The prospect of a euro zone breakup intensified

The prospect of a euro zone breakup intensified on Tuesday night as borrowing costs around the region soared and the Dutch prime minister said it should be possible to expel some members from the currency union. Investors are rapidly losing hope that a solution to the sovereign debt crisis will be found, and their fear was demonstrated by rising bond yields – the rate of interest governments have to pay to borrow – across almost all single-currency countries. The Dutch premier, Mark Rutte, stoked fears that a collapse could become a reality as he aired the prospect of countries being ejected, albeit as a last resort. "We would like countries to be able to be pushed out of the euro zone," Rutte said on a visit to London, adding member countries must "put out the fire" of the debt crisis. As analysts warned of "terror taking hold", even some of those countries until now regarded as safe havens, such as the Netherlands, came under pressure as fears about countries' creditworthiness spread from peripheral countries such as Greece into Europe's core. One bond expert described this as the most worrying day yet in the crisis - he said - France was now suffering a "full-blown run" on its debt, with investors dumping French bonds to move their money to safer havens. The source added that the credit default swap (CDS) market – where investors in effect bet on the prospects of countries going bust – now indicates that the chance of France losing its coveted top AAA rating is a near certainty. Italy's growth figures for the third quarter have yet to be released, but the latest update for the euro zone does not bode well. The 17-nation group grew by just 0.2% during the quarter, and many forecasts expect the euro zone economy to contract in the final months of this year. In Spain, there was more evidence of investors' frayed nerves as the government was forced to pay out its highest borrowing costs in 14 years on new debt. Investors did come forward with enough money, but Spain's borrowing costs shot up to more than 5%, compared with less than 4% at similar recent sales. Belgium was victim to the same flight from eurozone bonds, and yields on a sale of 12-month debt by Brussels were at a three-month high. Investors were looking outside the currency union, and Switzerland fared rather differently at its latest debt auction. Its sale of six-month bills had an average interest rate of -0.3%. In other words, investors are paying the Swiss government for the privilege of lending their money to the country.

After the fanfare of last week's G20 meeting - which by general consensus was a big disappointment - the Financial Times is reporting there could be another summit before Christmas. Last week's meeting in Cannes ended on Friday with no decisions taken to expand the size of the eurozone bail-out fund, either by involving the International Monetary Fund or by expanding the role of the European Central Bank. The FT says this morning that a deal failed because Germany's central bank vetoed one element of a proposed rescue package. The plan under discussion involved IMF nations paying more into the fund, and an increase in liquidity which eurozone nations could have used to expand the bail-out fund. If the Bundesbank can be persuaded to back this plan, then a meeting of G20 finance minsters could be called either this month or next, the newspaper said. The G20 is not due to meet again until February, which many leaders regard as too far away when markets are so uncertain.

Back to Armageddon, the European Financial Stability Facility, the eurozone rescue fund, has raised €3bn via a bond sale, but had to pay more than expected and met modest interest, banking sources told AFP. Demand was only slightly more than the €3bn on offer and the effective rate or return paid to buyers of the bonds was 3.59pc, higher than anticipated, the sources said. Italy was dragged deeper into Europe's debt crisis on Monday as its borrowing costs soared to their highest level since the euro was created. The yield, or interest rate, on 10-year Italian bonds leapt to 6.66% on Monday, as Silvio Berlusconi's government prepared for a key vote on the country's public finances on Tuesday. Analysts warned that Italian yields were now approaching the "danger area" where a bailout looks a real risk. Stock markets around Europe fell sharply, amid concern that the debt deal hammered out in Brussels less than two weeks ago will not fix the crisis. "The current feeling is that Italy is too large to bail out with the current mechanisms in place, should Greek-like turmoil spread to Italy," warned Peter O'Flanagan of Clear Currency. The FTSE 100 was down 1.6%, at 5,435. Banks bore the brunt of the falls – with Lloyds Banking Group down 4.7%, Barclays down 3.4% and Royal Bank of Scotland down 3.2%.The French CAC and the German DAX also fell, by 2.1% and 1.9% respectively.

