Greece to send loan request to euro zone as cash reserves burn

(Adds ECB funding, Schaeuble quotes)

* Greece to submit request for “loan agreement” on Thursday

* Athens minister hopes for deal by weekend

* Germany sees limited room for manoeuvre in talks

* Greece may run out of money by end of March -source

* ECB modestly raises emergency funding for Greek banks

By Renee Maltezou and John O’Donnell

ATHENS/FRANKFURT, Feb 18 (Reuters) – Greece’s leftist-led government said it will ask the euro zone on Thursday to extend a “loan agreement” for up to six months, raising prospects of a last-minute deal to keep the heavily indebted country afloat.

While European officials worked frantically with Athens to find a formula, the European Central Bank agreed on Wednesday to raise emergency funding for Greek banks, a person familiar with the ECB talks said. But the amount was enough to cover their needs for only a week if nervous Greeks keep pulling their deposits out at the current rate.

Greek Finance Minister Yanis Varoufakis expressed optimism that an impasse with fellow euro zone governments could be broken by the end of the week, saying he hoped a proposal to be submitted by Athens on Thursday would gain acceptance including from Jeroen Dijsselbloem, who heads the Eurogroup of the bloc’s finance ministers.

Dijsselbloem, along with German Finance Minister Wolfgang Schaeuble, has led demands for Athens to stand by its commitments to harsh austerity under its bailout programme with the European Union and IMF — the very policies that the new left-wing-led government has vowed to end.

With the bailout due to expire at the end of this month, Schaeuble has poured scorn on suggestions that Athens could negotiate an extension of euro zone funding without making any promises to push on with budget cuts and economic reforms.

But on Wednesday he indicated that there may be at least some room for compromise on a dispute that, if unresolved, could lead to Greece’s bankruptcy and departure from the euro zone.

“Our room for manoeuvre is limited,” he said during a debate in Berlin, but added. “We must keep in mind that we have a huge responsibility to keep Europe stable.”

Greece’s finances are in peril. It is burning through its cash reserves and could run out of money by the end of March without fresh funds, a person familiar with the figures said. The source said Athens had enough to repay a 1.5 billion euro ($ 1.7 billion) instalment to the International Monetary Fund next month but would struggle to pay public sector salaries and pensions in April.

TIDING BANKS OVER FOR A WEEK

Likewise its banks are dependent on the Emergency Liquidity Assistance scheme which is controlled by the ECB and provides funding as Greeks pull out their deposits, fearing Athens will impose capital controls to limit withdrawals — or that the country might even crash out of the common currency.

The ECB agreed on Wednesday to raise a cap on funding available under the scheme to 68.3 billion euros, a person familiar with the ECB talks said.

That was a rise of just 3.3 billion euros, less than Greece had requested. “The increase in the cap was a bit below what was requested, about 5 billion more, and expected,” one senior banker said. “Assuming the present outflow trends persist, it is enough to carry us over for another week.”

This modest increase keeps Greece’s banks, and thereby the government, on a tight leash and raises the pressure for a compromise at the Eurogroup.

The government of Prime Minister Alexis Tsipras wants to keep a financial lifeline for an interim period while sidestepping the bailout’s tough austerity conditions.

Whether other finance ministers in the 19-nation currency bloc, who rejected such ideas at a meeting on Monday, accept the request as a basis to resume negotiations will depend on how it is formulated, an EU source said. The wording has to match EU legal texts to win approval in several euro zone parliaments.

German Economy Minister Sigmar Gabriel, leader of the Social Democratic junior partners in conservative Chancellor Angela Merkel’s coalition, welcomed what he called the signal from the Greek government that it was ready to negotiate.

Tsipras said talks were at a crucial stage and his demands for an end to austerity were winning backing. “We have managed for the first time through contacts with foreign leaders to create a positive stance on our requests,” he said at a meeting with President Karolos Papoulias.

BRINKMANSHIP

EU officials said intensive consultations were under way between Athens, the Eurogroup and the European Commission, with Italy and France also involved in the search for a compromise.

European stocks rose to multi-year highs on Wednesday amid rising optimism that a deal would be reached by the end of the week. Greek government bond yields fell sharply and Spanish, Portuguese and Italian yields also dropped as fears of contagion to other vulnerable euro zone economies eased.

In a sign of concern in Washington at the financial risks to a strategically located NATO ally, U.S. Treasury Secretary Jack Lew telephoned Varoufakis to urge Greece to strike a deal with the euro zone and IMF, warning that failure would lead to immediate hardship.

Lew said the United States will continue to prod all parties in the talks to make concrete progress, noting that uncertainty was “not good for Europe.”

The Athens government released documents on Wednesday indicating it was taking a more flexible line to placate euro zone creditors than its anti-bailout rhetoric at home has suggested. They showed Varoufakis had offered to accept conditions on an extension to its loan agreements and even an inspection by the European Commission at a fraught meeting in Brussels on Monday.

