First Greek bank bailout cash could come before stress test – euro zone source

Greek banks could get a first capital injection soon after a bailout deal is agreed, as much as 10 billion euros, even before the European Central Bank completes a stress test, a euro zone official familiar with the issue said on Monday.

The official, who asked not to be named, said a bank test may not be finished before October but that it was recognized the Greek banks need urgent capital to normalize their operations.

So an initial sum may be allocated even before the ECB can assess the total of how much is actually needed.

The comments suggest that European officials are warming to Greek plans to get cash to banks as soon as possible and at the very latest before the end of the year.

Athens wants to ease capital controls, in place since June, which now limit withdrawals to 420 euros per customer per week.

It also wants to avoid having the recapitalization slip into 2016, at which time new EU regulations would require charges, or haircut, on large depositors, including companies.

The EU has suggested Greek banks may need anything from €10 billion to €25 billion, but the final amount is dependent on stress tests and an asset quality review. These tests will be accelerated, the source said.

Athens and international lenders are making unexpectedly quick progress in talks over an up to 86 billion euro bailout package, aiming to wrap up the deal this month and use the fresh money to repay a bond due to the ECB on Aug 20.

Another source said that the initial instalment must be sufficiently large to shore up confidence and a figure around 10 billion is seen making a psychological impact.

Greece's bank rescue fund injected €25 billion into the four main banks—National Bank, Piraeus, Eurobank and Alpha—in 2013 in exchange for shares, and last year they raised a further €8 billion from international investors. — Reuters

Euro zone summit aims to keep Greece in single currency

BRUSSELS - Euro zone leaders will fight to the finish to keep near-bankrupt Greece in the single currency on Sunday after the European Union's chairman canceled a planned summit of all 28 EU leaders that would have been needed in case of a "Grexit".

But leftist Prime Minister Alexis Tsipras will be required to enact key legislation in parliament from Monday to start restoring the broken trust of his partners in the 19-nation currency union before they will agree to open negotiations on a third bailout, ministers said.

European Council President Donald Tusk announced that he had called off the tentatively planned meeting of EU heads of state and government, saying the euro zone summit to start at 4 p.m. (1400 GMT) would "last until we conclude talks on Greece".

Eurogroup finance ministers resumed a meeting suspended after nine hours of acrimonious debate on Greece's application for another three-year loan on the basis of reform proposals Tsipras accepted after long resisting.

A draft statement seen by Reuters said Greece must pass laws to change its value added tax and pension systems, reform bankruptcy rules and strengthen the independence of its statistics office before bailout talks can even start.

"The Eurogroup... came to the conclusion that there is not yet the basis to start the negotiations on a new program," the draft said.

"Only subsequent to legal implementation of the above mentioned measures can negotiations on the memorandum of understanding commence, subject to national procedures having been completed," it said, in a reference to authorization by national parliaments in countries such as Germany.

The draft said Greece needed 7 billion euros by July 20, when it must make a crucial bond redemption to the European Central Bank, and a total of 12 billion euros by mid-August when another ECB payment falls due.

It did not say how those needs would be met. A source said the statement would be handed over to the euro zone leaders and might not be issued before they meet.

Several hardline countries voiced support for a German government paper that recommended Greece take a five-year "time-out" from the euro zone unless it accepted and implemented swiftly much tougher conditions, notably by locking state assets to be privatized in an independent trust to pay down debt.

Argument became so heated that Eurogroup chairman Jeroen Dijsselbloem decided to adjourn at midnight and resume talks at 11 a.m. to allow tempers to cool.

"The main obstacle to moving forward is a lack of trust," Italian Economy Minister Pier Carlo Padoan told reporters.

The ministers agreed in principle to seek ways to ease Greece's debt burden by extending loan maturities and other steps stopping short of a "haircut" or writedown, provided Athens first implements reforms.

Greeks see humiliation
European Commission Vice-President Valdis Dombrovskis, who is in charge of the euro in the EU executive, doused Greek hopes of an immediate agreement on Sunday to start loan negotiations.

"It's utterly unlikely the European Commission will get a mandate to start formal negotiations as regards a third program or ESM program today," he said, referring to the European Stability Mechanism bailout fund.

