Banks, Financial

Banking app targets millennials who want help budgeting

Graduate debt, rent and high living costs have made it hard for millennials to save for a house, a pension or even a holiday. For Ollie Purdue, a 23-year-old law graduate, this was reason enough to launch Loot, a banking app targeted at tech-dependent 20-somethings who want help to manage their money and avoid falling […]

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Economy

Eurozone inflation climbs to highest since April 2014

A welcome dose of good news before next week’s big European Central Bank meeting. Year on year inflation in the eurozone has climbed to its best rate since April 2014 this month, accelerating to 0.6 per cent from 0.5 per cent on the back of the rising cost of services and the fading effect of […]

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Financial

Wealth manager Brewin Dolphin hit by restructuring costs

Profits at wealth manager Brewin Dolphin were hit by restructuring costs as the company continued to shift its focus towards portfolio management. The FTSE 250 company reported pre-tax profits of £50.1m in the year to September 30, down 17.9 per cent from £61m the previous year. Finance director Andrew Westenberger said its 2015 figure was […]

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Financial

Travis Perkins and Polymetal to lose out in FTSE 100 reshuffle

Builders’ merchant Travis Perkins and mining company Polymetal face relegation from the FTSE 100 after their recent performances were hit by political events. The share price of Travis Perkins has dropped 29 per cent since the UK voted to leave the EU in June, as economic uncertainty has sparked concerns among some investors about the […]

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Banks

RBS share drop accelerates on stress test flop

Stressed. Shares in Royal Bank of Scotland have accelerated their losses this morning, falling over 4.5 per cent after the state-backed lender came in bottom of the heap in the Bank of England’s latest stress tests. RBS failed the toughest ever stress tests carried out by the BoE, with results this morning showing the lender’s […]

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Archive | November, 2016

Swiss arrest warrants for German tax inspectors

Posted on 31 March 2012 by

Credit Suisse headquarters in Zurich

German Social Democratic party (SPD) politicians reacted with fury on Saturday, after Switzerland confirmed it had issued arrest warrants against three tax officials from the SPD-controlled state of North Rhine-Westphalia in a major escalation of a lingering tax dispute between the two countries.

“This is a monstrous step”, said Hannelore Kraft, North Rhine-Westphalia’s premier. “The state of North Rhine-Westphalia protests against our employees being pushed into a criminal light”, she added.

Michael Lauber, Switzerland’s recently appointed federal attorney, confirmed warrants had been issued, as revealed by Germany’s Bild am Sonntag newspaper.

Mr Lauber said the decision to take action against the three unnamed officials followed their role in the purchase in 2010 by North Rhine-Westphalia of customer information about Germans holding offshore accounts in Switzerland.

The escalation comes at a sensitive time in Swiss-German relations, after the apparent collapse of a deal between Bern and Angela Merkel’s Christian Democrats led the federal coalition in Berlin to encourage rich Germans with secret Swiss accounts to regularise their affairs.

Under the arrangement, which mirrors a Swiss deal with the UK signed earlier this month, rich Germans with hidden Swiss accounts could retain their anonymity and avoid the risk of criminal action in the event of detection. In return, they would have to accept tax on future income from their accounts, along with a one-off penalty payment for tax not levied in the past – with all the proceeds going to the German authorities.

Switzerland’s government and bankers have praised the scheme as an elegant way of regularising so called “legacy” accounts, while boosting the coffers of financially stretched neighbouring countries. No statistics exist, but Germans are believed to be the biggest single holders of undeclared accounts in Switzerland, using the physical proximity between the two countries to transfer vast funds.

While strongly backed by Wolfgang Schäuble, Germany’s federal finance minister, the deal has been decried by SPD politicians who have claimed it lets tax dodgers off too lightly. As the agreement requires backing from the Bundesrat – the upper chamber of parliament, where Ms Merkel’s government has lost its majority – SPD states have blocked ratification.

Matters came to a head in the past week, after concessions by Switzerland to meet some of the SPD’s objections failed to produce the expected breakthrough.

News of the arrest warrants is likely to prompt populist glee in Switzerland, where there has been growing anger about apparent bullying by bigger neighbours. Apart from differences with Germany, Switzerland is also locked in a bruising battle about bank secrecy with the US.

