5 years after the crisis: Blame Washington or Wall Street?

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| By Suzanne McGee, The Fiscal Times

Five years after the crisis peaked with the collapse of Lehman Brothers, it is still possible to hear bankers claim that Washington forced them to take risks. That claim simply doesn’t have much merit, however.

It all started with a house and a mortgage.

The first is a hallmark of American society, representing the ideal of home ownership: About two-thirds of our fellow citizens own the house or apartment in which they live, encouraged to do so by factors that include being able to deduct the interest on their mortgage payments. And it is the ready availability of those mortgages that has enabled them to buy those houses in the first place.

When the financial crisis brought the entire system to its knees five years ago, the heart of the problem wasn't some esoteric investment strategy but something fairly basic: poor-quality mortgage loans, repackaged by banks and other institutions in such a way as to temporarily mask their weakness. Banks had always made these subprime loans -- issuing mortgages to borrowers with poor credit quality, or financing purchases of homes for buyers who weren't putting anything down themselves. But that had been a fraction of their business, perhaps 8% of all new mortgages in a year. By 2006, the percentage had grown to 20% nationwide, and was far higher in some parts of the country, even as homeowners were taking on debt they simply couldn't afford.

As all the postmortems take place around the fifth anniversary of the bankruptcy of Lehman Brothers, one of the most significant questions boils down to whether it was the financial institutions that made these loans and then restructured and resold them that should bear the blame for the near-meltdown of the system. Or, as others argue, was the crisis the fault of Washington (a convenient code word for politicians, regulators and their rules)?

One of those on Wall Street now viewed as having been blind to the problems that were taking shape in the mortgage world, former Citigroup (C) CEO Charles Prince, may go down in history for his comment that "as long as the music is playing, you've got to get up and dance." That is, as long as the subprime mortgage lending market was moving along and generating big profits for the industry as a whole, no bank could afford to sit it out and allow all those gains to flow to its rivals.

In the wake of the crisis, however, those who believe the blame for the near-meltdown can be laid at Washington's door seized on Prince's phrase as a way to explain what they think happened. In their view, policies ranging from the Alternative Mortgage Transactions Parity Act (which greatly increased the ranks of lenders allowed to write adjustable-rate, interest-only and other kind of mortgages that became so popular among subprime lenders) to the Community Reinvestment Act (which tried to stop discrimination in lending, but which some argue forced banks to lend to home buyers with poor credit) were responsible for the dramatic increase in subprime loans and the increase in leverage in the years leading up to the crisis. Moreover, they argue, other policies resulted in inadequate regulatory supervision of the institutions taking those risks.

Around the first anniversary of the collapse of Bear Stearns, on St. Patrick's Day of 2009, the issue came up for a formal debate at an event organized by Intelligence Squared U.S. The ranks of those arguing that Washington was more culpable included historian Niall Ferguson, who suggested that if Chuck Prince and his fellow Wall Street CEOs were dancing to the music, "you have to ask yourselves … who was playing the music." It wasn't that Ferguson didn't blame banks, he insisted, just that he and his fellow debaters blame Washington more.

Balderdash.

Five years after the crisis peaked with the collapse of Lehman Brothers, the forced merger of Merrill Lynch with Bank of America (BAC), and the near-implosion of many other institutions, it is still possible to hear bankers claim, with straight faces, that Washington forced them to take risks. That claim simply doesn't have much merit, however.

Let's first consider it from a common-sense perspective. How willing are banks to do things that they know in their gut are foolish or ill-conceived simply because the government wants them to? If anything, recent history has shown that they put their self-interest first -- and rightly so. Rock-bottom interest rates haven't sparked a flurry of new lending in the wake of the crisis; burned by the mortgage debacle, banks are guarding against credit risk more than they are abiding by the government's clear interest in seeing lending rise in order to fuel economic growth.

Historically, when banks haven't wanted to comply with a government rule or regulation, they have a tremendous track record in compelling whatever body is responsible to reverse the decision, PDQ. Remember that it was lobbying by banks, not by the government, that finally led to the collapse of the Glass-Steagall Act more than 60 years after it had been passed. If they could succeed in demolishing such a bedrock of financial regulation, could they really have been forced into acting against their best judgment by weaker, newer rules? It seems far more probable that these were rules they could live with or work around, or even rules that some of them believed would help make them more money.

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Five years after the crisis: what banks have not learned

12:30 PM after, Banks, crisis, learned, years No Comments

¦ By Suzanne McGee, the fiscal times

A near-death experience can be life-changing. But the mindset of big bank executives has changed little since they narrowly escaped the 2008 financial meltdown they helped cause.

This week brings with it two rather bleak Anni verse Aries. It has been 12 years since the Sept. 11, 2001, terrorist attacks, and five years since Lehman Brothers filed for bankruptcy as part of the 2008 crisis that nearly brought the global financial system to its knees.

Along with remembrance, these milestones should bring a that sense we have learned enough to ensure that history doesn't repeat itself, or at least a sense that the pain and misery is receding.

In the case of the financial crisis, at least, I'm not sure that we can say so. For proof, look no further than JPMorgan Chase (JPM), which emerged from the crisis a big winner. The bank had sailed in to buy Bear Stearns and prevent its collapse in March 2008 that what hardly a public service (it gave JPMorgan a big boost in Wall Street league tables, and JPMorgan CEO Jamie Dimon picked up the assets for a song, with government help), but it may so have sent the wrong message to the rest of Wall Street that their own institution would be too big to fail.

Be that as it may, JPMorgan Chase came through the crisis relatively stronger than it had been. But take a look at some of the comments and disclosures it made only this week, during a presentation to the Barclays Global financial services Conference in New York, and it becomes clear that five years after the crisis, we have yet to put many problem behind US.

And even the winners still have a lot to learn.

JPMorgan Chase is the biggest of these, and critics including Sheila Bair, former head of the Federal Deposit Insurance Corp., aren't at all confident that any of them have a good strategy for addressing the "too big to fail" conundrum. That means that if a future risk management snafu or business misjudgment trigger the collapse of a big financial institution, we could be right back at square one.

While JPMorgan Chase CFO Marianne Lake bragged about the bank's giant market share and capital position at the Barclays conference, Bair's broader point is that that child of market share brings systemic risk with it, and unless and until there's a workable "resolution" structure in place, the size of some of these of institutions today is still worrying.

Nor do many of Wall Street's critics draw much comfort from the Federal Reserve's annual stress tests - especially after the last one showed Citigroup (C) as being more resilient than JPMorgan.

"That's just downright odd," one analyst back in the spring told me, when those results were released.

The financial crisis what a reminder of how often Wall Street failed to ask itself the - "what might go wrong here?" - and failed to put in place systems that most basic child of question would increase the odds of identifying the biggest sources of risk before they morphed into large losses and write-downs.

Risk management - which, after all, isn 't a profit center but instead eats into returns on equity – still isn't embedded in Wall Street's DNA.

JPMorgan Chase is a great example of that, as the "London whale" trading losses reminded everyone last year. The bank's own reports on the problematic trades displayed myriad gaps in risk management, including evidence that some of the bank's managers manipulated internal risk models. Two of the directors who served on the bank's risk committee stepped down in July. JPMorgan Chase announced on Sept. 9 their replacements both have solid track records in finance; one of them, Linda Bammann, is a banking exec with risk management expertise.

But why wait five years to do this?

Government agencies have been busy filing lawsuits of all kinds against Wall Street institutions, many of them related to the way mortgage securities were originated, packaged, priced and sold before the crisis.

At JPMorgan Chase, the federal government and its agencies are conducting criminal investigations into the mortgage-backed securities operations as well as its energy-trading activities. other investigations target the London whale losses, the bank's credit card collections policies and activities and the way it handles mortgage foreclosures and guards against money-laundering.

Not all of these problems are historic in nature; the energy trading kerfuffle has surfaced only in the last year. New or old, the cost of defending against these allegations information, paying fines to settle regulatory claims and providing against other penalties, is climbing.

Lake, the chief finance officer, told her conference audience on Sept. 9 that to increase to the bank's litigation reserve to address a "crescendo" of these actual and potential lawsuits wants "more than offset" the $1.5 trillion of consumer loan loss reserves that will be released as credit quality when the bank's loan portfolio has improved. "We are still finalizing the number," she said.

Back in 2008, "subprime" ones stuck banks were with big portfolios of mortgages, and especially low-quality. They had been lending foolishly, assuming that they could always repackage those loans in such a way as to make them look appealing to someone out there.

Fast forward five years and the mortgage arena once more is a problem area for banks such as JPMorgan Chase. This time it isn't a question of losses, but of revenue - or rather, a steep decline in revenues from the home-lending business that the bank is likely to see as interest Council rise.

Mortgage-refinancing demand has falling Lake said this week that 60% from its peak in may, sooner and more rapidly than the bank had expected. Add that to competitive pressures and the time it takes to complete 'taking expenses of the system' out (translation: eliminating some jobs in this part of the business) and profit margins here want to be negative. At least this time, the mortgage business is likely to be only a drag on profits rather than a big question mark hanging over the future of the industry.

None of these are reasons to panic or to expect a re-run of the events of 2008 what is disconcerting, however, is the limited extent to which big financial institutions have changed the way they function in the wake of their near-death experience.

New regulations have been slow to emerge and have had unintended consequences. others haven't even materialized.

On the part of the banks themselves, a new mindset may be even further away today than it in the autumn of 2008, when CEOs and CFOs were still scared silly by the narrowness of their escape from complete disaster.

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The crisis of Europe buys time for fed

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| By Jim Jubak

A renewed flight to the safety of Treasury bonds euro fears would keep the rally going and the Fed time for an exit strategy to give.

As you unfold another act in the eurozone debt crisis/farce in Cyprus to see, please remember: the longer the eurozone debt crisis rolls, the better the chance that the Federal to shrink its balance sheet, will be reserve without the economy cratering.

