Are the financial markets really Europe’s savior? - Reuters Blogs Are the financial markets really Europe’s savior? - Reuters Blogs

Tuesday, June 12, 2012

Are the financial markets really Europe’s savior? - Reuters Blogs

Are the financial markets really Europe’s savior? - Reuters Blogs

If the euro is saved, the much-maligned power of global financial markets will deserve much of the credit.

The conventional wisdom among many on the intellectual left is that unbridled financial players threaten to destroy the European Union, one of history’s noblest, war-ending projects. The truth, however, is something else. To be sure, speculators lack noble motives, and global capital is a blunt instrument that tends to overshoot. But markets are forcing European leaders to fix their fatally flawed monetary union, a union that can only last with deeper economic integration and greater political (and democratic) legitimacy.

Last weekend’s agreement by Spain to accept a bank bailout, based on a European aid package of $125 billion, is a dramatic case in point. Senior Obama administration officials, in a series of urgent conversations with their European counterparts, warned that Spain posed the possibility of a “Lehman moment,” with global reverberations that no one could predict. If European leaders didn’t demonstrate to markets that they would pool their resources to address the banking meltdown of Europe’s fourth-largest economy, the contagion could have spread, what remained of U.S. and global growth could have evaporated, and the European Union itself would have been endangered.

In retrospect, it may have been wiser to build Europe without a common currency, one senior Obama administration official told me, given all the historical and national differences. However, now that the euro is used by 17 countries and has become a global reserve currency, the euro zone can’t be dismantled without unacceptable European and global risk. Thus, U.S. officials had been urging European leaders to settle the Spanish bank crisis before the Greek election next Sunday, June 17, and the G-20 meeting June 18-19, to avoid convening on the brink of financial catastrophe.

In the end, however, it wasn’t President Obama who forced a Spain deal through his lobbying with the top three euro country leaders – Chancellor Angela Merkel, French President François Hollande and Italian President Mario Monti. (Side note: One does wonder whether British Prime Minister David Cameron isn’t beginning to feel left out). Instead, it was the unrelenting pressure of European and global creditors and investors, who were withdrawing in droves from Spain, unsure whether a German-led Europe would provide the financial bazooka required.

The simple fact is that Europe some time ago ceased having a true monetary union. Although no country has withdrawn from the euro, markets have quit treating it as a trusted, common currency. As Irish economist Colm McCarthy writes: “Europe’s single financial market has been sundered through deposit flight and nation-by-nation re-matching of assets and liabilities.”

At an event jointly hosted by the Atlantic Council and Germany’s Suddeutsche Zeitung on Friday, IMF chief Christine Lagarde worried about political cycles running behind economic and market cycles, as “a movie we have watched one too many times.”

It looks something like this. Tensions escalate and, out of necessity, policy makers take action. But just enough for the danger to subside. Then the urgency is lost, momentum wanes, then the policy discourse begins to fracture, too focused on their own backyards and not enough on the big picture. And so tensions start to rise again.

But, with the passing of each cycle, we reach a higher and higher level of uncertainty, and the stakes rise. At this point, stability is at stake. Growth is at stake. In the case of Europe, the cycles are now threatening the very existence of the European project.

Markets tell politicians what they don’t want to hear. Economist Jean Pisani-Ferry says bond markets won’t be convinced until they see Europe has a banking union (Europe-wide banking supervision, deposit insurance, and crisis resolution), sufficient tax pooling (so that EU-level institutions can take charge of financial stability), and mutualization of enough of the costs of the crisis to convince markets that their bets against the euro are in vain.

Markets will continue to test Europe’s leaders until they are convinced they are committed to correcting their system’s flaws. And resisting markets is like complaining about the rain, and this one is a deluge. Global markets have a weight that no one anticipated when the Maastricht Treaty created the single currency in 1992.  Since then, global financial stock has quadrupled through 2010 to $212 trillion, from $54 trillion in 1990, according to the McKinsey Global Institute. More stunning yet, Lagarde says the total amount of outstanding OTC derivatives in 2011 was $648 trillion in 2011, compared with just $12.1 trillion in 1992.

Josef Ackermann, former Deutsche Bank chief executive and now chairman of Zurich Insurance Group, said at the Atlantic Council last week that markets have done Europe a favor by forcing upon it financial and structural reforms and greater discipline. “There’s no politician who stood up and said we have to change that – not one,” he said. Without markets shifting credit spreads, he believes Greek profligacy would have gone on for some more years. “We’ve completely changed the discipline of European countries going forward, and that’s a good thing.”

