US benchmark borrowing costs plunged to levels last seen in 1946 and those for Germany and the UK hit all-time lows as investors took fright at what they see as a disjointed policy response to the debt crisis in Spain and Italy. In a striking sign of the flight to haven assets, German two-year bond yields fell to zero for the first time, below the equivalent rate for Japan, meaning investors are willing to lend to Berlin for no return. US 10-year yields fell as low as 1.62 per cent, a level last reached in March 1946, according to Global Financial Data. German benchmark yields reached 1.26 per cent while Denmark's came close to breaching the 1 per cent level, hitting 1.09 per cent. UK rates fell to 1.64 per cent, the lowest since records for benchmark borrowing costs began in 1703. "They are extreme levels because we are in an extremely perilous situation. People just want to put their money somewhere where they think they will get it back. People may soon be paying Germany or the US to look after their money," said Gary Jenkins, head of Swordfish Research, an independent credit analysis company. The flight to safety came as the situation in Italy and Spain, the eurozone's third- and fourth-largest economies, deteriorated further. Italy held a disappointing debt auction and saw its benchmark borrowing costs rise above 6 per cent for the first time since January. The euro fell 0.8 per cent against the dollar to under $1.24 for the first time in two years. Confusion over how the Spanish government's rescue of Bankia, the stricken lender, will be structured led the premium Madrid pays over Berlin to borrow to hit fresh highs for the euro era at 540 basis points. Analysts said the elevated level meant that clearing houses could soon raise the amount of margin, or collateral, that traders need to post against Spanish debt, a move that led to the escalation of crises in Portugal and Ireland. The European Central Bank has made clear to Spain that it cannot use the bank's liquidity operations as part of a recapitalision of Bankia. However, the central bank said on Wednesday it had not been officially consulted on the plans. Equity markets globally fell on the eurozone fears with bourses in Paris, Frankfurt and London all dropping 2 per cent. But Nick Gartside, international chief investment officer for JPMorgan Asset Management, noted that while US bond yields had halved since April last year the S&P 500 equity market was at the same level. "One of those two markets is mispriced. Core government bonds are an efficient market and they are ahead," he added. Investors said borrowing costs for the US, UK and Germany were likely to continue to fall amid a worsening economic backdrop and the threat of more central bank intervention. Wealth managers have been moving client assets into currency havens in recent weeks, with the Swiss franc and the US dollar among the biggest beneficiaries "Risk aversion, a rapidly slowing global economy and unusually low policy rates will pin these short and intermediate maturity bonds at unprecedented low levels for quite a while," said Mohamed El-Erian, chief executive of Pimco, one of the world's largest bond investors. Mr Gartside said he could easily see German rates going below 1 per cent, following a path that only Japan and Switzerland have taken among major economies, while the US and UK could dip under 1.5 per cent. Markets are increasingly resigned to more turmoil until policy makers take more radical action. The two most popular plans of action for investors are for the ECB to buy Spanish and Italian bonds in unlimited size or for eurozone countries to agree on a fiscal union involving the pooling of debt. "You have to throw everything at it. Spain is just too big for half measures. The next intervention has to be not just massive in size but it has to show a total commitment," said Mr Jenkins. He recommends that the ECB set targets either for the premium Spain and Italy pay to borrow over Germany or for their yields.
Property prices in the capital’s most sought-after postcodes have been driven up by investors moving funds out of assets held in euros to buy into what is seen as a “safe haven” alternative. Foreign money seeking a refuge from the wider economic turmoil accounted for 60pc of acquisitions of prime central London property between 2007 and 2011, according to a report by Fathom Consulting for Development Securities. If the shared currency broke up completely, London property would initially be boosted by the continued flight towards a safe haven, the report predicts. But, once the break-up had taken place, demand for these assets as an insurance against this event would start to ebb. “Although fears about a messy end to the euro debt crisis may account for much of the gain in prime central London (PCL) prices that has taken place over the past two years, we find that a break-up of the single currency area is also the single greatest threat to PCL,” said researchers.
National deposit-insurance programs, strengthened by the European Union in 2009 to guarantee at least 100,000 euros ($125,000), leave savers at risk of losses if a country leaves the euro and its currency is redenominated. The funds in some nations also have been depleted after they were used to help bail out struggling lenders, leading policy makers to consider implementing an EU-wide protection plan.
