), which is showing greater flexibility under its new President Mario Draghi, euro zone officials say.
The ECB’s decision last month to provide cheap long-term loans to banks has helped assuage fears about the financial sector and could support sovereign debt sales going forward.
“We’re already seeing that Draghi is more flexible than Trichet,” the senior German official said, referring to the Italian’s French predecessor Jean-Claude Trichet. “He won’t put a bazooka in the window for everyone to see but he’ll do what it takes.”
The big question is whether this buys Europe’s leaders the time they need to overcome the formidable challenges they face in the new year.
(Reporting by Noah Barkin; Editing by Rosalind Russell)


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Quid Pro Quo: IMF Cash For Europe In Exchange for Iran Oil Ban?

By Ian Talley

Europe may have just traded a U.S.-pushed Iranian oil embargo in exchange for Washington’s support of International Monetary Fund bailout loans to Italy and Spain, if one economist’s speculation is right.
Jacob Kirkegaard, a fellow at the Peterson Institute for International Economics, speculates the timing Europe’s newly-proposed ban on Iranian oil imports is too fortuitous to be purely coincidental.
Greece, Spain and Italy–in that order–heavily depend on Iranian crude and have been the most resistant to an embargo. They are now no longer fighting a ban–Italy has stated it would support it in principle while the others have signaled they wouldn’t stand in the way. [The agreement in principle is subject to substantial negotiations on timing or exemptions for long-term deals.]
Each of those countries are also the current epicenters of Europe’s sovereign debt crisis. Athens is in the middle of negotiating an agreement with bondholders on a debt deal that will pave the way for a near doubling of emergency loans, including from the IMF. Italy has to roll over nearly $340 billion in debt this year, but the cost of borrowing has soared beyond levels economists say is sustainable. Rome late last year turned down an offer for an IMF loan, but many economists say Italy will need IMF credit to pull itself out of its financial mire. And Spain’s banks are facing a housing bubble that could very well mean Madrid must soon ask for IMF assistance.
Meanwhile, each time the possibility of new IMF loans to Italy or Spain has been raised among members of the Group of 20 nations, Washington has pushed back. U.S. Treasury officials have so far insisted that  Europe use its own resources to build a firewall against the contagion engulfing Italy and Spain. Any further lending to Europe from the IMF, the officials have said, would be purely supplementary.
Europe said it planned to lend EUR150 billion to EUR200 billion to the IMF as seed money for a bigger fund. Europe expects that cash to be matched by China, Japan and perhaps sovereign wealth funds such as that owned by oil-rich Saudi Arabia, which would ostensibly provide alternative crude supplies to Europe.
If that plan gains traction–and so far it hasn’t–it could create a new funding pool at the IMF worth roughly EUR500 billion.
Washington has largely been opposed to boosting IMF coffers for big European bailouts.
But rather than maintaining such opposition, Kirkegaard said he sees it as entirely rational horse-trading for U.S. Treasury Secretary Timothy Geithner to now give reluctant consent for the fund to help play savior in Europe in exchange for Europe supporting an oil embargo. [The U.S. is the only country with veto power on the IMF's executive board.]
The European Central Bank has already oiled the gears. The ECB has stepped up its liquidity provision to banks and bond buying for beleaguered euro zone members to levels that, if maintained through the year, top more than the EUR1 trillion Washington says is an effective firewall.
That will make it much easier for the U.S. to back IMF loans that give its lending members protected seniority while requiring the structural and fiscal reforms needed to return the euro zone back to health.
Spokesmen from the U.S. Treasury and International Monetary Fund weren’t immediately able to comment.
(Benoit Faucon in London contributed to this piece)

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China Unlikely to Ride to Europe’s Rescue Soon