Beyond that, however, he says politicians need to do much more to convince voters of Europe’s value. “A fragmented Europe has no way for self-determination,” he warned. “We will have to accept what the United States, China, India, Brazil and other countries [dictate to] us. This cannot be the future of our children.”

If Europe manages this crisis successfully, Ackermann argues, it will instill a new self-confidence that will express itself globally as Europe jointly conquers a historic challenge. Conversely, it follows that failure could dramatically reduce Europe’s influence and unity for at least a generation to come.

PHOTO: A demonstrator hangs fake Euro notes on her leg during a protest against Spain’s bailout at La Constitucion square in Malaga, southern Spain, June 10, 2012. REUTERS/Jon Nazca

Business traveller: Getting travel approval - Financial Times

June 12, 2012 7:36 pm

PNC Financial sees higher demand for mortgage buyback - Reuters

Thomson Reuters is the world's largest international multimedia news agency, providing investing news, world news, business news, technology news, headline news, small business news, news alerts, personal finance, stock market, and mutual funds information available on, video, mobile, and interactive television platforms. Thomson Reuters journalists are subject to an Editorial Handbook which requires fair presentation and disclosure of relevant interests.

NYSE and AMEX quotes delayed by at least 20 minutes. Nasdaq delayed by at least 15 minutes. For a complete list of exchanges and delays, please click here.

Scottish independence: SNP denies financial plan U-turn - BBC News

The Scottish government has denied performing a policy U-turn by asking UK regulators to oversee Scots banks in an independent Scotland.

The opposition said the move came following the SNP's previous criticism of UK industry controls on Scotland.

But a spokesman for First Minister Alex Salmond said the policy had now simply been "defined".

Scottish Finance Secretary John Swinney laid out his position during a speech in Glasgow on Monday evening.

He underlined a plan to keep a "sterling zone" and the UK regulatory framework, if the Scottish electorate voted for independence in the referendum, expected to take place in autumn 2014.

Addressing a business audience, Mr Swinney said a sterling zone would provide businesses in Scotland and the rest of the UK with the "certainty and stability for trade, investment and growth".

He added: "As the Bank of England takes on the role of regulator for UK financial services - a very sensible and long overdue position - retaining the pound will preserve the highly integrated UK financial services market.

"That framework is solid and substantial and I know that understanding our proposal is important to many of you in making your decisions about Scotland's future."

This is difficult stuff for SNP ministers.

Their rhetoric about the financial crisis has been about failed regulation from London being more significant than the failings of bankers in Scotland.

And even if John Swinney thinks the coalition government's reforms are welcome, it still looks like regulation from London.

And from London, it looks a bit presumptions that a Scottish government can assume the protection of institutions based in London.

But the nationalist view is that the Bank of England, being a central bank for the whole of the United Kingdom, is not the creature of Whitehall or of the rest of the UK, but of Scotland as well.

Likewise, the pound sterling is "as much Scotland's currency as it is the currency of England and Wales".

SNP policy favours an independent Scotland joining the Euro, pending a referendum, but the current economic conditions means the option is not currently attractive.

Ministers also said the Bank of England would continue to oversee monetary policy and set interest rates, but an independent Scotland could have a seat on its Monetary Policy Committee, or have a role in appointments.

Labour said the SNP had previously talked about an independent Scotland having its own financial watchdog and had pledged "light-touch regulation".

Scottish Labour leader Johann Lamont, said: "The SNP are making this up as they go along.

"The bank regulators they blamed for the collapse of the banking system are now the people they want to be in charge of the banking system. They reject the UK but want to keep George Osborne in charge of the banks?

"The truth is they know the people of Scotland reject leaving the UK, so they are now performing contortions on policy to make leaving the UK seem like remaining in it."

When asked what the point of independence would be if the SNP favoured keeping the pound and subscribe to London-based financial regulation, the spokesman for Mr Salmond said there was a "fundamental distinction" between monetary policy and fiscal policy.

He explained: "What fiscal policy provides you with is the levers of economic power in order to boost economic growth and increase employment in Scotland.

"No Westminster government has control over interest rates and has not done so since 1997, so, in that sense, it would be exactly the same as for successive Westminster governments."

The spokesman said independence would provide Scotland with a "strong voice" in Europe, adding: "Independence is the only constitutional policy which can ensure that we have the ability to remove trident nuclear weapons from the river Clyde - devo max doesn't provide that power.