($ 1 = 0.8775 euros) (Additional reporting by Reuters bureaux; Writing by David Stamp; Editing by Ruth Pitchford)

US and Greece helping to save the euro

Greece’s pleas to stop the “fiscal waterboarding” of its devastated economy are substantively no different from President Obama’s repeated warnings to Germany to stop bleeding the euro area economy with excessive fiscal austerity. Sadly, the president’s reportedly more than a dozen phone calls to the German Chancellor Merkel in 2011 and 2012 urging supportive economic policies in the euro area fell on deaf ears.

These calls were not just brushed aside; they were plainly ridiculed as Chancellor Merkel kept telling the media that “it made no sense to be adding new debt to old debt.”

But — worrying about one-fifth of U.S. exports going to Europe – Washington kept trying. The former U.S. Treasury Secretary Timothy F. Geithner went as far as visiting his German counterpart Wolfgang Schaeuble at his summer retreat on a North Sea island on July 30, 2012 to talk about relief to euro area economies. That’s where Geithner was in for a big shock. He writes in his book “Stress Test: Reflections on Financial Crises” that he was “frightened” by the German talk of Greece leaving (i.e., being pushed out of) the monetary union. President Obama, he says, was “deeply worried” about Berlin’s designs.

In the end, Geithner had to settle for his host’s assurances that everything was going to plan, and that the heavily indebted euro area countries were making progress on their structural reforms.

Indeed they were: At the time of that meeting, the Greek economy was sinking at a rate of 6.9 percent, followed by economic downturns of 3.5 percent in Portugal, 2.4 percent in Italy, 1.6 percent in Spain and a continuing economic stagnation in France.

These five countries represent 53.1 percent of the euro area economy, but Germany would not relent in its firm insistence on fiscal retrenchment. For the German Chancellor, these countries’ plight was just a case of self-inflicted wounds because “they did not respect the budget rules and failed to supervise their banks.”

Read More Greek deal odds ‘reasonably good’: Deutsche Bank co-CEO

That message played well with domestic audience in the run-up to German elections in September 2013. Obviously, it was important to be seen as a stern guardian of German finances bent on protecting taxpayers from southern spendthrifts and fiscal miscreants.

That policy exasperated so much Jean-Claude Juncker to push him into an unheard of attack on German leadership. Currently serving as the president of the European Commission (EU’s executive body), Mr. Juncker was Luxembourg’s prime minister and the chairman of the Eurogroup (a forum of the euro area finance ministers) when he aired his concerns in an interview to the French daily Le Figaro on July 29, 2012. Here is what he said: “… how can Germany have the luxury of playing domestic politics on the back of the euro? If all other 16 euro area countries did the same thing, what would remain of our common project? Is the euro zone just a branch office of the Federal Republic of Germany?”

NATO’s fraying southern flank

Washington, however, dropped the ball. The presidential election campaign was entering its most critical period, and in the late summer of 2012 (two months before the election date) it did not matter what Europeans were doing to themselves.

But now it does.

Having lost a quarter of its output during the financial crisis, the Greek economy weakened again in the fourth quarter of last year, leaving 28.5 percent of its labor force jobless and 50.6 percent of its youth out of the labor market. Italy remains mired in a seemingly intractable recession, with an unemployment rate of 12.9 percent and 42 percent of its young people unable to find a job. France’s 0.4 percent economic growth in 2014 marks a third consecutive year of virtual stagnation, with 10.3 percent of its idled labor force last December. Spain and Portugal have been able to eke out some recovery, but that has not made much difference to their deeply depressed labor markets; their respective unemployment rates stood at 23.7 percent and 13.5 percent at the end of last year.

President Obama certainly understood that these would be the consequences of pushing fiscal austerity on recessionary euro area economies. And, as Mr. Geithner observed, the president was “deeply worried” about Berlin’s policies because he suspected that they would lead to socio-political changes by forces that could undermine America’s all-important Atlantic alliance.

That’s what he got now — while facing an open warfare in the middle of Europe and a rapidly strengthening Chinese influence in Asia-Pacific.

Greece – a NATO member — is now in the hands of a coalition led by a radical left party. And Greece is of particular importance as a strategic partner in Eastern Mediterranean at a time when an increasingly assertive Turkey (also a NATO member) continues to expand its ties with Russia and with the China-Russia operated Shanghai Cooperation Organization. Washington probably also understands that, if pushed too far, Greece could – for starters — get more deeply involved with Russia’s energy projects, and with China’s efforts to complete its Maritime Silk Road to Europe through investments in Greek ports Piraeus and Thessaloniki, and in rail lines going from Greece to Hungary via Macedonia and Serbia.

Investment thoughts

Washington will help the euro by making sure that Greece’s already scaled-back demands for debt relief are met. A final solution may not be announced during today’s Eurogroup meeting in Brussels, but enough progress has been made for a compromise in the days ahead.

