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CLIPPING DE MATRIAS ECONMICO-FINANCEIRASE INTERNACIONAIS 22/06/2012 FINANCIALTIMES

Snarl-ups deal blow to success of Rio+20

IMF challenges Berlins crisis response

Madrid moves to ease bailout fears

Legal move threatens EU rescue fund

Influential authority on monetary policy

China lowers barrier to foreign investors

How effective has QE in the UK been?

Race to save euro will follow Grexit

Growth fears suppress risk appetite

Dollar shoots up post-Fed

Cut adrift between America and Europe

The bank that broke Spain

Snarl-ups deal blow to success of Rio+20

By Pilita Clark and Joe Leahy in Rio de Janeiro


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For a city preparing to host the 2016 Olympics and some of the 2014

World Cup games, this weeks UN Rio+20 earth summit has shone a

sometimes unflattering light on its hotel and transport networks.

Traffic jams have snarled up the city in spite of the governments

declaration of a school holiday during the event.

Lisa Jackson, one of the most senior members of the US delegation,

was due to speak on Tuesday at a conference in Copacabana co-

hosted by Eduardo Paes, Rio mayor, and Michael Bloomberg, New

York City mayor. Ms Jackson, administrator of the Environmental

Protection Agency, got so stuck in the citys chronic traffic that she

missed the event. Her speech was read out by another EPA official.

But the problems began well before the start of the summit. Whenofficial delegations went to book rooms for Rio+20 named because

it comes 20 years after Rio hosted the 1992 UN earth summit they

were confronted with hotel price-gouging.

A government-appointed travel agent in charge of bookings told

delegations they not only had to pay rates of $600 and more per

night but they had to stay for at least 10 days.

A European Parliament delegation decided to cancel, some poorer

country leaders shied away and media organisations downscaled their

planned coverage.

They blocked the rooms and started charging outrageous prices,

one summit official with knowledge of the preparations said of the

official travel agent. He said bad press eventually forced the Brazilian


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government to order the travel agent and hotels to lower their prices

and promise to reimburse those who had been overcharged.

Such problems may have hurt attendance. Just five weeks ago, the

guest list was looking good. The names of 83 heads of state, 44

heads of government and four vice presidents were down for the

three-day conference, which ends on Friday.

But internal UN figures seen by the Financial Times show that by

Wednesday, that list of 131 leaders had shrunk to just 95, fewer than

some had expected for what has been billed as the biggest summit

the UN has ever held.

There are no doubt many reasons for why the numbers fell, from the

eurozone crisis that kept many European leaders at home, to the USpresidential election, to the stalled negotiations on what the

conference would actually produce.

Brazilian officials say they are confident the traffic and

accommodation problems surrounding Rio+20 will be solved by the

time of the Olympics.

None of the infrastructure plans in Rio were planned for this

conference, said Ambassador Andr Corra do Lago of the foreign

ministry, Brazils chief negotiator at Rio+20. It is all planned for

2014 and 2016, so nothing is in place yet.

No World Cup football games will be played near the RioCentro, an

aide added. And Brazil plans to increase the supply of rooms in the

hotel industry, which has suffered from a lack of investment in recent

decades.

But others warned the government needed to learn from this event.

If this is a kind of learning curve, thats OK, but they keep sayingeverything is perfect when it isn`t, said the senior summit official.

Still, some of the summits minor logistical snafus have been

entertaining. When Zimbabwes Robert Mugabe began to speak at the

opening session of the conference, the sometimes erratic English


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translation on convention centre screens briefly described him as the

president of the Republic of OJ Simpson.

IMF challenges Berlins crisis response

By Peter Spiegel and Alex Barker in Luxembourg

Getty

The International Monetary Fund on Thursday challenged Berlins

game plan for pulling the eurozone out of its crisisby advocating a

series of short-term fixes that the German government has resisted.

Christine Lagarde, the IMF chief, said eurozone leaders needed to

prevent the single currency from deteriorating further by consideringthe resumption of bond buying by the European Central Bank and

pumping bailout money directly into teetering banks.

While Germany has resisted such measures, Ms Lagarde said the IMF

was concerned about additional tension and acute stress in both the

European banking sector and peripheral governments. She warned

that the long-term measures being considered by EU leaders ahead of

a summit next week were not enough.

The IMF believes that a determined and forceful move towards

complete European monetary union should be reaffirmed in order to

restore faith in the system because we see at the moment, the

viability of the European monetary system is questioned, Ms Lagarde

said.


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The IMF stance raises the stakes for todays four-way summit

between Ms Merkel and her French, Italian and Spanish counterparts

in Rome, where many of the issues raised by Ms Lagarde are likely to

be discussed.

Frances Franois Hollande, Spains Mariano Rajoy and Italys MarioMonti have been increasingly vocal in backing many of the same

measures urged by Ms Lagarde, particularly using the eurozones

rescue funds to inject capital directly into struggling banks.

The IMF chiefs forceful support for policies rejected by the German

government including a shift away from austerity measures and

towards more structural reforms to restart growth in the region

comes amid a growing chorus of international leaders pressuring

Angela Merkel, the German chancellor, to act with more urgency.

Berlin has been particularly resistant to using the eurozones 500bn

bailout system to directly recapitalise banks, insisting rescue loans be

funnelled through national governments to ensure repayment. But

such loans add to sovereign debt levels and an EU bank bailout for

Spain which could add as much as 100bn in debt to Madrids

books appears to have spooked sovereign bond markets, with

Spanish borrowing costs reaching euro-era highs in the week since

the rescue was announced.

Spanish authorities saidon Thursday much-awaited private audits of

its banking sector found that they would need a maximum of 62bn

in new capital. But Jean-Claude Juncker, who chairs the group of

eurozone finance ministers meeting in Luxembourg, said it would be

the EU, and not Spain, that decided how much to pump into Spanish

banks. A figure would be decided by July 9, he said.

In addition to the short-term measures, Ms Lagarde also called on the

eurozone to complete a fiscal and banking union in the longer-term,

structures that she said should include a eurozone-wide bank deposit

guarantee scheme and gradual but limited mutualisation of

eurozone sovereign debt both measures also resisted by Berlin.