Band-aid for the Eurozone - nothig else !

Brussels deal is another sticking "band-aid" to patch up a brocken eurozone - First, it is woefully short on detail. The euro bailout fund (the EFSF) is to be leveraged up to €1 trillion (£878bn) but we are not told how. Greek bond holders will take a haircut of 50pc but we don't know how this will work or even that Greece's creditors will accept it. European banks will need to raise an extra €100bn to recapitalise themselves, but we don't know whether they will be able and willing to raise this money from the markets. (They might instead react by cutting their lending, which would be catastrophic for the economy.) So the deal may yet disintegrate, but let us assume it holds together. Will it work? Apparently, after the haircut, the Greek debt to GDP ratio will be brought down to 120pc by 2020. Supposedly, creditors of the Greek government can then sleep easy. Come off it! Most observers put the danger point for sovereign indebtedness at about 90pc-100pc of GDP. And, by the way, all these numbers rest on forecasts that the Greek economy grows reasonably well. That looks hardly likely. Similarly, if the eurozone economy is weak then bad debts will rise and European banks will need more capital. Moreover, the sum of €1 trillion for the EFSF is rather low. Just a few weeks ago, the talk was of the fund needing to be €2 trillion, which is about the size of Italian government debt.

IN CONCLUSION : The statement from the EU heads of state does not provide the hard details that the markets might have hoped for. It starts by stating the obvious: "Measures for restoring confidence in the banking sector are urgently needed and are necessary in the context of strengthening prudential control of the EU banking sector". It makes clear that more needs to be done to guarantee funding for banks – and, as my colleague in Brussels David Gow revealed earlier, requires banks to hold a 9% capital by June 30 2012. The memo spells out: "Banks should first use private sources of capital, including through restructuring and conversion of debt to equity instruments. Banks should be subject to constraints regarding the distribution of dividends and bonus payments until the target has been attained. If necessary, national governments should provide support , and if this support is not available, overcapitalization should be funded via a loan from the EFSF in the case of Euro zone countries." The paragraph that is important for UK banks, which found themselves bound by state rules during the October 2008 bail out, re latest to whether banks receiving state aid this time round will also be subjected to tough rules. Lloyds, for instance has to sell off 632 branches and Royal Bank of Scotland has been forced to sell off branches, entire businesses and wind down parts of its balance sheet to meet Brussels rules. On first reading, the memo appears to show a more tolerant approach on this score. "Any form of public support, whether at a national or EU-level, will be subject to the conditionality of the current special state aid crisis framework which the Commission has indicated will be applied with the necessary proportionality in view of the systemic character of the crisis." No doubt, the lawyers are about to get busy.

Silvio Berlusconi has agreed to resign by January

Italy is very much to the forefront again - the government is hanging by a thread. Italian newspaper Repubblica is reporting that Silvio Berlusconi has agreed to resign by January in exchange for agreement from his coaltion partners on reform of pensions and government bureaucracy.

Italy, which has €1.9 trillion (£1.65 trillion) of debt, will try to sell €10.5bn of government bonds today, even as it races to come up with a credible debt-reduction plan in time for today's summit in Brussels. Obviously if Italy is without a leader, or can't get agreement on debt reduction, it will make getting a final agreement at this afternoon's meeting all the harder - it is the eurozone's third-largest economy after all...

The International Monetary Fund is considering taking part in the bail-out fund via a special investment vehicle (SPIV), Reuters reported. To increase the firepower of the €440bn EFSF without actually putting more money into it, the SPIV (try not to laugh at the name) will be able to issue debt and use the money raised to buy the bonds of indebted nations in the secondary markets, or make loans to governments. The SPIV would be able to raise money from private investors and sovereign wealth funds, and the IMF could also contribute. Of course, when the IMF is involved, it means stakeholders countries taxpayers are on the hook because of the country's contribution to the fund.