Unfortunately for the Fed (but fortunately for people, that lives in Spain, Italy, France, etc.), it is unlikely that the debt crisis in the euro zone over the long pull enough, give the Federal Reserve all the time he needs.

But, ya never know hey. European Heads of State and heads of Government have shown a remarkable ability to drag the crisis with partial solutions, which result in discussion not solutions at all. Maybe they can stretch out the crisis for three or four more years.

Finally managed to turn this group, which should be a crisis for the offshore money would, Cypriot banks to a referendum--filled the survival of the euro zone. And that a "solution" produced late Sunday night the Cyprus crisis, which was carried out in the not-so-long crisis in Spain, Italy, France and, most of all Greece, even worse.

Maybe there is hope for the Federal Reserve - and the US economy, after all. At least if the eurozone fed - debt crisis and U.S. equities and bonds prices-valuable support until September.

Here is the problem: the Federal Reserve, provision of liquidity in the days after the collapse of Lehman Brothers, stimulate the economy in the recovery from the financial crisis, to revive the real estate market, and finally in an effort to turn a faltering economic recovery in a self-sustaining phase of growth, has to be plump, printed money.

Jim Jubak

Trillions of dollars.

The fed the actual functioning is much more complex than Jackson's print and drop from helicopters. The Fed is buying bonds on the financial markets. This gives bondholders cash use to buy new bonds or shares or on everything from BMWs to spend, the expansion of the factories. How does the fed for these assets pay? The Fed needs to do anything quite so specific or primitive as printing money. It easy credits the account of the seller with the purchase price. Meanwhile, therefore everything is summed up, the Fed adds bonds was one of its balance sheet. This means that you can track the amount of money, which add the amount of money the Federal Reserve balance sheet is based on the Fed.

Reserve balance was the Federal $3.1 trillion at the beginning of March. A giant $2.6 trillion increase in the balance sheet is $488 billion on January 19, 2011. $2.6 Trillion is the "created" and added in two years in the United States and the global financial system.

The conventional wisdom says that the Federal to reduce this footprint, sooner rather than later must begin reserve. Sometime soon, says this wisdom needs to slow down the fed and then finished its current program each month $85 billion of Treasury bonds and mortgage-backed securities to buy.

Speculation is that the Fed might stop, that the purchase of early 2014. At this point the Fed will have added $765 billion assets in its balance sheet push that total $4 trillion in close by.

In the next step the Fed would begin perhaps as early as the year 2014, to reduce its balance sheet by some of these Treasury bonds and mortgage-backed securities for sale.

The conventional wisdom says that two things will happen when the federal reserve its balance sheet not reduce in relatively short time. First is that $3 trillion reserve in the money supply have pumped the Federal end of 2013, to drive inflation because a relaxing business eats up excess capacity starts. Second rising inflation and the Fed will push up selling its portfolio interest rates. It will be difficult, conventional wisdom says that $3 trillion in Treasury bonds for sale and mortgage-backed securities back into private hands without investors 'extra' booty from some as a reward.

At best, higher interest rates and higher inflation as a drag on the U.S. economy will act. In a scenario with something worse higher interest rates and higher inflation in growth would choke off enough to the economy cut. In the worst case, higher interest rates would increase the cost of financing the large federal debt the kinds of budget cuts and perhaps even raising taxes, the cuts in the recession in the euro zone would have made to a degree that require.

Some economists who have studied the structure of the Fed's balance sheet, believe that this scenario could get nasty deed. In an effort to drive the medium-term interest rates and the housing market jump start by lowering mortgage rates. the Federal Reserve has focused its purchase of Treasury bonds in medium-term maturities. Almost half of the Fed $1.78 trillion portfolio of Treasury bonds is in a period of five to ten years. So big the Fed are the enterprises these runtimes that some economists and bond-market analysts fear that the Fed has become the market for these terms take effect.

Sell anyone attempting this part of the portfolio, they fear, would cause very quickly to move interest rates up, because there are simply not enough buyers all this care without this kind of absorb the increase in yield.

In the last week-especially in the last remarks during the Fed Chairman Ben Bernanke Humphrey Hawkins to the Congress-the Federal pointed out reserve, that it thinks at least an alternative to the conventional wisdom. The Fed thinking seems to be that selling out to hold the portfolio on a slow enough prices to damage the economy at a minimum would long that just wait the Treasury bonds in the portfolio to tyres and then not rolling over the proceeds in new Treasury purchases not significantly more time it would take would the Fed balance sheet on something like the pre-crisis level to reduce.

That I seen estimates have the portfolio, the tires not older than the Fed schedule would add two or three years.

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Europe sees US debt crisis as dire as its own

7:30 AM crisis, Europe No Comments

John W. Schoen , NBC News

Now it’s Europe’s turn to worry about U.S. economy.

American officials have been wringing their hands for the past two years about the heavy burden of government debt piling up in Europe. On Tuesday, Europe’s Organization for Economic Co-operation and Development warned that the U.S. "fiscal cliff" threatens prospects for the eurozone’s economic recovery.

“We’re talking here about the medium and long-term viability of the United States economy,” OECD Secretary General Angel Gurria told CNBC. “Not only to avoid the fiscal cliff but then get to a moment where (U.S.) debt stops rising and the debt to GDP starts coming down to an area where we call all breathe more comfortably.”

In its latest Economic Outlook, the influential Paris-based think tank said that with the eurozone’s economy already headed in reverse, the United States faces the same fate if lawmakers fail to agree a deal to avoid a combination of tax hikes and budget cuts that will otherwise take effect next year.

“The US ‘fiscal cliff,' if it materializes, could tip an already weak economy into recession, while failure to solve the euro-area crisis could lead to a major financial shock and global downturn,” Gurria told reporters in Paris.

Even if a deal is reached, the OECD joined other forecasters calling for a continued global economic slowdown in 2013. For the U.S., that means expansion of just 2.0 percent, versus the OECD's 2.6 percent forecast in May.

The eurozone economy is expected to shrink by 0.4 percent this year and another 0.1 percent next year, before recovering at a weak 1.3 percent growth rate in 2014, the forecasters said.

Negotiations in Washington continued this week on a broad range of alternatives to the current budget law, which would impose roughly half a billion dollars in government spending cuts and tax increases starting Jan. 1. Uncertainty over the outcome has depressed hiring and investment by businesses, some economists say.

On Monday, White House economists estimated that the budget measure, unless altered or postponed, would carve some $200 billion out of consumer spending, which accounts for about two thirds of the U.S. economy. Together with deep cuts in government spending, the package would wipe out the current weaker recovery and shrink the U.S. economy by about 0.5 percent in 2013, according to the non-partisan Congressional Budget Office.

Congress and the White House have been deadlocked on solutions since the law was enacted after a bitter battle in July 2011 over increasing the government’s legal borrowing authority. Though President Barack Obama and Republican leaders have made conciliatory comments since the November election, there has been little in the way of concessions needed to reach a compromise.

Most observers believe that the worst of the tax hikes will be avoided – if only because they would be so politically unpopular. The so-called Alternative Minimum Tax, for example, would ensnare some 28 million households with new taxes next year unless Congress once again agrees to a “patch.”

But broad compromise on reforming the thicket of deductions, exemptions and other breaks in the tax code, along with restructuring the massive Medicare and Social Security entitlement programs, will be much harder to pull off.

“I think it is a romantic hope that to believe that these politicians can agree to a grand bargain that will fundamentally fix our budget deficit issue,” said Richard Hoey, chief economist at BNY Mellon. “ I think that is totally unrealistic.”

That kind of sweeping fundamental reform has eluded European governments for years.

On Monday, facing the latest precipice in their two-year saga trying to head off a Greek debt default, European leaders hammered out yet another bailout package that calls on the Greek government to pare down its debt in the coming decade.

But while the latest plan appeared to buy more time, the threat of the longer-term crisis remains.

“Athens’ cash reserves must be down to vapors,” said Carl Weinberg, chief economist at High Frequency Economics. “Any interruption in implementation of this scheme could cause an ugly default, with little or no warning.”

The details of the latest “solution” are murky, and the plan still faces opposition from both individual eurozone governments and potential legal challenges.

Terms of a proposed buyback of Greek debt that would leave some bond holders with losses haven’t been worked out. And the 44 billion euro ($53 billion) bailout payments over the next two months will be made in stages – with each new payment conditioned on Athens meeting milestones called for by its European benefactors.

The longer term solution to Europe's debt crisis is even murkier - a possible portent of what U.S. lawmakers face if they can't work out a broad tax and spending compromise soon.

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10 year old offers pizza solution to euro debt crisis

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Jurre Hermans / Courtesy Wolfson Economics Prize

10-year-old Jurre Hermans from the Netherlands proposed a solution to Greece's debt problem using pizza as a metaphor.

Solving the eurozone crisis and Greece's increasingly perilous financial state doesn't really sound like the type of problem that can be solved by using pizza as a metaphor, but 11-year-old Jurre Hermans didn't let that stop him.

When the judging panel for the 250,000 pounds ($399,000) Wolfson Economics Prize announced its short list of five finalists today, it also singled out a sixth person among the 452 contestants. The Dutch boy, who was 10 years old at the time, offered a one-page solution (Dad helped him with the translation to English, he told the judges) along with a diagram that turned Greece into a pizza.

In Hermans' solution, Greece would leave the eurozone and citizens would be required to exchange their euros for drachma. He even suggested specific penalties for people who tried to hide euros or smuggle them out of the country.

Although he didn't get into details of the exchange rate, Hermans said drachma would be "dramatically" less valuable. He underscored this point with a sad face drawn on the stick figure Hermans labeled "Greek people," and added in his entry, "You see, the Greek guy does not look happy!!" 