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Ms Lagarde said that while the IMF consulted several EU institutions

in its three-week evaluation, it did not run its recommendations by

Berlin.

We did not go into each and every member states political position,

she said. We certainly hope that wisdom will prevail and that thebest solution can be at least looked at, rated against its drawbacks

and found net positive.

Madrid moves to ease bailout fears

By Victor Mallet in Madrid and Ralph Atkins in Frankfurt

Bloomberg

Spain has sought to ease investors fears that it needs a full-scale

international bailout of its economy by publishing two stress tests

showing that Spanish banks need between 16bn and 62bn in new

capital.

The estimates of how much extra capital its banks might need fall

well within the sum of up to 100bn that Spain requested for its

financial system from its eurozone partners this month.

Fernando Restoy, deputy governor of the Bank of Spain, said the

numbers were a long way from the maximum that the eurogroup

agreed to make available to Spain.

He also said that the needs would be focused on four groups already

assisted by the state Fund for Orderly Bank Restructuring (Frob),

including Bankia, the group of seven cajas that is being nationalised


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by the government after requesting an extra 19bn in emergency

capital and so triggering Spains call for European help.

The three biggest groups in the country dont need assistance in the

form of new capital, even in the stressed scenario, he said in a

reference to Santander, BBVA and Caixabank.

At a meeting of eurozone finance ministers on Thursday night, Jean-

Claude Juncker, the Luxembourg prime minister who heads the

group, said he expected a formal request for aid to come from Madrid

by Monday, though a decision on how much money would be

awarded would not be made until the ministers meet again July 9.

However, the eurogroup deferred a decision on whether the bailout

loans would get seniority over existing Spanish sovereign debt. KlausRegling, head of the eurozones 440bn rescue fund, played down the

issue, saying the maximum needs for Spanish banks amounted to

less than 10 per cent of the countrys economy and therefore were a

minor part of the total public debt of Spain.

Oliver Wyman and Roland Berger, the consultancies that conducted

the stress tests, worked under the supervision of Spanish and

European institutions to produce separate calculations of the needs of

Spanish banks, looking at 14 banking groups that make up 90 percent of the system.

Oliver Wyman said the banks needed between 16bn and 25bn over

the next three years under the base scenario using current

estimates of economic developments, and between 51bn and 62bn

in a stressed scenario involving economic shrinkage of 4.1 per cent

this year and steep falls in the prices of property and land.

Roland Bergers calculations came up with a shortfall of 25.6bn in

normal circumstances and 51.8bn in the stressed conditions, for

which it described the assumptions as harsh.

The European Central Bank, meanwhile, is expected to give Spanish

banks a much-needed boost with a significant loosening of rules on

collateral required to obtain its liquidity, which could be followed by

steps to reduce the role of credit rating agencies.


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The concession, which could be announced as early as Friday, would

allow Spanish banks to make greater use of asset-backed securities

when drawing ECB funds. The move coming as European

authorities and Madrid draw up their plans to recapitalise the

countrys banks will help to offset a possible liquidity squeeze

caused by downgrades by credit rating agencies.

The decision by the ECBs 22-strong governing council is part of a

review of collateral rules aimed at ensuring that liquidity continues to

flow to sound eurozone banks and to reduce its reliance on external

bodies such as Standard & Poors and Moodys.

One option under consideration is to drop completely the use of

external ratings when deciding how much banks can borrow using

government bonds as collateral. At present, the ECB uses a slidingscale, imposing a larger haircut on bonds rated below the A grades,

which means banks can borrow a smaller percentage of the bonds

value.

Luis de Guindos, Spanish economy minister, said in Luxembourg that

a formal request for EU funding for Spanish banks would come in the

next few days and not during the current two days of meetings of EU

finance ministers.

This is a formality, Mr De Guindos said upon arriving at the

Luxembourg gathering. I think that before the end of July we will

have an idea, a very clear, detailed idea of how we will do [the

recapitalisation].

Legal move threatens EU rescue fund

By Gerrit Wiesmann and Quentin Peel in Berlin


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Bloomberg

Hopes of launching the eurozones permanent rescue fund in the first

days of July suffered a blow on Thursday when one of Germanys

opposition parties said it would ask the countrys highest court to

suspend ratification while deciding whether it complied with the

constitution.

The legal move overshadowed an agreement between Germanys

government and the opposition parties other than the Left

clearing the way for parliamentary approval by the end of June of the

500bn European Stability Mechanism and the EUs new fiscal

compact in exchange for measures to boost economic growth and

progress towards European financial transaction tax.

The court challenge by the radical Left party underlines the role of the

Karlsruhe court in shaping Germanys response to the eurozone crisis.It follows similar appeals in 2010 to block disbursement of emergency

loans to Greece and the launch of the European Financial Stability

Facility, the eurozones temporary bailout fund.

On those occasions, the court rejected applications for injunctions

ruling that any delay would cause greater damage to Germany than a

temporary constitutional infringement. It then took the court over a

year to hear arguments and then ultimately ruled in favour of both

bailout initiatives.

Similarly, the court is likely to reject an injunction to stop the launch

of the ESM while it assesses its legality, but it could still take a few

weeks even to reach that decision on the injunction.


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The ESM is due to come into effect at the beginning of July and could

have been immediately tapped to fund a bailout of Spains banks,

although ratification may also be delayed by a week in Italy. The

fiscal compact is meant to come into force on January 1.

Chancellor Angela Merkel thrashed out a deal with opposition leadersin three hours of talks in her office in Berlin. It will allow the

Bundestag to vote on June 29 although Joachim Gauck, German

president, now will not sign the bills into law until the court decides

on how to proceed.

In Berlin on Thursday, opposition leaders claimed a significant victory

with the agreement over the ESM, forcing Ms Merkel to adopt a more

proactive policy to boost economic growth and commit herself to

fighting for a financial transaction tax even if it involves only ninemembers of the eurozone.

Wolfgang Schuble, finance minister, has warned that opposition to

the FTT from the UK, and eurozone members such as Ireland, Finland

and the Netherlands, could scupper a deal. But Germany will now

push for a tax to be agreed among the minimum legally possible

nine of the 17 eurozone members.