The arrest warrants follow a growing practice among SPD-run German states to offer big financial rewards for Swiss bank employees prepared to sell confidential client information. Such behaviour is a serious crime in Switzerland, which has strict laws on bank secrecy, enforceable by prison sentences.

Mr Lauber told Swiss radio that there were concrete reasons to suspect the German officials had been involved in a breach of bank secrecy at Credit Suisse, Switzerland’s second-biggest bank.

The bank last year negotiated an out-of-court settlement with North Rhine-Westphalia after the latter bought for €2.5m a CD containing details about hundreds of German clients.

Some German officials and politicians have expressed reservations about the purchase of stolen data and its standing if ever brought before the courts. But the practice has not been tested – and has proved extremely effective in persuading thousands of Germans with hitherto secret Swiss accounts to declare their holdings voluntarily.

The latest steps are being played out against the background of forthcoming state elections in North Rhine-Westphalia and Schleswig Holstein, with SPD politicians viewing the issue of tax dodging and “social justice” as potential vote winners.

“The North Rhine-Westphalian tax officials were just doing their duty to hunt German tax cheats,” said Ms Kraft.

Myanmar launches new currency system

Posted on 31 March 2012 by

YANGON, March 31 – Myanmar will hold the first auction on Monday under a new currency regime that aims to unify its multiple exchange rates, a senior banker said, outlining the country’s boldest economic reform yet after years of isolation.

The Central Bank of Myanmar has published little so far about the new system. It has announced the new managed float would take effect from Sunday, April 1, when commercial banks are closed.

“April 2 will be the first day of the auction,” the banker told Reuters, declining to be named because he was not authorised to speak to the media.

The Central Bank of Myanmar is expected to announce a reference rate for the kyat against the dollar at around 9:30am on Monday (0300 GMT), the banker said.

The rate will be set after it receives bids from banks in Myanmar. Banks will then be allowed to buy and sell the currency in a trading band 0.8 per cent either side of the reference rate.

The new rate is expected to be floated near the recent black market range of 800 to 820 kyat per dollar, which is already used for most transactions in the country.

An official rate of around 6.4 kyat to the dollar has been used in the past by the government and some state firms, although the budget for the fiscal year starting April 1 was set using a rate of 800.

The kyat’s unofficial rate has jumped from more than 1,000 per dollar in 2009 as foreign money has flowed into the timber, energy and gem sectors. That has hurt a swath of Burmese, from farmers and manufacturers to traders and employees of foreign firms paid in dollars.

EU calls for IMF to boost its war chest

Posted on 31 March 2012 by

Eurozone crisis

European leaders said they believed the €200bn increase in their fiscal rescue fund agreed on Friday would be enough to persuade non-eurozone countries that Europeans had “done our homework” and lead them to supplement eurozone efforts by building their own global firewall against contagion.

François Baroin, the French finance minister, said after two days of meetings here with his European counterparts that “Europe has done its part”, suggesting it was now up to other large global economies to contribute to an enlarged International Monetary Fund war chest.

Wolfgang Schäuble, the German finance minister, said he wanted to put an end to speculation that the fund would be increased any further, adding that the eurozone has “now given our contribution” and had lived up to its “global responsibility.”

“There is no sum with which you can convince financial markets,” Mr Schäuble said, referring to the size of the eurozone firewall. “You can only be convincing with structural measures,”

Christine Lagarde, the IMF chief, has sought an additional $500bn for the IMF as a back-up to the eurozone’s two rescue funds, which now have a combined ceiling of €700bn. But US and IMF leaders have cautioned that their support for such an increase was contingent on a significant increase in the eurozone funds.

Although the US has said it would not contribute to the new IMF firewall, its support is crucial as the largest IMF shareholder.

US and IMF officials welcomed the eurozone decision, but were cautious about predicting whether it would lead to a commensurate effort by Group of 20 leading economies when they gather in Washington next month for the IMF’s spring meetings.

“Today’s announcement by the eurogroup reinforces a trajectory of positive efforts to strengthen confidence in the euro area,” said US Treasury spokeswoman Natalie Wyeth. “Over the last several months, European leaders have made significant progress in addressing the crisis.”