With that pool of euros, which Hermans depicted as a pizza, the Greek government could pay off its creditors. "Everyone who has a debt gets a slice of the pizza," he wrote. According to his diagram, banks and companies to which the troubled nation owed money would all get paid back in proportion to their debts.

Hermans finished with, "Of course if a country has paid back all his debts, he can return to the eurozone."

While the pizza theory of economics didn't make the final cut for the Wolfson competition, the judges did award Hermans a 100 euro prize for his efforts. 

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Airlines could lose $8 billion from euro crisis

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GENEVA — Airlines worldwide face over $8 billion in losses next year if Europe's politicians fail to get to grips with the region's debt crisis, the industry's leading trade group warned on Wednesday.

A collapse of efforts to shore up the euro and prevent a new shock to the global banking system would hit air transport across the globe and cripple the Asian profit machine which has led the industry's recovery since 2009, Geneva-based IATA said.

"The biggest risk facing airline profitability over the next year is the economic turmoil that would result from a failure of governments to resolve the eurozone sovereign debt crisis," said Tony Tyler, Director General of the International Air Transport Association.

"Such an outcome could lead to losses of over $8 billion, the largest since the 2008 financial crisis," he added.

Even in the best-case scenario, Europe's airlines face losses in 2012 and the gap between the industry's haves and have-nots is expected to widen.

Asian carriers are seen soaking up new demand and North American airlines should gain as capacity cuts allow them to raise prices, but European airlines will lose out -- especially in a worst case scenario for the euro.

IATA, which represents 240 of the best-known airlines carrying 84 percent of global traffic, cut its central forecast for 2012 industry profits to $3.5 billion from $4.9 billion.

Its 2011 profit outlook was unchanged at $6.9 billion.

Until now, aviation has been relatively optimistic about its prospects as Europe teeters on the edge of recession, with rising demand in Asia and capacity restraint in North America seen boosting profits and driving talk of a two-speed market.

Few industry leaders have been willing to contemplate a meltdown, with Airbus and Boeing cranking up production to record levels to meet demand for fuel-efficient jets given the continued strength of oil prices.

But IATA said it could not ignore growing economic risks.

"There remains a very significant risk that the sovereign debt crisis in the eurozone could spiral out of control, generating a banking crisis and more widespread economic weakness," it said in a new market forecast issued on Wednesday.

IATA's worst-case scenario draws on a risk assessment on the European debt crisis carried out by the Organization for Economic Co-operation and Development.

The exercise takes account of the possibility of a full-blown banking crisis marked by deep European recession, with the fall-out felt globally. IATA adopted the OECD's downside forecast that the global economy would grow by 0.8 percent next year.

"In this scenario, airlines would see growth in passenger demand grind to a halt and a 4.7 percent contraction in cargo markets," IATA said. Asian carriers would sink from a $3.3 billion profit in 2011 to a $1.1 billion loss.

Trade slowdown
Freight markets are already falling in a sign of declining business confidence and weakening global trade, though the passenger business of many airlines is performing better than expected. Freight traffic shrank 5 percent between May and October.

"International trade has pretty much ground to a halt and we are likely to see a slowdown in business and personal travel as a result," said IATA Chief Economist Brian Pearce.

The signs available to airlines, whose networks capture day-to-day signals about the economy and broadly track business and consumer confidence, already suggest Europe is unlikely to muddle through its debt problems without some type of recession.

"Even if government intervention averts a banking crisis it is unlikely that Europe will avoid a brief recession. Business and consumer confidence has already fallen too far," IATA said.

Tyler, who until recently headed Hong Kong-based airline Cathay Pacific, also expressed concerns about the availability of financing needed to help Airbus and Boeing maintain their high levels of production.

"I think there is more than a possibility that financing will be much more difficult next year than it has been hitherto and certainly more expensive," he told reporters.

"From my conversations with lessors, there is no doubt that it is tightening up and that is more likely to be the constraint in the immediate short-term," he said at IATA's annual briefing.

His comments appeared less positive than a forecast on Tuesday from leading manufacturer Boeing and recent bullish statements from European planemaker Airbus.

Boeing said it expected a 23 percent rise in global aircraft deliveries by value to $95 billion in 2012 and said capital markets would help fill a gap left by nervous European banks.

IATA groups most of the world's flag carriers and network airlines such as United Airlines, Lufthansa and Singapore Airlines. Its membership excludes most low-cost carriers which have generated much of the industry's traffic growth, but its market forecasts do include them.

Shares in Lufthansa and the parent of British Airways fell around one percent on Wednesday.

Under the central forecast of $3.5 billion global airline profits, regional differences are expected to widen in 2012 as European carriers slip into a combined loss of $0.6 billion and Asian airlines pull in profits of $2.1 billion helped by China.

North American carriers are looking at combined 2012 profits of $1.7 billion due to recent cost cuts and capacity restraint but IATA says the recent bankruptcy filing of American Airlines is a reminder of the chill spreading through the sector.

Copyright 2011 Thomson Reuters.

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Europe's leaders scramble to avert crisis

9:23 AM avert, crisis, Europes, leaders, scramble No Comments

Buddy can you spare a euro? France's President Nicolas Sarkozy, speaking at the Conservative European People's Party (EPP) congress in Marseille, warns that Europe's economy is facing huge risks.

By John W. Schoen, Senior Producer

As Europe's leaders gather for what some believe may be their last chance to preserve the continent's  monetary union, European central bankers slashed interest rates Thursday to ease a credit crunch that has sparked a euro zone recession.

Despite talk of bold new measures to tighten controls over members' spending and debt, though, there appears to be little chance that the eighth crisis summit this year, set to begin in Brussels late Thursday, will resolve the deep political divisions that have brought Europe to the brink of financial collapse. 

Just hours before leaders of the 17 nations joined by a common currency convene the summit, French President Nicolas Sarkozy echoed what many observers have been saying in the weeks leading up to the meeting.

"Never has the risk of Europe exploding been so big," he told a gathering of European Union leaders. "The diagnosis is that the euro, which should inspire confidence, is not inspiring this confidence. If there is no deal on Friday, there will be no second chance."

The current quandary has been building for more than a year, as have fears that one or more Europe’s most heavily debt-laden governments will default. Despite three bailouts, a cobbled patchwork of backstop funds, and multiple failed summits and proposed solutions, the crisis continues to envelop the European financial system and economy.

Investors are demanding ever–higher interest rates on government bonds to offset the risk they wont get their money back. European bankers are having a harder time raising capital, even as regulators have ordered them to build up bigger cash reserves. That’s made it harder, and more costly, for European businesses and consumers to borrow money.

The European Central Bank tried to douse the flames Thursday by cutting interest rates a quarter point to a record low one percent. But at a news conference following the rate cut announcement, ECB President Mario Draghi dashed hopes that the move signaled the opening round of a wider effort to to ease rising market pressure on interest rates with massive bond purchases.

Draghi's comments sent financial markets lower and further eroded confidence that Friday’s meeting will generate a meaningful solution to the crisis.

"One step forward, two steps back," said Alan Clarke, U.K. and euro zone economist at Scotia Capital. "The euro zone leaders might as well not bother. Pack their bags, go home, enjoy the weekend and do their Christmas shopping."

The latest plan being floated by Sarkozy and German Chancellor Angela Merkel would create a mechanism for automatic penalties on countries that don’t meet budget deficit targets. Euro zone countries would also be forced to include a balanced budget requirement in their constitutions.

Even if the 17 leaders agree to such a plan on Friday, it remains to be seen whether voters in member countries will go along.

Proposals for tough budget-balancing measures have been warmly received by investors. But they have generated violent protests in countries such as Greece that have enacted them. Deep spending cuts have also accelerated the euro zone's economic contraction. 

No matter what measures those leaders agree to, they will have little long-term impact without popular support.

“Because of the bumps in the road that will inevitably occur along the way, it will be too easy for politicians down the road, when it's not Merkel or Sarkozy, to blame it on the people who agreed to it at the time,” said  Steve Crawford, an investment banker with Centerview Partners. “I think some democratic process needs to occur because of the consequences that are likely to happen down the road.”

That process will take time, something many investors believe Europe has run out of. 

European voters, meanwhile, remain deeply divided over how to get the continent back on a sound financial footing. French voters are loathe to dilute their national independence by turning over control of budgetary decisions to a central European agency with the veto power over spending decisions. With a presidential election looming, Sarkozy faces rivals who are warning voters that he wants to sacrifice French sovereignty to unelected EU officials.

German voters, on the other hand, are opposed to any measure that would divert their taxes to the cause of bailing out weaker, free-spending countries. Merkel has also steadfastly opposed calls for the ECB to print euros to underwrite massive bond purchases; that’s largely due to the German public’s deep-seated fears of a recurrence of hyperinflation that sank the Weimar Republic in the 1920s. 

The Fast Money traders take a look at Mario Draghi's comments impacting stocks today and await former MF Global CEO Jon Corzine's testimony.

Consumer and business confidence has been sapped by the crisis, tipping the euro zone into a mild recession that threatens to deepen the longer leaders fail to arrive at a solution.

The ECB’s official forecast calls for euro zone gross domestic product to shrink by as much as a full percentage point next year. Some private forecasters, including IHS Global Insight’s chief European economist Howard Archer, think that assessment may not be pessimistic enough.

The ECB's rate cut follows a concerted move on Nov. 30 by central banks areound the world to supply the global capital markets with more cash and avert a wider credit crunch. The Federal Reserve has been working to put out the fire with a series of so-called “swap lines” that supply the ECB with dollars, which it then lends to European banks in exchange for dollar-denominated bonds. As other sources of dollar funding have dried up, European bankers have leaned heavily on those swaps, borrowing $50 billion this week. That’s up from $500 million in November.

Bond rating agency Standard & Poor's put more pressure on European leaders to solve the debt crisis by threatening to downgrade its risk assessment for all 17 countries that use the euro.  The warning Wednesday includes the European Union itself, along with large euro zone banks.