The compromise will force Ms Merkel to fly home from the Europeansummit in Brussels on June 29 to attend a special late Friday

afternoon session of the Bundestag, to report on her success in

getting an active growth plan agreed, and wider agreement on the

FTT.

She was forced to negotiate with the opposition because the fiscal

compact is a treaty to change the German constitution and therefore

requires a two-thirds majority in parliament.

Ms Merkel will also have to win the same majority in the Bundesrat

from the 16 federal states and further talks will take place to win

their backing on Sunday. They are concerned that the pact will

restrict their budget powers.

Failure to reach agreement would have been a humiliation for the

chancellor, who has insisted that her eurozone partners all adopt the


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fiscal compact including a constitutional debt brake enforcing a

balanced budget in some cases against their better judgment.

Ireland was constitutionally obliged to put the pact to a referendum.

Ms Merkel was determined to link the two treaties in a joint vote in

the Bundestag, in order to persuade rebels on her own backbenchesto back the ESM. By tying it to the fiscal pact, she is seeking to

demonstrate that more German money will not be pledged in

guarantees to eurozone partners without the strict budget discipline

enshrined in the fiscal pact.

Eurozone divided on Athens bailout terms

By Peter Spiegel in Luxembourg

EPA

Eurozone finance ministers sparred over whether to allow more time

for Greece to hit tough deficit targets mandated in its 174bn bailout,

with representatives from most triple-A northern countries vowing no

leeway while the French minister indicated his government was open

to such a shift.

The diverging stands, articulated by ministers as they gathered in

Luxembourg for their first meeting since the weekend vote in Greece,

suggested divisions were deepening among eurozone capitals in

advance of an expected request by the new Greek government to

extend their programme by two years.

Under the terms of the current bailout, Greece must make another

11.7bn in austerity measures over the course of the next two years,


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and the focus of the debate is expected to centre on whether those

cuts can be spread over a longer period.

Pierre Moscovici, the French finance minister, said that the election of

a government led by Antonis Samaras, head of the centre-right New

Democracy party that backed the bailouts terms, meant that Europe

should show more understanding of the Greek plight.

We know that it means that Greece will have to respect its

commitments, Mr Moscovici said. But it also means that Europe has

to be sensitive to the feelings of the Greek people, and take

measures in order to help the country achieve growth. Efforts must

be made, but at the same time we have to create conditions for

hope.

Mr Moscovicis government has shown little reluctance to challenge

Germany and its northern European allies Finland, Austria and the

Netherlands in the way they have tackled the eurozone crisis, and

his remarks stood in sharp contrast to ministers from those countries.

Jan Kees de Jager, the Dutch finance minister, said there was no

alternative to hard, painful reform in Greece, while Maria Feckter,

his Austrian counterpart, said she expected little flexibility.

We will have to see how much time Greece missed due to its election

campaign, Ms Feckter said. If it missed too much, Greece will have

to work even harder.

Some EU officials have said the Greek programme could be put back

on a realistic track by giving Athens more time to hit its budget

targets and adding about 20bn to the bailout, but new money is

anathema in Germany and in the Netherlands, which is in the middle

of a high-stakes national election where anti-bailout parties are

gaining in the polls.

Other officials have suggested that rather than shifting the deficit

targets, Greece could be helped by cutting rates on bailout loans

even further and extending the period for repayment. Such a plan

could save Greece billions of euros without the politically difficult

decision to award it more aid.


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Influential authority on monetary policy

By Geoffrey Wood

Bloomberg

Anna Schwartz, who has died at the age of 96, was one of those few

economists who changed our understanding of the world. Her seven-

decade association with the US National Bureau of Economic

Research was remarkable enough in its duration; all the more so for

the work she produced there, both independently and in collaboration

with others including a young colleague called Milton Friedman.

They teamed up to examine the role of money in the business cycle,

and the first product of the partnership wasA Monetary History of the

United States 1867-1960. Its appearance in 1963 came at a time

when the influence of money on economic activity and prices was

either played down or denied outright by the majority of economists.

Their book swept away the consensus. Few would now deny the

importance of monetary control in managing inflation.

A further work by Schwartz and Friedman followed in 1970 and a

third, which examined the UK as well, came out in 1982. All three

volumes combined analytical insight and rigour with a massive weight

of scrupulously sifted evidence.

Schwartz also changed minds over financial regulation though not

to a great enough extent among policy makers, as the recent global

upheavals have shown. In a series of studies Schwartz emphasised

that stable price levels are essential for financial stability. The

uncertainty engendered by an absence of the former makes the latter


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unattainable. But even if we have price level stability, from time to

time individual financial institutions will fail.

Drawing on evidence from more than two centuries, she

demonstrated that individual failures need not have huge

consequences for the economy. Individual institutions, however large,should therefore be allowed to fail. This should be an expected part of

the policy regime.

Had this recommendation been adopted before the recent crisis,

rather than as is happening now after the event, the world could have

been spared much trouble.

Anna Jacobson Schwartz was born in New Yorks Bronx borough on

November 10 1915 to Hillel and Pauline Jacobson. Her father was areligious scholar. She gained a BA from Barnard College, New York, in

1934 and her MA from Columbia University in 1935. A year later she

married Isaac Schwartz, an accountant, with whom she had two sons

and two daughters. Her husband died in 1999; she is survived by her

children, seven grandchildren and six great-grandchildren.

After a year in the US Department of Agriculture and four years at

Columbia University, in 1941 she joined the staff of the National

Bureau, where she worked full-time almost up to her death. Whenshe arrived at its base in Cambridge, Massachusetts, the non-profit

making organisation was engaged in the study of business cycles.

She joined in this work, and with Arthur Gayer and Walt Rostow

produced the monumental Growth and Fluctuations in the British

Economy, 1790-1850. It appeared in two volumes in 1953 and

remains a key text for scholars of the period.

Although only briefly holding a teaching position, she continually

helped and developed younger scholars by working with them. At City

University in London she was for many years an adviser on the

monetary history of the UK, commenting on papers, suggesting lines

of approach and speaking both at academic conferences and to

students directly.