An advertisement featuring Greek euro currency notes are seen through a metro train window in Athens. Photographer: Kostas Tsironis/Bloomberg
May 30 (Bloomberg) -- David Forrester, a currency strategist at Macquarie Bank Ltd., talks about the impact of Europe's debt crisis on the euro and the outlook for the Australian dollar. Forrester speaks with Rishaad Salamat on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)
“These schemes were not designed to deal with a complete meltdown of a banking system,” said Andrew Campbell, professor of international banking and finance law at the University of Leeds in the U.K. and an adviser to theInternational Association of Deposit Insurers. “If there’s a systemic failure, there needs to be some form of intervention.”
With European officials openly discussing a Greek exit from the euro for the first time, savers in Spain, Italy and Portugalmay start to withdraw cash on concern that those countries will follow Greece and their funds will be devalued with a switch to a successor currency. None of those nations has the firepower to handle simultaneous runs on multiple banks.
Pulling Deposits
Households and businesses pulled 34 billion euros from Greek banks in the 12 months ended in March, 17 percent of the country’s total, according to the ECB.
Deposits at banks in Greece, Ireland, Italy, Portugal and Spain fell by 80.6 billion euros, or 3.2 percent from the end of 2010 through the end of March, ECB data show. German and French banks increased deposits by 217.4 billion euros, or 6.3 percent, in the same period. Bank-deposit data for April will be released starting this week.
“Contagion fears might compel individuals in Portugal, Ireland, Italy and Spain to withdraw bank deposits due to concerns over solvency, redenomination, or otherwise,” UBS AG (UBSN) Chief Investment Officer Alexander Friedman said in a May letter to client advisers. “This could spark a major banking collapse, requiring truly unprecedented action from the ECB.”
Even after boosting capital and building up liquidity buffers of more than 1 trillion euros over the past two years, lenders may be unable to survive a system-wide bank run without political intervention, either in the form of a pan-European deposit guarantee or an expanded bank-bailout facility, Jernej Omahen, an analyst at Goldman Sachs Group Inc. (GS) in London, said in a May 22 report to clients.
“An EU-wide deposit-guarantee fund may prove to be the most important tool to preserve financial-market stability if Greece were to leave the euro area,” said Tobias Blattner, an economist at Daiwa Capital Markets in London.
Hollande, Monti
European leaders discussed regionalizing deposit guarantees as part of talks on reigniting growth in the euro area, EU President Herman Van Rompuy said after a summit in Brussels on May 24. French President Francois Hollande said after the meeting that he and Italian Prime Minister Mario Monti backed the plan. European Central Bank Executive Board member Peter Praet called for a similar scheme on May 25 as part of a financial union with one authority responsible for supervision and resolution of cross-border banks.
Policy makers also may consider cutting interest rates, buying more bonds through the EU’s Securities Market Program and starting a third longer-term financing operation to stem concerns that the currency may break up, Stefan Nedialkov, a London-based analyst at Citigroup Inc. wrote in a May 17 note.
Argentine Crisis
Savers pulled 27 percent of deposits from Argentina’s banks between 2000 and 2003 during a currency crisis, Nedialkov wrote. If Ireland, Italy, Portugal and Spain follow a similar pattern, about 340 billion euros could be withdrawn, he estimated.
Companies have already started to remove cash from southern Europe as soon as they earn it. Many already are sweeping funds daily out of banks in those countries and depositing it overnight with firms in the U.K. and northern Europe, according to David Manson, head of liquidity management at Barclays Plc in London, who advises company treasurers.
“There is a spectrum of perceived risk, which starts with Greece on one end and Germany and the U.K. on the other,” Manson said. “Portugal, Italy and Spain are all somewhere in the middle of that spectrum. This trend of sweeping deposits north has been exacerbated by the current crisis.”
Redenomination Risk
EU policy makers last overhauled rules on deposit-guarantee plans in 2009 after a global banking crisis exposed discrepancies in the level of protection offered in different countries. They raised the minimum amount insured to 100,000 euros a person from 20,000 euros. National governments were also told to ensure that their programs were pre-funded with contributions from lenders rather than topped up after a bank collapses. The way lenders are charged for the funds and how much they have to pay varies from nation to nation.
