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Europe’s Debt Problem Has Deeper Roots Than Greece

Greek Prime Minister Alexis Tsipras, center, talks with German Chancellor Angela Merkel and French President Francois Hollande at the start of eurozone leaders' summit on the Greek crisis in Brussels on Sunday.
Greek Prime Minister Alexis Tsipras, center, talks with German Chancellor Angela Merkel and French President Francois Hollande at the start of eurozone leaders’ summit on the Greek crisis in Brussels on Sunday

Currency bloc still searching for lasting solution to high debts. Greece has a deal—or rather, it has a chance to have negotiations on a deal. But Europe still hasn’t found a lasting solution for Greece’s debt burden—a missing piece in the eurozone’s crisis armory.

Greece’s third bailout might run to as much as €86 billion. But to even start talks on that financing, the Greek parliament must pass reams of legislation by Wednesday, including mechanisms for semiautomatic spending cuts if the country fails to hit fiscal targets.

Only emergency bridge financing will prevent a default on the European Central Bank. Greece’s debt, however, remains a problem that hasn’t been fully addressed.

The real issue isn’t the amount of debt, even though Greece’s total debt stood at 177% of gross domestic product in 2014 and it already owes other governments, the International Monetary Fund and the European Central Bank €246 billion, according to Deutsche Bank. It is the constraints the euro places on managing debt.

Europe has ruled out face-value reductions, and even a softening of terms—longer maturities or grace periods—will have to wait until a new program is in place, under way and has undergone a positive first review.

Such measures can be significant, and Greece has already benefited from them, reducing its financing costs. But the sheer scale of Greece’s debt remains a political flash point.

There are usually several ways of attempting to fix a government debt problem, including growth, inflation, austerity, and restructuring. The most palatable is growth: ideally, a country could grow into its debt burden, making it sustainable.

Over time, economic reforms could boost Greece’s growth, and are desperately needed. But this is no quick fix; it involves unpopular political choices.

Inflation is no way out: the European Central Bank’s mandate sees to that. True, inflation dynamics vary from country to country. But for now, it may well be Germany, where government debt is already falling, that sees higher inflation.

That leaves austerity and restructuring. Austerity in small doses is bearable, but has clearly tested political limits in Europe. And restructuring is a costly option for an advanced-economy bloc.

The lesson from Greece is that while eurozone members can force losses on private-sector bondholders, they cannot do the same when it comes to loans from other governments. Indeed, the only way to do so appears to be to leave the euro and default.

An outright reduction in debt would otherwise put the eurozone on the road to a fiscal union that no government or voter has agreed to.

The euro effectively attempts to enforce ascetic virtue on debtors: they cannot devalue or inflate away the value of their debt, so instead they are forced to reform their economies.

The worry is that Greece isn’t the only highly-indebted member of the eurozone; a renewed economic downturn could prove challenging for others.

That might expose further the limitations imposed by the euro. But for now it puts the onus squarely on Greece to reform its economy, and fast.

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Banks probed over automated forex deals

Wall Street banks are facing the threat of new and more damaging allegations about their rigging of foreign exchange markets, as New York’s banking regulator intensifies a probe into computer-driven currency trading — raising the prospect that the total penalties arising from the scandal will exceed the $10bn already paid.

The New York Department of Financial Services, run by Benjamin Lawsky, has become increasingly convinced that banks have been systematically abusing forex markets through the use of automated trades driven by computer algorithms, according to people familiar with its investigation.

Findings from the probe may indicate more widespread market abuse than US and UK authorities disclosed on Wednesday, when detailing their settlement with six global banks, the people added.

They pointed out that this $5.6bn settlement related to allegations of market manipulation in the forex spot market — but Mr Lawsky’s probe covers electronic trading, which accounts for the majority of forex transactions.

Trading platforms at Barclays and Deutsche Bank are being scrutinised by the DFS, and the regulator has also subpoenaed information from BNP Paribas, Credit Suisse, Goldman Sachs and Société Générale.

Its investigation into Barclays is the most advanced, and several bank employees have been called to give evidence, according to people familiar with the case. So far, the probe has led the agency to suspect that the bank intentionally sought to gain unfair advantages over clients and counterparties through its forex trading platform, the people claimed.