Schwartz was a lover of music, particularly opera. On one London

evening, after a soprano had sung a dazzling Handel aria and then


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turned and walked offstage naked, having dropped the towel she had

been wearing, her companion received a hearty dig in the ribs and

heard a throaty chuckle followed by the words: Saucy Handel!

Over her lifetime she covered many other areas including work on the

international transmission of inflation and business cycles, the role ofgovernment in monetary policy, deflation, and measuring the output

of banks. All of which are issues more relevant than ever.

China lowers barrier to foreign investors

By Robert Cookson in Hong Kong

China has lowered barriers to foreign ownership of domestic stocks

and bonds in one of the most significant relaxations of its strict

capital controls in more than a decade.

The China Securities Regulatory Commission has announced it will

allow international fund managers with as little as $500m under

management and two years operating history to apply for investment

licences.

The previous threshold $5bn under management and a five-yearrecord meant only the largest global fund houses could be admitted

to its qualified foreign institutional investor programme.

The QFII scheme, which grants quotas to selected foreign groups to

invest in Chinese markets, has expanded slowly since its launch in

2002. Foreign investors still account for only about 1 per cent of the

total free-float market capitalisation in China.

This [reform] is the most significant move since the QFII schemestarted, said Fraser Howie, co-author of Red Capitalism and an

expert on Chinese finance. Its opened the door for bringing in

hundreds more foreign investors.


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The CSRC, which plans to introduce the reforms as soon as July, also

announced late on Wednesday that qualified foreign investors would

be allowed to invest in index futures and the interbank bond market.

Louis Gave of Gavekal, a Hong Kong-based research house, said the

reforms were tremendously bullish for good quality stocks listed onthe Chinese mainland, and would help investors arbitrage the price

differential between shares that are dual-listed in both Hong Kong

and Shanghai.

Guo Shuqing, the new head of the CSRC who was previously

chairman of China Construction Bank, has accelerated the pace of

capital markets reform in China since he joined the regulator in

October.

In April, the CSRC announced that international fund managers would

be allowed to invest a combined $80bn in Chinas onshore capital

markets, up from the previous limit of $30bn.

The CSRC allocates licences to foreign institutions case by case and

the State Administration of Foreign Exchange decides the size of each

investment quota.

This means Beijing can pick and choose which institutions are able to

access the domestic capital markets. Hedge funds have never been

approved and few analysts expect to change any time soon.

As of the end of May, 170 institutions had been approved to invest a

total of $26bn under the QFII scheme.

The CSRC said it would speed up the approval process by enabling

application documents to be submitted via its website.

How effective has QE in the UK been?

The minutes of the Bank of Englands June policy meeting have

reinforced expectations that a fresh round of quantitative easing in

the UK could be imminent. But might the Bank also look to other


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ways of helping the economy and how effective has QE actually

been?

David Owen, chief European financial economist at Jefferies, saidthe minutes would naturally fuel expectations of a further round of

QE. Our central case is that ultimately another 75bn will be

announced by the end of the year, he says.

But we would also still not rule out a further cut in interest rates.

This was discussed at the June meeting but seemed to be partly ruled

out by the scope to which a cut would be passed on to borrowers, orwould indeed further restrict credit supply.

However, this in turn was partly a function of the funding costs

facing banks which to some extent should be addressed by the

measures announced in the Mansion House Speech last week.

The effective rate on a weighted average of all loans secured against

housing has fallen since March 2009, although for the most credit-

constrained and indebted households, this may not be the most

relevant measure.

John Hydeskov, senior analyst at Danske Bank, expects the Bank toincrease its asset purchase target by 50bn to 375bn at its July

meeting and raises the issue of the effects of QE.

The Bank argues that Identifying the impact of QE on gilt yields has

become increasingly difficult, as monetary policy committee

announcements about the amount of assets the Bank intends to

purchase are now widely anticipated by financial markets, he says.


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However, we would suggest the Banks economists have

underestimated the impact from the eurozone crisis in the latest

round of asset purchases where UK yields probably would have

fallen anyway as a result of safe-haven flows.

Furthermore, the Bank only evaluates the effectiveness of the QEprogramme on the back of yields. Perhaps a more accurate metric

would be the effect on the economy or the ability to spark bank

lending to businesses and households and here, QE has so far had

little impact.

Victoria Clarke, economist at Investec, pointed out that the minutesshowed the monetary policy committee to be notably wary of

developments in the eurozone, citing in particular events in Greece

and uncertainties over the Spanish bank recapitalisation.

The G20 summit which has just ended may provide some further

impetus to ease policy, she says. We have no doubt that global

leaders have been placing central bankers under immense pressure

to take further steps to shore up the global economy. The Bank,perhaps, may be looking for a more international cue to do so.

Furthermore, the minutes point towards the Bank being keen to see

the UK Treasury step up to the plate to do more to support lending to

businesses and households.

We have seen the central bank-government poker game played out

with our eurozone neighbours; the European Central Bank has been

keen to see politicians do their bit before it has offered up more

support.

Race to save euro will follow Grexit

By Willem Buiter


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Following the re-run of the Greek parliamentary elections, we have a

New Democracy-led coalition government. This removes the risk of

an early Grexit as it is likely the minimum demands for relaxation of

fiscal austerity by the new government will not exceed the maximum

fiscal austerity concessions Germany and other core euro area

member states are willing to make.

Some relaxation on the timing of austerity, some limited early

disbursement of funds to pay for essential public goods and services,

and some token pro-growth gestures courtesy of the European

Investment Bank and EU structural and cohesion funds will most

likely keep Greece in the euro for the time being.

However, we consider it highly unlikely that Greece will comply

sufficiently with even lite fiscal austerity conditionality, let alonewith structural reform conditionality, including privatisation targets,

which are unlikely to be relaxed. Political opposition to both austerity

and reform is now stronger in Greece than ever before. So is

resistance to bailouts in the core. The troika the European

Commission, European Central Bank and the International Monetary

Fund may forgive a Greek failure in the September progress

assessment, but is unlikely to tolerate another failure to comply on all

fronts by the December assessment.