No provision was made for the possibility that a country would leave the euro, said two people involved in establishing the rules who declined to be identified because the talks were private. That provides little assurance to depositors concerned that their savings in euros may be redenominated as well as that banks may fail.
“For a pan-euro deposit-guarantee scheme to ‘firewall’ deposits in Italy, Ireland, Portugal and Spain following a potential Greek exit, it needs to explicitly cover redenomination risk as well,” Ronit Ghose, a Citigroup analyst based in London, wrote in a May 25 report. That would cost more than 150 billion euros, he estimated.
‘Longer-Term Project’
The European Commission said in a July 2010 report that a pan-European deposit guarantee would be cheaper and more effective than individual national facilities, though legal issues made it a “longer-term project” to be reviewed by 2014.
The EU currently is weighing plans to force national governments to ensure that a minimum amount of money is immediately available to stabilize a bank in the event of a run. Under the proposals, to be published by the commission June 6, funds would be raised through annual contributions by banks. Lenders could be tapped for further financing in an emergency, then national central banks, before governments would be obliged to lend to each other as a last resort.
Member states could merge these requirements with existing national arrangements to guarantee bank deposits, and would also be required to pool financial resources when a cross-border bank is on the point of failure, according to a draft of the plans obtained by Bloomberg News on May 25.
Depleted Funds
In the meantime, concern is rising that existing national funds may struggle to honor their guarantees should the crisis worsen and sovereign borrowing costs remain elevated. Yields on 10-year Italian government bonds have jumped 1.09 percentage points to 5.77 percent from a March 9 low for the year. Their Spanish equivalents have increased 1.45 percentage points to 6.45 percent over the same period.
“Guarantees are still provided locally, by governments and agencies that have credit risk, reducing the value of the insurance,” Jonathan Glionna, a London-based analyst at Barclays, wrote in a May 22 note to clients.
Spain has dipped into its guarantee fund, which stood at 6.6 billion euros in October, to cover loan losses for buyers of failed banks. It used the facility to inject 5.25 billion euros into Caja de Ahorros del Mediterraneo when it agreed to sell it to Banco Sabadell SA in December. The deposit-guarantee program will also reimburse the bank-rescue fund for the 953 million euros it paid for a stake in Unnim Banc, which was sold to Banco Bilbao Vizcaya Argentaria SA. (BBVA) The country had 931.2 billion euros of deposits at the end of March, according to ECB data.
Politically Difficult
Italy’s deposit-insurance program is still unfunded, with banks pledging to contribute if and when necessary. Silvia Lazzarino De Lorenzo, a spokeswoman for Roberto Moretti, chairman of the Interbank Deposit Protection Fund, declined to comment. The country had 1.1 trillion euros of deposits at the end of March, ECB data show.
Portugal has a deposit fund of 1.4 billion euros collected from banks through annual contributions, according to Barclays. The country’s total deposits stood at 164.7 billion euros at the end of March, according to the central bank.
One option for an EU-wide insurance plan would involve Europe’s largest banks contributing 107 billion euros, or 1.5 percent of eligible deposits, to a fund over 10 years, according to proposals by Dirk Schoenmaker and Daniel Gros of the Centre for European Policy Studies, a Brussels-based research group.
Implementing such a program wouldn’t be difficult technically because it would be only a matter of harmonizing existing standards, said Simon Gleeson, a financial-services lawyer at Clifford Chance LLP in London.
“The real difficulty is that domestic consumers in countries like Germany will be forced to pony up for the failures of foreign banks,” Gleeson said. “That makes it politically very difficult.”