By ALAN WHEATLEY | REUTERS

Published: December 26, 2011

VENICE — The sign in a boutique selling glass hand-crafted on the Venetian island of Murano betrays an uncertain grasp of English. But the owner is very sure who is to blame for the tough times confronting the 700-year-old local glassmaking industry.
“Everything in this shop is not made in China,” the sign proclaims. A few doors away, imported Murano look-alikes sell for much less. To the untrained eye, they appear identical.
With Europe drowning in debt and flirting with recession, China’s influence can only rise more. Euro zone governments would love Beijing to plow more of its $3.2 trillion in foreign-exchange reserves into their bonds.
China is also likely to chip in with a loan to the International Monetary Fund to provide a financing backstop in case Italy and Spain are shut out of the bond markets.
The $3.5 billion acquisition last week by China Three Gorges of the Portuguese government’s stake in the utility Energias de Portugal is also a sign of things to come. Financiers turn instinctively to fast-growing China as they try to flush out buyers for assets going on the block as European governments, banks and companies pay down debt.
But despite expressions of interest by Chinese leaders in diversifying the country’s overseas asset base away from government paper, analysts do not expect a sea change in China’s traditionally cautious approach to expanding in Western markets. Africa and Asia are likely to remain China’s top targets for now.
“There are going to be opportunities, but we’re not going to see China buying up Europe,” said Thilo Hanemann, research director at the Rhodium Group, an investment advisory and strategic planning firm in New York.
There are many reasons for the wariness. Lengthy delays in obtaining the approval of regulators in Beijing put Chinese companies at a disadvantage in mergers and acquisitions when the seller wants a quick deal. Chinese companies may lack the management skills to integrate overseas acquisitions. And perhaps most important, their prospects are much brighter at home than they are in Europe.
“If you compare the rates of growth in China and in Europe, are you sensible buying into a brand that’s seen its best years of growth?” said Edward Radcliffe, a partner in Shanghai with Vermillion, a merger and acquisition advisory boutique that focuses on cross-border China deals.
Still, he said that some larger Chinese groups, both state-owned and private, had started to explore opportunities in Europe and the United States.
The 27-member European Union is China’s biggest export market.
But foreign direct investment in the European Union by China has badly lagged, totaling $8 billion by the Union’s reckoning or $12 billion on China’s count — less than 0.2 percent of total foreign direct investment in the Union, according to Rhodium. The firm has kept its own tally since 2003, but its total of $15 billion through mid-2011, though greater than the official data, is still small.
Mr. Hanemann said he was sure 2012 would see deals in Europe in technology and consumer products to enable Chinese companies to climb the value ladder and build their domestic market share. “Ultimately, Chinese companies have to become true multinationals, like Japanese and Korean firms before them,” he said. “Over the longer term, there’s no reason to believe that China is going to take a different path.”
But he was skeptical about whether most Chinese companies would be able to seize the opportunities that were likely to crop up in the coming year. To do so, they would have to manage public perceptions in Europe and obtain quick regulatory approval at home.
“There are a lot of deals that the Chinese cannot take on,” Mr. Hanemann said. “If the Chinese government sees a company making a bid for troubled assets that risks provoking a political backlash in Europe, I think they’d step in to make sure there’s no embarrassment for the Chinese side.”
The failure of Chinese companies to buy Saab, the Swedish carmaker that was declared bankrupt last week, was a telling example of the difficulties facing Chinese investors, Mr. Hanemann said.
But the picture is not black and white. After all, Volvo, another Swedish carmaker, was acquired by a Chinese company from Ford Motor in 2010.
Christine Lambert-Goué, managing director in Beijing at Invest Securities China, said that Chinese companies were not looking mainly for outright acquisitions but for brands, patents and technology that would bolster their positions at home.
“Companies are only ready to pay for assets from Europe that will enable them to gain market share in China,” she said.
Investment in Europe will take off eventually, but a deteriorating political climate represents an obstacle in the short term, said Jonathan Holslag of the Brussels Institute of Contemporary China Studies.
The European Union, like the United States, is talking tough about Chinese “state capitalism” and is devising a more assertive trade policy to counter what it sees as a playing field tilted against foreign companies.
For its part, Beijing smells protectionism in response to its growing economic clout.
“The European Union is disappointed with the reluctance of Beijing to open its economy further, whereas Beijing complains about Europe being too reluctant to share its knowledge or to allow Chinese investors to expand their presence in important sectors like infrastructure,” Mr. Holslag said.
And if Europe fails to snap out of its economic malaise, the risk is that a super-competitive China will be made a scapegoat.
“The more governments are confronted with high unemployment figures, the more we will start to see China as a challenger rather than as a savior,” Mr. Holslag said.
Alan Wheatley is a Reuters correspondent.
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Travel mag targets the ‘young, sexy and broke’

A popular DUMBO-based travel website for young globe-trotters on a tight budget is veering offline and onto the magazine rack.
Offtrackplanet.com – an online travel magazine geared toward the “young, sexy and broke,” – will sell copies of their magazine for the first time in more than 300 stores nationwide – including Barnes and Noble.
It’s an unususal step at a time when print publications are slashing budgets and even folding to go digital.
“Print still establishes some credibility. Anyone can slap together a website,” said company CEO and cofounder Freddie Pikovsky, 28.
The quarterly magazine – which will retail for $4.95 and hit newsstands on January 4th – is just as edgy as the site. The latest issue features stories on Paris’ finest sex shops; how to haggle with street vendors abroad and the best places to get tanked with locals in Madrid.
Pikovsky – who was born to Russian immigrants in Bensonhurst – said his life changed on a European backpacking trip in 2008 and hopes the website and magazine’s party atmosphere will inspire people to travel.
“I had all these misconceptions that traveling was reserved for people who were wealthy and that it was a waste of time,” said Pikovsky. “I want to inspire other people to experience something that could change their world.”
The site first launched in 2009 from Pikovsky’s Sunset Park apartment after he met his partner Anna Starostinetskaya, 28, in a Bedford-Stuyvesant hostel. Starostinetskaya – an immigrant from the Ukraine who grew up in Los Angeles – said studying abroad in Spain for six months in 2004 changed her life.
“We talk a lot about the partying and the sex culture but it’s not our job to give people a motive,” said Starostinetskaya. “It’s our job to inspire them.”
Officials for book giant Barnes and Noble said 200 of their stores will sell Off Track Planet magazine and will feature it in their top travel markets.
“We believe it’s a great quality magazine that meets our standards for sale in our store,” said newsstand vice president, Theresa Thompson. “We think it’s edgy and will appeal to a young traveler.”
Despite the foray into print, the tech-first company is working on a sophisticated mobile app that will allow backpackers to connect with experienced travelers and access content from the website. Pikovsky said the company is short about $800,000 to make the app work and is looking for donations from investors.
“We want to reinvent travel guides” said Pikovsky. “We like to say we’re creating movement around the world.”
for more information, visit www.offtrackplanet.com
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