I trust that today’s decision will pave the way for an increase of the IMF resources by the IMF spring meetings next month, in mid-April

– Olli Rehn

The decision taken on Friday was the least ambitious of three options laid out by the European Commission, which included alternatives to raise the ceiling to as much as €940bn. European Union officials have warned such a minimalist approach may fail to “unlock” funding from non-European G20 countries.

In a statement, Ms Lagarde said the increase to €700bn will “support the IMF’s efforts to increase its available resources for the benefit of all our members,” and eurozone leaders said they believed the move was enough to get non-eurozone support.

“I think now the Europeans can travel to the spring meeting of the [World] Bank and the fund in Washington having done our homework on European firewalls and this can then be complimented by the global firewalls of the IMF resources,” said Jörg Asmussen, a member of the executive board of the European Central Bank.

Olli Rehn, the European Commission’s top economic official, noted that eurozone countries had already committed to lending €150bn to the IMF firewall. Although he had advocated a bigger increase, Mr Rehn said he was “satisfied” with the decision and said it should enable G20 countries, including some of the rapidly-developing Bric economies, to participate in the IMF fundraising.

“I trust that today’s decision will pave the way for an increase of the IMF resources by the IMF spring meetings next month, in mid-April,” he said.

Additional reporting by Robin Harding in Washington

Much at stake for Co-op as talks teeter

Posted on 30 March 2012 by

Just before Christmas, Lloyds Banking Group was confident the sale of 630 branches would be stitched up by this weekend.

While the business had not attracted the level of interest it was hoping for, Lloyds had selected the Co-operative Group as its preferred bidder – a popular choice in government and consumer circles – and said that it expected to secure terms for a deal in the first quarter.

Three months later the talks are hanging in the balance, with both sides playing down expectations that a deal will be reached.

At stake is not only a straightforward exit for Lloyds from the business it must sell to meet state aid rules but also a rare opportunity to create a serious competitor to the big five banks, say consumer groups.

Should the Co-op fail to agree a deal with Lloyds, the mutual would return to slower organic growth, picking up branches where it can and extending banking services in its grocery stores.

Reaching the kind of scale it would instantly achieve through the Lloyds purchase – 1,000 branches compared with its current 340 – without a big acquisition could take decades.

Meanwhile the Lloyds business would either be floated or sold off to NBNK, an investment vehicle that would be keen to reopen talks after its bid for the branches was rejected last year.

Either way, without an existing banking arm to merge the Lloyds branches into, hopes are fading that this business could create a viable competitor for consumers.

A review by Sir John Vickers’ banking commission last year said that to compete effectively banks need at least 6 per cent of the current account market.

As a standalone business the Lloyds branches would have about 4.6 per cent, less than Santander UK and Nationwide but more than other building societies.

“It’s clear this is the deal everyone wants,” says someone familiar with the process. “But the government can’t force it.”

While the Co-op’s bid has the support of ministers and consumer lobbyists, the regulator is taking a tougher stance.

Anxious that it does not wave through any more banking deals that blow-up shortly after they are approved, the Financial Services Authority is considering whether it should regulate the Co-op’s entire business if it buys the Lloyds branches.

This would pose stringent capital requirements on not just the mutual’s banking arm but also its grocery chain, funeral parlours, pharmacies and other smaller businesses.

For a group that is already struggling to compete with large retailers such as Tesco and Boots, this would be a disaster.

Having to hold a larger capital buffer would restrict the funds available to the Co-op for expanding its other businesses and could put further pressure on already squeezed profit margins, according to people close to the situation. Simply put, if the regulator does take this view, it is likely to kill the Co-op’s plans.

The mutual’s chief executive said on Thursday that discussions were continuing and a final decision would be made in the coming weeks.

He made clear that he would only push ahead if the deal was beneficial for members who have a stake in the whole organisation, not just the bank.

Should the talks collapse, Lloyds would probably resort to its back-up plan of floating the branch network – an option analysts say carries more risk that a clean sale.

This would make Lloyds solely responsible for carving out the branch network as an independent business, ensuring it had fully-functional systems and a robust management team and board.

Lloyds would also face the uncertainty of pricing a float in a difficult market and convincing private investors to back a bank that had failed to attract a buyer.