Merkel's spokesman Steffan Seibert told journalists that further changes to Europe's bailout fund would require the agreement of the Bundestag, the German parliament. The eurozone's efforts to solve its escalating debt crisis plunged into disarray Thursday, when Germany and France called a second emergency summit after it became clear that they would not be able to bridge their difference in time for a first crisis meeting Sunday. Merkel's address to parliament scheduled for Friday was cancelled, and Seibert said it would take place next week. Sunday's summit was supposed to deliver a comprehensive plan to finally get a grip on the currency union's debt troubles by detailing new financing for debt-ridden Greece, a plan to make Europe's banks fit to sustain worsening market turbulence and a scheme to make the eurozone bailout fund more powerful. The announcement came from the offices of French President Nicolas Sarkozy and German Chancellor Angela Merkel after it became clear that the currecy union's two biggest countries could not agree on the main points of the plan. Both governments said that all elements of the eurozone's crisis strategy would be discussed on Sunday "so it can be definitively adopted by the Heads of State and Government at a second meeting Wednesday at the latest." It also said that the two leaders would meet Saturday afternoon ahead of the summit in Brussels in the hope of making progress.

The European Union's executive may ask for powers to censor credit ratings for countries in crisis, its financial reform chief said on Thursday, describing a ban as one way of stopping fallout from "ill-thought-out" ratings. The proposal, which officials cautioned may be impossible to police, would be the most stringent curb yet on rating agencies and highlights frustration in France, which was this week warned by Moody's that its top rating was under threat, and Germany. "These rating agencies should probably be considered one of the causes of this crisis," said Michel Barnier, the former French foreign minister who is now the EU commissioner in charge of regulating finance.

Standard & Poor's Ratings Services has downgraded Spain a notch, citing increasingly unpredictable financing conditions that could squeeze a private sector already pressured by struggling economic growth. The move comes as politicians in Slovakia finally voted to expand Europe's bail-out fund, ending a nail-biting stand-off that threatened the Greek rescue mission and rattled global markets. S&P expects theowing challenges for Spain's private sector as it seeks fresh external financing to roll over high levels of external debt. S&P now rates Spain at AA-, three steps below the top AAA rating. Its outlook is negative. Slovakia became the last of the 17 members to ratify new powers for the €440bn (£385bn) European Financial Stability Facility (EFSF) in a move that will deliver eurozone leaders as much as €3 trillion firepower against the escalating debt crisis. The news came as the Financial Times reported that emerging market countries are working on ways to contribute money rapidly to expand the effective firepower of the International Monetary Fund, with the aim of increasing its role in fighting the eurozone sovereign debt crisis. An announcement is due at the G20 in early November, it is claimed.

The leaders of France and Germany have announced that they are ready to recapitalise Europe's troubled banks and have reached agreement on a "long-lasting, complete package" to counter the bloc's debt crisis. But the German chancellor, Angela Merkel, and Nicolas Sarkozy, the French president, refused to go into detail about the plans, saying they had to think of the markets and iron out "technical issues" before consulting the other 25 leaders in the European Union. The announcement came hours after the governments of France, Belgium and Luxembourg said they had approved a plan for the future of the embattled Franco-Belgian bank Dexia. "We are determined to do whatever necessary to secure the recapitalisation of our banks," Merkel said at a joint news conference with Sarkozy at the chancellery in Berlin on Sunday evening. "A sound credit supply is the basis of sound economic development," she added. Both leaders were tight-lipped on whether they had decided that the €440bn (£380bn) bailout fund, the European financial stability facility (EFSF), could be used to recapitalise banks – a position known to be favoured by the French – or whether it could only be used as a last-ditch resort if a member state could not cope with shoring up its banks' capital on its own. The latter is known to be Merkel's preference, but on Sunday the chancellor would only say: "Germany and France want the same criteria to be applied, and criteria that are accepted by all sides." Merkel added: "We are not going into details today," adding that the duo would present a "complete package" for stabilising the eurozone at the end of the month in time for the G20 summit in Cannes on 3-4 November. "This summit has to be a success for the sake of the global economy," she stressed.