Grexit may well be triggered by a troika review declaring Greece

wilfully non-compliant with the conditionality of its programme,

stopping the disbursements to the Greek sovereign. Greece defaults

and the eurosystem and the Greek ELA (emergency liquidity

assistance provided by the Greek central bank) stop funding the

Greek banks. At that point Greece exits the euro area, following the

imposition of capital controls, foreign exchange controls, restrictions

on deposit withdrawals and a temporary suspension of the Schengen

agreement.

It is highly unlikely the core eurozone would be willing to take on

significant exposures to Spain and Italy unless it can be established

unambiguously that a wilfully and persistently non-compliant

programme beneficiary will be denied further funding. Therefore

Grexit would become even more probable should Spain and Italy


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require a broader troika programme and external help, respectively,

which appears likely. The greatest fear of the core nations is not the

collapse of the euro area but the creation of an open-ended,

uncapped transfer union without a surrender of national sovereignty

to the supranational European level.

Grexit is likely to create extreme deprivation in Greece, and lead to

social and political instability. We are likely to see evidence of this

even before it takes place. The damage can be limited by ensuring

that Greece stays an EU member even after it exits the euro. This is

the most likely outcome.

The direct impact of a Greek exit on the rest of the eurozone, the EU

and the rest of the world through trade and financial links is minor.

The only risk is through exit fear contagion. This will lead to a suddenfunding stop for all sectors in any economy perceived as being at

material risk of exit after Greece. The European Central Bank,

supported by the troika, has the resources and may have the will to

keep at-risk sovereigns and banking sectors funded until the markets

are convinced no country that is adequately compliant with

programme conditionality and which does not want to leave the euro

will be allowed to be forced out by a sudden stop on market funding.

There is now a material risk, if procrastination and policy paralysisprevail, that the endgame for the euro could be an onion-like

unpeeling and unravelling. Survival to fight another crisis will require

at least the following: an enhanced sovereign liquidity facility,

banking union and sovereign debt and bank debt restructuring, with

only limited sovereign debt mutualisation.

The endgame for the euro area, if the political will to keep it alive is

strong enough, is likely to be a 16-member area, with banking union

and the minimal fiscal Europe necessary to operate a monetary unionwhen there is no full fiscal union.

Minimal fiscal Europe will consist of a larger European Stability

Mechanism, the permanent liquidity fund, and a sovereign debt

restructuring mechanism (SDRM). The ESM will be given eligible

counterparty status for repurchase agreements with the eurosystem,


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subject to joint and several guarantees by the euro area member

states. There will be some ex-post mutualisation of sovereign debt.

Sovereign debt restructuring through the SDRM will recur.

Banking union aims to sever the poisonous umbilical cord between

sovereigns and the banks in their jurisdictions. A road map tobanking union will likely be announced at the EU summit on June 28-

29. It had better be a credible path. In any case, implementation is

the hard part, and time is of the essence.

Willem Buiter is chief economist at Citigroup

Growth fears suppress risk appetiteBy Jamie Chisholm, Global Markets Commentator

Friday 12.40 BST. The weeks foul cocktail of global growth fears,financial system worries, central bank disappointment and lingering

eurozone angstis souring investors risk appetite.

The FTSE All-World equity index is down 0.6 per cent after Asian

stocks lost 1.2 per cent and the FTSE Eurofirst sheds 0.6 per cent.

Some commodities are adding to the previous sessions steep

declines, with copper off another 0.8 per cent to $3.27 a pound,

though Brent crudeis adding 88 cents to $90.11.

Currencies are steadier after recent swift moves, with the dollar index

flat and the euro losing 9 pips to $1.2537. Risk aversion is not

extending to haven. however, where small price falls sees the yield

for 10-year Bunds rise 1 basis point to 1.55 per cent.

A plethora of catalysts contributed to sharp declines for growth-

sensitive assets on Thursday. These issues continue to reverberate

around markets on Friday, joining lingering eurozone fretting to

deliver a decidedly risk averse mood.


22/35

As is usually the case in such circumstances it is difficult to gauge

which factor has had, and is still having, the greatest impact.

But a glance at intraday charts will show that US losses accelerated

on Thursday after Goldman Sachs advised clients to short the S&P

500 index, targeting a downside of 1,285. The Wall Street benchmark

index lost 2.2 per cent to close at 1,326.

Also contributing to the sell-off in New York was anticipation that

Moodys was about to deliver its long-awaited downgrade of 15 of the

worlds biggest banks.

Some of these were not as bad as expected, however Morgan

Stanleys rating was trimmed by two rather than the forecasted three

notches and this helped US stock futures perk up a little in after-hours trading. The S&P 500 is on track to gain 0.2 per cent.

The rotten performance of industrial commodity prices in the past few

days is another clue to an important cause of recent market anxiety.

The Reuters-Jefferies CRB index, a commodities basket, is sitting at

its lowest level since September 2010, having lost 28 per cent since

touching a cyclical high 13 months ago as investors become

increasingly concerned about the prospects for global growth.

Soft surveys of China, US and eurozone manufacturing have joined

weaker than expected US home sales and weekly jobs data to paint a

dour economic scene. Mining stocks have led the market sell-off.

Some traders can find succour in the belief that such tepid indicators

of activity will only hasten the arrival of more Federal Reserve

assistance.

But Wednesdays Fed announcement of an extension to its OperationTwist programme has underwhelmed those who wanted a more

aggressive intervention to support assets. Furthermore, Jeffrey

Lacker, a hawkish Fed official, reiterated on Friday his belief that

additional easing risked sparking inflation.


23/35

This monetary policy disappointment has arguably been most starkly

reflected in the performance of gold. The bullion often rallies on

investors anticipation of the inflationary impact of central bank

largesse. But it is trading at $1,570 a troy ounce, having shed 3.4 per

cent so far this week.

At least hopes are rising that the European Central Bank may be

more accommodating in the coming months, with many in the market

starting to expect further interest rate cuts from the eurozones

monetary guardian.

This dovetails with investors sense of a building political consensus to

heed the IMFs call for more flexibility by the eurozoneregarding the

tools it can use to support the blocs sovereign debt markets.