Greece's new finance minister, Euclid Tsakalotos, was silent in public but the reaction among some lawmakers in Tsipras' radical leftist Syriza party, still smarting from having to swallow austerity measures they had opposed, was furious.

"What is at play here is an attempt to humiliate Greece and Greeks, or to overthrow the Tsipras government," Dimitrios Papadimoulis, a Syriza member of the European Parliament, told Mega TV.

With banks shuttered for two weeks, cash withdrawals rationed and the economy on the edge of an abyss, some Greeks in the streets of Athens vented their anger on German Chancellor Angela Merkel and Finance Minister Wolfgang Schaeuble.

"The only thing that I care about is not being humiliated by Schaeuble and the rest of theme" said Panagiotis Trikokglou, a 44-year-old private sector worker.

Greece has already had two bailouts worth 240 billion euros from euro zone countries and the International Monetary Fund, but its economy has shrunk by a quarter since the crisis began, unemployment has soared above 25 percent and one in two young people is out of work.

Athens defaulted on an IMF loan repayment last month and faces state bankruptcy if it cannot make the bond redemption on July 20, which would likely force the ECB to cut emergency funding for Greek banks.

German sources said Schaeuble, Merkel and Social Democratic Vice Chancellor Sigmar Gabriel had agreed on a division of labor to force Greece to accept tougher conditions or leave the currency area temporarily.

However economists said the idea of a temporary exit was likely to mean ejecting Athens from the European monetary union in the end.

Paul De Grauwe, a Belgian economist at the London School of Economics, compared it to a couple having a trial separation.

"Temporary Grexit is like temporary divorce. Most if not all end up being permanent," he said in a Twitter message.

Holger Schmieding, chief economist of Berenberg Bank, was even more categorical, saying: "Temporary Grexit is Grexit."

Analyst Nicolaus Heinen of Deutsche Bank told Reuters that billions of euros withdrawn by Greeks before capital controls were imposed would crowd out any new currency in a cash economy similar to Cuba or Lebanon, where the dollar is king.

There would be political conflict over a date for Athens' return to the euro zone, and "tension between Greece and the rest of Europe would be bound to grow if Greece was sent to stand outside the classroom like a naughty schoolboy," Heinen said.

Merkel is under mounting pressure from her own conservatives not to give any more money to Greece, but she has so far said she wants to hold the euro zone together, and that will require a third program for Athens.

She requires the assent of the German parliament to agree to the opening of loan negotiations, so diplomats expect her to commit to calling a special session of the Bundstag to give her that mandate if Greece enacts prior reforms this week

The United States has added its voice to calls for a deal this weekend, concerned at the geopolitical consequences if Greece were to be cut loose and become a failed state in the fragile southern Balkans, adjoining the Middle East.

"No one wants to see a North Korea in southeastern Europe," a European Commission official said. — Reuters

Europe rejects Greek bailout extension after referendum shock

BRUSSELS, Belgium - Greece hurtled towards default and a possible euro exit Saturday after Europe responded to the leftist government's announcement of a surprise referendum by refusing to extend Athens's desperately needed bailout.

The most dramatic day in the five-month crisis saw long lines of people queuing at cash machines in Greece after the announcement by radical Prime Minister Alexis Tsipras, amid fears of a bank run and possible capital controls.

In Brussels, Greek Finance Minister Yanis Varoufakis had asked eurozone colleagues to stretch the aid plan for a few days past its June 30 expiry date and until after the July 5 referendum vote on a creditor reform plan, but they unanimously rejected his appeal.

The move leaves debt-laden Athens struggling to meet a crucial 1.5 billion euro IMF debt payment on Tuesday, putting Greece's place in the single currency at risk and threatening the entire post-war European project.

"The Greek government has broken off the process, has rejected the reform proposal and is now putting the question in a negative way to the Greek people, which is an unfair way of putting the question," Eurogroup president Jeroen Dijsselbloem told a press conference.

"Given that situation, I think we might conclude that however regretful, the program will expire Tuesday night," the Dutch minister said.