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Euro debt crisis increase the odds of recession in the United States

2:05 PM crisis, increase, recession, States, United No Comments

Reserve Bank increases the European debt crisis the chances on a US recession with economic downturn rather than not by early 2012, according to a survey by the San Francisco federal.

It is difficult, to assess the probability of exactly wrote an analysis of the leading us economic indicators suggests a rising probability of a recession of by the end of the year and early next year, researchers at the regional fed Bank Monday. The risk of a recession will disappear after the second half of 2012, they found.

To solve tax problems have new Governments in Greece and Italy, with fresh promise, in the last few days, allayed investor concerns about a short-term debt default in the euro zone, but Europe's debt crisis far from solved. The region their worst hours since the second world war is facing, German Chancellor Angela Merkel said Monday.

Buffett: Not certain Europe keeps debt crisis

Although domestic threats to economic growth in the United States are limited, a shock from abroad could derail a fragile recovery.

The weak US economy is more than usually vulnerable to turbulence beyond Europe's borders, as the U.S. shows unexpectedly strong effects from Japan's devastating earthquake in March, the researchers said.

"European government bonds default value can the United States back into a recession sink" Travis wrote mountains, early Elias and Oscar Jorda in the latest San Francisco fed economic writing. "However, when we navigate the storm in the second half of 2012, it seems, that risk will rapidly dwindle in 2013."

Global survey of armed appears a few optimistic workers

The risk assessment, recession is worse than that of many private economists. A November 4 Reuters of primary dealers survey see Wall Street economists one chance, a US recession next year, 30 percent down from 35.5 percent a month earlier.

Last week the Fed warned Deputy President Janet Yellen on the threat of Europe, said Governments must take energetic measures, contain the crisis or risk of serious damage to the United States influential.

Before you on their contribution to the Fed Board in Washington, Yellen led the San Francisco fed.

Her successor, John Williams, will be a major political speech Tuesday.

Copyright 2011 Thomson Reuters.

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ABCs of Euro crisis have citizens asking WTF?

1:53 PM asking, citizens, crisis No Comments

BRUSSELS — From a rescue fund called the EFSF to another known as the ESM, by way of a SPIV trust and an FTT levy, the acronyms and other labels generated by the European Union's fight to contain its sovereign debt crisis range from the arcane to the bizarre.

As pressure escalates on the EU to solve the chaos, so does the tome of technical jargon for programs aimed at regaining stability. But often the capital-letter-laden alphabet soup ends up causing more confusion than it's designed to resolve.

The EU's increasing power, from a new diplomatic corps to a push for more oversight over national budgets, also raises questions over whether it uses jargon to communicate internally, or whether it uses the mystery to its advantage.

"Euro zone leaders do partly rely on the lack of understanding of ordinary taxpayers to push through these crisis measures and distract attention from their shortcomings," said Raoul Ruparel, an economist analyst at the eurosceptic Open Europe think-tank in London. "They gloss over these terms like NPV, net present value, but these are crucial details," he said.

For example: when the EFSF (European Financial Stability Facility) expires, the permanent ESM (European Stability Mechanism) will enter into force, but not before a deal on PSI (private sector involvement) in more aid for Greece.

At the same time, politicians working on avoiding more crises are drawing up revisions to MiFID, which will essentially usher in more regulation of financial markets. But there is also MiFID II in the works and proposed revisions to MAD.

The EFSF and the ESM should not be confused with their smaller partner, the EFSM — while the biggest fight could be over the MFF, the EU's long-term budget, and all that after Basel 2.5, the CRD capital requirements law and a crackdown on CRAs.

"I nearly lost my mind working through Basel," said one European banker, referring to the set of global banking supervisory rules that the EU implements across the bloc.

One summit has become a byword for EU officials to reduce a complex emergency debt package into a single phrase: July 21.

Sometimes that date has been twisted into a more unintelligible reference. "The point now is to implement a decision of the 21st of July-plus," Greek Finance Minister Evangelos Venizelos said in Brussels in late October.

Even sophisticated money managers struggle with the EU's internal workings. Some investors worried that an October 26 summit had been canceled when they heard of a procedural decision to scrap a meeting of EU finance ministers, known as Ecofin.

Hours after the summit went ahead, journalists jeered European Commission officials as they struggled to disentangle NPV from "notional haircuts" — a crucial element of an agreement designed to contain the worsening crisis.

Already losing popularity among Europeans over its clumsy handling of the debt crisis, the EU risks further alienating its citizens with the latest tide of opaque and convoluted jargon.

In the EU's latest survey on attitudes to the 27-nation bloc, less than a third of Europeans said they know what is going on at the European Parliament. Asked if they had heard of euro bonds — a proposal to issue debt jointly by the 17 nations in the euro and which could take budgetary powers away from national parliaments — 57 percent said 'no', the poll found.

The phrase generates equal but different confusion in debt markets, where 'eurobond' has long been shorthand for a type of international bond.

"The fundamental issue is that people feel almost nervous and anxious about the EU and that translates into insecurity and hostility because they don't understand how the place works," said Paul Adamson, editor of the online European affairs magazine E!Sharp and a campaigner against EU jargon.

Bureaucracies from the U.S. military to multinational companies are renowned for their jargon. But the EU's highly complex institutions are steeped in specialized language — dubbed eurospeak — with a tradition of naming policies after the places and people connected with their creation.

Schengen is no longer just a quiet Luxembourg town but a passport-free area; Gymnich, the name of a German castle, is now code for a meeting of EU foreign ministers. Officials responsible for preparing weekly talks between EU ambassadors are known as the Antici group after their Italian founder.

Jargon has grown as more countries have joined the EU to encompass its 23 languages: EFSF becomes FESF in French, FEEF in Spanish, ERVV in Finnish and SECA in Irish Gaelic.

Jose Manuel Barroso, the president of the Commission, said in late October that the bloc's complexities are "the single biggest complaint I receive everywhere I go in Europe."

One effort to bring Europeans closer to their officials and representatives is the newly-opened European Parliament visitors' center, built to rival the visitor center at the U.S. Congress in Washington. But beyond the razzmatazz of hi-tech, interactive displays and role-playing games, the debt crisis goes quietly unmentioned.

"We know there's a crisis because we live it every day," said Maria Jose Garrido, a lawyer from Madrid outside the visitor's center. "It's not going to go away just because you don't talk about it clearly."

Copyright 2011 Thomson Reuters.

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Geithner: European crisis threatens global economy

8:12 PM crisis, economy, European, Geithner, Global, threatens No Comments

HONOLULU — Treasury Secretary Timothy Geithner has demanded rapid action by Europe to restore financial stability, warning that the region's economic crisis is "the central challenge to global growth."

"We are all directly affected by the crisis in Europe," Geithner said after a meeting of finance ministers of the 21-member Asia-Pacific Economic Cooperation forum late on Thursday. "It is crucial that Europe move quickly to put in place a strong plan to restore financial stability. They're moving ahead, but we just need them to move ahead more quickly and with more force behind it."

Asia-Pacific finance chiefs agreed to do whatever it takes to prevent the malaise from Europe's debt crisis spreading as a possible European recession threatens the global economy.

Wall Street rallies amid progress in Europe

President Barack Obama spoke with German Chancellor Angela Merkel and French President Nicolas Sarkozy late on Thursday and also called Italian President Giorgio Napolitano.

Turmoil
Italy's upper parliament voted on Friday to pass a package of spending cuts, after being pushed to the brink by bond markets. In Athens, a new interim government was sworn in as Greece attempted to calm the political turmoil that has threatened to bankrupt it and force it out of the euro zone.

European shares edged higher on Friday on hopes that Italy would make political progress that will enable it to quickly cut a debt mountain, easing investors' worst fears about the euro zone debt crisis.

The European Union warned on Thursday that the 17 countries using the euro common currency could slip back into recession next year as the debt crisis that has already engulfed Ireland, Portugal and Greece has shown alarming signs of spinning out of control.

The spillover from the European crisis is adding to the pressure in the Asia-Pacific — now the strongest driver of world growth — for more effective trade regimes to help spur job creation and for reforms to ensure financial resiliency.

Geithner said the Asia-Pacific's economies were "in a better position than most to take steps to strengthen growth in the face of these pressures."

A European recession would be felt sharply in the U.S., where growth is already anemic, and in Asia, which relies on Europe as a big market for its cars, clothing, consumer electronics and other exports.

In Rome, months of dithering and delay ended when the Italian upper house voted to pass an austerity package Friday. The law should in the lower house on Saturday, triggering the resignation of prime minister Silvio Berlusconi, who pledged to quit once has promised to resign after the financial stability law was endorsed by both houses of parliament.

Goodbye 'bunga bunga', hello prison for Berlusconi?

Mario Monti, a former European Commissioner who has emerged as favorite to replace Silvio Berlusconi as prime minister.

If the second vote passes smoothly as expected, Napolitano may accept Berlusconi's resignation as early as Saturday night and formally mandate Monti to try to form a new government soon afterwards.

If Rome burns, US will feel the heat

At first, Berlusconi had insisted that early elections were the only option. But he has since softened his stand and is said by sources to be open to a new government.

Greece's new interim Cabinet was sworn in Friday, with former European Central Bank Vice President Lucas Papademos at its helm as prime minister and the key position of finance minister unchanged.

The new government of Papademos, who also spent time as Greece's central bank governor, must now implement the terms of Greece's latest debt deal — a €130 billion ($177 billion) agreement reached by the European Union on Oct. 27. It includes provisions for private bondholders to forgive 50 percent — or some €100 billion — of their Greek debt holdings.

Leave Germany? Live in Germany? It's all Greek to them

With European leaders struggling to agree on how to tackle the deepening crisis, pressure has mounted on the European Central Bank to act more forcefully.