A year after its implementation in May 2011, the European Commission's Privacy and Electronic Communications Directive will finally start to be enforced as of tonight, meaning visitors to websites are required to be informed of, and given choice over, the site's intentions to store their data in cookies. Though there has been fierce opposition to the directive, some companies, such as the BBC, Channel 4 and the Guardian, have now begun implementing measures that range from multiple user choices in the level of information shared with the site, to a single message informing the user that, by continuing to browse, they have automatically agreed to have their information stored. Further reading EU cookie law is a 'restraint to trade online', says online retailer Most UK organisations not compliant with EU cookie law New EU cookie law set to come into force But the majority of companies, it is widely reported, will miss tonight's deadline. While the Information Commissioner's Office (ICO) still disagrees that a "one size fits all" policy of standardisation is not the way forward when enforcing cookie legislation, some believe such a framework is the only way forward. Society for engineering and technology professionals, the Institution of Engineering & Technology said, "The implementation of this directive is likely to prove very variable until the introduction of a set of standards on the best way to provide a balance between easy browsing and personal privacy. "We had hoped that more progress would have been made on achieving this in the 12 month implementation delay that the Information Commissioner, Christopher Graham, gave British organisations."
That is the theory. But in practice, any protection the law offers investors could be difficult to enforce, according to lawyers trying to protect their corporate clients against the upheaval sure to follow if Greece defaults on its debts and adopts a new currency. So their advice is blunt: Remove cash and other liquid assets from Greece and prepare to take a short-term hit on any other investments. “My personal view is that it is irrational for anyone, whether a corporation or an individual, to be leaving money in Greek financial institutions, so long as there is a credible prospect of a euro zone exit,” said Ian Clark, a partner in London for White & Case, a global law firm that has a team of 10 attorneys focusing on the issue. Several multinational corporations have already taken the same view. Vodafone, the mobile phone operator, and GlaxoSmithKline, the pharmaceuticals firm, say they are “sweeping” money out of Greece and into British banks each evening. This applies not just to Greece but to most other euro nations, although Glaxo says it still keeps money in Germany. Corporate attorneys say looking to E.U. law provides only approximate guidance on whether Greece could stop using the euro while remaining in the Union. Although the E.U. prides itself on basing decisions on strict interpretation of the legal texts in its governing treaty and other legislation, the rules on euro membership have proved flexible. For example, while all 27 E.U. nations are supposedly obliged to join the single currency, once they meet certain economic criteria, Britain and Denmark were able to negotiate the option of retaining their own currencies. Sweden is one of the nations technically obliged to join the euro, but since a national referendum opposed the idea in 2003, no one has pressed the country to do so. Similarly, while leaving the euro might, legally, mean quitting the union itself, most experts see this as a technicality that can be circumvented as well. “The treaty doesn’t cover the question of what would happen if a country were to leave the euro and return to its previous currency,” said Stephen Weatherill, Jacques Delors Professor of European Law at Oxford University. “In the absence of any provision, there is plenty of space for European governments to concoct a solution, adopt it and for it to be legally enforceable,” he added. “In general, you can do anything you like, so long as you do not breach pre-existing international obligations.” The mechanics of leaving the euro would surely lead Greece to impose so-called capital controls to stem the flight of money from a currency destined to be devalued. Again, such controls look impossible under E.U. law. But Mr. Weatherill thinks that a loophole allowing for the protection of public security could be invoked. Mr. Clark, of White & Case, a global law firm, points to a clause in Article 65 of the treaty that says that the pledge on free movement should not prevent countries from taking measures “which are justified on grounds of public policy or public security.” Mr. Clark and his team serve clients that include financial institutions like BNP Paribas and hedge funds. In February, Andrew Witty, the chief executive of GlaxoSmithKline, said: “We don’t leave any cash in most European countries” except Germany. Tens of millions of pounds flow into accounts in Britain every day, he said. But, apart from trying to ensure that debts are paid promptly and therefore in euros, legal options for companies are limited. Contracts covered by Greek law, particularly for services delivered in Greece, provide little protection against the currency’s being redenominated and devalued — a development regarded as unlikely until recently. “Greece would, through its laws, be able to amend contracts governed by Greek law or to be performed within the territory of Greece,” Mr. Clark said. “It is the governing law and the place of performance of the contract that is most important.” International contracts, which might be covered by English, German or Swiss law, would be more likely to be honored in the designated currency, though in some cases the wording of the legal document may be vague. And even if the law is on their side, companies would find that to extract payment from a Greek company, they would need a judge in Greece to enforce a ruling from a foreign court. “Enforcement of foreign judgments is harder or easier from country to country within the E.U.,” Mr. Clark said. “Greece has always had a reputation of being a difficult place in which to enforce judgments, from a practical perspective.” That means that international trading partners are likely to share in any losses that accompany a Greek exit from the euro. “International businesses that have long-term interests in Greece are going to have to be pragmatic and probably, in the short term, give some dispensation to their Greek counterparties, rather than trying to enforce the terms of contracts that cannot be performed,” Mr. Clark said.