Underscoring Greece's perilous position in the currency union, Dijsselbloem said the other 18 eurozone finance ministers would now hold fresh talks without Greece present to discuss the "consequences" and "prepare for what's needed to ensure the stability of eurozone remains at its high level."

Greece fears ‘permanent’ damage

The Greek parliament will vote on whether to go ahead with the referendum at midnight  (2100 GMT), after an address by Tsipras.

The outspoken Varoufakis warned that the decision could permanently damage the single currency, formed in a bid to bring unity to a once fragmented continent.

"The refusal of the Eurogroup today to endorse our request for an extension of this agreement for a few days or a couple of weeks ...will certainly damage the credibility for the Eurogroup as a democratic union and I am very much afraid the damage will be permanent," Varoufakis said.

But he said he was "still fighting" for a deal, and insisted the radical leftist Syriza government would "honor the verdict of the Greek people" in the referendum.

A Eurogroup statement issued after the meeting said it was "supported by all members... except the Greek member."

Greece's negotiations with its international creditors that have dragged on since January, when Tsipras's Syriza party first took power on a promise of ending austerity after two EU-IMF bailout programs since 2010, worth 240 billion euros.

Syriza has repeatedly refused to make cuts to pensions and changes to the VAT system demanded by Greece's bailout monitors: the European Commission, European Central Bank and International Monetary Fund.

A week of intensive talks in Brussels ended with Greece's creditors on Friday offering Athens a five-month, 12-billion-euro ($13.4-billion) extension of its rescue program, on condition it committed to fresh reforms.

Germany's hardline pro-austerity finance minister Wolfgang Schaeuble said the Greek government had "ended the negotiations unilaterally" and rejected that offer.

ATM queues

The European Central Bank will now play a crucial role in ensuring Greece's banks have the cash to open on Monday, and two top Tsipras aides were meeting ECB head Mario Draghi in Brussels on Saturday.

The governing council of the ECB was also reported to be meeting on Sunday, and was "closely monitoring developments", the bank said.

Greece was stunned by the referendum announcement by radical leader Tsipras, which came just hours after he had been at a summit with European leaders in a bid to end the crisis.

"The people must decide free of any blackmail," the 40-year-old prime minister said in a televised address to the nation late on Friday.

"We were asked to implement austerity measures... allowing the deregulation of the labor market, pension cuts, and an increase in VAT on food products, targeting the humiliation of an entire people," Tsipras said in his address.

Queues built up at cash machines in Athens. In Greece's second city, Thessaloniki, some banks have run out of money, according to an AFP reporter, while a National bank branch had a queue of 50 people.

"I have a shop. I came to the bank to withdraw as much money as I can in order to cover the needs of my shop for next week," 42-year-old Maria Kalpakidou told AFP.

Demand at petrol stations was also said to have "heightened" but there were no fuel shortage problems, according to state news agency ANA.

Draghi has been keeping the Greek banking system alive with near-daily cash infusions as it is frozen out of the capital markets.

The Eurogroup will now discuss worst case scenarios, ranging from a Greek default next week to a possible exit from the eurozone and even, as suggested by the Greek central bank, the 28-nation European Union. — Agence France-Presse

source: gmanetwork.com

Behind the scenes, Greece and creditors push for breakthrough

ATHENS/BRUSSELS - Greek Prime Minister Alexis Tsipras spoke to the leaders of Germany, France and the European Commission by phone on Sunday in an attempt to break the deadlock over a cash-for-reforms deal as time runs out to save Greece from bankruptcy.

After months of wrangling and with anxious depositors pulling billions of euros out of Greek banks, Tsipras's leftist government has signaled a willingness to make concessions in order to unlock 7.2 billion euros in bailout money.

But a day before an emergency summit in Brussels, it is still unclear how far Tsipras, elected in January on a pledge to lift his people out of years of austerity, will yield.

His Syriza party plans a rally in Athens to send "a loud message of resistance" against demands for more cuts and tax hikes in a country battered by years of recession.

But the mood has also hardened in Germany, which has contributed more money than any other country to bailing out Greece. German Chancellor Angela Merkel is under pressure from within her ranks not to give in to Greek demands, even if that means contemplating Greece leaving the euro zone.