A longer term outlook, however, remains clouded. The euro area management has to change to make possible a more balanced growth and a policy making process compatible with an effective monetary union. But that is impossible without further political integration and significant sovereignty transfers no country seems willing to concede.

Another issue is Europe’s security architecture in the wake of the war in Ukraine and a number of frozen conflicts that might flare up any time. Washington neo-cons coalescing around Hillary Clinton’s undeclared presidential campaign have got their knives out – they are ready to strengthen the Atlantic alliance as a pillar of the new world order. Wish them luck.

Meanwhile, the growing U.S. economy and a strong dollar will continue to provide a lifebuoy to the beleaguered euro area economy.

Michael Ivanovitch is president of MSI Global, a New York-based economic research company. He also served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York and taught economics at Columbia.

Greece Sets Collision Course With Euro Partners After Tsipras Forges Anti-Austerity Coalition

European finance ministers started work on reviving Greece’s troubled rescue program as new Prime Minister Alexis Tsipras took office promising to end austerity.

Finance chiefs from the 19-nation euro area signaled their willingness to do a deal with Tsipras — so long as the new Greek prime minister drops his demand for a debt writedown. At a meeting in Brussels on Monday, ministers agreed quickly to work with the new government to help keep Greece in the euro, Dutch Finance Minister Jeroen Dijsselbloem said.

More from Bloomberg.com: Euro Strengthens After Greek Vote; U.S. Stocks Fluctuate

“We stand ready to support them in that ambition,” said Dijsselbloem, who led the meeting.

Officials in Brussels and Athens, as well as Berlin, Frankfurt and Washington, must reconcile creditors demands for more reform with voters’ exhaustion with austerity in order to stop Greece running out of money by mid-year. In a post-election speech, Tsipras, 40, said he aims to give Greeks back their dignity.

More from Bloomberg.com: Oil Slides to Near 6-Year Low; Saudi Arabia Holds Firm Despite Supply Glut

The new prime minister drew congratulations and an invitation to Brussels from European Commission President Jean-Claude Juncker in a telephone call today, an EU official said, and IMF Managing Director Christine Lagarde also lent her support to the new government. The outreach shows that authorities are anxious to find a way out of the standoff over Greece’s debts and remaining aid funds.

‘Other Taxpayers’

Euro-area ministers may “dangle the potential for future debt relief” through maturity extensions and interest rate cuts, while also preparing for hard negotiations as Greece’s cash needs increase, Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington, said in a telephone interview. He said at the end of the day, there still needs to be a deal on the current troika program.

More from Bloomberg.com: Blizzard Set to Bring New York, Northeast to a Standstill

“It’s true that the Greek electorate has spoken yesterday,” Kirkegaard said. Still, “Greece owes its debt to other taxpayers in the euro area and guess what, they have a vote too,” he added.

Tsipras’s Syriza party and the Independent Greeks announced plans for a coalition in Athens after Syriza won an emphatic election victory by harnessing a public backlash against years of job losses and hardship.

Schaeuble’s View

While Tsipras promised Greeks he’ll seek a writedown on the country’s debt from the European Central Bank, the International Monetary Fund and the euro area, most of the finance ministers said that is not up for debate. Monday’s meeting came too early for Greece’s incoming government to send its own finance minister.

“Nobody is forcing anything onto Greece but the obligations apply,” German Finance Minister Wolfgang Schaeuble said. “I don’t think it makes any sense now” to talk about a debt writedown, he added.

All the same, officials offered several areas for potential compromise.

Concessions to Greece

Thomas Wieser, the European Union official in charge of preparing meetings of euro-area finance ministers, told Austrian radio ORF that Greece’s official creditors will probably extend the deadline for the country to qualify for its next aid disbursement and Malta’s finance minister, Edward Scicluna, said the troika is also likely to ease its demands for further economic overhauls in Greece.

“The dialogue with the Greek authorities needs to be positive, calm and respectful,” French Finance Minister Michel Sapin told reporters after the meeting.

Greece’s program of austerity was in return for pledges of 240 billion euros ($ 270 billion) in aid since May 2010 with Germany as the biggest contributor.

For Yanis Varoufakis, an economist and Syriza lawmaker who is tipped as a potential Greek finance minister, the bailout wasn’t a rescue but “a vicious cycle,” that patently hasn’t worked.

“We want to sit down with our colleagues in Europe and find a mutually beneficial agreement,” he said in an interview with Bloomberg Television.

Euro Climbs

Stavros Theodorakis, the leader of the centrist To Potami group which won 17 out of 300 seats in the new parliament, said his party is also willing to join negotiations with the troika because the country needs to present a united front. He spoke to Mega TV in Athens after meeting with Tsipras.

The euro climbed for the first time in three days against the dollar as investors concluded that a Greek exit from the single currency zone was less likely, while Greek stocks and bonds fell. Dijsselbloem said markets reacted moderately to the elections. EU finance ministers are used to elections and are prepared to take them in their stride, he added.