Analysts at Credit Suisse expect Goldman to have lost $392m in the three months to the end of September, while analysts at Barclays predict losses in the region of $180m. The trading revenues at Wall Street banks have been damaged over the summer by the sharp decline in global stock markets, the volatility across many asset classes and shaken confidence among chief executives to do deals.‬ The third quarter saw the FTSE 100 drop 13.7pc, the Dow Jones Industrial Average fall 12.1pc and the S&P 500 sink 14.3pc. Analysts at Credit Suisse expect that to have reduced revenues at Goldman's Fixed Income, Currency and Commodities division – a key driver of profits for the bank over the last decade. Revenues are expected to drop to $1.8bn, a 37pc fall on last year. "We expect overall fixed-income sales and trading activity to be very weak during the quarter," said Howard Chen, an analyst at Credit Suisse.‬ Goldman's investment banking division, which has been hit by macro-fears about the European debt crisis and an economic slowdown in the United States, will see revenues nose-dive 29pc to $825m, compared with the same quarter last year, according to Credit Suisse. The prospect of Goldman's first loss since 2008 underlines the pressure facing what is historically one of the industry's top performers. The bank has already announced a $1.2bn cost-cutting programme to be cut from its operations by mid-2012. But the new plan will increase cuts by as much as $250m. This could equal up to 5pc of the firm's expenses based on its 2010 spending. Wall Street recruiters say that Goldman, alongside other banks, may choose to make deeper cuts to jobs to be able to pay its best staff bigger bonuses.‬ When finance ministers from the G20 major economies meet next weekend, they could be excused for having a sickening feeling of deja vu. This time it's Paris, not London, but, just as in May 2009 when Gordon Brown brought the power-brokers of the world economy together in Docklands, they are trying to prevent a financial crisis spiralling out of control and dragging the global economy into recession. This time, though, there is far less political agreement or goodwill. Instead of the US, where the collapse of Lehman Brothers sent consumers and investors into panic mode, this time the focus is firmly on the eurozone, and time is running out. Greece is on the brink of going bust if it doesn't receive a fresh injection of cash, and bond vigilantes are focusing their fire on the much bigger Italian and Spanish economies, which had their debt downgraded by Moody's on Friday. Meanwhile, many economists think the eurozone as a whole may already have sunk into recession.

"The sovereignty of the German state is inviolate and anchored in perpetuity by basic law.

Andreas Vosskuhle, head of the constitutional court, said politicians do not have the legal authority to sign away the birthright of the German people without their explicit consent. "The sovereignty of the German state is inviolate and anchored in perpetuity by basic law. It may not be abandoned by the legislature (even with its powers to amend the constitution)," he said. "There is little leeway left for giving up core powers to the EU. If one wants to go beyond this limit – which might be politically legitimate and desirable – then Germany must give itself a new constitution. A referendum would be necessary. This cannot be done without the people," he told newspaper Frankfurter Allgemeine. The extraordinary interview comes just days before the Bundestag votes on a bill to revamp the EU's €440bn bail-out fund (EFSF), enabling it to purchase EMU bonds pre-emptively and recapitalise banks. Tensions are running high after it emerged over the weekend that officials are working on plans sketched by the US Treasury and the European Commission to "leverage" the firepower of the EFSF to €2 trillion, in conjunction with lending from the European Central Bank. Carsten Schneider, finance spokesman for the Social Democrats, demanded that Chancellor Angela Merkel and finance minister Wolfgang Schäuble clarify their "true intentions " before the vote on Thursday. "A new multi-trillion programme is being cooked up in Washington and Brussels, while the wool is being pulled over the eyes of Bundestag and German public. This is unacceptable," he said. Prince Hermann Otto zu Solms-Hohensolms-Lich, the Bundestag's deputy president and finance chief for the Free Democrats (FDP) in the ruling coalition, expressed outrage over the secret plans. "Unless the German finance minister can give an immediate assurance that there will be no leveraged formula, I will not vote for this law. We might as well dispense with months of negotiations if all this means is that the Bundestag will be circumvented and served cold left-overs," he said. The accusation that German leaders are conspiring with EU officials to emasculate the Bundestag is highly sensitive, going to the core of the raging debate in recent months over EU encroachments on German democracy.