Athens urgently needs access to funds to avoid defaulting on a 1.6 billion euro IMF loan that falls due at the end of the month. But as the crisis gets pushed from one meeting to the next, each side has put the responsibility on the other's shoulder for finding a deal.

Money has drained out of Greek banks after a breakdown in talks last weekend, and Greece might have to impose capital controls within days if there is no breakthrough.

Tsipras called Merkel, French President Francois Hollande and Juncker with the latest Greek offer over the weekend.

"The prime minister presented the three leaders Greece's proposal for a mutually beneficial agreement that will give a definitive solution and not a postponement of addressing the problem," a statement from Tsipras's office said.

His government was holed up in an hours-long cabinet meeting on Sunday. Over the weekend, senior European officials have remained in close contact ahead of a meeting of finance ministers and euro zone leaders on Monday.

"Everyone's talking to everyone," an EU official said. "We're continuing to work informally on a solution."

No to blackmail

For a deal to work, Tsipras will need a solution that is acceptable to his party or else may be pushed to call a snap election or a referendum to secure a mandate for an agreement.

Under the austerity measures imposed by the IMF, the European Union and the European Central Bank in two bailouts, Greece's economic output has fallen 25 percent, wages and pensions have been slashed, and one in four Greeks is jobless.

The Greek government has resisted demands for pension cuts or tax rises, arguing that the austerity imposed on the southern European country had made the crisis worse. A senior Syriza lawmaker said on Sunday that previous ideas put forward by Juncker would have led to a "social holocaust".

"Democracy cannot be blackmailed, dignity cannot be bargained," the Syriza party said in a statement on Sunday, announcing its planned protest.

"Workers, the unemployed, young people, the Greek people and the rest of the peoples of Europe will send a loud message of resistance to the alleged one-way path of austerity, resistance to the blackmail and scare-mongering."

European ministers have played down the prospect of a final agreement on Monday but hope a political understanding can be reached in time for a full deal by the end of June.

Merkel's Bavarian allies warned against giving in to Greece, with senior Christian Social Union lawmaker Hans Michelbach saying he saw no realistic chance of an agreement on Monday.

"If the EU lets the government in Athens get away with its intransigence, we can bury the euro," Michelbach said in a statement on Sunday.

"Either Greece declares itself willing for a viable solution or the country must leave the euro. The euro zone could cope with the consequences of a Greek exit," he said. — Reuters

Global Markets: Stocks struggle after euro zone growth reports

LONDON - European stocks fell back on Friday and US stocks looked set to open flat after a mixed bag of euro zone growth numbers that showed France and Germany growing marginally but others like Italy still firmly in recession.

Asian stocks had fallen earlier on the latest signs that growth in China is also slowing and the European data confirmed that the outlook for much of the world economy still looks much shakier than for the United States.

Energy stocks were depressed as crude oil edged up from a near four-year low hit in Asian time and the Russian ruble, hammered in recent weeks as world oil prices fell, was down almost 1 percent, testing record lows around 48 per dollar.

Germany's economy eked out growth of 0.1 percent on the quarter, while France - generally seen as in deeper trouble than its neighbor - grew by 0.3 percent, helping the euro zone as a whole to grow 0.2 percent.

"The German number is slightly positive - in line with expectations, but it's still soft," said Patrick Jacq, a rate strategist at BNP Paribas in Paris.

"The (French) growth in Q3 is only driven by inventories. It's just a one-off positive figure in a very weak environment and therefore this is not something which could lead the market to think that the economic situation is improving in France."

European shares fell 0.4 percent, with traders saying a dip below an important technical barrier had helped spur a slump in Frankfurt mid-morning.. France performed better but was still 0.1 percent lower.

Telecom gear maker Nokia was among the big losers, down 5.6 percent as traders cited disappointment with the group's updated profit margin targets.

MSCI's broadest index of Asia-Pacific shares outside Japan slipped 0.2 percent, countered by a half-point rise in Tokyo.