To contact the reporters on this story: Rebecca Christie in Brussels at [email protected]; Jonathan Stearns in Athens at [email protected]

To contact the editors responsible for this story: Alan Crawford at [email protected] Ben Sills, Jurjen van de Pol

More from Bloomberg.com

  • Tsipras Wins and Sets Greece on Collision Course With Euro Partners
  • Where to Buy Gasoline for $ 0.002 a Gallon, Seriously
  • Hedge Funds Bet Oil Will Fall Further

Dollar strengthens against Euro on US jobs data

Following the U.S. jobs report on Friday, the dollar strengthened against the euro. It declined slightly against the yen.

The U.S. j ob picture held steady in December, with the U.S. economy creating 252,000 jobs for the end of the year, while the unemployment rate dropped to 5.6 percent. This extends the longest run of job creation on record. The U.S. was expected to create 240,000 jobs.

The dollar index (Exchange:.DXY), which tracks the greenback against a basket of major currencies, last stood unchanged. The index hit its highest in almost a decade on Thursday.

The euro stood at around $ 1.1806, near a nine-year low of $ 1.1754 reached on Thursday and close to $ 1.1747, the level at which it began trading in January 1999.

Numbers released on Friday by the euro zone’s two biggest economies, France and Germany , only darkened the outlook for the 18-nation currency bloc. Industrial output declined in both countries and German exports fell sharply.

Also weakening the euro was concern that a January 25 Greek general election will lead to a stand-off between Berlin and Athens over austerity policies imposed on Greece as a condition of its international bailout.

“Currently, market pricing is beyond that so there’s still a lot of scope for U.S. yields to rise and for that to continue to provide support for the U.S. dollar.”

“The dollar index is likely to rise beyond the 2005 peak. But to rise well beyond the peak, we will likely need to see further widening in yield gaps (between the dollar and other currencies),” said Minori Uchida, chief FX strategist at Bank of Tokyo-Mitsubishi UFJ in Tokyo.

Euro near 9-year low; dollar firm ahead of US jobs data

The euro wallowed near a nine-year low on Friday on growing expectations that the European Central Bank will embark on quantitative easing, while the dollar held firm before US jobs data that could cement the case for a rate hike by the Federal Reserve.

ECB President Mario Draghi said the bank’s Governing Council stands ready to take unconventional measures if needed to stem a prolonged period of low inflation, fuelling expectations of a policy move later this month.

Bond buying

The euro stood at $ 1.1806, having hit a nine-year low $ 1.1754 on Thursday as traders grew more convinced that the ECB might start buying euro zone sovereign debt. The currency was down 5.3 per cent in the past four weeks, the biggest such fall since May 2012.

“We note that (Wednesday’s) daily close below the 2010 low at $ 1.1877 has amplified bearish sentiment, with the resulting breakout targeting the 2005 low at $ 1.1640 as the next major support target,” George Davis, chief technical analyst at RBC Dominion Securities in Toronto, said in a note to client.

Soft euro zone economic data this week only cemented expectations of an early ECB action.

German industrial orders

German industrial orders suffered an unexpected slump in November, data showed on Thursday, a day after price data confirmed the euro zone slipped into deflation.

In addition, concern that a January 25 Greek general election would lead to a stand-off between Berlin and Athens over austerity policies imposed on Greece provided another reason for investors to steer clear of the euro.

On the other hand, the dollar was broadly firm as investors look for a solid increase in US employment, with the dollar index, now at 92.211, coming within sight of its 2005 peak of 92.630.

“The dollar index is likely to rise beyond the 2005 peak. But to rise well beyond the peak, we will likely need to see further widening in yield gaps (between the dollar and other currencies,” said Minori Uchida, chief FX strategist at Bank of Tokyo-Mitsubishi UFJ.

Against the yen, the dollar stood at 119.53 yen, extending its recovery from a low of 118.05 hit on Tuesday.

US payrolls data

Investors expect the US payrolls data due later on Friday to post a solid increase of 240,000 in December, after surprisingly strong gains of 321,000 in November.

Despite recent improvements in the job market, the Fed has said it will be patient in raising rates as inflation is expected to be subdued.

Fed’s patient approach

Boston Fed President Eric Rosengren, speaking on Thursday, highlighted the Fed’s cautious stance, saying the Fed can likely be patient not only on the timing of the first interest rate hike but on the series of subsequent hikes.

Still any signs of a pick-up in wage increases could heighten speculation of earlier action, with some analysts noting the importance of average hourly earning data that comes with the jobs report.

Earnings rose 0.4 per cent in November, the strongest in almost a year and a half. Another rise of 0.3 to 0.4 per cent could change the perception, likely damaging many emerging market currencies, Steven Englander, global head of G10 foreign exchange strategy at CitiFX in New York, said.

“The biggest jolt to the market would be to see a second month of AHE gains… we have not had an 0.7 percent gain over a two-month period since 2008, so it would count as a breakout,” he said.

