Economy Watch: Euro-Zone Agreement Still Elusive

October 24, 2011
By Dees Stribling, Contributing Editor

Image Courtesy wikipedia user Wouter Hagens

Euro-zone panjandrums met over the weekend in Brussels for the 13th “crisis-management summit” in less than two years, and perhaps made progress on the vexing problems of national debt in Greece and elsewhere. Or perhaps they didn’t make any progress, depending on how one feels about the restructuring of Greek debt (which is off the table) or persuading Greek bond holders to step up and take a haircut (which is still the preferred method, officially).

How much of a haircut? That seems to be a point of continuing contention between Germany and France, who are running the euro show. The Germans favor a bit more of a haircut, maybe 50 percent, while the French seem to want less, say 40 percent, since French banks — in their wisdom — hold a lot of Greek debt. Also, apparently the Germans have prevailed over the French desire to use unlimited European Central Bank funds to fight the crisis.

The Italians are under intense pressure to come up with a better debt-shrinking plan to keep their too-big-to-fail economy from failing, a demand that France and Germany can actually agree upon. Silvio Berlusconi, prime minister of Italy and renowned international playboy, has promised to come up with such a plan. The Financial Times reported over the weekend that “when asked … if the Italian prime minister had reassured them about his action to reduce his country’s debt level, Ms Merkel and Mr Sarkozy looked at each other with wry smiles, casting their eyes to the ceiling.”

Another Downgrade for the USA?

A Bank of America Merrill Lynch report released over the weekend said that the United States is likely to experience another ratings-agency downgrade before the end of the year, though it didn’t specify whether that might be Moody’s or Fitch. A downgrade might hurt the economy or be greeted with a shrug by investors, but no one is sure just yet.

“The credit rating agencies have strongly suggested that further rating cuts are likely if Congress does not come up with a credible long-run plan” to cut the deficit, Ethan Harris, Merrill’s North American economist, wrote in the report. In other words, if the supercommittee doesn’t come up with a deal next month to cut $1.2 trillion from the U.S. budget that would prevent economy-damaging automatic cuts to the budget.

Moody’s Investors Service currently has a negative outlook on the United States’s Aaa rating, while Fitch Ratings still has a stable outlook on its AAA rating on the United States. Neither downgraded U.S. sovereign debt during the heat of the debt-ceiling imbroglio last summer, as Standard & Poor’s did.

Billions Gone in Mortgage Crisis

According to data compiled by Bloomberg and published over the weekend, the five largest home lenders in the United States have lost a total of $69 billion since 2007 thanks to bum mortgages. The tally came on news that JPMorgan Chase & Co. revealed that it incurred $1.3 billion in such expenses during its third quarter, some $314 million for buying back mortgages and $1 billion for litigation related to crummy mortgages.

Bank of America Corp. has accounted for a majority of the mortgage-related losses since ’07 due to its B-school-textbook case of an unwise acquisition of Countrywide. During the bank’s most recent quarter, its bad-mortgage losses were $1.18 billion, but since 2007, the total has been $40.3 billion, according to Bloomberg. Wells Fargo & Co. has seen mortgage-related losses of $5.48 billion, while Citigroup Inc. has lost $2.2 billion, since 2007.

Wall Street was feeling expansive on Friday, with the Dow Jones Industrial Average gaining 267.01 points, or 2.31 percent. The S&P 500 spiked 1.88 percent and the Nasdaq advanced 1.49 percent.