A Reuters poll showed Japanese companies overwhelmingly want Prime Minister Shinzo Abe to delay or scrap a planned tax increase, a move expected to come along with a decision, expected by many, to call a new election.

The yen, down more than 3 percent against a stronger dollar this month, fell another half percent to a seven-year low of 116.385 yen per dollar.

"The argument is that delaying the sales tax hike means the impulse to CPI inflation will start to drop," said Alvin Tan, a currency strategist at French bank Societe Generale in London.

"If there's no additional sales tax hike, the impulse to higher inflation starts to fade away quite rapidly. So in order to push inflation higher, which is what everybody wants, you need the currency to weaken a lot more."

New chapter
The perception that the US economy is faring better than either Europe's or Japan's, and expectations that monetary policy there will tighten next year as a result, has helped push the dollar higher against both the euro and yen.

The euro was down 0.2 percent at $1.2429, inching back towards a two-year low of $1.2358 struck last Friday.

Oil edged up from an early four-year low below $77 a barrel, still pressured by excess supply and skepticism that OPEC would cut output at a meeting in two weeks.

The International Energy Agency, which usually refrains from predicting oil prices, said in its monthly report that prices could fall further in 2015 and pressure was building on OPEC to cut supply.

"It is increasingly clear that we have begun a new chapter in the history of the oil markets," the IEA, which advises the United States and other industrialized countries, said.

"Barring any new supply disruption, downward price pressures could build further in the first half of 2015."

Brent hit an intra-day low of $76.76 in Asian time but had recovered to trade at $78.52 as of 1248 GMT.

Global benchmark Brent is down from $115 in June and has dropped for eight weeks in a row, its longest weekly losing streak since records began in 1988, based on Reuters data. — Reuters

As Europe struggles, companies focus on cost cuts

DAGENHAM, England - Glistening chains on the turnstyles at Ford Motor Co.'s plant in east London illustrate how, even when companies unveil positive news about their European operations, it may not mean things are picking up in the economy.

Ford told investors this week that its European operation was performing better than expected and that its turnaround on this side of the Atlantic was on track.

But this recovery is largely premised on cutting costs, with demand for vehicles still falling across the continent and the industry facing overcapacity.

"The outlook for the business environment in Europe continues to be uncertain," Bob Shanks, the U.S. automaker's chief financial officer, told analysts on Wednesday.

A day later work stopped at the 750-strong Dagenham plant, which made bonnets and doors for Transit vans, and workmen lowered white concrete barriers across the entrances to employee car parks—all part of Ford's plan to create a "more efficient manufacturing footprint" in Europe.

Aggressive cost-cutting in Europe contributed to the better-than-expected second-quarter profit General Motors Co reported on Thursday.

Other sectors are also cutting back. Kimberly Clark shut a Spanish factory after the company decided to stop selling its Huggy diapers in most European markets and exit other businesses on the continent.

U.S. advertising group Interpublic, supermarket chain Carrefour, electrical goods makers Indesit and staffing group Randstad were among the companies which told investors in the past fortnight that weak European demand was forcing them to cut costs and jobs.

"Whatever earnings growth is coming is base-line activity or cost cutting. Capex [capital expenditure] is where companies are saving money, trying to keep the bottom line healthy," said Chris Weafer, senior partner with consultancy Macro-Advisory.

Recent economic data has suggested the euro zone is starting to turn a corner and Britain looks definitively to be back on a growth path.

Those improvements in leading indicators have prompted institutional investors to look at Europe with new interest.

With stock markets in Japan and the United States posting double-digit gains so far this year, investors may have squeezed as much as they can out of a recovery story there and are looking for the euro zone and Britain to pick up the growth baton.

But it will take more than the first tips of green shoots to persuade companies to invest heavily once more.

Chicken and egg

Investment plummeted after the financial crisis, with the euro zone business investment rate in the last quarter of 2012, the most recent period for which figures are available, at its second-lowest level since 2001.

The widespread focus among executives on scaling back, and the dearth of plans to spend more, highlighted how Europe was not out of the woods yet, despite some recent positive signs from Eurozone Purchasing Managers' surveys last week, said Yiannis Koutelidakis, economist at Fathom Consulting.