Sterling at near 18-month low

Sterling stayed near an 18-month low on Thursday, as it suffered from a mix of broad dollar strength, weaker UK growth prospects and political uncertainty. The pound traded at $ 1.5091 near Thursday’s low of $ 1.5034.

As expected, the Bank of England kept its benchmark interest rate at its all-time low of 0.5 per cent, where it has remained since 2009. The BoE is now expected to keep it there until next year – a stark change from six months ago, when many were betting on a rise before the end of 2014.

FOREX-Euro near 9-year low, dollar firm ahead of US jobs data

* Euro pressure by mounting expectations of ECB easing

* Investors expect solid U.S. job gains

* Larger rise in U.S. wages could fan Fed rate hike

By Hideyuki Sano

TOKYO, Jan 9 (Reuters) – The euro wallowed near a nine-year low on Friday on growing expectations the European Central Bank will embark on quantitative easing, while the dollar held firm before U.S. jobs data that could cement the case for a rate hike by the Federal Reserve.

ECB President Mario Draghi said the bank’s Governing Council stands ready to take unconventional measures if needed to stem a prolonged period of low inflation.

The euro stood at $ 1.1792, having hit a nine-year low $ 1.1754 on Thursday as traders grew more convinced that the ECB might start buying euro zone sovereign debt as soon as this month.

“We note that (Wednesday’s) daily close below the 2010 low at $ 1.1877 has amplified bearish sentiment, with the resulting breakout targeting the 2005 low at $ 1.1640 as the next major support target,” said George Davis, chief technical analyst at RBC Dominion Securities in Toronto in a note to client.

Soft euro zone economic data this week also fanned expectations of early ECB action.

German industrial orders suffered an unexpected slump in November, data showed on Thursday, a day after price data confirmed the euro zone slipped into deflation.

In addition, concern that a Jan. 25 Greek general election would lead to a stand-off between Berlin and Athens over austerity policies imposed on Greece provided another reason for investors to steer clear of the euro.

On the other hand, the dollar was broadly firm as investors look for a solid increase in U.S. employment, with the dollar index, now at 92.307, coming within sight of its 2005 peak of 92.630.

Against the yen, the dollar stood at 119.79 yen, extending its recovery from a low of 118.05 hit on Tuesday.

Investors expect the U.S. payrolls data due later on Friday to post a solid increase of 240,000 in December, after surprisingly strong gains of 321,000 in November.

Despite recent improvements in the job market, the Fed has said it will be patient in raising rates as inflation is expected to be subdued.

Boston Fed President Eric Rosengren, speaking on Thursday, highlighted the Fed’s cautious stance, saying the Fed can likely be patient not only on the timing of the first interest rate hike but on the series of subsequent hikes.

Still any signs of a pick-up in wage increases could heighten speculation of earlier action, with some analysts noting the importance of average hourly earning data that comes with the jobs report.

Earnings rose 0.4 percent in November, the strongest in almost a year and a half. Another rise of 0.3 to 0.4 percent could change the perception, likely damaging many emerging market currencies, said Steven Englander, global head of G10 foreign exchange strategy at CitiFX.

“The biggest jolt to the market would be to see a second month of AHE gains… we have not had an 0.7 percent gain over a two-month period since 2008, so it would count as a breakout,” he said.

Sterling stayed near an 18-month low on Thursday, as it suffered from a mix of broad dollar strength, weaker UK growth prospects and political uncertainty.

As expected, the Bank of England kept its benchmark interest rate at its all-time low of 0.5 percent, where it has remained since 2009. The BoE is now expected to keep it there until next year – a stark change from six months ago, when many were betting on a rise before the end of 2014 (Editing by Shri Navaratnam)

Time for bottom fishing in the euro area?

Things will probably get worse because the highly unpopular French government is squeezed by political forces from left and right urging more assertive economic and foreign policies. They see Germany as a hegemon dictating the proceedings to the rest of Europe. The French left is in disarray, but the rightwing parties are regrouping around a distinctly nationalistic agenda largely set by the strengthening far-right Front National (FN) — which is bristling at German hectoring.

“Dozing on a volcano”

German relations with Italy are also characterized by frictions about structural reforms and fiscal consolidation. Struggling with a recessionary economy, a record-high unemployment rate of 13.2 percent (with youth unemployment at 44 percent), and a first-ever general strike last Friday by two of the country’s largest trade unions against a center-left government, Italy’s labor market reforms and fiscal policies are hostages to the notoriously slow and complicated political process.

Some progress on both issues is being made, though. And, without naming names, Italy’s finance minister is complaining that these efforts are not being acknowledged (presumably by Germany). But there is much less discretion about that on the part of Italy’s political leaders the government has to depend on to implement these reforms. A number of them are regularly venting strident anti-German statements and demagogic calls for Italy to leave the euro area.