“It’s an issue of valuation,” says Robert Law, an analyst at Nomura. “The fewer options Lloyds has to choose from, the lower the price is likely to be.”

Also, he says, without a firm bidder Lloyds may have to improve the asset package, by including better quality mortgages, for example, to attract private investors.

Lloyds’ priority throughout the process has been to limit the execution risk of a deal rather than extract the highest price.

Analysts warn that failing to agree terms with the Co-op would leave the bank in a weak negotiating position and having to shoulder all the risk.

Wm Morrison bids to bolster staff saving

Posted on 30 March 2012 by

Wm Morrison, the UK supermarket chain, is set to offer its workers a novel pension savings scheme that will help them avoid the risk of fluctuating financial markets. The scheme comes alongside a comprehensive financial education effort which will run for the next three years, designed to promote what the company calls “a culture of saving”.

Norman Pickavance, group human resources director at Morrison, said the move to what are known as “cash balance” pension plans, and the drive to upgrade workers’ understanding of personal finance, are part of a move to improve customers’ shopping experience in an increasingly fierce fight for market share in the UK supermarkets industry.

“The business driver is that we want to be a different kind of supermarket,” Mr Pickavance said. “The service we provide depends on the skills of our workforce. Keeping people for the long term is a key part of that.”

Morrison also did not want to see older workers remain on the job solely because they do not have enough savings to retire, he said. “If they don’t want to keep working, they shouldn’t have to.” Last year the UK scrapped rules allowing employers to force workers into retirement at age 65, a practice known as the default retirement age.

Morrison has retained Alvin Hall, the personal finance specialist, to do “money makeovers” with staff to teach them how to manage their personal finances, in a campaign to be known as “Save Your Dough”.

Cash balance pension schemes promise to set aside a percentage of each worker’s pay every year and guarantee that it will rise in line with an indicator such as interest rates. In the UK, Barclays Bank is one of only a handful of employers that offers such pensions, although they are common in the US.

Morrison will ask workers to contribute 5 per cent of pay to the scheme, and it will contribute a notional 9 per cent of pay for each worker each year. But rather than rise and fall with markets, the sum will rise every year in line with inflation. Mr Pickavance said Morrison had not yet decided which inflation measure will be used.

The scheme offers less security than a defined benefit plan. At retirement, workers will take their lump sum and buy an annuity, with retirement income dependent on conditions in the annuities market at the time.

Although workers may lose out during years of bull markets, they will be protected through the sort of turmoil that has prevailed in the UK since 2008 and which has destroyed the retirement hopes of many older workers who now find they must remain at work.

Mr Pickavance said that Morrison had held focus groups to determine what type of benefit would best suit its staff and found widespread distrust of pensions because of recent stock market losses. Particularly among junior staff, he said, “there is a really negative emotion about [investment] losses.”

Fewer than 10 per cent of Morrison’s 132,000 employees are in the defined contribution scheme, which is open to new and existing workers and in which the supermarket matches each worker’s contribution of 5 per cent of pay with a similar sum of its own.

Few Danish lenders grab state lifeline

Posted on 30 March 2012 by

Danish banks borrowed just DKr18.9bn ($3.4bn) from the country’s central bank in the first of two operations designed to smooth funding issues and offer a lifeline to lenders that are due to pay back state aid in the next year or so.

The figure was just a fraction of the amount many had expected banks to borrow under the three-year loan programme offered by Danmarks Nationalbank. Analysts had predicted Danish banks would borrow at least $20bn.

The funding injection mimics measures taken by the European Central Bank to stave off a liquidity crisis in Europe’s banking system when hundreds of eurozone banks borrowed more than €1tn in December and February under the ECB’s longer-term refinancing operations.

Nils Bernstein, governor of Danmarks Nationalbank, pointed out in a statement that there were “no success criteria” attached to whether Danish banks used the facility or not. However, he reiterated that banks could take advantage of the cheap, three-year loan facility “on identical conditions” in September.

Lenders using the facility pay the central bank’s benchmark lending rate, which stands at 0.7 per cent.

Copenhagen was forced to provide state aid to a number of Danish lenders after the 2007-08 crisis, when rising interest rates and sharp increases in food and energy prices hit household incomes, dented consumer demand and led to a correction in property prices. Danish banks have until 2013 to pay back about DKr150bn of state aid.