The leaders of Germany, Italy, Spain and France will hold a summit

on Friday to discuss the eurozone crisis.

Meanwhile, Spanish and Italian bond yields, though well off recent

highs on hopes that the blocs bailout fund will ride to the rescue,

remain at levels considered unsustainable for each nations funding

needs and continue to be watched as a simple proxy for the markets

eurozone angst.

There was good demand for Madrids 2.3bn sale of medium-term

Spanish bonds on Thursday, but Spains borrowing costs soaredto a

15-year high of 6.01 per cent for the five-year portion of the offering.

Madrids 10-year benchmark on Friday is down 9 basis points at 6.52

per cent, and Romes equivalent is up 3bp to 5.78 per cent.

Dollar shoots up post-Fed

By Alice Ross

The dollar made significant gains against other major currencies as

risk aversion increased after the release of disappointing economic

data in both the US and the eurozone.


24/35

The dollar continued to build on the gains made against the euro

following the US Federal Reserves decision to extend its Operation

Twist programme of buying long-term treasuries while selling

shorter-dated securities. The US currency was sold before the

decision, on expectations the Fed could take more drastic action.

The dollar received a further boost on Thursday as haven demand

was boosted by weak manufacturing figures from the Philadelphia

branch of the Federal Reserve, a closely-watched indicator of US

economic growth. German manufacturing data also disappointed

investors.

The euro fell more than 1.1 per cent against the dollar to hit $1.2554,

while the dollar rose nearly 1 per cent against the yen to Y80.32, its

highest level against the Japanese currency in more than a month.

Analysts said the dollar was continuing to find support from the

cloudy outlook for the eurozone, with politicians yet to reach

agreement on a mooted plan to use the eurozones bailout fund, the

European Financial Stability Facility, to buy eurozone bonds.

In the current, more challenging environment for risk appetite we

expect the US dollar to remain well supported, said analysts at

Morgan Stanley.

Indeed, with negative readings from global growth leading

indicators, we expect the broad US dollar recovery trend to be

resumed.

The late move in the dollar eroded the pounds earlier rise after UK

retail sales were stronger than expected, recovering from its losses

the previous day on expectations of further monetary easing.

Sterling had reached a high of $1.5732 as figures showed retail salesrose1.4 per cent in May, up from a 2.3 per cent slump in April. It

later fell in line with the rest of the market against the dollar, losing

0.6 per cent to $1.5610.

However, the pound retained its gains against the euro, rising 0.5 per

cent to 1.2427.


25/35

Cut adrift between America and Europe

By Philip Stephens

As the English Channel gets wider so too does the Atlantic. When

Barack Obama and David Cameron talked recently about the euro,

the US president reprised an argument made by his predecessors.

Americas interest, Mr Obama is reported to have said, resided in a

strong and cohesive Europe. Britain should be part of it. The US did

not want to see the prime minister left on the sidelines when the

crisis subsided.

Mr Obama offered a few thoughts on how the single currency could

be stabilised. The US backed the idea of eurozone bonds to underpin

the creditworthiness of weaker economies. It could see the argument

for a European-wide guarantee for bank deposits. Stabilising the

financial system would probably require the creation of a banking

union. Mr Cameron, he hoped, would play a constructive role.

The president will have been disappointed by the response. The prime

minister has said loudly and clearly that Britain will not join debt

mutualisation or European-wide depositor protection schemes. While

it could support a banking union for the eurozone, Britain would stand


26/35

aside. What is more, its approval would be conditional on special

safeguards for the City of London.

Mr Obama has made no secret of his agitation for an early end to

eurozone turmoil. There is a US election on the near horizon. As the

US economy has slowed, his poll lead over Mitt Romney has

evaporated. Things are getting urgent.

Democratic campaign managers see a worsening employment outlook

as the one thing that could deny Mr Obama a second term. The big

threat to the US economy comes from the eurozone. So it is pretty

obvious why the president does not want Mr Cameron to start waving

a British veto if Germany, France, Italy and the rest finally get a grip.

Taking a longer view, such exchanges between US presidents andBritish prime ministers have been a recurring theme of the so-called

special relationship. Washington has long thought that an EU with

Britain as an active player makes for a more reliable partner in the

transatlantic alliance. By contrast, British prime ministers have often

cherished the vain hope that by cuddling up to the US they could

afford to keep their distance from Europe.

When the Berlin Wall came down, George H.W. Bush offended

Margaret Thatcher by strongly backing German unification. He alsomade the none-too-diplomatic observation that Germany would

emerge as the leading player in post-communist Europe. But Mr Bush

held fast to the policy of encouraging Britain to remain inside the

European tent.

Mr Cameron, of course, makes his own choices. It would be more

than curious were British politicians to set a course in Europe dictated

by Americas national interest. But Mr Obamas dmarche was a

reminder, if one were needed, that Britains twin relationships with

the US and Europe are not discrete alternatives. In this eternal

triangle, the closeness of the alliance with Washington rests on the

leverage Britain exercises on its own continent.

The exchange also underlines how a resolution of the eurozone crisis

would change profoundly the political geography of Europe. Mr

Camerons government, with the reluctant acquiescence of the Liberal


27/35

Democrats, the smaller, and notionally pro-European coalition

partner, disdains European integration. What is happening now is that

eurozone push is reinforcing eurosceptic pull. As they negotiate

new arrangements to pool economic decision-making, other EU

leaders, and notably Germanys Angela Merkel, are growing less

tolerant of British exceptionalism.

Mr Cameron says that Britains interest would be best served by

deeper co-operation in the eurozone. In the short term that is true. It

would certainly take some of the pressure off the British economy. Mr

Cameron is confronted with a fiscal deficit to match that of Greece

and a stalled economy. Britain, like everyone else, badly needs

growth.

The strategic consequences of an integrated eurozone are somethingelse. If (and, given the record of the past couple of years, it remains

an important if) governments create an economic and political

union, Britains voice will be weakened. Decisions on Europes

economic policy have already gravitated towards the euro-plus group

of present and prospective members of the single currency. This

process will be greatly accelerated if financial is added to fiscal

integration.