Spain’s fast-growing radical left movement Podemos (We can) is also drawing strength from hostility to devastating socio-economic effects of austerity policies advocated by Germany. Currently polling at close to 30 percent, Podemos is becoming a serious contender in next year’s general elections. This unprecedented political formation is feeding on a 24 percent unemployment rate, more than half of unemployed youth and nearly one-third of the working poor – “mileuristas” earning about €1,000.00 per month.

Read More Europe economy ‘not improving fast enough’: EU

Greece’s apparently more virulent radical left party – Syriza – has a popular support of 25.5 percent, slightly ahead of the governing center-right New Democracy Party’s 22.7 percent. The poll, conducted by Kapa Research and published today (Sunday, December 14) by To Vima newspaper, also shows that the Greek Socialist Party (PASOK), the country’s third-largest, polled at 6.7 percent.

If, as seems likely, the next Greek president cannot be elected by the parliament in the three rounds of ballots, starting next Wednesday (December 17) and ending on December 29, the Prime Minister Samaras seems inclined to call an election rather than align himself with Syriza.

But regardless of how this situation plays out, Syriza has enough political clout to complicate Greece’s painful economic adjustment by continuing to rail against austerity policies.

And what is Germany saying to all this?

Lagarde's Error Could Be Costly For The Euro Area

The IMF’s Article IV consultation with the Euro area makes grim reading.

It starts off upbeat:

The euro area recovery is taking hold. Real activity has expanded for four consecutive quarters. An incipient revival in domestic demand is adding to the impetus from net exports. Financial market sentiment has improved dramatically, particularly after the recent ECB measures. Sovereign and corporate yields are now at historic lows in many countries, and lower funding costs have helped banks raise more capital.

And it then goes on to praise the efforts national governments have made to clean up their balance sheets. It also commends policy-makers and regulators for the nascent banking union and the clean-up currently in progress. “Strong policy actions have boosted investor confidence and laid the foundations for recovery”, it cheerfully proclaims.

But that’s where the cheerfulness ends. The fact is that the Euro area is still in deep, deep trouble. The IMF identifies four key areas of weakness:

  • Activity and investment have yet to reach pre-crisis levels. The recovery of private investment has been weaker than in most previous recessions and financial crises. In the first quarter of 2014, growth was weaker than expected and unevenly distributed across countries.
  • Balance sheets are still impaired and debt levels elevated. Public debt levels remain high. Weakness in banks’ balance sheets inhibits the flow of credit and corporate and household debt overhangs impede demand.
  • Inflation is worryingly low, including in the core countries. By keeping real interest rates and real debt burdens elevated, very low inflation stifles demand and growth. It also makes difficult the adjustment in relative prices and real wages that must occur for sustainable growth to take hold.
  • Unemployment, especially among the youth, is unacceptably high. The average rate for the euro area is around 12 percent. Youth unemployment is even more elevated, averaging close to 25 percent. High unemployment erodes skills and human capital, inflicting permanent damage on the capacity of economies to grow.

And the IMF notes that much higher growth is needed to bring down unemployment and debt. Indeed it is. The most highly-indebted countries in the Euro area – unsurprisingly, also those with the highest levels of unemployment – are either flirting with recession, or deeply depressed. Falling gdp raises the sovereign debt/gdp ratio. If growth in these countries fails to recover, their debt/gdp levels will inevitably rise, not because they are necessarily borrowing more (though if tax receipts also fall due to recession they may be forced to) but due to simple arithmetic. Households, too, are unable to reduce their debts when incomes are stagnant or falling. The Euro area as a whole does need much higher growth, especially in the periphery.

It’s not at all clear where this growth is going to come from. Euro area policy-makers so far have relied on fiscal adjustment to restore competitiveness in order to generate export-led recovery. But there is a global slowdown at present, largely due to China’s economic difficulties. Given this, the fragile export-led recovery of countries like Portugal and Ireland looks very vulnerable.

Intra-Euro area exports don’t look too promising either. Germany’s economy is slowing, and other core countries such as Finland and the Netherlands are in recession. France’s economy is rapidly becoming a basket case. There is a general shortage of demand within the Euro Area which is manifesting itself as very low inflation. This is echoed outside the Euro Area too: inflation everywhere is on a downwards trend. There is, in fact, a global shortage of demand.

The IMF, wisely, advises that Euro area policy-makers should concentrate on supporting demand. It commends the ECB’s recent interest rate cuts and TLTRO lending programme. And it recommends that if demand remains poor, the ECB should do QE, specifically by buying a weighted basket of Euro area government bonds.

The IMF also warns the Euro area not to impose additional fiscal austerity in response to debt/gdp hikes arising from recession: “large negative growth surprises should not trigger additional consolidation efforts”. IMF researchers have previously shown that debt/gdp actually tends to rise during fiscal consolidation, so reinforcing consolidation when debt/gdp rises can cause a damaging spiral of austerity, missed debt reduction targets and more austerity.