The absence of spending from companies is contributing to a chicken and egg situation, delaying the recovery that might prompt them to spend more.

"The lack of investment and the continued government austerity, is definitely a drag on the outlook," said Bert Colijn, economist at the Conference Board, a research organization.

"If we see a recovery in Europe in the second half of the year, which is something that is becoming more realistic, that recovery will be very slow."

Some businesses said predictions of recovery in the second half of 2013 were optimistic. Marco Milani, Chief Executive of Italy's Indesit, said he wasn't confident of recovery in 2014 and consequently was cutting back investment and shifting manufacturing out of Europe.

In June, the company published a plan that envisaged cutting its Italian workforce by a third and moving some operations to emerging markets, including Turkey.

Economists say these kinds of actions pose long-term risks for Europe, because even when demand recovers, it will increasingly be served from outside the continent.

"The crisis will leave structural scars on the economy," Koutelidakis said.

Corporate belt-tightening could even be accelerated if the United States starts withdrawing monetary stimulus, as Federal Reserve Chairman Ben Bernanke has indicated it might. Such a move could raise borrowing costs for European businesses, further eating away at profits and discouraging investment.

Not all companies are reporting falling sales in Europe.

Home-appliance manufacturers Whirlpool Corp and Electrolux AB forecast a rebound in demand from Europe, suggesting consumer confidence may be returning.

It would be natural for consumer spending to pick up before capital investment.

"While southern Europe continues to lag, there are some positive trends in Germany, the Nordics in particular and the UK," Electrolux Chief Executive Keith McLoughlin told Reuters.

But even in some cases where companies reported strong European demand and plans to increase hiring to meet it, they retained an air of caution.

Swedish truckmaker Volvo reported healthy sales and said it was increasing production in Europe to help deal with a growing order backlog.

Yet Chief Executive Olof Persson told analysts on Wednesday that Volvo, which makes trucks under brands such as Renault and Mack as well as its own name, would take on temporary workers to raise output, rather than commit to taking on new full time employees.

"This production ramp up has been done with temporary workers. And this is what we're going to focus on very much going forward ... in order to be more agile in adapting to whatever comes ahead of us," Persson said. —Reuters

source: gmanetwork.com

Eurozone crisis is over - France's Hollande

TOKYO - The crippling debt crisis that has ravaged Europe for years is finished, France's President Francois Hollande has declared, despite high unemployment and lingering recession on the continent.

"You must understand that the crisis in the eurozone is over," Hollande told an audience in Japan during a three-day state visit.

Hollande's comments on Saturday came just a week after thousands of people took to the streets of European cities to vent their anger at the "troika" of international powers whose insistence on austerity is blamed for worsening their economic hardship.

There were angry scenes in Frankfurt near the European Central Bank, and in Spain and Portugal -- two of the countries that have received bailouts to help them plug fiscal holes.

The troika of international lenders -- the International Monetary Fund, the European Union and the European Central Bank -- have imposed strict conditions on countries such as Greece and Portugal in exchange for bailout funds.

In Greece and Spain the unemployment rate has reached 27 percent, while Portugal's is forecast to climb to a record 18.2 percent this year.

The figures for youth unemployment are much higher.

Hollande, who was in Tokyo on the first state visit by a French president in 17 years, said Japan and Europe needed to cooperate to forge an economic partnership that would be good for both.

"I want to play a major role in getting an agreement between Europe and Japan," he said, a reference to free trade negotiations that have recently been given the nod.

A Japan-Europe partnership "would be economically good for Europe and good for Japan."

During his visit, Hollande was generous in his praise of Japanese Prime Minister Shinzo Abe's bid to reignite growth in the torpid Japanese economy, a policy dubbed "Abenomics", which he said Friday was "good for Europe".

The prescription blends big fiscal spending, easy money and structural reforms intended to make it easier to do business in Japan.

In the six months since Abe came to power, Japan's stock market has boomed and the value of the yen has slid, giving hope to the country's beleaguered exporters and sending his approval ratings soaring.