The DFS has reached similar initial conclusions in its Deutsche Bank probe but, as it is only at the document review stage, it is not as advanced as the Barclays investigation, the people said.

They added that the DFS investigations into the banks that received subpoenas are at an earlier stage and no initial conclusions have been reached.

All of the banks declined to comment.

On Wednesday, the US Department of Justice and other agencies announced that they had reached a $5.6bn settlement with Barclays, Citigroup, JPMorgan Chase, Royal Bank of Scotland and UBS over a series of allegations of foreign exchange manipulation.

However, while the DFS was one of the agencies involved in the settlement with Barclays, its trading platform investigation remains separate.

The regulator has jurisdiction over banks that hold a New York state banking license — which includes many foreign banks but excludes most domestic groups, which are overseen by other regulators.

On Wednesday, Mr Lawsky announced he would be leaving the agency in late June. He plans to start his own law and consulting firm, in addition to becoming a visiting scholar at Stanford University as part of the school’s cyber initiative.

Whoever replaces Mr Lawsky at the DFS is expected to continue his hardline approach to dealing with Wall Street banks, people familiar with the case said.

Deutsche Bank slumps to quarterly net loss as legal costs weigh

A man walks past Deutsche Bank offices in London December 5, 2013. REUTERS/Luke MacGregor

Deutsche Bank AG (DBKGn.DE) fell to a net loss in the third quarter after falling victim to the legal costs which already this week prompted a management reshuffle designed to help tackle a long list of unresolved litigation issues.

Germany‘s top lender has stumped up around 7 billion euros (5.52 billion pounds) in fines and charges since 2012, overshadowing management efforts to restructure and reform the bank and making its stock one of the worst performers in the European sector so far this year.

The bank, which in June raised 8.5 billion euros to strengthen its balance sheet, originally hoped to clear the decks of legal issues in 2014, but has postponed that target to 2015. “There continues to be significant uncertainty about the timing and size of potential impacts” of litigation, Chief Finance Officer Stefan Krause said.

Its shares fell 1.4 percent by 1103 GMT on Wednesday, contributing to a 28 percent fall so far this year and placing the bank just a notch ahead of National Bank of Greece (NBGr.AT) in performance rankings in the STOXX Europe 600 index of European banks .SX7P.

Deutsche Bank also sounded a note of caution on some of its revised 2015 profit goals after spending 894 million euros on litigation in the quarter, saying conditions remained challenging in several areas including “transaction” banking, or the provision of money transfers, trade finance and treasury services to corporations.

Signalling it had not done enough to resolve a long list of lawsuits and investigations in areas such as the setting of benchmark interest rates, the bank had said on Tuesday it was reorganising its management board and had created a new role focused on legal issues, to be taken by audit head Christian Sewing.

“We aim to resolve these (issues) as soon as possible,” co-Chief Executive Officer Anshu Jain said on a conference call.

Separately, Deutsche named Marcus Schenck, a London-based Goldman Sachs (GS.N) investment banker and former finance chief of German energy group E.ON (EONGn.DE), to replace CFO Krause, who will take on a new board seat in charge of strategy.

FURTHER PENALTIES

The bank is two years into a turnaround plan that has led to costs falling and operating profit rising, but the threat of further penalties from alleged misconduct has cast a shadow over its share price and management’s success claims.

Investigators are looking into possible attempts at interest-rate and forex-benchmark manipulation, high-frequency trading, possible violations of U.S. sanctions on Iran and other activities.

Deutsche fell to a quarterly net loss of 92 million euros from a 51 million profit in the year-earlier period, while net revenue increased a modest 2 percent.

Pretax profit rose 3.6 percent in Deutsche’s important investment banking division, boosted by a 15 percent jump in revenue derived from trading debt and foreign exchange.

But that trading jump lagged a 24 percent rise seen by U.S. rivals such as Citibank (C.N) and JP Morgan (JPM.N), according to Reuters calculations.

“Other banks took better advantage of market opportunities in this quarter than Deutsche Bank,” said analyst Guido Hoymann at brokerage Metzler Securities.