The IMF’s dovish stance has not gone down well in Germany. The German finance minister Wolfgang Schäuble disagreed with the IMF: far from easier monetary policy being needed, he argued that there was too much liquidity in financial markets and interest rates were too low. His worry was rising house prices in Berlin and other prime real estate areas. Low inflation in Germany bothered him not a jot, and nor did high unemployment and depression in the periphery. Rather, he emphasised the importance of fiscal consolidation in the periphery. In his view periphery countries can, and should, reduce their debt and deficits through their own efforts without help either from the centre or from the ECB. Growth will return when they make the necessary structural reforms.

It didn’t go down too well at the ECB, either. Draghi reminded everyone that QE can involve purchases of private sector securities – presumably with SME loan securitizations in mind, since that is the scheme currently being cooked up by ECB policy wonks. But as ever, he prefers to “wait and see”. Maybe the measures taken in June will be sufficient to restore growth in the Euro area despite all the headwinds. Maybe there is a confidence fairy. Maybe.

Christine Lagarde

Christine Lagarde (Photo credit: Adam Tinworth)

The widening cracks in the Troika are all too evident. But there is a much bigger problem. Last year, the IMF severely criticized the UK government’s fiscal austerity programme, which it said hampered growth. But the UK is now growing more strongly than any other Western country. On British television, IMF chief Christine Lagarde apologized. “We got it wrong”, she said.

Her apology was a major error. As Simon Wren-Lewis explains, the UK’s fiscal austerity has indeed hampered growth in the last four years, delaying the UK’s recovery from the financial crisis. But more importantly, Lagarde’s apology destroyed the IMF’s credibility regarding the politically-difficult Euro area Article IV consultation. It gave carte blanche to Euro area officials and politicians to say “you were completely wrong about the UK. Why should we take your advice?”

The IMF was not wrong about the UK – it was just late to the party. And it is not wrong about the Euro area, either. The Euro area desperately needs a looser monetary policy and relaxation of fiscal austerity. Structural reforms, while necessary, will not be sufficient to restore growth. The Euro area needs more investment – as the IMF recommends – and demand support, particularly in core countries where inflation is falling.

Above all, the Euro area needs hope. Relentless austerity and debt deflation depresses not just economies, but people. And it is people that drive economies. Somehow, the people of the Euro area have to be shown that politicians and officials really want to see growth restored. At the moment, it is not clear that Euro area politicians and officials even recognise that they have a problem. Wolfgang Schäuble’s comment that he sees no risk of deflation in the Euro area – even though inflation is currently at 0.5% – is telling. While politicians and officials remain so divorced from reality, it is hard to see much hope for the Euro area. A convincing IMF Article IV consultation could have restored some hope. The IMF’s loss of credibility is a disaster.

Although the IMF’s Article IV findings were grim, the recommendations, if implemented, would help to generate recovery. But they seem likely to be ignored. Lagarde’s error could prove very costly for the people of the Euro area.

Euro entry: Latvia banks on austerity 'success'

LATVIA, which joined the euro- zone yesterday, banks on its experience of austerity to bring it prosperity in a currency union where other economies have floundered.

The Baltic country of just two million people became the bloc’s 18th member at midnight, taking a step further out of the shadow of neighbouring Russia a decade after joining the European Union (EU) and Nato.

Latvia’s Acting Prime Minister Valdis Dombrovskis, who led his country through its worst economic crisis since it left the former Soviet Union in the early 1990s, said euro adoption was an opportunity, but not a guarantee of wealth, and the country should not relax its fiscal policy.

“It’s not an excuse not to pursue a responsible fiscal and macroeconomic policy,” he said after withdrawing the first euro banknote after midnight from a cash machine here.

The euro switchover ceremony took place at a site where Latvia’s crisis began – the former headquarters of the collapsed Parex bank, now headquarters of state-owned Citatele bank, which emerged from Parex’s ruins.

Parex, the country’s second-biggest bank by assets, went bust at end-2008, forcing the Baltic state to seek an international rescue to keep its currency, the lat, pegged to the euro at the same rate.

Its economy shrank by a quarter during 2008-2010, but then grew at the fastest pace in the EU, expanding by 5.6 per cent in 2012, after the government slashed spending and wages and hiked taxes in one of the harshest austerity programmes in Europe.

Latvia’s efforts have won praise from EU policymakers, who have pointed numerous times to the Baltic state as an example that austerity can work.

“Thanks to these efforts … Latvia will enter the euro area stronger than ever, sending an encouraging message to other countries undergoing a difficult economic adjustment,” European Commission president Jose Manuel Barroso said on Tuesday.

Still, a few concerns remain. The European Central Bank has warned Latvia that the high level of foreign deposits, mostly from Russia, in Latvian banks, as in Cyprus, was a risk factor.

Latvia also enters the eurozone without a permanent government after Dombrovskis resigned in December, taking political responsibility over a supermarket collapse in Riga that killed 54 people.