For some in austerity-weary Europe, Abe's recipe seems much more appealing than more of the same budget-cutting that Germany -- the continent's paymaster -- insists on.

On Saturday, Hollande said Japan and Europe face the same challenges and must follow the same path to regain confidence and boost growth.

"We must act quickly and efficiently," he told his audience. "This is what Shinzo Abe wants for Japan, this is what I want for France.

"If we work together in Europe and if you, the Japanese make an effort to participate in this new dynamic, together we can change things.

"Seeing Japan committed to a policy of growth is encouraging. We need stable, sustainable and controlled growth." — Agence France-Presse

source: gmanetwork.com

Europe stock rally pauses; further gains eyed

Paris — European shares dipped early on Monday as investors took a breather following the previous week's rally to multi-year highs, although further gains were seen on the back of strong support from central banks.

Trading volumes were thin with the UK stock market, Europe's largest, closed due to a national holiday.

At 0745 GMT, the euro zone's blue chip Euro STOXX 50 index was down 0.3 percent at 2,756.73 points. On Friday, the benchmark topped its 2013 high hit in January and surged to a near-two year peak of 2,764.17, rising after better-than-expected US monthly jobs data.

"Now that the index crossed above its 2013 high, the mood is definitely bullish," said Guillaume Dumans, co-ahead of 2Bremans, a Paris-based research firm using behavioral finance to monitor investor sentiment.

"Central bank action is the main reason behind the rally, and it eclipses for now any worries about the macro economy."

Around Europe, Germany's DAX index was down 0.1 percent, but with its record high still in sight, and France's CAC 40 was down 0.2 percent, retreating from a near-two year high hit last week.

Spain's IBEX was down 0.1 percent and Italy's FTSE MIB down 0.4 percent.

French utilities GDF Suez and EDF were down 1.2 percent and 0.7 percent respectively, as investors worried about potential stake sales from the French state after Prime Minister Jean-Marc Ayrault said on Sunday the government was considering selling part of its holdings in a number of firms.

On the earnings front, German industrial gases producer Linde rose 3 percent after posting better-than-expected results.

The Euro STOXX 50 index surged 3 percent last week, boosted by the European Central Bank's interest rate cut as well as an unexpectedly robust US monthly jobs report which eased worries over the pace of economic growth in the world's biggest economy.

"The positive trend could accelerate with the Euro STOXX 50 rising towards its 2011 highs," Aurel BGC chartist Gerard Sagnier said.

"Every dip will be an opportunity to buy." — Reuters

source: gmanetwork.com

Euro zone bank troublespots don't come down to size

DUBLIN/LONDON - Though the implosion of Cyprus's bloated banking system has put other euro zone economies with outsized financial sectors such as Luxembourg and Malta in the spotlight, loan quality is the real litmus test of a country's financial stability.

Attracted by low taxes, high interest rates and light regulation, foreign deposits, largely from Russia and other former Soviet states, pumped up the Cypriot banking sector to nearly eight times annual economic output, more than double the European average of around 3.5 times.

Stripping out Russian banks and other international lenders, the three Cypriot banks for which the state was liable had assets amounting to more than five times Gross Domestic Product (GDP), a huge proportion for an island of just 800,000 people.

What caused the problem, however, was that Cyprus's two main banks used the gush of deposits to gamble on the Greek economy, leaving them horribly exposed when Europe imposed losses on Greek sovereign bonds. The implosion of the Greek economy rotted their loans to that country.

"Banks don't fail because they are big. Banks fail because they make bad lending decisions," said Frank Gill, director of European sovereign ratings at Standard & Poors.

"It is important to understand that the Cypriot banking crisis was born on the asset not the liability side of the balance sheet."

Bank of Cyprus's non-performing loans shot up to 17 percent of its total book at the end of September last year. Cyprus Popular Bank, known as Laiki, which is being shut down as part of the Cypriot bailout, almost quadrupled its loan loss provisions to €400 million in the third quarter of 2012.

Big sector, small duchy

Officials from Luxembourg, anxious to protect the country's reputation as a hub for international capital, are quick to draw the distinction between their risk exposure and Cyprus's.