Denmark’s banks – many of which are very small and operate low-margin businesses – are dealing with a weak domestic economy and the fallout from the wider sovereign debt crisis in Europe. Many are purely domestic lenders and would not have been able to take advantage of the ECB facility, because Denmark is not part of the eurozone.

Lenders have also found it harder to tap the public debt market to raise funds after the collapse of Amagerbanken a year ago, when many senior creditors were forced to accept losses on the money they were owed.

Danske Bank, Denmark’s largest lender, said on Friday that it had borrowed DKr15bn under the programme, using assets from its bond portfolio as collateral.

“We have chosen to avail ourselves of the Danish central bank’s new facility purely on the basis of business considerations,” says Peter Rostrup-Nielsen, Danske Bank’s chief risk officer. “We see the facility as a positive element in banks’ opportunities to support economic growth.”

Analysts said Danske was simply taking advantage of the cheap funding.

Strong first quarter for global markets

Posted on 30 March 2012 by

Global financial markets closed out a buoyant first quarter on Friday, with some indices enjoying their biggest rally since 2009.

The FTSE World index has climbed more than 11 per cent since January 1, its best quarterly performance since September 2010 and the best start to the year since 1998. “People realised they were pricing in Armageddon last year, and risk aversion has now been reversed,” Bob Doll, chief equity strategist at BlackRock, the world’s largest asset manager, told the FT.

Click to enlarge

The US market has been led by strong gains for banks and technology stocks, with the 50 per cent surge in Apple’s shares alone accounting for 15 per cent of the S&P’s 11.6 per cent rise. By contrast the blue-chip Dow Jones Industrial Average, whose more defensive constituent stocks pay higher dividends, finished the quarter up 7.5 per cent.

Asian stocks have also benefited from the return of global risk appetite. The MSCI Asia Pacific index has risen 13.5 per cent since the start of the year. Japanese stocks have been the top performers in the region, with the Nikkei 225 up 19.3 per cent as exporters benefited from the weakening of the yen against the dollar.

Many of this year’s best performing assets
– European bank shares, junk bonds, volatile emerging market currencies and peripheral eurozone government bonds –
had been pummelled in the second half of 2011.

The UK’s FTSE 100 index, however, has is only up a modest 3.7 per cent this year. In contrast, Greece’s stock market has gained more than 7 per cent – after shedding over 60 per cent in 2011.

“It’s been a fantastic quarter, especially for assets that fell out of favour last year,” said Ashish Shah, head of global credit investments at AllianceBernstein.

Nonetheless, many fund managers and bankers caution that the strong performance of the first quarter of the year is unlikely to be replicated. “We often get rallies at the start of the year, and it’s not plain sailing from here, particularly in Europe,” said William Davies, head of global equities at Threadneedle. “There are definitely potholes in the road forward.”

Lex chart

The sustainability of Greece’s debt restructuring remains uncertain, and investors have become increasingly concerned by Spain’s budget deficit slippage. The Spanish Ibex is the only major index to have dropped in the first quarter.

Norway’s sovereign wealth fund – one of the world’s largest investors owning over 1 per cent of global equities and 2 per cent of all European equities – is set to cut its exposure to Europe and increase it in emerging economies.

Mr Doll expects global stock markets to end the year higher, but warned that it could be a rocky trajectory: “We’ve come a long way in a short period, so a pause now would be natural. There are still a lot of things to be concerned about.”

Troubled Game Group nears rescue deal

Posted on 30 March 2012 by

There is fresh hope for Game Group this weekend, with the troubled video games retailer close to a rescue deal.

Three people familiar with the situation said a deal to buy Game out of administration was close. They said OpCapita, the private equity group that acquired electrical retailer Comet for £2 last year, was the frontrunner to acquire the video games retailer’s UK operations.

A rescue deal could come early next week. However, the situation remains fluid, with a consortium led by Royal Bank of Scotland and Barclays still evaluating keeping Game on the high street through a debt-for-equity swap.

People familiar with the situation said the complexity of a bank-led proposal, involving multiple lenders, meant a sale was more likely. OpCapita may also have an advantage over the other bidders as it first expressed interest in Game before it went into administration on Monday. It made an offer two weeks ago to acquire Game’s debt before administration, although this was rejected by Game’s banks.

GameStop, the US video games retailer is also thought to be interested in some of Game’s international operations. It was mooted as a potential buyer for some of the British shops although it was thought unlikely to pay a significant sum for the business.

A rescue deal could potentially bring hope to Game’s almost 3,000 employees in the 333 remaining stores.

Game admitted defeat after it was unable to pay a £21m quarterly rent bill, and PwC was appointed as administrator on Monday. PwC said it would close 277 stores with immediate effect, leading to just over 2,000 job losses.

GA Europe, the retail restructuring specialist, is supporting PwC in the continuing trading of Game as well as the store closure programme.

The collapse of Game was the biggest retail casualty since Woolworths in 2008. If it is rescued, it would also be the latest retail chain to be bought out of administration in a slimmed down form. Last month, Edinburgh Woollen Mill acquired the bulk of Peacocks after it collapsed in January.

However, it emerged earlier this month that OpCapita was looking to sell 60 of Comet’s stores.

Some analysts believe there is still a place for a specialist video games retailer despite the pressures on the market, including video gaming increasing moving online.

All parties declined to comment.

So far, the pain is likely to stay mainly in Spain

Posted on 30 March 2012 by

A Great Quarter is coming to an end. Stock markets have rallied consistently since the turn of the year, with no significant pullback. Helped, doubtless, by deep pessimism at the turn of the year, that made this the best opening quarter since equities entered their bear market in 2000.

For the S&P, its rise of about 11.5 per cent is the strongest opening quarter since 1998. For world stocks, the rise has been similar. In Japan, the Nikkei 225 had its best opening quarter since 1988, before its long slump started – although note that its 19 per cent rise is almost entirely a function of the weakening of the yen that followed the Bank of Japan’s surprise decision to loosen monetary policy. Measured in dollars, its rise was 11.7 per cent. Among the bigger markets, perhaps China was the only significant disappointment, with stocks gaining only 3 per cent for the quarter.

Market rallies seldom persist in straight lines. A pull-back before would arguably be healthy. And there is a risk of a repeat last year’s script, when a strong open was followed by a tough summer.

Why was this quarter so good? Two factors have justified the gains. First, the US economy has surprised on the up-side. As analysts have improved their forecasts, so that rate of positive surprise has dwindled, and the rate of improvement in critical measures such as jobless claims has fallen off. Next week’s data, highlighted by Monday’s supply-managers’ surveys and Friday’s payrolls, may determine whether this is the time for a pullback.

More importantly, there has been news from Europe. The European Central Bank’s long-term refinancing operations (LTROs), bestowing more than a trillion euros on European banks for three years at low interest rates, averted a crippling credit crunch, removed the risk of an imminent banking collapse, and engineered a sharp reduction in the rates that the Italian and Spanish governments have to pay on their debt. That eased the crisis, and gave politicians more time to negotiate longer-term solutions to the eurozone’s fiscal problems.

Did the ECB do anything more than relieve the risk of disaster? And are politicians really using the space they have been offered to achieve any thing more useful?

The answer to the first question appears to be “no”. Governments from Lisbon to Athens are finding it as hard as ever to balance the books.

The answer to the second could determine whether markets endure a drubbing to match 2011.

Beyond Brussels, the focus is now on the Iberian peninsula. Portugal, the market believes, must brace for a second bailout. As for Spain, it has failed to join in with the rest of the party this year.

The Ibex index of Spanish stocks fell 4 per cent for the quarter, in euro terms, led mainly by domestic banks and construction groups – the sectors most affected by the Spanish property bubble which is still far from completely unwinding. Meanwhile its government bond yields fell below 5 per cent, thanks to ECB-fuelled buying by banks. Now those yields are rising once more. They briefly hit 5.5 per cent, and have never returned to normal levels.

Part of the problem is political. Spain’s new prime minister Mariano Rajoy annoyed investors by announcing that he was watering down his public deficit targets for this year from 4.4 to 5.8 per cent of gross domestic product. The juxtaposition of violence in the streets during Thursday’s general strike with Friday’s budget, featuring an immediate 6 per cent rise in electricity prices and a 17 per cent cut in government spending, rammed home just how hard it will be to win popular assent for austerity – particularly when the economy is already forecast to contract by 1.7 per cent this year.