Latvia enters the eurozone as the single currency bloc marks its 15th anniversary, and the euro is now used by 333 million Europeans.

Even so, neighbouring Lithuania is the only remaining EU country showing much enthusiasm for euro admission after the temptations and strains of sharing a currency forced Greece, Ireland, Portugal, Spain and Cyprus to seek international bailouts for their government finances or their banks.

Estonia joined the eurozone in 2011, and Lithuania aims to do so in 2015.

Latvia, which becomes the fourth smallest economy in the eurozone after Malta, Estonia and Cyprus, expects the euro to lower its borrowing costs and encourage investors by eliminating currency risk.

Both Standard & Poor’s and Fitch have raised the country’s credit ratings in anticipation of its euro entry.

But opinion polls show ordinary Latvians are divided on the euro’s merits, with many worried that its adoption will be an excuse to raise prices. “In all other countries which had switched to the euro, prices rose. Most likely, they will rise here as well, ” said Oleg Bachurin, 62, a pensioner. Reuters

euro rate – Yahoo News Search Results

Latvia-riga-supermarket-euro_currency-euro_zone-eu-010114-reuters.jpg

Latvia caps years of austerity with euro zone membership

January 01, 2014

A man holds a €100 (RM451) banknote as he shops in a supermarket in the Latvian capital city of Riga today. - Reuters pic, January 1, 2014.A man holds a €100 (RM451) banknote as he shops in a supermarket in the Latvian capital city of Riga today. – Reuters pic, January 1, 2014.Latvia joined the euro zone today, banking on its experience of austerity to bring it prosperity in a currency union where other economies have floundered.

The Baltic country of just 2 million people became the bloc’s 18th member at midnight, taking a step further out of the shadow of neighbouring Russia a decade after joining the European Union and NATO.

Latvia’s acting prime minister, Valdis Dombrovskis, who led his country through its worst economic crisis since it left the former Soviet Union in the early 1990s, said euro adoption was an opportunity, but not a guarantee of wealth, and the country should not relax its fiscal policy.

“It’s not an excuse not to pursue a responsible fiscal and macroeconomic policy,” he said after withdrawing the first euro banknote after midnight from a cash machine in Riga.

The euro switchover ceremony took place at a site where Latvia’s crisis began – the former headquarters of the collapsed Parex bank, now headquarters of state-owned Citatele bank, which emerged from Parex’s ruins.

Parex, the country’s second-biggest bank by assets, went bust at end-2008, forcing the Baltic state to seek an international rescue to keep its currency, the lat, pegged to the euro at the same rate.

Its economy shrank by a quarter during 2008-2010, but then grew at the fastest pace in the EU, expanding by 5.6% in 2012, after the government slashed spending and wages and hiked taxes in one of the harshest austerity programs in Europe.

Latvia’s efforts have won praise from EU policymakers, who have pointed numerous times to the Baltic state as an example that austerity can work.

“Thanks to these efforts … Latvia will enter the euro area stronger than ever, sending an encouraging message to other countries undergoing a difficult economic adjustment,” European Commission President Jose Manuel Barroso said on Tuesday.

Still, a few concerns remain. The European Central Bank has warned Latvia that the high level of foreign deposits, mostly from Russia, in Latvian banks, as in Cyprus, was a risk factor.

Latvia also enters the euro zone without a permanent government after Dombrovskis resigned in December, taking political responsibility over a supermarket collapse in Riga that killed 54 people.

Latvia enters the euro zone as the single currency bloc marks its 15th anniversary, and the euro is now used by 333 million Europeans.

Even so, neighbouring Lithuania is the only remaining EU country showing much enthusiasm for euro admission after the temptations and strains of sharing a currency forced Greece, Ireland, Portugal, Spain and Cyprus to seek international bailouts for their government finances or their banks.

Estonia joined the euro zone in 2011, and Lithuania aims to do so in 2015.

Among the ex-Communist EU countries that have yet to adopt the euro, Croatia is stuck in recession while bigger economies such as Poland, the Czech Republic and Hungary have become reticent about currency union.

Latvia, which becomes the fourth smallest economy in the euro zone after Malta, Estonia and Cyprus, expects the euro to lower its borrowing costs and encourage investors by eliminating currency risk.

Both Standard & Poor’s and Fitch have raised the country’s credit ratings in anticipation of its euro entry.

But opinion polls show ordinary Latvians are divided on the euro’s merits, with many worried that its adoption will be an excuse to raise prices.

“In all other countries which had switched to the euro, prices rose. Most likely, they will rise here as well, which is bad,” said Oleg Bachurin, 62, a pensioner.

Latvia’s central bank expects euro zone entry to lift consumer prices by 0.2-0.3 percentage point in 2014, taking inflation to 2 percent.

“I’m not worried (about euro adoption). I believe it’s progress. We should not look back, we should go forward,” said Anita Linde, 57, a retailer. – Reuters, January 1, 2014.

euro rate – Yahoo News Search Results