Though it has the largest banking sector in the euro zone, at an eye-watering 22 times GDP, and a population of only just over half a million people, roughly equivalent to Tucson, Arizona, the Grand Duchy is keen to emphasize that its banks are healthy and its liabilities much smaller than they appear on paper.

"In all the articles of the last few weeks, you have this famous bar chart measuring the size of the financial sector against GDP. It is not the way it should be looked at," said Marc Saluzzi, chairman of the Association of the Luxembourg Fund Industry.

"If you look at Luxembourg, our center is much more diversified; it is run by 142 banks, which are essentially subsidiaries of very large foreign banks, with solvency ratios above 15 percent. We are agents and not principals."

Stripping out international banks, the core of Luxembourg's financial system is based around three banks—state-owned BCEE, BGL BNP Paribas, in which French bank BNP Paribas has a majority stake, and Banque Internationale a Luxembourg (BIL), majority owned by Qatar's al-Thani royal family.

"Like the Cypriot banks, they do have fairly large external assets," said Gill of those three banks. "Our estimate is just under €100 billion of external assets, which is 45 percent of GDP, but these are almost exclusively holdings of tradable, financial, highly liquid assets, securities they could realistically convert into liquidity almost instantly.

"They are not claims on an insolvent economy."

According to the IMF, just 0.4 percent of loans in Luxembourg were non-performing as of June last year.

Bail-in bolters

After Luxembourg, Malta has proportionately the next largest financial sector in the euro zone, at around eight times the country's GDP.

But this statistic is misleading.

Stripping out international banks including some Turkish lenders that book a lot of their loans through Malta for tax reasons and do not take domestic deposits or lend domestically, the local banking sector has assets equivalent to under 300 percent of GDP and is dominated by two lenders—Bank of Valletta and HSBC Malta.

If trouble hit, HSBC Malta would likely have the support of its parent HSBC, Europe's largest bank, leaving Bank of Valletta with assets equivalent to around 1.4 times GDP.

Malta's domestic banks had non-performing loans equivalent to 8.2 percent of the loan book as of June 2012, according to the IMF.

While the domestic banks in Malta have limited foreign exposure and have so far sidestepped any fallout from the euro zone crisis, the central bank this week called for them to raise their provisioning to better cushion them from potential losses.

The vulnerability for Malta is the uncertainty caused by the Cypriot bailout, which for the first time forced large depositors and holders of senior bank debt to take losses—a 'bail-in' as the jargon has it.

"The key risk facing Malta is that its international offshore investors begin to relocate in light of the policy uncertainty created by the Cypriot bail-in," said Myles Bradshaw, portfolio manager at PIMCO.

"This would have significant negative economic effects that could in turn create a problem with domestic banks' asset quality. Together with the deep recession, this could force Malta to seek external assistance."

Fool me twice

Markets are betting that Slovenia, a country of 2 million perched on Italy's northeast border, will be the next euro zone country to succumb to a bailout.

In contrast to Cyprus, Slovenia's banking system is not large—around 1.4 times as big as the economy—and there are negligible foreign depositors.

But the Slovenian banks, most of them state-owned, are crippled with bad loans, which reached 14.4 percent of their loan books last year.

Like Cyprus, Slovenia does not have the money to recapitalize them.

The Paris-based Organization for Economic Cooperation and Development heaped pressure on Slovenia this week when it said the level of bad loans at Nova Ljubljanska, Nova KBM and Abanka Vipa could be much bigger than previously thought and capital needs could be "significantly higher."

If Slovenia needs a bailout, investors will be watching to see if Europe stays true to its word that the Cypriot bailout was unique.

A Cyprus-style rescue involving losses on large depositors and banks' senior bonds would re-ignite contagion risk, particularly for countries with large banking sectors.

"Cyprus has sent a strong message to a lot of people," said Lee Robinson, founder of asset management firm Altana Wealth. "Non-Europeans will be asking themselves whether they have exposure to any of these other countries where the financial sector looks dangerously large relative to GDP."

"Simply saying this won't happen again is not enough—it's the 'Fool me once, shame on you. Fool me twice, shame on me'." — Reuters

source: gmanetwork.com