The president of the European Commission warned that the collapse of the eurozone would cause a crash that would instantly wipe out half of the value of Europe’s economy, plunging the continent into a depression as deep as the 1930s slump, according to a report in Britain's Daily Telegraph.

Jose Manuel Barroso said that if the euro area broke apart, the estimated initial cost would be up to 50 per cent of European gross domestic product. "It would jeopardize the future prosperity of the next generation. That is the threat that hangs over us," he said.

The Associated Press, Reuters and msnbc.com staff contributed to this report

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Sarkozy: Greek debt crisis like Lehman Brothers'

7:43 PM Brothers, crisis, Greek, Lehman, Sarkozy No Comments

PARIS — It was a mistake to let Greece join the euro single currency when it did because its economy was not ready to form a monetary union with others in the club, French President Nicolas Sarkozy said Thursday.

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"It was a mistake," Sarkozy said, when asked during a TV interview about having Greece adopt the euro two years after the single currency was created.

"Its economy was not ready," Sarkozy said.

Sarkozy gave a rare televised interview to explain the euro zone crisis plan agreed in Brussels the previous evening to the French electorate, six months before a presidential election.

He likened Greece's sovereign debt crisis to the crisis at Lehman Brothers, and said that a failure to come up with a way to help Greece would have thrown the euro zone and world economy into disorder.

"If Greece had gone bankrupt, there would have been a domino effect that would have affected everybody. The entire euro zone risked being taken down," Sarkozy said.

The deal, thrashed out after days of tense talks between Sarkozy, German Chancellor Angela Merkel, other euro zone leaders and private financial institutions, halved Greece's private-sector debt to 100 billion euros after bondholders agreed a 50 percent haircut.

Copyright 2011 Thomson Reuters.

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ABCs of Euro crisis have citizens asking WTF?

3:52 AM asking, citizens, crisis No Comments

BRUSSELS — From a rescue fund called the EFSF to another known as the ESM, by way of a SPIV trust and an FTT levy, the acronyms and other labels generated by the European Union's fight to contain its sovereign debt crisis range from the arcane to the bizarre.

As pressure escalates on the EU to solve the chaos, so does the tome of technical jargon for programs aimed at regaining stability. But often the capital-letter-laden alphabet soup ends up causing more confusion than it's designed to resolve.

The EU's increasing power, from a new diplomatic corps to a push for more oversight over national budgets, also raises questions over whether it uses jargon to communicate internally, or whether it uses the mystery to its advantage.

"Euro zone leaders do partly rely on the lack of understanding of ordinary taxpayers to push through these crisis measures and distract attention from their shortcomings," said Raoul Ruparel, an economist analyst at the eurosceptic Open Europe think-tank in London. "They gloss over these terms like NPV, net present value, but these are crucial details," he said.

For example: when the EFSF (European Financial Stability Facility) expires, the permanent ESM (European Stability Mechanism) will enter into force, but not before a deal on PSI (private sector involvement) in more aid for Greece.

At the same time, politicians working on avoiding more crises are drawing up revisions to MiFID, which will essentially usher in more regulation of financial markets. But there is also MiFID II in the works and proposed revisions to MAD.

The EFSF and the ESM should not be confused with their smaller partner, the EFSM — while the biggest fight could be over the MFF, the EU's long-term budget, and all that after Basel 2.5, the CRD capital requirements law and a crackdown on CRAs.

"I nearly lost my mind working through Basel," said one European banker, referring to the set of global banking supervisory rules that the EU implements across the bloc.

One summit has become a byword for EU officials to reduce a complex emergency debt package into a single phrase: July 21.

Sometimes that date has been twisted into a more unintelligible reference. "The point now is to implement a decision of the 21st of July-plus," Greek Finance Minister Evangelos Venizelos said in Brussels in late October.

Even sophisticated money managers struggle with the EU's internal workings. Some investors worried that an October 26 summit had been canceled when they heard of a procedural decision to scrap a meeting of EU finance ministers, known as Ecofin.

Hours after the summit went ahead, journalists jeered European Commission officials as they struggled to disentangle NPV from "notional haircuts" — a crucial element of an agreement designed to contain the worsening crisis.

Already losing popularity among Europeans over its clumsy handling of the debt crisis, the EU risks further alienating its citizens with the latest tide of opaque and convoluted jargon.

In the EU's latest survey on attitudes to the 27-nation bloc, less than a third of Europeans said they know what is going on at the European Parliament. Asked if they had heard of euro bonds — a proposal to issue debt jointly by the 17 nations in the euro and which could take budgetary powers away from national parliaments — 57 percent said 'no', the poll found.

The phrase generates equal but different confusion in debt markets, where 'eurobond' has long been shorthand for a type of international bond.

"The fundamental issue is that people feel almost nervous and anxious about the EU and that translates into insecurity and hostility because they don't understand how the place works," said Paul Adamson, editor of the online European affairs magazine E!Sharp and a campaigner against EU jargon.

Bureaucracies from the U.S. military to multinational companies are renowned for their jargon. But the EU's highly complex institutions are steeped in specialized language — dubbed eurospeak — with a tradition of naming policies after the places and people connected with their creation.

Schengen is no longer just a quiet Luxembourg town but a passport-free area; Gymnich, the name of a German castle, is now code for a meeting of EU foreign ministers. Officials responsible for preparing weekly talks between EU ambassadors are known as the Antici group after their Italian founder.

Jargon has grown as more countries have joined the EU to encompass its 23 languages: EFSF becomes FESF in French, FEEF in Spanish, ERVV in Finnish and SECA in Irish Gaelic.

Jose Manuel Barroso, the president of the Commission, said in late October that the bloc's complexities are "the single biggest complaint I receive everywhere I go in Europe."

One effort to bring Europeans closer to their officials and representatives is the newly-opened European Parliament visitors' center, built to rival the visitor center at the U.S. Congress in Washington. But beyond the razzmatazz of hi-tech, interactive displays and role-playing games, the debt crisis goes quietly unmentioned.

"We know there's a crisis because we live it every day," said Maria Jose Garrido, a lawyer from Madrid outside the visitor's center. "It's not going to go away just because you don't talk about it clearly."

Copyright 2011 Thomson Reuters.

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Italy eyes unity cabinet as EU dithers on crisis

10:18 AM cabinet, crisis, dithers, Italy, unity No Comments

After four days of chaotic haggling, former European Central Bank vice-president Lucas Papademos was appointed to head an interim crisis cabinet charged with saving Greece from default, bankruptcy and an exit from the euro zone.

In Rome, former European Commissioner Mario Monti emerged as favorite to replace Italian Prime Minister Silvio Berlusconi within days and lead an emergency government that would implement long delayed reforms of pensions, labor markets and business regulation.

Political and economic turmoil in Italy has spurred fears of a possible break-up of the euro zone with borrowing costs for Europe's third biggest economy at unsustainable levels and the 17-nation currency bloc unable to afford a bailout.

German Chancellor Angela Merkel, Europe's main paymaster, called for broad political support for reforms in Greece and said she believed Italy was winning back confidence, but political clarity was still needed in Rome.

She rejected talk of a possible shrinking of the currency area, saying: "We only have one goal, that is to bring about a stabilization of the euro zone in its current form."

European Union officials continued to dither and pass the buck on how best to fight the worsening sovereign debt crisis.

Three senior ECB policymakers rebuffed pressure from investors and foreign governments to intervene massively as a lender of last resort on bond markets to shield Italy and Spain from rapidly spreading financial contagion.

"We have gone pretty far in what we can do but there is not much more that can be expected from us. It is now up to the governments," ECB governing council member Klaas Knot told the Dutch parliament.

Knot, who is also Dutch central bank chief, said bond-buying only had a temporary effect. The ECB has bought more than 180 billion euros of peripheral euro zone bonds and traders said it was active again in the market on Thursday, but the purchases have failed to lower borrowing costs durably.

Stepping up the scale of bond-buying would eventually force the ECB to start printing money with the risk of stoking inflation, which was why the EU treaty had excluded such action, Knot said.

ECB executive board member Peter Praet said it was not the task of the central bank to intervene "when there are fundamental doubts about the sustainability of some countries". Outgoing ECB chief economist Juergen Stark earlier rejected calls for the ECB to act as lender of last resort like the U.S. Federal Reserve or the Bank of England.

In Brussels, a euro zone official said there were no plans to use the bloc's 440-billion-euro ($600 billion) rescue fund to help Italy, even with a precautionary credit line.

"Financial assistance is not in the cards," the official said. A second official said: "The ECB will be drawn like every one else by the weight of gravity (to act)."

MARKETS STEADIER

Italian 10-year bond yields steadied at around 7 percent, a level seen as unquestionable in the long term, due to signs that the political deadlock may be easing. Rome paid less to sell 1-year treasury bills than many had feared.

Sources in Berlusconi's conservative PdL party said he was now convinced it would be better not to call elections at the moment, an abrupt reversal. The billionaire media magnate has agreed to resign within days after parliament approves long delayed economic reforms demanded by European partners.

PdL parliamentary floor leader Fabrizio Cicchitto said the party was considering backing a unity government led by Monti, a respected economist favored by the center-left opposition.

Berlusconi's populist coalition partner, the Northern League, said it would not support a Monti government.

Monti, 68, was appointed a senator for life on Wednesday in a move that appeared to prefigure his possible rise to the premiership, but he has made no public statement and it is unclear what conditions he may set for taking office.

In Athens, Papademos said after agreeing to head a crisis coalition: "The Greek economy is facing huge problems despite the efforts undertaken.

"The choices we will make will be decisive for the Greek people. The path will not be easy but I am convinced the problems will be resolved faster and at a smaller cost if there is unity, understanding and prudence."

The euro rose from a one-month low and world stocks inched up on hopes that new governments being formed in Italy and Greece could help fend off a euro zone break-up.