Alibaba Shares Debut At $92.70; Chinese E-Commerce Giant More Valuable Than Facebook, Amazon

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Founder and Executive Chairman of Alibaba Group Jack Ma attends the company’s initial price offering (IPO) at the New York Stock Exchange on September 19, 2014 in New York City. The New York Times reported yesterday that Alibaba had raised $21.8 Billion in their initial public offering so far. Andrew Burton/Getty Images

Shares in Chinese e-commerce giant Alibaba Holdings Ltd. opened trading on the New York Stock Exchange Friday at $92.70, 36 percent percent higher than its IPO price, making the Hangzhou-based firm more valuable than Amazon.com, Procter & Gamble or Facebook Inc.

The debut gave Alibaba an initial market cap of $228 billion; shares initially surged as high as $99.70 before falling back to the IPO price in the first hour of trading.

The debut came after Alibaba’s IPO, which raised $21.8 billion, a number that could rise to $25 billion if underwriters exercise their option to increase their allotment by 15 percent.

If that happens, the deal will exceed the $22 billion raised by the IPO of the Agricultural Bank of China in 2010, which holds the global record, according to the Wall Street Journal.

The mega-deal values Alibaba tantalizingly close to Walmart, the world’s largest retailer, which has a market cap of $245 billion.

Investment bank Cantor Fitzgerald encapsulated the enthusiasm for the stock by giving it a “buy” rating and a $90 price target, and saying the company “had the potential to dominate global online commerce over time.”

“We believe that a differentiated pricing model, strong brand, and unmatched scale give Alibaba an unfair competitive advantage relative to peers both in and outside China,” analyst Youssef Squali wrote.

The pop in shares created a windfall for the underwriting banks, including Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan and Morgan Stanley, which helped price the shares and make money on the gain over the IPO price. It also means big shareholders like founder Jack Ma himself also left money on the table.

Russia’s Evraz signs $425 mln syndicated loan

Aug 13 (Reuters) – Russian steelmaker Evraz said on Wednesday it had signed a $425 million five-year pre-export credit facility with a syndicate of international banks.

The proceeds will be used to refinance existing debt, Evraz said in a statement, adding that the pool of foreign lenders included Deutsche Bank, ING, Nordea, Societe Generale and Raiffeisen Bank.

Evraz is a rare Russian company to raise money on international capital markets at a time when tensions between Russia and the West are running high over Moscow’s role in the Ukraine crisis.

Western debt and equity markets are now largely closed for Russian borrowers after the United States and the European Union slapped sanctions on some Russian businessmen and companies, including top oil firm Rosneft and major banks Sberbank and VTB.

Evraz said in early June it was planning on securing a syndicated loan of up to $1 billion with up to 10 banks, well before the West imposed its toughest round of sanctions on Russia over fighting in Ukraine.

Here Are The Key Geopolitical Risks That Threaten To Rock The Markets

geopolitics risk map

Geopolitics is arguably the leading risk to the global economy and financial markets. Market strategist Ed Yardeni recently characterized Iraq as a “clear and present threat to the bull market.”

Here’s a map from Deutsche Bank’s House View presentation highlighting the major, potentially destabilizing risks around the world.

Japanese Employee at Deutsche Bank Arrested on Bribery Charges

TOKYO — An employee of Deutsche Bank‘s Japanese brokerage unit was arrested on Thursday on suspicion of showering a local pension fund manager with expensive meals, golf outings and trips overseas in return for some 1 billion yen in investments.

Shigeru Echigo, 36, the former head of Deutsche Securities’ pension fund sales team, was arrested on bribery charges along with a former pension fund manager for a Japanese trading house, a Tokyo Metropolitan Police official said in a statement read out over the telephone.

Mr. Echigo spent at least 900,000 yen on food and drink, golf and overseas travel for Yutaka Tsurisawa, a pension fund executive for Mitsui, from April to August last year, according to the statement. The favors were meant to express thanks for some 1 billion yen in financial products Mr. Tsurisawa had purchased from Deutche Securities, and to encourage the executive to keep up those purchases, the statement said.

Deutsche Securities also spent over 5 million yen to entertain executives at two other corporate pension funds last year, Japan’s financial regulator said in a separate statement. Deutsche took executives at one of those funds out on some 40 occasions, on top of paying for overseas travel, according to the regulator, the Securities and Exchange Surveillance Commission.

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