A former head of security at Lloyds Bank has been charged in connection with an alleged £2.5m fraud. Jessica Harper, 50, of Croydon, south London, is accused of submitting false invoices to claim payments, between September 2008 and December 2011. At the time she was working as head of fraud and security for digital banking and allegedly made false claims totalling £2,463,750. Ms Harper will appear at Westminster Magistrates' Court on 31 May. She has been charged with one count of fraud by abuse of position. The bank, which is now 39.7% state-owned after being bailed out by the government during the financial crisis, refused to comment on the charging of Ms Harper. A Metropolitan Police spokesman said she was arrested on 21 December 2011 by officers from its fraud squad. Andrew Penhale, from the Crown Prosecution Service's Central Fraud Group, said: "The charge relates to an allegation that between 1 September 2008 and 21 December 2011, Jessica Harper dishonestly and with the intention of making a gain for herself, abused her position as an employee of Lloyds Banking Group, in which she was expected to safeguard the financial interests of Lloyds Banking Group, by submitting false invoices to claim payments totalling £2,463,750.88, to which she was not entitled. "This decision to prosecute was taken in accordance with the Code for Crown Prosecutors. "We have determined that there is a realistic prospect of conviction and a prosecution is in the public interest."
Some of the most senior officials in Whitehall receive a total of up to £4m funnelled through private companies or other intermediaries, making it impossible to tell whether they had paid the full amount of tax, a review found. Ministers announced that in future senior staff must be on the government payroll to ensure they are paying the correct income tax and National Insurance, or their contracts will be terminated. The highest paid “off payroll” official was believed to have worked as commercial director for the High Speed 2 rail project, earning up to £1,799 per day. Danny Alexander, the Treasury chief secretary, said a new law was being drafted to require anyone controlling any public or private organisation to be on the payroll. He ordered the review after it emerged in February that Ed Lester, the head of the Student Loans Company, had negotiated a deal to be paid through a private company which allowed him to avoid tens of thousands of pounds in tax.
BRITAIN yesterday piled pressure on German Chancellor Angela Merkel to save the euro. 6 comments Related Stories PM: Make or break for euro HE to issue plea to Merkel to fork out as only way to stave off meltdown New French Pres gets a soakingFrench warning for CameronSarky poll malarky will leave PM narky David Cameron and Chancellor George Osborne said she must use her financial clout to stop the single currency collapsing. The PM hammered the message home in emergency talks via video-link with Mrs Merkel and French president Francois Hollande. It came as the chaos in Greece spread to Spain — with fears of a run on banks in both countries. Greeks have taken £560million from local banks in the past week. And yesterday Spain’s Bankia bank was forced to deny reports customers had taken £800million out of its coffers in the past seven days. Last night the fears hit Santander UK as credit rating agency Moody’s downgraded the bank along with its Spanish owner and 15 other Spanish banks. And credit agency Fitch downgraded Greece on fears it will be booted out of the Eurozone. Earlier, Mr Osborne said the Treasury had drawn up emergency plans to cope with Greece quitting the euro. He told MPs: “Britain will be prepared for whatever comes.” Mr Cameron had warned countries such as Greece and Spain can only survive if richer countries did more to “share the burden of adjustment”. He also backed Eurobonds to raise billions to prop up crisis-hit countries — a proposal that would have to be bankrolled by Berlin. After the video chat, a Downing Street spokesman said the PM urged the eurozone to take “decisive action to ensure financial stability and prevent contagion”.
In a sweeping reassessment, ratings agency Moody’s announced in Madrid that it is downgrading 16 Spanish banks because it could not be sure of the ability of the country’s government to provide the necessary support.
Santander UK was among the banks highlighted after the ratings agency took aim at its parent Banco Santander, based in Spain.
The Spanish banking crisis has hit the British high street, with the news that Santander has had its credit rating cut
Santander is one of the biggest players in UK retail banking, having taken over the former Abbey National, Alliance & Leicester, Bradford & Bingley and most recently the English branches of the Royal Bank of Scotland.
The new lower A2 credit rating is certain to be a cause of anxiety to Santander UK’s millions of British customers.
Nevertheless, they can be confident that their deposits up to £85,000 are guaranteed by the British government should there be a loss of confidence.
The 63-year-old singer, who had hits including Hot Stuff, Love to Love You, Baby and I Feel Love, died in Florida on Thursday morning. She had largely kept her battle with lung cancer out of the public eye. But the website TMZ reported that the singer had told friends she believed her illness was the result of inhaling toxic dust from the collapsed Twin Towers. On Thursday night tributes were paid to the singer, considered by many to be the voice of the 1970s. A statement released on behalf of her family — husband Bruce Sudano, their daughters Brooklyn and Amanda, her daughter, Mimi from a previous marriage and four grandchildren — read: “Early this morning, surrounded by family, we lost Donna Summer Sudano, a woman of many gifts, the greatest being her faith. "While we grieve her passing, we are at peace celebrating her extraordinary life and her continued legacy.
Investigators are questioning Mexico's former deputy defence minister and a top army general for suspected links to organised crime, in the highest level scandal to hit the military in the five-year-old drug war.
Mexican soldiers on Tuesday detained retired general Tomás Angeles Dauahare and general Roberto Dawe González and turned them over to the country's organised crime unit, military and government officials said.
Angeles Dauahare was number 2 in the armed forces under President Felipe Calderón and helped lead the government's crackdown on drug cartels after soldiers were deployed to the streets in late 2006. He retired in 2008.
Dawe González, still an active duty general, led an elite army unit in the western state of Colima and local media said he previously held posts in the violent states of Sinaloa and Chihuahua.
An official at the attorney general's office said they would be held for several days to give testimony and then could be called in front of a judge.
"The generals are answering questions because they are allegedly tied to organised crime," the official said.
Angeles Dauahare said through a lawyer that his detention was unjustified, daily Reforma newspaper reported.
If the generals were convicted of drug trafficking, it would mark the most serious case of military corruption during Calderón's administration.
"Traditionally the armed forces had a side role in the anti-drug fight, eradicating drug crops or stopping drug shipments," said Alejandro Hope, a security analyst who formerly worked in the government intelligence agency.
"After 2006, they were more directly involved in public security, putting them at a higher risk of contact [with drug gangs]," he said.
About 55,000 people have been killed in drug violence over the past five years as rival cartels fight each other and government forces.
Worsening drug-related attacks in major cities are eroding support for Calderón's conservative National Action Party, or PAN, ahead of a 1 July presidential vote.
Over the weekend, police found 49 headless bodies on a highway in northern Mexico, the latest in a recent series of brutal massacres where mutilated corpses have been hung from bridges or shoved in iceboxes.
Opinion polls show Calderón's party is trailing by double digits behind opposition candidate Enrique Peña Nieto from the Institutional Revolutionary Party, or PRI, which says the government's drug strategy is failing.
Traditionally, the military has been seen as less susceptible to cartel bribes and intimidation than badly paid local and state police forces, who are often easily swayed by drug gang pay offs.
But there have been cases of military corruption in the past. Angeles Dauahare himself oversaw the landmark trial of two generals convicted of working with drug gangs in 2002.
Those two generals were convicted of links to the Juárez cartel once headed by the late Amado Carrillo Fuentes, who was known as the Lord of the Skies for flying plane load of cocaine into the United States.
Since then, the Sinaloa cartel - headed by Mexico's most wanted man Joaquín "Shorty" Guzmán - has expanded its power and is locked in a bloody battle over smuggling routes with the Zetas gang, founded by deserters from the Mexican army.
Speculation is mounting that a British-based trader dubbed 'Voldemort' is behind a $2billion loss for America's largest bank. The man, also nicknamed the 'London Whale' and the 'White Whale', is suspected by financial analysts of making massive and hugely risky trades for JPMorgan Chase when he should have been mitigating risk. Bruno Michel Iksil, as he has been named by the Washington Post, is French-born, based in London and worked for the Chief Investment Office which has been at the heart of the bank's recent losses.