Not only Spanish politicians are being tested. European finance ministers yesterday reached a compromise in their attempts to strengthen the “firewall” against further sovereign debt problems. There will now be a total of €700bn available to aid governments who cannot finance their debts. But this sum was lower than many had hoped. It remains far less than the combined borrowing needs of Italy and Spain for the next two years.

It is encouraging that finance ministers agreed this without being forced to do so by a crisis. If nerves return, however, it may not be enough to convince investors that contagion from one market to another can be averted.

Markets are not oblivious to this; that is why Spanish securities have performed so badly while others have rallied. As the rest of Europe has rallied convincingly, the judgment at present is that contagion can indeed be contained. Any pain in Spain will stay there. But it would not take much to shake that confidence, or at least for a pullback in risky assets to put that confidence to the test. After a Great Quarter, the danger is that markets enter a Latin Quarter.

Europe warned crisis not over yet

Posted on 30 March 2012 by

Euro coin pworld

European finance ministers were warned on Friday that the underlying causes of the continent’s debt and banking crisis had yet to be resolved, as Spain, struggling to rein in its fiscal deficit, published its most austere budget since democracy returned after the Franco era.

Two confidential analyses prepared by European Union officials and distributed to ministers meeting in Copenhagen said €1tn in cheap loans to banks provided since December by the European Central Bank had provided a reprieve, but sovereigns and financial institutions needed to use the relative calm to shore up finances and balance sheets.

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“Contagion may … re-emerge at very short notice, as demonstrated only a few days ago, and re-launch the potentially perverse triangle between sovereign, bank funding risk and growth,” one of the analyses, prepared by the EU’s economic and finance committee and seen by the Financial Times, said. The existence of the documents was first reported by the Italian daily La Stampa.

The reference was a clear allusion to the recent sharp rise in Spanish borrowing costs, which have hovered near 5.5 per cent for more than a week. Eurozone and Spanish officials have launched a two-front offensive in an attempt to prevent the country becoming the next crisis victim.

In Copenhagen, ministers agreed to increase the ceiling of their two bailout funds to €700bn, an attempt to erect a firewall big enough to convince markets the EU can protect Spain. In Madrid, the government announced €27bn in benefit cuts and tax increases as part of the toughest budget since the death of General Francisco Franco in 1975.

As part of what Cristóbal Montoro, the budget minister, referred to the “the biggest fiscal consolidation of the democracy”, €12.3bn will be raised in new taxes, with €5.3bn coming from corporate taxes, and €2.5bn projected to come from a temporary amnesty on tax evasion.

Other savings will come from cutting ministry budgets by almost 17 per cent to €65.8bn this year. The foreign affairs ministry is hardest hit, losing 54 per cent of its funding. Industry and agriculture both lost just over 31 per cent each.

“We are convinced that Spain will no longer be a problem, especially for the Spanish, but also for the European Union,” Luis de Guindos, finance minister, said.

The warning on the fragility of the European recovery undercuts optimistic rhetoric by government leaders. Nicolas Sarkozy, French president, this month said the eurozone had “turned the page”, and Mario Monti, his Italian counterpart, this week said the “financial aspect” of the crisis had ended.

However, senior officials at EU institutions – particularly the ECB and the European Commission, the EU’s executive branch – have been more sanguine, warning the ECB’s long-term refinancing operation has bought time but cannot replace reforms in national economies and the financial sector.

The second document, which was prepared by the Commission, warned bluntly: “The euro crisis is not over. Many of the underlying imbalances and weaknesses of the economies, banking sectors or sovereign borrowers remain to be addressed.”

The paper argued the elements of the recent restoration of confidence – finalising a second Greek bailout, increasing the eurozone’s rescue fund, EU-wide bank recapitalisation, new eurozone fiscal discipline rules, and efforts to pass policies to encourage growth – must be fully implemented or leaders risk losing their last chance to act.

“If this window of opportunity is not most effectively used … we might have missed the last chance for a considerable amount of time,” the analysis said.