Decisions about the single market, in which Britain has a vitalnational interest, would inevitably be made within the single currency

grouping. Quite plausibly, Britain would find itself alone, or with one

or two others, in a second tier. Notionally, it might be assured of an

equal say but, de facto, its status would be downgraded to that now

enjoyed by Norway, Iceland and Liechtenstein in the European

Economic Area.

Some officials with deep experience of the EU and all its works argue

that it need not come to this. Whatever their frustrations with Britain,other governments value its instincts and contribution: Germany

shares an open economic outlook; France Britains global outlook.

With some smart diplomacy and a modicum of compromise, Brits and

continentals could continue to muddle along together.


28/35

This assumes Mr Cameron wants such an outcome. Many in his party

see a disengagement as an opportunity. In any event, the new

arrangements in the eurozone will change the terms of British

participation in the EU. An eventual British referendum to decide the

future of the relationship now looks all but inevitable.

One eurosceptic figure in Mr Camerons cabinet was heard some time

ago to remark that there was no longer any need for Britain to leave

Europe, as Europe was leaving Britain. Events may prove him right.

The bank that broke Spain

By Victor Mallet and Miles Johnson

Bankia has imperilled Madrids finances and driven it to seek a bailout

Eyevine

A very solid group with more than 10m customers.

That was how a senior Bankiaexecutive described the big Spanish

bank on the last Friday of April.

Amid rumours of grave financial problems, he assured two sceptical

journalists that the task of integrating the seven regional savings

banks in the group was largely complete, and that plans to cut costs,

reduce debt and minimise dependence on fickle wholesale fundingmarkets were well advanced.


29/35

Weve created a brand Bankia, the executive said at the groups

headquarters in northern Madrid, although the confidence he sought

to convey was undermined by his evident unease and hasty exit from

the room after being summoned to a meeting.

Just over a week later, the centre-right government of Mariano Rajoy,prime minister, intervened to save the bank. The game was up for an

ill-fated behemoth that began life with more than 4,000 branches and

nearly 25,000 employees.

Rodrigo Rato, a former Spanish finance minister and ex-managing

director of the International Monetary Fund who became Bankias

executive chairman, was obliged to resign. The government

announced a partial nationalisation at an estimated cost of up to

10bn.

Then came the most shocking blow of all: on May 25, Jos Ignacio

Goirigolzarri, an experienced banker brought out of retirement to

replace Mr Ratoand rescue Bankia, said it needed twice as much to

clean out bad loans. He requested 19bn in new emergency capital,

on top of earlier state aid of 4.5bn. Bankia restated its 2011 results

to reflect a net loss of 3bn instead of the reported net profit of

309m.

Created in January last year, and floated on the Madrid stock

exchange six months later, Bankia and its parent Banco Financiero de

Ahorros (BFA) were touted by Mr Rato as the biggest bank in Spain in

terms of domestic business, with 341bn in loans and deposits, and a

10 per cent market share. Yet by last month, less than 18 months

later, Bankia had become the biggest banking catastrophe in Spains

history.

The Bankia debacle, however, is not merely a stain on the reputation

of Spanish banking. Mr Goirigolzarri made his appeal for capital at a

moment when Madrid was finding it increasingly hard to raise money

with sovereign bonds. That triggered the decision two weeks later by

Mr Rajoy to swallow his pride and appeal to the EU for a bailout of up

to 100bn to help recapitalise Spanish banks.


30/35

And the failure of that Spanish mini-bailout to soothe the markets

could yet prompt the need for a full bailout of Spain, along the lines

of the earlier rescues of Greece, Ireland and Portugal and so imperil

the 17-nation eurozone.

What detonated the latest phase of this crisis was the situation at abig financial institution and its enormous capital requirements, Angel

Ron, chairman of Banco Popular, a listed Spanish commercial bank,

said earlier this month in a reference to Bankia. That was the tipping

point, agreed one analyst.

Trouble in the regions

The origins of the institution that did so much damage to Spain are in

the countrys regions, which have gained considerable powers inrecent years. Bankias components Caja Madrid, Bancaja from

Valencia and smaller savings banks from the Canary Islands,

Catalonia, Rioja and the towns of Avila and Segovia in central Spain

were typical of the cajas that accounted for half of Spains banking

system by assets before the crisis began. They began as regional

businesses and were in most cases closely connected to politicians in

the areas where they operated, so that Caja Madrid and Bancaja were

influenced and run by the Popular party now in government.

Above all, the cajas were exposed to property, having financed the

homebuilding bonanza in the decade up to 2007 and lent freely to

developers, construction companies and housebuyers.

Since 2009, other cajas and groups of cajas have failed too. They

were seized by the state and sold or simply nationalised in Castilla

La Mancha, Andalucia, Valencia, Galicia and Catalonia. Bankias fall

was worse, however, because not only did it exemplify all the political

and managerial weaknesses of the Spanish financial system, it was

also so large as to be systemically important. Its failure would

threaten the entire banking network and it was therefore too big to

fail.

Interviews with Bankia executives, other bankers and analysts show

mistakes were made on all sides: by national and regional politicians

of both the PP and the Socialist party, stock market and bank


31/35

regulators, the previous and current managers of the bank and its

component cajas, by investment bankers, bank analysts and by an

insufficiently inquisitive media. While it is easy to make such

judgments with the benefit of hindsight, it is also true Spanish

commercial bankers have long been scathing in private about the

property lending follies of the cajas, especially around Valencia where

Bancaja was based.

Madrid was only slightly better. During Spains housing boom,

mortgage lending at Caja Madrid, the largest of the savings banks

that formed Bankia, started to grow so quickly that, by 2007, some

executives were trying to slow things down. After its mortgage book

expanded by 25 per cent in 2006, Carlos Stilianopoulos, Caja Madrids

then head of capital markets and later Bankias chief financial officer,

said: We dont want to grow this fast. We are a savings bank so we

dont have to keep shareholders happy. We prefer to have a solid

institution.

At the same time, warnings from abroad about the overheating of

Spains property market were dismissed. Perhaps in other countries

this pace of growth would be seen as a bubble, he told Euromoney.

But not in Spain.