The yield on 10-year Spanish bonds popped back above 6% yesterday and Italian 10-year yields stand at 5.66%. Such rates, if sustained for long periods, are simply unaffordable. Unsurprisingly, bank shares across Europe were also whacked yesterday. The problem is twofold. First, the politicians didn't get to grips with the size of Greece's debt problems. After a round of modest haircuts for private-sector creditors and a reduction in the rate on the interest rate charged on the bail-out loans, the country's debt-to-GDP ratio should no longer hit 170% soon. But the revised figure – maybe 130% – still looks too high to allow Greece to recover. Its economy is still too uncompetitive and you have to be an extreme optimist to believe tax receipts will arrive when they are due. So a third Greek bailout looks like only a matter of time. Get ready for more bitter rows over how the pain should be distributed between holders of Greek bonds and the taxpayers of other eurozone countries. That is no way to encourage companies to invest or consumers to spend – but it is the way to try the patience of German taxpayers. The second problem is the design of the European Financial Stability Facility – the rescue fund that is to be the first line of defence against speculative attacks. But how would Italy and Spain be defended in practice? The EFSF has been handed powers to intervene but no new cash. A fighting fund would have to be raised by passing the hat round member states – a challenge that looks a tall order today.

The over 4 million Romanians who contribute 3% of their gross monthly income to one of the eight funds have thus found out after three years that they finance, without their knowledge, UK banks or car manufacturers in Germany. The eight funds invested around 130 million lei in foreign shares, such as those of BMW, Daimler and Louis Vuitton and a further 308 million lei in corporate bonds, such as those issued by UK banks Royal Bank of Scotland, Lloyds and the Bank of Ireland. Investments of the eight funds on the Bucharest Stock Exchange amounted to 300 million lei, with the biggest investments targeting the five SIFs (Financial Investment Companies), Petrom and BRD, while investments in bonds issued by Romanian companies amounted to 50 million lei. Two thirds of the cumulated assets of the eight funds, i.e. around 2.2 billion lei, are invested in Romanian T-bills.

Wolfgang Ruttenstorfer, 61, the man who bought the biggest company in Romania, Petrom, will step down as CEO of OMV, after a nearly ten-year term at the helm of the Austrian petroleum group. Tomorrow Petrom and OMV announce the last financial results under Ruttenstorfer. Ruttenstorfer and Treichl, another austrian - CEO of Erste Bank, the owner of BCR in Romania - who's mandate will expire in one year, can be considered the most powerful executives in Romania given that Petrom controls around 40% of fuel distribution, and BCR accounts for 20% of the banking market. In fact, the two are also heads of the supervisory boards of Petrom and BCR respectively, set up after the privatisation of the two companies to keep a close eye on the performance of chief executives.According to 2009 data, Petrom generated around 17% of OMV's business, with the local company accounting for more than half the hydrocarbon reserves controlled by the Austrians, while in Erste's case around 20% of its assets are accounted for by BCR assets. Ruttenstorfer's departure from the helm of OMV was announced as early as the end of March 2009, when it was decided to extend his mandate until April 2011, and to appoint Gerhard Roiss as CEO of the group after that date. Roiss, 59, is currently deputy CEO and head of the refining, marketing and petrochemical division. (Z.F)

Foreign direct investments in 2009 were around 1.4 billion euros lower than original calculations had shown, down 63% against the previous year, instead of the original 48% decline.
The NBR (National Bank of Romania) has revised its statistical data on foreign direct investments, coming up with an overall 1.4 billion-euro decline against the original value that resulted from the monthly calculations of the central bank. Originally, the NBR had reported foreign direct investments worth 4.9 billion euros, down 48% against 2008, but the real decline was 63%, to 3.5 billion euros. "The National Bank conducts an annual research in collaboration with the National Statistics Institute to determine the amount of foreign direct investments, based on which investment data calculated on a monthly basis during the year are revised. The investigation offers various information on foreign direct investments, such as: their structure, investments by economic sectors and reinvested profit," Constantin Chirca, deputy manager of the NBR's Statistical Department told ZF.