SMALLER EURO ZONE DENIED

Merkel, French officials and the EU's executive Commission all tried to quash talk of a possible shrinking of the euro area, although they raised the possibility last week that Greece might leave the single currency.

EU sources told Reuters that French and German officials had held informal discussions on a two-speed Europe with a more tightly integrated and possibly smaller euro zone and a looser outer circle.

The discussions among senior policymakers, still in the realms of the theoretical, have focused on how to protect the euro zone from breaking up via tighter common policies which some members may by unable or unwilling to live with.

European Commission President Jose Manuel Barroso issued a stark warning of the dangers of a split in the European Union.

"There cannot be peace and prosperity in the North or in the West of Europe, if there is no peace and prosperity in the South or in the East," Barroso said in a speech in Berlin.

Merkel called on Wednesday for changes in EU treaties after French President Nicolas Sarkozy advocated a two-speed Europe in which euro zone countries accelerate and deepen integration while an expanding group outside the currency bloc stays more loosely connected.

The head of the International Monetary Fund called for political clarity in efforts to tackle Italy's debt crisis, warning that the world could face a "lost decade" if Europe's problems were not tackled boldly.

Uncertainty around who would succeed Berlusconi was fuelling market volatility, Christine Lagarde said on a visit to China.

"No one exactly understands who is going to come out as the leader. That confusion is particularly conducive to volatility," she told a news conference in Beijing. "Political clarity is conducive to more stability and my objective from the Fund's point of view is better and more stability."

A senior G20 source said the idea of convening an emergency meeting of finance ministers of the world's leading economies to discuss support measures for the euro zone before the French presidency ends at the end of the year had been dropped. They would meet next in Mexico in February.

Euro zone finance ministers agreed on Monday on a road map for leveraging the currency bloc's rescue fund to shield larger economies like Italy and Spain from a possible Greek default.

But markets are running faster than policy and there are deep doubts about the efficacy of those complex leveraging plans, and with Italy's debt totaling around 1.9 trillion euros even a larger bailout fund could struggle to cope.

Copyright 2011 Thomson Reuters.

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Sarkozy: Greek debt crisis like Lehman Brothers'

11:54 AM Brothers, crisis, Greek, Lehman, Sarkozy No Comments

PARIS — It was a mistake to let Greece join the euro single currency when it did because its economy was not ready to form a monetary union with others in the club, French President Nicolas Sarkozy said Thursday.

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"It was a mistake," Sarkozy said, when asked during a TV interview about having Greece adopt the euro two years after the single currency was created.

"Its economy was not ready," Sarkozy said.

Sarkozy gave a rare televised interview to explain the euro zone crisis plan agreed in Brussels the previous evening to the French electorate, six months before a presidential election.

He likened Greece's sovereign debt crisis to the crisis at Lehman Brothers, and said that a failure to come up with a way to help Greece would have thrown the euro zone and world economy into disorder.

"If Greece had gone bankrupt, there would have been a domino effect that would have affected everybody. The entire euro zone risked being taken down," Sarkozy said.

The deal, thrashed out after days of tense talks between Sarkozy, German Chancellor Angela Merkel, other euro zone leaders and private financial institutions, halved Greece's private-sector debt to 100 billion euros after bondholders agreed a 50 percent haircut.

Copyright 2011 Thomson Reuters.

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Europe's deepening crisis threatens US economy

3:36 AM crisis, deepening, economy, Europes, threatens No Comments

By John W. Schoen, Senior Producer

With the Greek government on the verge of collapse, Italy facing doubts about its massive debt, the leaders of the industrialized world met in France to try to stop the financial crisis playing out there from spreading around the globe.

Their options are extremely limited. If the crisis isn't contained, the shocks will be felt more painfully in the U.S.

"The European debt crisis is the single biggest threat to the U.S. recovery and the global recovery," said IHS Global Insight chief economist Nariman Behravesh. "The situation in Europe could spin out of control, as we've certainly seen in the last couple of days. And that could take the U.S. down with it."

Nearly two years after the it began,the crisis is already forcing Europe's economy back into recession, according to European Central Bank President Mario Draghi.

“What we are observing now is slow growth, heading towards a mild recession by year end,” he told reporters in Frankfurt Thursday, on the first day of his new job.

The fate of the European and U.S. economies are linked through multiple ties. The trade relationship is "the largest and most complex in the world," amounting to about $3.8 billion day and generating more than 7 million jobs, according to the Office of the U.S. Trade Representative. Slowing consumer and business spending in Europe means slowing demand for U.S. products and services.

The impact of a deeper European recession would be quickly felt on large U.S. companies that have been reporting strong profits overseas despite a sluggish recovery at home. That could force renewed belt-tightening, prompt layoffs and send the unemployment rate higher. 

Hey middle class, tell us about yourselves

To blunt the impact of that downturn, the ECB cut interest rates Thursday - by a quarter point to 1.25 percent - as the crisis widened. Greek officials Thursday scrambled to head off a proposed referendum that could force a withdrawal from the Euro and threaten the viability of the common currency. Deep budget cuts and a mass layoff of government workers have sent the Greek economy sharply in reverse. Though France and Germany are demanding further cuts before extending aid to Athens, Greek leaders counter that further cuts are politically untenable.  

Other heavily indebted European countries are drifting closer to that economic abyss. On Wednesday, Italy missed a critical deadline to come up with a plan to cut its budget deficit and revive growth. Spain, Portugal and Ireland are wrestling with proposals for similar measures to ease those countries' heavy debt burdens. 

Toon-Off: The Greek debt crisis 

As Europe's leaders have proposed, and shelved, multiple solutions in recent months, some observers believe that European leaders have not yet come to terms with the scope of the debt crisis. The latest includes a proposal that holders of Greek debt "voluntarily" agree to see the value of those bonds cut in half. But some observers say the measures proposed so far don't go nearly far enough.

"The Europeans have to come to grips with reality," said former Federal Reserve governor and Columbia University economist Frederic Mishkin.

Mishkin believes that means European leaders need to prepare for a much bigger writedown of Greek debt, along with the larger losses that would inflict on European banks holding those bonds. But it's not clear that European bank regulators have taken the steps needed to make sure the financial system there can withstand those losses.

"This has always been the issue," said Mishkin. "The good news is that the denial phase is starting to go away, and that's critical to finding a successful solution here. Although it's going to be damn difficult to do so."

The threats to Europe's financial system have already rocked U.S. financial markets and sapped American business and consumer confidence. But a wider meltdown could spread rapidly across the Atlantic.  

One "transmission mechanism" would be the impact on the U.S. dollar, which remains a safe haven for global investors in times of crisis. Demand for dollar-based assets drives up the value of the currency, imposing a penalty on U.S. exporters.

While U.S. banks and financial institutions are believed to be relatively well insulated from direct default of Greek and other European debt, less is known about the holders of default insurance on those bonds, so-called credit default swaps.

The proposed "voluntary" Greek bond writedown is an effort to avoid an actual default, an event that would trigger billions of dollars worth of swap payments. The fear is that a cascade of losses from issuers of default insurance could spread quickly through the global financial system, much as the collapse of Lehman Brothers sparked the financial meltdown of 2008.

European central bankers have resisted the kind of massive bond buying programs that the U.S. Federal Reserve undertook to calm the financial waters after the Panic of 2008. Thursday's rate cut signaled that Draghi could bring a more aggressive response to the crisis. But some observers see the move as too little, too late.

"Draghi made clear that the Bank will not buy enough bonds to provide the 'firewall' that markets hope might stem the region’s crisis," said  Jennifer McKeown, an economist for Capital Economics. "For now then, the euro zone’s fate will remain in the hands of the region’s governments, who appear increasingly unable or unwilling to respond."

As the crisis unfolded Thursday, leaders of the Group of 20 largest economies were arriving in Cannes, France for a regularly scheduled meeting. The agenda will include the search for solutions to the nearly two-year-old crisis.

But President Barack Obama and the U.S. delegation will have little new to offer. As Fed chairman Ben Bernanke told reporters Wednesday, Europe's problems can only be solved by Europe's leaders.

"It is a bit frustrating. ... ultimately it's their responsibility to find solutions to this very difficult problem," he said. "Of course, I and Treasury Secretary (Tim Geithner) and other economic policymakers in the United States do confer and meet with European policymakers on a regular basis and we give our advice, for what it's worth.  Sometimes they take it.  Sometimes they don't.  But obviously, they're the ones who have to make those decisions."

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Rating cut puts Spain back on crisis radar

7:18 PM crisis, radar, rating, Spain No Comments

MADRID (Reuters) - Standard & Poor's cut Spain's credit rating Friday, sending the euro briefly lower and underlining the challenges facing Europe's major powers as they meet G20 counterparts over the euro-zone debt crisis.

S&P, whose move mirrored that by fellow ratings agency Fitch last week, cited high unemployment, tightening credit and high private-sector debt among reasons for cutting the nation's long-term rating to AA- from AA.

Spanish 10-year government bond yields rose slightly in response, although they remained almost 60 basis points lower than those of Italy and, at 5.27 percent, some distance from the 7 percent level widely regarded as unsustainable.

"Despite signs of resilience in economic performance during 2011, we see heightened risks to Spain's growth prospects due to high unemployment, tighter financial conditions, the still high level of private sector debt, and the likely economic slowdown in Spain's main trading partners," S&P said.

It also noted the "incomplete state" of labor market reform and the likelihood of further asset deterioration for Spain's banks, and downgraded its forecast for Spanish economic growth in 2012 to about 1 percent, from the 1.5 percent it forecast in February.

High yields on Spanish government bonds point to concerns that it could be the next euro zone economy to require a Greece-style bailout, and despite an unpopular austerity program, doubts remain that Spain will meet its deficit target of 6 percent of GDP this year.

The Financial Times quoted a senior Spanish official as saying that meeting the 6 percent deficit target would be "difficult."

But Spain's Economy Minister Elena Salgado said later on Friday that there would be some margin for maneuver this year thanks about 2 billion euros raised by an auction of wireless frequencies and lower interest payments.

"Interest payments by the central government will be at least 2 billion euros below budget. So the combined effect of the spectrum auction and lower interest payments will mean we have a margin of 0.4 percent (of GDP)" Salgado said.

BETTER PIIGS

S&P announced the downgrade as finance ministers and central bank chiefs from the world's 20 biggest economies were due to meet later Friday in Paris amid pressure to find an urgent and convincing solution to the deepening debt crisis.

Spanish unemployment, at 21 percent, is the highest in the European Union, reflecting a stagnant economy, the collapse of a decade-long housing boom and cuts aimed at taming a public sector deficit that reached 11.1 percent of GDP in 2009.

The decision to shelve multi-billion-euro privatization plans, mainly due to tough market conditions, has meanwhile deprived the state of much needed revenues.

"The market's perception of Spain is that it's in a stronger position (than other debt-laden states) - with a strong defense on bank capitalization in place from the FROB bad bank fund, aggressive government action to control and cut spending and a 70 percent debt/GDP ratio," said Bill Blain, senior director at broker NewEdge Group.

"The biggest problem, but the issue I read least about, is the unresolved crisis between central government making cuts and the reticence of regions to follow," he said.

Salgado said the government will shortly announce its plans to ensure Spain's heavily-indebted regions meet their tough 2011 deficit targets.[nE8E7L700E]

JOB DILEMMA

A botched labor market reform in 2010 did little to alleviate joblessness that is concentrated mainly amongst younger Spaniards, and a new government after November 20 general elections will be under pressure to tackle the issue.

The center-right People's Party is expected to win the election easily and deepen austerity measures but they have shied away from presenting specific policy measures for fear of eroding public support.

Like Fitch, which also now rates Spain at AA-, S&P signaled further possible downgrades for Spain, saying there was still a risk the euro zone's fourth-largest economy could slip into recession next year, with a 0.5 percent contraction.

The euro reached a session low of $1.3723 after the downgrade, but later recovered on reports the European Central Bank was buying Spanish and Italian debt.

Hopes that G20 officials would agree on the outlines of a plan to resolve the debt crisis ahead of a European Union summit on October 23 also buoyed the shared currency, which remained on course for its biggest weekly rally since January.

Spain's blue chip index was little affected by the rating cut.

Finance chiefs from outside the euro zone are expected to speak frankly when they meet their European counterparts at Friday's G20 meeting, given impatience growing over the crisis and its implications for the rest of the world.

Thursday, Fitch cut credit ratings or signaled possible downgrades for several major European banks. It downgraded UBS and Royal Bank of Scotland. It also placed Barclays Bank, BNP Paribas, Credit Suisse, Deutsche Bank and Societe Generale on watch negative.

(Reporting by Balazs Koranyi, Mark Bendeich, Elisabeth O'Leary and Judy MacInnes; Editing by Catherine Evans and Patrick Graham)

Copyright 2011 Thomson Reuters.

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WRAPUP 1-US rejects plan to strengthen IMF in euro zone crisis

11:11 PM crisis, rejects, strengthen, WRAPUP No Comments

 PARIS — Proposals to double the size of the IMF as part of a broader international response to Europe's debt crisis ran into resistance from the United States and others on Friday, burying the idea for now and putting the onus firmly back on Europe.

The outlines of the plan, that had the backing of several developing economies, emerged as G20 finance ministers and central bankers began meeting in Paris to discuss a world economy under threat from European nations mired in debt.

One G20 source said emerging market policymakers backed injecting some $350 billion into the International Monetary Fund.

U.S. Treasury Secretary Timothy Geithner and his Canadian and Australian counterparts poured cold water on the idea. The IMF's dominant shareholders, including the United States, Japan, Germany and China, are content that the fund's $380 billion worth of resources is enough.

"They (the IMF) have very substantial resources that are uncommitted," Geithner said.

German Finance Minister Wolfgang Schaeuble agreed the euro zone debt crisis was for Europe to solve, and expressed confidence that EU leaders would produce a plan at an Oct. 23 summit that would be convincing for financial markets.

The United States is among countries keen to keep pressure on the Europeans to act more decisively to end the two-year-old debt crisis that began in Greece but has since spread to Ireland and Portugal and is lapping at Spain and Italy.

"The first priority here is for Europeans to put their own house in order," Australian Finance Minister Wayne Swan said.

Canadian Finance Minister Jim Flaherty also said the G20 should keep up pressure on the euro zone on its "arduous" journey towards a solution and not focus on IMF resources.

If minds needed concentrating further, the downgrade of Spain's credit rating a few hours earlier highlighted the risk of a much larger economy than Greece coming under threat.

Standard and Poor's cut Spain's long-term credit rating, citing the country's high unemployment, tightening credit and high private sector debt.

French and German officials are trying to put flesh on the bones of a crisis resolution plan in time for the European Union summit.

Fears about the damage a default by Greece -- and possibly others -- could inflict on the financial system have driven a confidence-sapping bout of market volatility since late July, with global stocks falling 17 percent from their 2011 high in May.

Unlike in 2009 when the G20 launched coordinated stimulus to pull the world out of crisis, the rest of the world is chafing at Europe's slow response while Washington and Beijing are sparring over the yuan currency.

The Franco-German crisis plan is likely to ask banks to accept bigger losses on their Greek debt than the 21 percent spelled out in a July plan for a second bailout of Athens, which now looks insufficient.

"It will be more, that's more or less certain," French Finance Minister Francois Baroin said.

It should also lay out a system for recapitalising banks and plans to leverage the euro zone's 440 billion euros European Financial Stability Facility to give it more punch.

Schaeuble said European banks should be helped, if necessary, with state means to strengthen their capital.

Japanese Finance Minister Jun Azumi said he would share with his G20 counterparts Japan's "bitter experience" of failing to contain its 1990s banking crisis by doing too little, too late.

Whilst the EFSF has the resources to cope with bailouts for Greece, Portugal and Ireland, it would be overwhelmed by the need to rescue a bigger economy such as Italy or Spain.

The most effective method would be to turn the EFSF into a bank so it could draw on European Central Bank resources. Both Germany and the ECB are opposed to that. Attention has turned to the idea of making the fund more like an insurer.

For example, if the EFSF covered the first 20 percent of losses a bank could suffer in case of a default -- it could multiply its firepower fivefold to over 2 trillion euros.

The G20 may refer to the euro crisis in its communique and in closing news conferences on Saturday evening, but little else of substance is likely to be inked in with the EU summit in nine day's time the make-or-break moment.

G20 sources said most BRICS economies were in favour of bolstering the IMF's capital as a crisis-fighting tool.

"We have said this before and have conveyed this again, that if emerging economies and the BRICS are called upon to contribute, we can do it via the International Monetary Fund," one of the sources said. "India is open to it, China and Brazil are also okay with the idea."

Another G20 source said the IMF would present a plan which had broad support to its executive board to make short-term credit lines available to fundamentally healthy countries hit by liquidity crises. It could aid euro zone countries hit by the current crisis of confidence in the bloc's sovereign debt.

Any real progress on bigger goals such as setting parameters to measure global imbalances and reining in speculative capital flows is unlikely to come before a Nov. 3-4 summit in Cannes, where France passes the G20 baton to Mexico.

A French finance ministry source said that for Cannes, France hoped to have two or three measures agreed for countries showing imbalances: consolidation measures for those with high deficits and stimulus measures for those with surpluses.

"We are going to try to make some progress and obtain, perhaps not tomorrow or Saturday but by Cannes, a list of measures country by country," he said. "These must be measures which will have an impact on the real economy."

A separate G20 source said after preparatory talks late on Thursday that China would commit to boost its consumption through a five-year plan, via households and companies as well as infrastructure.

The G20 countries make up 85 percent of global output.

An April G20 meeting placed seven large economies under review -- the debt-burdened United States, export driven China and the economies of France, Britain, Germany, Japan and India. Officials have said privately the aim was to get Beijing to discuss the yuan, and China's cooperation is essential to the success of the process.

A G20 official said China would not commit to a quick liberalisation of its yuan currency to help rebalance global growth, but would offer to use expansionary fiscal policy to fuel domestic demand.

"No, they were pretty firm on that -- there will be no progress," the official said.

Copyright 2011 Thomson Reuters.

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As crisis widens, Europe's leaders keep talking

4:26 PM crisis, Europes, leaders, talking, widens No Comments

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French President Nicolas Sarkozy and German Chancellor Angela Merkel met over the weekend and told reporters Monday they had worked out yet another plan to contain the widening financial crisis sweeping the continent. But they deflected questions about the plan's details.

By John W. Schoen, Senior Producer

More than a year after European officials began squabbling over solutions — and the continent's worst financial crisis since World War II has begun to engulf the banking system — the talking continues.

On Monday, Dexia, an embattled Franco-Belgian bank, became the first victim of the credit squeeze battering European lenders. European leaders moved to save the bank as the leaders of France and Germany emerged from yet another weekend of "emergency talks" on a coordinated plan to backstop European lenders.

“We are determined to do everything necessary to ensure the recapitalization of Europe’s banks,” Chancellor Angela Merkel said in Berlin after meeting with President Nicolas Sarkozy of France.

But the two leaders provided no details, leaving investors with little confidence that the plan will work.

"Now we have a plan to have a plan for recapitalization," said Steen Jakobsen, chief investment officer at Saxo Bank, a Danish investment bank. "We so many have plans for plans that I'm getting confused."

Though solutions remain murky, the problems facing Europe were brought into sharper focus by Dexia's failure. With no unified backstop in place, France and Belgium stepped in with $120 billion in loan guarantees for Dexia, which was taken over by the Belgian government.

As the crisis spreads, it's unclear how many more banks are at risk of being swamped by losses on holdings of government bonds issued by heavily indebted countries like Greece.

Now, as individual governments are forced to backstop their banks, the debt issued by those countries is being called into question. Moody's warned on Monday that it was reviewing Belgium's credit rating for a possible downgrade.

The risk is that Europe's governments find themselves caught in a vicious cycle. As Europe slides into recession, banks holding government bonds face losses if those bonds default. But without a coordinated plan to backstop failing banks, the burden will fall to individual governments. That cost of bank bailouts would further strain those government's budgets, increasing the risk of default.

"The governments that have problems with sovereign debt are recapitalizing banks that have problems with sovereign debt," said Adrian Schmidt, an investment strategist at Lloyds Bank. "It's getting somewhat circular."

Merkel and Sarkozy said Monday they would finalize the plan to backstop Europe's banks by the end of the month. But they offered no details, including the possible price tag for a unified program to provide more cash to the banking system.

There's widespread agreement that Europe's banks need more capital to weather the ongoing financial crisis. But there's little consensus over just how much they need. The problem is compounded by the steep drop in the price of Europe's bank stocks, which has made it harder for them to sell stock to raise cash.

The hope is that government pledges to backstop failing banks will help calm investors and provide bankers with more sources of private funding. But investors remain leery.

"I do not think being guaranteed by governments is any guarantee these days," said Jakobsen.

The announcement from Sarkozy and Merkel that a plan was near follows multiple failed attempts at a coordinated solution. Those have included a European version of the U.S. Troubled Asset Relief Program launched in 2009 to bail out American banks. Last year, European leaders cobbled together a so-called "financial stability facility," but that fund is now widely seen as too small to cover potential losses.

"We've been talking about Europe and potential solutions for months," said Scott Nations, President of NationsShares. "First it was leveraging the stability facility. And then they were going to do euro TARP. They're not coming to any conclusions or any solutions."

It remains to be seen how the latest plan will resolve the underlying threat of a debt default by Greece and other weaker economies. As the crisis has widened, the European Union's 17 member governments have remained split over a basic question: who should foot the bill?

Europe's leaders are running out of time to resolve that long-simmering debate. Over the weekend, Greek officials wrapped up the latest round of talks on the next $11 billion installment of an aid package needed to stave off a debt default. Without the payment, Athens is expected to run out of cash in the next few weeks. The latest round of proposals may be Greece's last chance to head off the financial collapse that has been looming for over a year.

But for now, the talking continues. On Monday, the EU announced that its next regular summit would be postponed by six days to Oct. 23 to allow time "to finalize our comprehensive strategy on the euro area sovereign debt crisis", according to European Council President Herman Van Rompuy.

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Finance ministers want Europen crisis resolved

6:33 PM crisis, Europen, finance, ministers, resolved No Comments

WASHINGTON — Finance ministers, seeking to prevent another global recession, increased pressure on European countries to resolve their debt crisis by coming up with a bold rescue plan, but there were indications of further divisions ahead over what new actions to take.

Officials from the U.S. and other countries outside of Europe, concerned at the impact the crisis is having on their own economies and jittery financial markets, told their European counterparts time is running short to prevent potential domino-style defaults in Europe.

"The threat of cascading default, bank runs and catastrophic risk must be taken off the table," U.S. Treasury Secretary Timothy Geithner told his colleagues Saturday at the annual meeting of the International Monetary Fund. "Decisions as to how to conclusively address the region's problems cannot wait until the crisis gets more severe."

He said European governments needed to join with the European Central Bank to provide stronger support to calm market fears and not work at cross purposes.

Mark Carney, the head of Canada's central bank, suggested "overwhelming" the problem by more than doubling the current euro rescue fund, increasing its size to 1 trillion euros, an amount that would equal $1.35 trillion. German Finance Minister Wolfgang Schaeuble, who leads the eurozone's largest economy, and British treasury chief George Osborne also indicated they favor boosting the rescue fund's firepower.

U.S. and global financial markets have experienced intense volatility in recent days over concerns that Greece is in danger of defaulting on its debt and that this would put further strains on major European banks that carry large Greek debt in their books.

The crisis could then drag in other heavily indebted European nations, including Portugal and Ireland, and even bigger economies such as Italy and Spain.

The IMF panel, which sets policy for the 187-nation financial institution, ended its discussions Saturday with a pledge to work decisively and in a coordinated way to deal with Europe's debt crisis.

The IMF statement echoed pledges of increased support made Thursday by the finance ministers of the Group of 20 major economies. But both statements were vague on what form additional support would take.

"Today, we agreed to act decisively to tackle the dangers confronting the global economy," new IMF Managing Director Christine Lagarde told reporters at a closing news conference.

The European debt crisis was the first challenge Lagarde faced as she took over the IMF job in June, but she had grappled with it before when serving as France's finance minister and thus knows the intricacies.

Lagarde refused to comment on reports that holders of Greek bonds may be forced to accept bigger losses on their holdings as a condition by other governments if they are to supply further support to Greece to meet its debt payments.

She said it was important for the 17 governments that use the euro to meet the commitments they made in July, when they decided to give the eurozone bailout fund new pre-emptive powers and reached a deal on a second bailout for Greece

"It's implementation first and foremost," Lagarde said. "No qualification."

Greek Finance Minister Evangelos Venizelos also ruled out a debt default, saying Saturday that his country was working hard on implementing the July decisions.

"Greece is never going to default because that would have been catastrophic for the euro area and for many other countries beyond the euro area," he said in a statement.

The three days of discussions wrapped up late Saturday with a meeting of the Development Committee, which sets policy for the World Bank.

World Bank President Robert Zoellick announced at a final news conference that the World Bank planned to triple to $1.88 billion the amount of humanitarian support the bank is providing to countries in drought-ravaged areas of the Horn of Africa. The World Bank has estimated that more 13 million people in the region are in need of humanitarian assistance. Zoellick said the increased support was aimed at trying to prevent the current humanitarian crisis "should not and need not be a perpetual crisis."

_____

Associated Press writer Martin Crutsinger contributed to this report.

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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Greek PM cancels U.S. trip as debt crisis deepens

4:15 AM cancels, crisis, deepens, Greek No Comments

ATHENS — Greek Prime Minister George Papandreou canceled a planned visit to the United States on Saturday to deal with a deepening crisis at home, days before European Union and IMF inspectors decide on further funding for the debt-ridden country.

Finance Minister Evangelos Venizelos rushed to allay fears the canceled trip signaled imminent default, saying such talk was "ridiculous," but the conservative opposition seized the opportunity to demand snap elections, fanning fears Greece lacks the will needed for tough measures ahead.

"The comments and analyses about an imminent default or bankruptcy are not only irresponsible but also ridiculous," Venizelos said in a statement.

"Every weekend Greece ... is subject to this organised attack by speculators in international markets."

Papandreou was in London, en-route to United Nations and International Monetary Fund (IMF) meetings, when he decided to turn back after discussing developments with Venizelos, government officials said.

"The prime minister judged that he should not be away. He wants to ensure that all of Greece's commitments (to its EU partners) are fulfilled," government spokesman Ilias Mossialos told Reuters.

A government official speaking on condition of anonymity told Reuters pressure was high on Athens from euro zone partners to take additional measures to merit continued funding from a 110 billion euro ($150 billion) bailout to avert default.

"There is an issue of trust. Our partners want very specific steps and commitments and our record so far unfortunately does not inspire confidence," said the official.

Next week, Greece is due to resume talks with EU and IMF inspectors who will judge fiscal progress before releasing the next 8 billion euro loan tranche in October.

Greece has said it has cash until next month.

"It's a sign that things are very tight. Papandreou's presence is crucial to make sure there are no setbacks with issues that need to be resolved," said Theodore Krintas, head of wealth management at Attica Bank.

ELECTION CALL

The conservative opposition New Democracy party, which voted against the bailout that saved Greece from bankruptcy last year, seized the opportunity to make a fresh call for snap elections.

"The only solution is elections, so that the people's will is expressed," New Democracy leader Antonis Samaras said in a speech in the northern city of Thessaloniki.

New Democracy, which is leading the ruling socialists in opinion polls, says the policy mix used cannot bring Greece out of the crisis and austerity measures were stifling the economy.

The conservatives are riding a wave of public discontent after two years of austerity measures and are proposing tax cuts and growth boosting measures instead.

"When a policy hurts my country, I will surely say no. Why should I co-sign a mistake?" Samaras said. "We want this destructive policy toppled."

Apart from the slow pace of reforms and fiscal slippages, international lenders are most concerned with the lack of political consensus in Greece. Even if elections are held in 2013 as planned, the next government must apply agreed policies for the country to recover.

The ruling socialists have a majority in parliament but political analysts say internal dissent and public unrest, such as strikes and violent protests, may prompt snap elections.

Fiscal slippage this year, which the government blamed on a deeper-than-projected recession, forced Athens to slap a levy on property to make up for the shortfall as a target of capping its budget deficit at 7.6 percent of gross domestic product looked out of reach.

Lenders have long warned against one-off measures and more taxes as a way out of the crisis shaking the euro. They have asked for urgent reforms and privatisations and a drastic shrinking of the bloated public sector.

EU economic and monetary affairs commissioner Olli Rehn has said inspectors from the European Central Bank, EU and IMF would report back on progress in early October, meaning the next disbursement of aid to Greece could be paid by mid-October.

A second 109 billion euro bailout agreed in July, after it became clear Greece would not be able to return to bond markets, has also hit snags.

Euro zone partners are asking for collateral before giving Athens more cash and banks are slow to participate in a bond swap scheme key to the deal.

Papandreou was to meet United Nations Secretary-General Ban Ki-Moon in New York on Sunday and IMF head Christine Lagarde on Tuesday. Venizelos is still due to attend an IMF meeting in Washington later in the week.

Copyright 2011 Thomson Reuters.

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