Start Quote

I don't quite know how you can be a servant of two masters, in terms of two separate treasuries and one central bank”

End Quote Sir Howard Davies

"Independence is the only constitutional option which can ensure that Scotland decides which military activities we are involved in in order that never again can Scotland be dragged into an illegal war such as Iraq."

The comments came as Sir Howard Davies, a former head of the Financial Services Authority, told BBC Radio's Good Morning Scotland programme that the SNP position to keep a central Bank of England and the pound was unclear.

He said: "It's not obvious quite how a system with two separate finance ministries and one central bank would work.

"Supposing the Bank of England looked again at a Scottish bank and said, 'it's really in trouble, people would want it to be rescued, but we're not going to rescue it unless we're indemnified', where would they look for that indemnity?

"It wouldn't be the UK Treasury, presumably the English Treasury - it would have to be the Scottish Treasury.

"I don't quite know how you can be a servant of two masters, in terms of two separate treasuries and one central bank. I can't think of an analogy where that's the case."

The Scottish government said it supported a key recommendation of the Vickers report into banking reform to remove the taxpayer from having to bail out troubled institutions in future.

Responding to Sir Howard's point, Scotland's deputy first minister, Nicola Sturgeon, said in the event of a Scottish bailout being needed: "The Scottish government, in that scenario, would pay the Bank of England to provide lender of last resort facilities for Scottish banks.

"The Scottish government has made clear, the SNP's made clear, that an independent Scotland would remain within sterling."

A Treasury spokesman said the Scottish government's proposals remained "totally unclear".

The spokesman said: "If they are proposing a full monetary union with Sterling, then the Eurozone crisis shows that strong control of monetary policy, fiscal policy and borrowing would have to be agreed with the UK government and exercised centrally.

"This includes the role of the Bank of England and the conduct of macro-prudential regulation.

"If they are proposing an independent Scotland using the pound but without a formal monetary union, the presumption is that the Bank of England would not be required to act as lender of last resort or take account of the Scottish economy when setting monetary policy."

Buffett lauds Chicago small business program graduates - Chicago Sun-Times

Updated: June 12, 2012 3:52PM

In Chicago Tuesday morning, billionaire investor Warren Buffett shared the story of how he paid $1 billion to buy a Chicago area business (the Pampered Chef) started by Doris Christopher with a $3,000 loan from her husband’s insurance policy. He also told of paying $60 million to buy another business launched by a Russian immigrant with $500.

“It finally dawned on me: You’ve got to catch these people early,” he said to 37 Chicago entrepreneurs who graduated from the Goldman Sachs 10,000 Small Businesses Initiative. “I wanted to meet 37 people like I met this morning. These are winners.”

Buffett and Goldman Sachs CEO Lloyd Blankfein joined Mayor Rahm Emanuel at the graduation of the entrepreneurs from the program.

For the past 20 weeks, through the City Colleges of Chicago’s Harold Washington campus, the business owners studied accounting, human resources, negotiation and marketing, among other topics. The program also included one-on-one business consultation and advice from Goldman Sachs professionals.

City Colleges Chancellor Cheryl Hyman said that as a part of the city’s colleges to careers initiative, Harold Washington College will focus on business, small business growth, and entrepreneurship professional services training.

Dennis Deer, graduate of the 10,000 small business program, said he has learned skills to empower his employees to succeed. He is CEO of Deer Rehabilitation Services Inc., a company that provides case management, psychological and forensic services to ex-offenders and law enforcement professionals.

He says he is now “spending time working on my business, not in my business.” He recently hired four new employees, raising his workforce to 22.

The initiative that launched in Chicago in September included a commitment of $25 million in small-business loans, business education and grants for supporting community partners.

It’s designed to help local small businesses create jobs and stimulate economic growth.

US stocks turn higher on hopes of stimulus - AP -

U.S. stocks are closing higher, recovering some of their big loss from a day earlier, after a Federal Reserve official said he supported more measures to stimulate the economy.

The Dow Jones industrial average closed up 162 points to 12,574.

Charles Evans, president of the Fed's Chicago bank, told Bloomberg News that he supported action to produce faster job growth. Last week, Fed Chairman Ben Bernanke said he was ready to act if the economy needs it but made no promises.

The Standard & Poor's 500 index gained 15 points to 1,324, and the Nasdaq composite rose 33 points to 2,843.

Gaining stocks outpaced losers about four to one in the United States. Volume was light, about 3.3 billion shares.

Copyright 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

No comments: