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Eurozone debt crisis 'in dangerous new phase' warns IMF chief | Business | The Guardian

9/15/11 4:50 PM

Eurozone debt crisis 'in dangerous new phase' warns IMF chief
Central banks to pump cheap dollars to European banks Lagarde says 'political dysfunction' could wreck recovery
Phillip Inman, economics correspondent guardian.co.uk, Thursday 15 September 2011 15.52 EDT

International Monetary Fund head Christine Lagarde described a vicious circle of weak growth and weak balance sheets fuelling a crisis of confidence. Photograph: Michael Reynolds/EPA

International Monetary Fund chief Christine Lagarde has warned that a "vicious circle is gaining momentum" in Europe and the US that could wreck attempts at a recovery and undermine rescue operations for Greece and other indebted EU countries. She said "political dysfunction" was feeding policy indecision in a "dangerous new phase of the crisis" that could make a delicate situation harder to resolve. Her comments, most of which were directed at eurozone's chief policymakers, came as the world's major central banks agreed to provide unlimited dollars to European banks to prevent a rerun of the Lehman Brothers collapse three years ago. The Bank of England joined the Bank of Japan, the US Federal Reserve and the European Central Bank in a joint mission to provide dollars more cheaply than international money markets. Stock markets reacted positively to the initiative, with the FTSE up 2% at 5337 and the German Dax and French CAC both up 3%. Banking stocks rose sharply, with BNP Paribas up as much as 22%. Many of Europe's weakest banks are expected to make use of the funds after finding their access to dollar loans cut off in recent months. US institutions withdrew loan facilities while the Greek situation remained unresolved, analysts said.
http://www.guardian.co.uk/business/2011/sep/15/imf-chief-warns-political-dysfunction Page 1 of 7

Eurozone debt crisis 'in dangerous new phase' warns IMF chief | Business | The Guardian

9/15/11 4:50 PM

The European commission added to the gloomy outlook after it said the economic situation would deteriorate towards the end of the year with growth slowing to a standstill in the last quarter. It cut its 2011 growth forecast for the UK to just 1.1% from the previous estimate of 1.7%. Lagarde, the former French finance minister, repeated her warning that eurozone banks vulnerable to a Greek default needed to boost their capital. French banks have come under the spotlight following an unprecedented lending spree to the Greek government and Greek banks. A default by Greece on its debts would leave them with a large hole in their finances. Socit Gnrale has a total exposure to Greek government and commercial debts equal to !6.6bn (5.7bn), and BNP Paribas has !8.5bn, according to their disclosures to the European Banking Authority. Crdit Agricole has a total exposure of !27bn. Insurance policies sold by French banks in the form of credit default swaps (CDSs) could also result in large losses. Many of the CDS contracts offered by French banks have, in turn, been insured with other eurozone banks, which could be dragged into a crisis by the need to honour these as well as absorb their own losses on loans to Greece. Echoing analysts who argue the core problem for the eurozone is the lack of reserves to buffer against loan defaults, Lagarde said there was a need for governments to increase their support for the banking system. "Balance sheet pressures are knocking the wind out of the recovery," she said. "There is still too much debt in the system. Uncertainty hovers over sovereigns across the advanced economies, banks in Europe and households in the US. "Weak growth and weak balance sheets of governments, financial institutions and households are feeding negatively on each other, fuelling a crisis of confidence and holding back demand, investment and job creation. This vicious cycle is gaining momentum and, frankly, it has been exacerbated by policy indecision and political dysfunction." She added that while governments needed to cut their own debts this should not be at the expense of growth, in a barely disguised warning to the US, the UK and other governments with slowing economies that they risked social unrest without more aggressive policies to tackle unemployment. "I see a number of interweaving strands here entrenched high unemployment, especially among the younger generation; fiscal austerity that chips away at social protections; perceptions of unfairness in Wall Street being given priority over 'main street'; and legacies of growth in many countries that predominantly benefited the top echelons of society. These issues add more fuel to the confidence crisis." Analysts remained deeply divided over the fate of Greece and the eurozone. Some argued the concerted effort by the French president, Nicolas Sarkozy, and the German chancellor, Angela Merkel, this week to rally support for Greece and a second bailout facility, combined with the actions of central banks, had calmed investors and bought time for Greece to sort out its finances. Others said the efforts of the banks were a sticking plaster for a situation demanding government action.

http://www.guardian.co.uk/business/2011/sep/15/imf-chief-warns-political-dysfunction

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Eurozone debt crisis 'in dangerous new phase' warns IMF chief | Business | The Guardian

9/15/11 4:50 PM

Trevor Greetham, a fund manager at US investment firm Fidelity, said: "With sentiment very negative we are seeing a strong positive market reaction to the central bank initiative but liquidity action isn't enough to take us back into bull market mode. The dollar move is a repeat of the joint action central banks took in December 2007, early on in the last crisis. Liquidity support will not remove solvency fears as these relate to Greek default and its possible knock-on effects. "It's also worth remembering it is the slowdown in global growth over 2011 that is putting increasing pressure on the European periphery and lead indicators suggest that slowdown is still in place."

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Comments in chronological order (Total 14 comments)


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TedStewart 15 September 2011 9:04PM A crisis that requires bankers and politicians to work cooperatively together to resolve. What are the chances of that? Recommend? (6) Report abuse
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mickyfong 15 September 2011 9:18PM "I see a number of interweaving strands here" well hey Chris...good for you...but there's fcuk all you can do about it. This is bigger than anyone can even comprehend...it needs a phoenix rising from the ashes but only after it's all burned down first. innit Recommend? (2) Report abuse

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Eurozone debt crisis 'in dangerous new phase' warns IMF chief | Business | The Guardian

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MrShigemitsu 15 September 2011 9:19PM A crisis that requires bankers and politicians to work cooperatively together to resolve. What are the chances of that? Very high indeed. Politicians co-operate at all times with whatever bankers want them to do. Recommend? (3) Report abuse
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redmirror 15 September 2011 9:21PM These numbnuts have no idea what they are talking about. How many of them foresaw the 'Great Recession'? Zip. Enough said. I'll take my chances and wait for the sky to fall. I don't trust one of them. Recommend? (0) Report abuse
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Rangifer 15 September 2011 9:22PM A bank bailout in advance rather than a bank bailout after the event. It won't make any more difference to the ailing economies of the Eurozone than have any of the other bailouts hitherto. Plus a change, plus c'est la mme chose, Madame Lagarde. Recommend? (1) Report abuse
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MooseFreedomFighter 15 September 2011 9:27PM utter manmade madness - pathetic that we can even solve our own made up crisis, we are very much doomed Capt Mainwaring !!!! Recommend? (0) Report abuse
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MooseFreedomFighter
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Eurozone debt crisis 'in dangerous new phase' warns IMF chief | Business | The Guardian

9/15/11 4:50 PM

15 September 2011 9:28PM bet the rich stay rich and the poor get shafted no change there then Recommend? (2) Report abuse
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AVoiceFromAmerica 15 September 2011 9:28PM Here we go again. Trillions for the banks - not one penny for the working person. Recommend? (3) Report abuse
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lostinmidwest 15 September 2011 9:30PM I know I am a bit dim, so somebody expalin to me why BNP, SG and CA simply don't write the debt down, or off completely. They have numdreds of billions more in assets. Sure their stock price would take a substantial haircut, but hey, thats that name of the game: sometimes you make bad investment decisions and you pay a price. And it can't have anything to do with capital reserve ratios since those assets (Greek sovereign debt) are worthless anyway - unless we are all playing a game of lets pretend. Recommend? (2) Report abuse
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hydroxl 15 September 2011 9:31PM Generations of economists were taught in university that human beings are "rational utility maximisers" and that is still the dominant theoretical assumption. The new field of behavioural economics is still in its infancy and hasn't yet gained enough traction in the economics community to affect monetary or fiscal policy. But humans are self-evidently NOT "rational utility maximisers" ; they are social animals, heavily influenced by passions, fears, fantasies, tribalism, and especially the behaviour and emotions of other humans, especially in the aggregate. This flaw is why economic models and predictions so often fail - because their core assumption about their central agent - humans - is wrong. Anyone who regularly reads business and investment news regularly sees headlines saying "Economists were surprised" at [this or that], or "Unexpected increase" (or decrease) in [some economic metric]. Everything takes them by surprise. So it's a bit rich for Christine Lagarde to complain about political stalemates and indecision. Get a clue, Christine, that's what humans DO. We are political animals; we
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Eurozone debt crisis 'in dangerous new phase' warns IMF chief | Business | The Guardian

9/15/11 4:50 PM

are social and emotional animals. Instead of idiotically expecting humans to suddenly turn into a bunch of little robots to fit your "rational utility maximiser"; why don't you and your fellow economists come up with models that describe the real world? Recommend? (3) Report abuse
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theejudge 15 September 2011 9:41PM theejudge finds that they do not realise that the thing is broken. Laissez faire is over just like communism is over. The Neo Liberal dream of a world that converges on American capitalism is over. A system that expects Greece to coexist on parity with Germany is a sham. It is time to stop throwing our money into a black hole because it will not save Europe. The European Union is finished ! Recommend? (1) Report abuse
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theejudge 15 September 2011 9:45PM and the court bailiff forgot to say all rise for thee judge Recommend? (0) Report abuse
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superburger 15 September 2011 9:47PM "I see a number of interweaving strands here entrenched high unemployment, especially among the younger generation; fiscal austerity that chips away at social protections; perceptions of unfairness in Wall Street being given priority over 'main street'; and legacies of growth in many countries that predominantly benefited the top echelons of society. These issues add more fuel to the confidence crisis." nobody complained when their 2bed terrace was 'worth' 500,0000,00000. or they'd just put the 52" plasma on the credit card. or were taking their fifth foreign holiday of the year. An obvious boom was going on, yet we supposed to believe the 'Iron Chancellor' that there would be "no more boom and bust!" nonsense, of course, so why the surprise at the size of the crash? and, when it all ends (as these things generally do) and the next boom starts again, people will behave just the same.

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Eurozone debt crisis 'in dangerous new phase' warns IMF chief | Business | The Guardian

9/15/11 4:50 PM

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nishville 15 September 2011 9:48PM To paraphrase Douglas Adams, some of us think all forms of hypothetical money as opposed to gold standard was a bad idea while there are those who even consider the demise of bartering and the appearance of coins as a big mistake. You cannot let go of the strict definition and tight control of something that represents so much power when accumulated in vast amounts and expect that everything will go just swimmingly. Recommend? (0) Report abuse
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