Caja Madrid continued to grow and moved into marketing exoticfinancial instruments to foreign investors, such as bundled packages

of loans.

Fifty per cent of the banking sector in Spain which was the cajas

did not have the corporate governance or the management skills to

withstand a crisis, says one of the many investment bankers

involved in the July 2011 initial public offering of Bankia.

After 2008 when the Spanish property bubble started to deflate,

Lehman Brothers collapsed and the eurozones sovereign debt crisis

began the Bank of Spain and the socialist government of Jos Luis

Rodrguez Zapatero launched a programme of soft mergers

between cajas to improve efficiency. At first, however, the reforms

were far from brutal. Managers responsible for failing cajas were


32/35

often either retained or sent into retirement with multimillion euro

compensation packages.

A problem goes public

As the crisis deepened, Spanish, European and internationalregulators increased capital requirements. For Bankia, a fateful

decision was the introduction of a Spanish rule that forced banks to

have a minimum core tier one capital ratio of 10 per cent of their

assets unless they were listed, in which case they were allowed 8

per cent. The idea was to save taxpayers money but it pushed

Bankia into an IPO that most agree now should never have happened

in the way it did.

I find it very hard to believe that those who created the Bankiastructure, and who were working on the listing were not aware of the

problems of the bank, said one adviser involved in Bankias

nationalisation.

Ahead of its listing, Bankia hired Lazard, where Mr Rato had worked

after leaving the IMF, to co-ordinate and advise on the sale of shares,

later taking on a group of international investment banks led by

Bank of America/Merrill Lynch, Deutsche Bank, JPMorgan and UBS

to market the deal to international investors. Lazard in Spain declinedto comment.

In spite of this army of financial support, investment bankers who

worked on the deal said there was negligible interest from foreign

institutions. They could think of only one fund manager in London

who was interested in buying a few shares.

If I was an investment banker I would never have done the Bankia

IPO I would never have been able to recommend this to a client,

says a UK-based fund manager who declined to buy.

The process of selling Bankia abroad was described by some of those

involved as chaotic and mayhem, with numerous banks struggling

to get their views heard over each other, and being forced to filter

negative feedback from potential investors back to Lazard and

another core adviser, STJ Advisors.


33/35

Several advisers reported back to Bankia that it needed to raise more

money, particularly given the large gap between loans and deposits,

its 32.9bn of real estate exposure and its need to repay its high-

interest 4.5bn loan from the state Fund for Orderly Bank

Restructuring.

A crucial factor holding Bankia back from agreeing to sell more of its

equity, giving it a greater buffer to withstand losses, was that it was

impossible to do so without diluting control of the savings banks that

formed Bankia to below 50 per cent, unacceptable to regional

politicians seeking to retain their influence.

Roadshow blues

Bankia was floated on the basis of unaudited accounts due to therecent creation of the Bankia Group, the prospectus said and it

was eventually Deloittes refusal to sign the 2011 accounts that

prompted the governments intervention last month.

The risks of investing in a Spanish bank were known, and the

prospectus made it clear, says one of the advisers. But what came

out about the 19bn hole? None of us could have expected that.

Bankia was also short of experienced top executives, a failing that

prompted some of the investment banks trying to market the IPO to

threaten to withdraw from the process shortly before the international

roadshow. Mr Rato then chose Francisco Verd, the little known vice-

chairman of Banca March, as his chief executive.

There was a lot of improvisation, says one banker. It was a very

odd IPO. And when foreigners shunned the share offer, senior

members of the Zapatero government called the heads of Spanish

banks and corporations, and strong-armed them into buying 40 per

cent of the 3bn worth of shares in the national interest. Retail

clients across Spain some 350,000 of them were persuaded to

buy the rest.

The big mistake was when they came back from the roadshow and

saw that there was no interest. They should have stopped the deal,

says Iigo Vega, a banking expert.


34/35

Bankia has had an exceptionally rough ride since listing. In

September, Santiago Lpez Daz, analyst for Exane BNP Paribasand

a critic of the cajas, inaugurated coverage of the bank by advising

investors to sell, a rare stand among analysts attached to institutions

working for Bankia. BNPP had been a bookrunner for the deal.

Executives at Bankia describe months of difficulties as European

regulators and then the PP government, elected last December,

imposed a succession of ever steeper capital demands on struggling

Spanish banks as protection against their bad property loans. You

passed one barrier and then another one appeared, says one Bankia

executive. That gave us a lot of headaches.

It was clear in April that the end was near when the IMF, without

naming Bankia, called for yet more capital for Spanish banks topreserve financial stability. It is critical that these banks, especially

the largest one, take swift and decisive measures to strengthen their

balance sheets, and improve management and governance

practices, the IMF said.

Within two weeks, Mr Rato was pushed out by his former colleagues

in the PP government. Within five weeks, Miguel Angel Fernndez

Ordez, Bank of Spain governor, was persuaded to step down a

month early amid criticism of his regulatory role.

Mr Vega, the bank expert, calculates Mr Goirigolzarris latest demands

for capital mean total bad loan provisioning requirements for

Bankia/BFA including the amount already set aside by the bank

reached more than 41bn up to December last year, nearly double Mr

Ratos number. That is like 18 per cent of the original credit

portfolio, which is an amazingly high number.

He continues: What went wrong? The underwriting [loan

assessment] standards of Bancaja and Caja Madrid were basically

rubbish...its been a big bubble and the banks were lending like

crazy.

Hopes shattered


35/35

Among the victims were not only Spains international standing and

the reputation of its banking system, but also the hundreds of

thousands of bank customers who bought Bankia shares in the belief

that they were a safe investment. The government is resisting a

public inquiry, but the public prosecutor has launched an investigation

into five possible crimes at Bankia, including fraud, false

documentation and embezzlement.

Bankias branch workers were encouraged to buy its shares by their

trade union as a show of support. I buy Bankia. Do you? was the

slogan of the unions campaign, which also ran on Facebook.

Staff who did were seemingly oblivious to the likelihood that all

shareholders would have their investments diluted to almost nothing

by the injection of rescue funds. It was another tragic footnote to thesorry tale of the bank that broke Spain.

clipping 22062012 - financial times

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